Friday Addition Edition- Apollos Inflation Hedge

The Fed has made it clear that they are content to let inflation run a little hot if it keeps the economy moving higher. They had adopted that as policy last year. Deflation has become the real fear for central al bankers, and the Fed is willing to do damn near anything to keep deflation at bay.

Jerome Powell and his trusty crew now think that 2021 will have 6% economic growth year over year. All in all, this is shaping up to be a much quicker recovery than any of us could have even imagined this time last year. Right now, the Fed's official inflation numbers are still somewhat muted, but they have indicated they expect that to change this year.

Those of us living in the real world look around and see that judging by stock prices, housing prices, bitcoin, and shitcoin levels, inflation is already being cooked into ht values of both real and mythical assets. If you eat food or need gas to fuel your car, you have also already begun seeing signs of inflation.

There are risks to the growing economy/rising inflation scenario. Chief among these is a slowdown in the vaccination rates that allows for mutations of the COVID virus to take hold in the U.S. population. The hoped-for flood of vaccine seems to be delayed by a week every week.

One of the great questions historians of the future, when studying the pandemic, will ask is what both Presidents, Trump and Biden, did not use the already involved Defense Production Act to create more supply. The only time we ever actually need government is in a real crisis, and this really seems like it should have qualified.

Barring that awe, we are probably going to see some Fed-defined inflation this year. The bond market thinks we will continue to see a strong economy as yields continue to shoot up on the yield curve's longer end.

Of course, there is also a better than zero chance that the massive amount of money printing of the last year leads to interest rates and inflation spikes that the Fed is not anticipating. Then the rosy outlook stuff could vanish, leaving the stock market with its pants down.

How will it play out?

Don't ask me. I am the only one in the world besides Charlie Munger to admit I have no idea how this ends. When asked about the impact of stimulus on the world, Munger said, "I do think that we don't know what these artificially low interest rates are going to do or how the economy is going to work in the future as governments print all this extra money. The only opinion I have there is that I don't think anybody knows what's going to happen for sure."

I concur.

What I do know is that it looks like, for now, that interest rates on the long end are going to be allowed to rise.

While rising rates can be bad news for traditional fixed income portfolios, this will probably be an outstanding time to look into floating rate loans funds. These funds have interest rate resets, and in times of inflation, the payout on your fund can actually increase.

The resale value of the notes can also go up as rates increase

If we turn to closed-end funds, we can buy into floating-rate notes at a discount to net asset value that provides a margin of safety in our positions.

Given my affinity for investing alongside private equity firms in debt markets, my pick of the Apollo Senior Floating Rate Fund (AFT) should come as no surprise.

After all, who knows more about lending money than some of the biggest borrowers on the planet?

The fund is trading at a discount to NAV right now of 9.3%. The fund yields almost 6%and pays a monthly dividend.

Both Saba Capital and Bulldog Investors are recent buyers of this fund, and I have usually fared well when following those two into closed-end fund trades.

I don't think I would get greedy and put my whole net worth in the Apollo Senior Floating Rate Fund, but an allocation in an income portfolio is a smart move right now. If the Fed does let inflation run hot for longer than the old policy allowed, this fund will have a solid performance in 2021.

Posted to Banking on Profit on Mar 19, 2021 — 4:03 PM
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