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Re: Are Higher Stock Allocations the Only Option for Retirees?

Thank you for your suggestions.
I am attracted to RE but at this point in my life, I am not sure that I want to get into it. Would REITs be an option in your view?

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Re: Are Higher Stock Allocations the Only Option for Retirees?


@AlwaysPassive wrote:
Thank you for your suggestions.
I am attracted to RE but at this point in my life, I am not sure that I want to get into it. Would REITs be an option in your view?

Sent from my iPhone

No...however there may be a few specialty reits.

Current REIT real estate, such as owning malls/buildings/apartments etc very poor outlook re covid.

Best is single family home ownership...there are a few companies doing gangbusters here, buying tons of homes...but I think they are private businesses.  You capture current high demand for rentals, with current high demand for single family homes, away from cities...outlook good for long term home price increases.

REIT yields not very attractive currently.  

Lots of fees to various parties involved with REITs.

Direct ownership yourself solves much of this.  I agree being a landlord is something I do not want to do in retirement.  I am pleasantly surprised at how easy having a property manager has made my life!

I'm 75...if younger, I would explore more ways/options to invest in such homes...now.  Maybe local partnerships, etc.

Think of this, younger people:  If you own outright four rental properties when you retire, you can have a comfortable retirement.  So, buy one property a decade...low mortgage rates...rent it...buy more.  Spend the time slowly paying back the mortgages.  Refinance if rates go lower; rejoice if rates go higher.  What a country!

R48

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Re: Are Higher Stock Allocations the Only Option for Retirees?

I don't understand why people have problems with bonds. Yes, the yield is down to 1.20% for VBTLX, but the total return YTD is 7.69%. In the meantime it's 0.60% YTD for VFIAX as of 27 July. So the bond side of the equation is bringing in more money. I hold 30% stock, the rest is bonds and cash. It's what gives me the I don't care attitude about the market, then again, I don't live 100% off my investments.

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Re: Are Higher Stock Allocations the Only Option for Retirees?


@Poorfolio wrote:

I don't understand why people have problems with bonds. Yes, the yield is down to 1.20% for VBTLX, but the total return YTD is 7.69%. In the meantime it's 0.60% YTD for VFIAX as of 27 July. So the bond side of the equation is bringing in more money. I hold 30% stock, the rest is bonds and cash. It's what gives me the I don't care attitude about the market, then again, I don't live 100% off my investments.


First, that actual dividend is falling qtrly, as bond fund managers replace maturing bonds, with new, lower coupon ones.

Second, I suspect you are not aware of a feature of bonds called CONVEXITY.  Turns out, as bond yields approach zero, bond prices go up by a magnified amount.  Thus that total return you cite is bond prices going way above par.  However, unless you, or the manager,  sell, you do not realize this gain, as the bonds all go to "par price, initial face value, at maturity."  They do not grow like stocks.

Ditto when bond yields go back up from low rates, the price  fall is magnified.  You are in a "high risk" situation now.  For more on convexity, study this article and the curves to see what I am talking about.

IMO you can't win from here: If bond yields stay the same, too little coupon return; if bond yields go up, you lose principal due price declines; if bond yields fall to zero, or negative, you get a good price gain, but only if you sell/exit bonds...for they ALL go to par at maturity.  Convexity:

https://portfoliocharts.com/2019/05/27/high-profits-at-low-rates-the-benefits-of-bond-convexity/

and

https://www.investopedia.com/articles/bonds/07/price_yield.asp

R48

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Re: Are Higher Stock Allocations the Only Option for Retirees?


@retiredat48 wrote:

@Poorfolio wrote:

I don't understand why people have problems with bonds. Yes, the yield is down to 1.20% for VBTLX, but the total return YTD is 7.69%. In the meantime it's 0.60% YTD for VFIAX as of 27 July. So the bond side of the equation is bringing in more money. I hold 30% stock, the rest is bonds and cash. It's what gives me the I don't care attitude about the market, then again, I don't live 100% off my investments.


First, that actual dividend is falling qtrly, as bond fund managers replace maturing bonds, with new, lower coupon ones.

Second, I suspect you are not aware of a feature of bonds called CONVEXITY.  Turns out, as bond yields approach zero, bond prices go up by a magnified amount.  Thus that total return you cite is bond prices going way above par.  However, unless you, or the manager,  sell, you do not realize this gain, as the bonds all go to "par price, initial face value, at maturity."  They do not grow like stocks.

Ditto when bond yields go back up from low rates, the price  fall is magnified.  You are in a "high risk" situation now.  For more on convexity, study this article and the curves to see what I am talking about.

IMO you can't win from here: If bond yield stay the same, too little coupon return; if bond yield go up, you lose principal due price declines; if bond yields fall to zero, or negative, you get a good price gain, but only if you sell/exit bonds...for they ALL go to par at maturity.  Convexity:

https://portfoliocharts.com/2019/05/27/high-profits-at-low-rates-the-benefits-of-bond-convexity/

and

https://www.investopedia.com/articles/bonds/07/price_yield.asp

R48


Thanks for the response. I have looked at the choices you offer as alternatives to bonds, but at my age I can't make things too complex for my wife in case she has to deal with it. My bonds have gone up for a while, and if they go down I hope my stocks will compensate. With my present allocation I think I can make it through the end of the year without a lot of worries.

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Re: Are Higher Stock Allocations the Only Option for Retirees?

AlwaysPassive,

Go back to Bogleheads and read the transcript of the podcast with Bill Bernstein.

Start with this and see if it applies:

Question:

"At what point does it make sense for an investor to start shifting their portfolio away from say an equity bias portfolio towards one that holds more fixed income? And is it an age thing? Is it you've met your personal goal thing or is it really a preference thing in your mind?

Well, it's certainly is a risk thing. One thing that gets quoted back to me a lot, and I stole from a guideline of Richard Ryan who was a bond analyst and a consultant, which is when you've won the game, you stop playing. So if you're someone who has accumulated enough assets to maintain body and soul for the bulk of your retirement, 20, 25 years worth of residual living expenses, then you really ought to be taking risk off the table. I don't mean sell all your stocks, but certainly cut back on your stock exposure so that if you do happen to have a bad result in the stock market, you will not be eating cat food.

And it becomes sort of a Pascal's wager. You can make a mistake, if you will, obviously, by selling out and then having the market go higher. You might've been able to buy the [Beemer] or fly first class and now you don't have that opportunity, but I can assure you that the mistake in the opposite direction is a much worse mistake to make. If you can't buy the [Beemer] or fly first class, you will have regret. I can assure you, you have a lot more regret if you make the opposite mistake, which is to maintain a high stock allocation into retirement and see your portfolio get cut in half, and then run out of money after seven or eight or 10 or 12 years, which can easily happen to you.

Now that's all dependent on your burn rate. For example, it's an irrelevant question to ask to the person who's got enough ... at least an American who's got social security or a pension and enough to pay their basic living expenses. It doesn't matter what that person's stock portfolio does, they're still going to always be able to pay their rent and put groceries on the table and not have to move in with their kids. All right? And so it all depends on what your burn rate is. That person has a burn rate of zero of their portfolio. If your burn rate is only one or two or even 3%, you can probably still be fairly aggressively invested in stocks. But if your burn rate is four or 5%, then you best seriously consider reducing your asset allocation for stocks as you run out of human capital. That is when you're 55, 60 years old. [boldface added]

Question:

How do we reconcile that idea of taking risk off the table once you reach the LMP, the liability matching portfolio? How do we reconcile that with the idea that stocks can be less risky than bonds over a very long period of time?

Because over shorter periods of time, then the stocks are certainly riskier than bonds. What's the sort of crossover point? It's somewhere around 30 years. Maybe it's 20 years, maybe it's 40 years. I don't know. But the bottom line is if you are 65 years old, you are squarely in the short term risk pool. Okay? If on the other hand, you're 30 years old, you are in the long term risk tool and that's the basic reason. Academics like to play this parlor game is do stocks become riskier over time or less risky over time? And the Orthodox answers, they become more risky over time. But it's really a stupid question to ask without adding, at what stage of your career? Okay?

Clearly, if you're a young person with an excess of human capital and you're saving, bonds are riskier than stocks, all right? But if you're a retired person who is 65 or 70 years old, clearly stocks are riskier because you're much closer to being in the short term pool than the long term pool. And you might say, "Well, someone who is 65 can usually live to be 95 or 100." And that's true, but the risk doesn't occur at age 95 or 100. The risk occurs when you're 68 years old and your stock portfolio gets cut by 60% and you're burning 5% per year. And so that clearly puts you in the short term risk pool, even though you might be living 30 or 40 years." [boldface added]

Bob

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Re: Are Higher Stock Allocations the Only Option for Retirees?


@linter wrote:

speaking of 100% in one stock, galeno, here's something i read over on seaking alpha that some folks thought could work out quite okay:

xxxxxxxxxxxxxxxxxxxx

Here is a safe way to get 10% per year, every year, and NEVER run out of money.

Put all your money in SCHD. Withdraw 1% each quarter, sell in the money covered calls on the shares you are going to sell anyway to pocket another 2.5% per year, and get that juicy 3.5% dividend yield.

SCHD, on average, goes up 7% each year and the dividend increase 5% each year.

So to recap: 4% withdrawal + 3.5% divided.+ 2.5% covered call premium = 10% each year and never run out of money.

Got something better? Please share!

xxxxxxxxxxxxxxx


VTSAX -- better, not much but better on backtest and other performance compares.

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Re: Are Higher Stock Allocations the Only Option for Retirees?

Preferreds and  bond CEFs...not equity, not bonds...something in between. (they are bond cefs but they act more like equities -- with higher yields - imho)

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Re: Are Higher Stock Allocations the Only Option for Retirees?


@GLI2019 wrote:

AlwaysPassive,

Go back to Bogleheads and read the transcript of the podcast with Bill Bernstein,

Start with this and see if it applies:

Question:

"At what point does it make sense for an investor to start shifting their portfolio away from say an equity bias portfolio towards one that holds more fixed income? And is it an age thing? Is it you've met your personal goal thing or is it really a preference thing in your mind?

Well, it's certainly is a risk thing. One thing that gets quoted back to me a lot, and I stole from a guideline of Richard Ryan who was a bond analyst and a consultant, which is when you've won the game, you stop playing. So if you're someone who has accumulated enough assets to maintain body and soul for the bulk of your retirement, 20, 25 years worth of residual living expenses, then you really ought to be taking risk off the table. I don't mean sell all your stocks, but certainly cut back on your stock exposure so that if you do happen to have a bad result in the stock market, you will not be eating cat food.

And it becomes sort of a Pascal's wager. You can make a mistake, if you will, obviously, by selling out and then having the market go higher. You might've been able to buy the [Beemer] or fly first class and now you don't have that opportunity, but I can assure you that the mistake in the opposite direction is a much worse mistake to make. If you can't buy the [Beemer] or fly first class, you will have regret. I can assure you, you have a lot more regret if you make the opposite mistake, which is to maintain a high stock allocation into retirement and see your portfolio get cut in half, and then run out of money after seven or eight or 10 or 12 years, which can easily happen to you.

Now that's all dependent on your burn rate. For example, it's an irrelevant question to ask to the person who's got enough ... at least an American who's got social security or a pension and enough to pay their basic living expenses. It doesn't matter what that person's stock portfolio does, they're still going to always be able to pay their rent and put groceries on the table and not have to move in with their kids. All right? And so it all depends on what your burn rate is. That person has a burn rate of zero of their portfolio. If your burn rate is only one or two or even 3%, you can probably still be fairly aggressively invested in stocks. But if your burn rate is four or 5%, then you best seriously consider reducing your asset allocation for stocks as you run out of human capital. That is when you're 55, 60 years old. [boldface added]

Question:

How do we reconcile that idea of taking risk off the table once you reach the LMP, the liability matching portfolio? How do we reconcile that with the idea that stocks can be less risky than bonds over a very long period of time?

Because over shorter periods of time, then the stocks are certainly riskier than bonds. What's the sort of crossover point? It's somewhere around 30 years. Maybe it's 20 years, maybe it's 40 years. I don't know. But the bottom line is if you are 65 years old, you are squarely in the short term risk pool. Okay? If on the other hand, you're 30 years old, you are in the long term risk tool and that's the basic reason. Academics like to play this parlor game is do stocks become riskier over time or less risky over time? And the Orthodox answers, they become more risky over time. But it's really a stupid question to ask without adding, at what stage of your career? Okay?

Clearly, if you're a young person with an excess of human capital and you're saving, bonds are riskier than stocks, all right? But if you're a retired person who is 65 or 70 years old, clearly stocks are riskier because you're much closer to being in the short term pool than the long term pool. And you might say, "Well, someone who is 65 can usually live to be 95 or 100." And that's true, but the risk doesn't occur at age 95 or 100. The risk occurs when you're 68 years old and your stock portfolio gets cut by 60% and you're burning 5% per year. And so that clearly puts you in the short term risk pool, even though you might be living 30 or 40 years." [boldface added]

Bob


Bernstein is famous for being wrong with his forecasts on equities and ignoring the effect that dividend income can have in insulating an investor from having to sell stocks after a steep decline. If an investor owns enough dividend paying equities, retirement benefits and SS which exceed expenses and taxes there will be no need to sell stocks when there is a 20%-30% drop In stocks because the investment income and retirement benefits will continue to be paid. Intelligent investors know that declines in stock markets are an opportunity to buy quality stocks on sale. In march I sold a value fund and a low volatility fund as the market crashed and replaced them with growth funds at the end of the month. I also bought, tech, recovery stocks and QQQ which rose as the government and Federal reserve poured $Ts into the economy. My dividends continued to pay my expenses after the 23% Stock drop in the first quarter of 2020 and I didn’t need to sell any shares to pay bills. Value of my 90% equity portfolio is the same as it was in February.

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Re: Are Higher Stock Allocations the Only Option for Retirees?

The short answer  depends on your ability to take the risk of a 40% down turn that takes 3 or more years to recover.  You should  determine your current and short term 2 to 3 years cash need.  If you are lucky and stable income such as pensions, social security and other guaranteed income and reliable medical insurance more than meets the cost for living; then the uncertain market  does not matter if you believe it will recover.  

Other wise I think you are in a heap of trouble. Low interest rates below the inflation rate puts many in a bind.

For me i still seem to have extra money pouring in; since even during this down turn  all but a few of the 20 or so stocks, etfs and cef are still paying the same dividend.  I bougtt most of these years ago.  

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Re: Are Higher Stock Allocations the Only Option for Retirees?


@GLI2019 wrote:

Respectfully, I do challenge your premise.

I am 78 and continue to have a substantial (nearly 50% allocation) to bonds.  Yes, I am getting less income; yes, I am getting and have experienced substantial capital appreciation passed on to me through RMDs primarily.

Why is it that so many folks don't understand that bonds can (and do) provide capital appreciation and can (and do) ameliorate risk?

I wish I had a buck for every time over the years that I have read some statement similar to the following: e.g., "showing negative returns in real term[s] for the future."  The future is beyond my grasp.  But I have a firm grasp on my capital appreciation.

Bob

P.S. I have a high regard for many Bogleheads and am friends with several.  Is Taylor, for example, selling his Total Bond position in a three fund portfolio?  Maybe there is a distinction between Original Bogleheads and some newer claimants to the description?


2 Things are working for you

1) At age 78 you are beyond the danger years of not making it because of a huge loss in the first several years, especially if you retire younger at age 55-60.  This is why Kitces and Pfau concluded: "Declining equity glide paths do not necessarily help support retirement success. Static allocations generally fare worse than more conservative starting allocations that rise in equity exposure throughout retirement. Depending on the underlying assumptions, the optimal starting equity exposures are generally around 20 percent to 40 percent and finish at around 40 percent to 80 percent."

2) Do you have a pension?

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Re: Are Higher Stock Allocations the Only Option for Retirees?

How many new threads a week can we start about the same subject?

There is thread going on now and it's at the top...https://community.morningstar.com/t5/Fidelity-Investments/Own-your-age-in-bonds/m-p/712777#M4833

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Re: Are Higher Stock Allocations the Only Option for Retirees?

Agreed, but definitely not at the level of intolerance (e.g., toward COVID-19 threads) by @RyanM yet:)

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Re: Are Higher Stock Allocations the Only Option for Retirees?


@FD1001 wrote:

How many new threads a week can we start about the same subject?

There is thread going on now and it's at the top...https://community.morningstar.com/t5/Fidelity-Investments/Own-your-age-in-bonds/m-p/712777#M4833


There will be more of these threads because a lot of investors drank the BH coolaid to load up on bonds because they would provide steady income of 4-6% and the bond values would remain stable and avoid the volatility of stocks. But bond yields below 1% for the foreseeable future is making a sustainable retirement unlikely for investors with high bond allocations which is why they are looking to find a way to higher returns with no increased risk. 

Investors who relied on Bill Bernstein For their asset allocation advice will be sorry they did so. There is no such thing as being able to leave the Investment game when you have won which is a fiction that made a lot of money for Bernstein.

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Re: Are Higher Stock Allocations the Only Option for Retirees?

The chase for yield has been going on for a long time. Retirees have been crushed by low rates and have been forced into higher-risk securities. Retirees are the silent sacrificial lamb here. A suggestion that some have made is using gains as income. It was the norm at one time when CGT was more favorable than income tax as governments tried to get companies to reinvest. However, this only helps fill an income gap over the short term. The question is whether rates can ever return to normal where they reward investors for inflation and credit risk over and above the risk-free rate.

When rates rise it has an adverse effect on valuations. Note this isn't just relevant to bonds. Share prices, which are currently trading at very high valuations are also interest-rate sensitive. So, if you were to invest in shares, you are likely to lose principal, when, and if, rates start to crawl back up, or even before. To reduce capital risk you would need to select dividend stocks that are undervalued. If you bought into an ETF that would be harder to achieve.

The bottom line is avoid adding risk when so much uncertainty surrounds markets. This is especially relevant to retirees. If your income has been significantly impacted, tap into gains. Otherwise, batten down the hatches, only spend on essentials and wait it out. Since there is no opportunity cost from doing this, if things don't improve, you haven't lost anything.

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Re: Are Higher Stock Allocations the Only Option for Retirees?


@Mortmain wrote:

The chase for yield has been going on for a long time. Retirees have been crushed by low rates and have been forced into higher-risk securities. Retirees are the silent sacrificial lamb here. A suggestion that some have made is using gains as income. It was the norm at one time when CGT was more favorable than income tax as governments tried to get companies to reinvest. However, this only helps fill an income gap over the short term. The question is whether rates can ever return to normal where they reward investors for inflation and credit risk over and above the risk-free rate.

When rates rise it has an adverse effect on valuations. Note this isn't just relevant to bonds. Share prices, which are currently trading at very high valuations are also interest-rate sensitive. So, if you were to invest in shares, you are likely to lose principal, when, and if, rates start to crawl back up, or even before. To reduce capital risk you would need to select dividend stocks that are undervalued. If you bought into an ETF that would be harder to achieve.

The bottom line is avoid adding risk when so much uncertainty surrounds markets. This is especially relevant to retirees. If your income has been significantly impacted, tap into gains. Otherwise, batten down the hatches, only spend on essentials and wait it out. Since there is no opportunity cost from doing this, if things don't improve, you haven't lost anything.


Just what do you think the new normal interest rate is going to be? 4-5%? In June 2006 federal reserve raised the funds rate to 5.25%, highest in 20 years. 2 1/2 years later it was cut to 0 where it remained for 7 years when the fed started raising the rate to 2.5% in December 2018. Since then the rate has declined to 0 again where it will stay for several years because the central banks will keep their interest rates at 0 or less to increase spending in their economies.

It was recently noted that 70% of the global government fixed income, $32T, has a yield of 0.5% or less. Problem with fixed income Rates is there is too much fixed income chasing bonds which is why bond yields will be below the rate of inflation, 1.3%, for the foreseeable future.

This is why I invest in dividend stocks with yields of 4% or more taxed at cap gains rtes.

 

 

 

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Re: Are Higher Stock Allocations the Only Option for Retirees?

Thank you for your comments.
I fully agree with you on the danger of increasing risk. I have been very careful not to do that. Fortunately I am not in a situation where I should run out of money unless we live much longer than expected.

Sent from my iPhone
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Re: Are Higher Stock Allocations the Only Option for Retirees?

AP,

 As a passive investor, you may find Jonathan Clements' articles helpful.

 

Farewell Yield
Jonathan Clements  |  June 13, 2020
THEY’VE LONG BEEN endangered, but 2020 may mark their demise: After four decades of falling interest rates, it seems safe investments offering attractive yields have finally disappeared.
https://humbledollar.com/2020/06/farewell-yield/


Breaking the Rules
Jonathan Clements  |  June 27, 2020
My advice for retirees: Forget investing for yield and instead aim to earn a healthy total return by allocating at least half your portfolio to stocks. In buoyant years for the stock market, look to harvest gains. In rough years, get your spending money by selling bonds and cash investments.
https://humbledollar.com/2020/06/breaking-the-rules/

"There seems to be some perverse human characteristic that likes to make easy things difficult.---Warren Buffett"

veni vidi vici vti
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Nice summary, Mortmain:

"The bottom line is avoid adding risk when so much uncertainty surrounds markets. This is especially relevant to retirees. If your income has been significantly impacted, tap into gains. Otherwise, batten down the hatches, only spend on essentials and wait it out. Since there is no opportunity cost from doing this, if things don't improve, you haven't lost anything."

I cited the Bill Bernstein quote to supply the OP with one way of conceptualizing his/her concerns.

My focus was/is on the OP's query, not on predictable ad hominem attacks.

If it helps to satisfy FD's curiosity, the answer is no I don't have a pension per se but I sure as heck have a near equivalent--20 years of annuity income and counting. But this thread is not about me or thee but the OP. 

Nothing further from me other than my compliments to Mortmain.

Bob

 

 

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Re: Are Higher Stock Allocations the Only Option for Retirees?

 

I am familiar with what GL12019 posted re Bernstein, etc.

There is a resolution here...perhaps a middle point...an alternative to bonds.

That is, money market funds and very short term bond funds.  Yes, we need a definition that what the OP is referring to is traditional vanilla bond funds of some meaningful duration.

Thus, mm funds and short term bond funds fit the bill.  You will get an interest rate not much less than current long term bonds...yet you really freeze principal.  You eliminate the convexity problem...and the problem with rising rates.  You have greatly reduced your chance of solid NEGATIVE REAL RETURNS in bond funds.

BTW This is me.  I have the most I have ever had in mm funds and short term bond funds.  I have patience.  I sleep at night knowing this money will not be impacted by changing rates.

And it meets Bernsteins "Why play the game" when you have made it.  To me, longer duration bonds are a much riskier game now, than stocks.  Especially with the fed reserve propping up these bonds with billions and billions of QE purchases.  What happens when the kool aid is removed?  

It's simple.  A decade ago the fed bailed out banks on the backs of senior citizens...think zero rate CDs.  Now, the gvt/fed is bailing out covid on the backs of senior citizens and bondholders...protecting the wealthy and hedge funds.  What a country.

R48

 

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