The BMW Method
The Big Picture

Format for Printing

Format for printing

Request Reprints


By BuildMWell
July 11, 2005

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

Thanks to the wonderful work of our friend Mike Klein, we have the ability to see what few others can. We have a really fine view of the big picture and we can easily sort out fact from fiction concerning the actions of the Fed. At least, I think we can.

Let's look at the bottom line. The Fed wears many hats, but the one hat that they must wear and the one that they care the most about is their cost of money. They have to borrow to pay the debts of our government. This borrowing is the basic foundation of our investment choices and understanding this is the key to making money over the long haul.

The "Holy Grail" of the Treasury Bond market is their ten-year paper. Let's take a BMW Method look at 10-year Treasuries using Mike's 40-year chart.$TNX.X.html

Please spend some time looking at that chart...especially the linear one in the middle of the page. That, my friends is "real life" and it is the reason that I am so very pleased with our future prospects here in America.

If you like bell curves, that linear chart shows a perfect one. Starting 40 years ago in 1965, the 10-year bond yield was just above 4%...right where it is again today. We had yields all the way up to 15% in the early 1980s and the stock market found itself in deep trouble. We have since seen the treasury yield drop very consistently to 1965 levels once again. You might say we have been on a roller coaster ride and the ride is close to being over. But, how many people know that?

Understanding what we are looking at is the important thing. Once we rationally see the past, we can logically approach the future. But, I continue to hear all sorts of misleading tripe about the past. Many experts seem to be confused about why the things we see today actually make complete why the Fed is raising their funds rate as they are. But, one glance at Mike's chart and it is clear...they want the long-term rates to stabilize around 3-1/2% to 4%. That is good for the government and it is good for business. Low interest rates are a very strong driving force for progress.

What the Fed wants more than anything is a "soft landing." We are witnessing that right now. Look at the chart again if you doubt me. We are very gently coming in on a glide path to about a 4% long-term bond rate. Maybe even 3-1/2%.

If we look back to the year 2000, we can see the results of the last Fed funds activity. Remember when the Fed was raising rates from 1997 until June of 2000? They were not trying to "kill the stock markets" like so many idiots said. Instead, they were trying to slow the drop in the bond yield and change the direction for the soft landing we are getting today. Rates were dropping much too fast in 1997/1998 and many folks were talking about a repeat of the Japanese fiasco where the rates went to zero...that was not good. Sure, the stock market suffered for a few years, but that is now behind us. The future is bright again.

In fact, the stock markets were on an irrationally exuberant rise that was leading to disaster. The crash of the NADSAQ shows the real picture. Thank God it came to a halt when it did. Meanwhile, the Dow was not really that inflated in 2000 and it is already back to near the all-time highs.

After raising rates to almost 7% in 2000, the fed began reducing them again to jump start the economy. Thus, we are slowly coming into the proper long-term rate structure...right back to 1965 levels. Jimmy Carter spoke of his "Misery Index" back in the late 1970s, has everyone forgotten how bad things had gotten for us investors back then? Today is a cake walk in comparison. Everything is different today and the future is very encouraging.

Runaway government spending took the Treasury bond yield to unbelievable heights between 1965 and 1982. Inflation peaked at a double-digit level at the same time. The stock market was flat from 1965 until 1982. Why risk investing in stocks when the government guaranteed 14% returns? Investors are not stupid, they put their money where the yields are high and the risk is low. But, by 1980, there was much talk about our government declaring bankruptcy! That is how bad things were.

Today, stocks that pay dividends are back in style. The yields are going up and the stocks have a CAGR that sweetens the pot. To make this even nicer, the tax rate on dividends is fixed at 15% so there is another incentive to own stocks. Inflation is under control and the long bond is yielding about 4%. The stage is set for excellent equities growth.

In 1965, Treasury Bonds rates were they are dropping. Is it that hard to see the difference between today and 40 years ago? The situation today is the opposite of the one we saw in 1965. This is not rocket science.

But, what happened from 1982 until 2000? We had a super run of 18 years worth of fine growth. After 17 years of malaise, we had 18 years of prosperity. But, do we need more malaise again...I say, no, we do not.

However, I hear lots of experts who point to the years between 1965 and 1982 and say that we are "due" for another secular bear market...they claim we are in one right now. They say that we may not recover for another 5 years! They seem to take great pleasure in scaring investors away from stocks. But, why? Why scare people away from the one place where wealth is created the fastest? And, why do they think there is another secular bear market in the cards? The Treasury bond rates are coming down...not going up. We do not need to repeat our past mistakes, do we? Haven't we learned what not to do from the past 40 years?

I am confused. Why is it so easy for us to see all this while no one else can? Why am I so up-beat while I hear all sorts of negative hype on the financial news shows? I mean, this is so very clear to me by just looking at a simple chart. Could it be that no one else has the chart? Could that be the problem?

I hate to say it, but I do not believe that no one else has the charts. If we can draw them, so can the experts. I mean, we are not experts, and we drew them. I am afraid that the financial gurus just want to keep them a secret. Maybe it is to keep the average investor confused. There is a great deal of money to be made by keeping the average investor perpetually in a confused state. That way, they rely on the experts for advice...investing is considered just too difficult for the neophyte.

The BMW Method is designed to help eliminate all that confusion. If anything I have written here is confusing, please tell me. I will gladly try to clear things up. To me, we will all do better if we have a clear picture in our heads concerning the future. And, we can get the picture much easier when we understand the past. At least, that is what I believe.

If I have done my job well, you can see what I am talking about. I fear that there are some folks who have a vested interest in keeping us confused for their personal gain. We must stop them with our ability to see things correctly. The BMW Method does that for me.

Become a Complete Fool
Join the best community on the web! Becoming a full member of the Fool Community is easy, takes just a minute, and is very inexpensive.