September 19, 2017, 6:00 pm EST              Invest Alongside Billionaires For $297/Qtr

BR caricatureWith a Fed decision queued up for tomorrow, let’s take a look at how the rates picture has evolved this year.

The Fed has continued to act like speculators, placing bets on the prospects of fiscal stimulus and hotter growth. And they’ve proven not to be very good.

​Remember, they finally kicked off their rate “normalization” plan in December of 2015.  With things relatively stable globally, the slow U.S. recovery still on path, and with U.S. stocks near the record highs, they pulled the trigger on a 25 basis point hike in late 2015.  And they projected at that time to hike another four times over the coming year (2016).

​Stocks proceeded to slide by 13% over the next month.  Market interest rates (the 10 year yield) went down, not up, following the hike — and not by a little, but by a lot.  The 10 year yield fell from 2.33% to 1.53% over the next two months.  And by April, the Fed walked back on their big promises for a tightening campaign.  And the messaging began turning dark.  The Fed went from talking about four hikes in a year, to talking about the prospects of going to negative interest rates.

​That was until the U.S. elections.  Suddenly, the outlook for the global economy changed, with the idea that big fiscal stimulus could be coming.  So without any data justification for changing gears (for an institution that constantly beats the drum of “data dependence”), the Fed went right back to its hawkish mantra/ tightening game plan.

​With that, they hit the reset button in December, and went back to the old game plan.  They hiked in December.  They told us more were coming this year.  And, so far, they’ve hiked in March and June.

​Below is how the interest rate market has responded.  Rates have gone lower after each hike.  Just in the past couple of days have, however, we returned to levels (and slightly above) where we stood going into the June hike.

But if you believe in the growing prospects of policy execution, which we’ve been discussing, you have to think this behavior in market rates (going lower) are coming to an end (i.e. higher rates).

As I said, the Hurricanes represented a crisis that May Be The Turning Point For Trump.  This was an opportunity for the President to show leadership in a time people were looking for leadership.  And it was a chance for the public perception to begin to shift.  And it did. The bottom was marked in Trump pessimism.  And much needed policy execution has been kickstarted by the need for Congress to come together to get the debt ceiling raised and hurricane aid approved.  And I suspect that Trump’s address to the U.N. today will add further support to this building momentum of sentiment turnaround for the administration. With this, I would expect to hear a hawkish Fed tomorrow.

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March 17, 2017, 4:00pm EST               Invest Alongside Billionaires For $297/Qtr

With the Fed’s third rate hike this week in the post-financial crisis era, let’s take a look at how market rates have reponded.

Here’s a chart of the U.S. 10 year government bond yield.

On December 16, 2015, the Fed moved for the first time.  The 10-year traded up to 2.33% that day and didn’t see that level again for 11-months.  Despite the fact that the Fed forecasted four hikes over the next twelve months, the bond market wasn’t buying it.  A month later, the fall in oil prices turned into a crash.  And the 10 year yield printed a new record low at 1.32%, just under the crisis lows.

On December 14, 2016, the Fed made the second move. This was after they had spent the better part of the last nine months walking back on what they thought would be their 2016 hiking campaign.  The difference?  Trump was elected the new President and he was already fueling confidence from talk of big, bold fiscal stimulus.  The Fed’s big hiking campaign was placed back on the table.  The high in yields the day the Fed made hike #2 was 2.58%.  The next day it put in a top at 2.64% that we have not seen since.

And, of course, this past week, we’ve had hike #3.  The 10 year yield traded up to 2.60% that day (Wednesday) and we haven’t seen it since, despite the fact that the Fed has continued to tell us another couple of hikes this year, and that the economy is doing well, expect about three hikes a year through 2018. Yields go out at 2.50% today.

So why aren’t market rates screaming?  The 10 year yield should be 3.5%+ by now.  And consumer rates should be surging.  Is it the Bank of Japan, the European Central Bank and China buying our Treasuries, keeping a cap on yields?  Is it that the market doesn’t believe it and thus the yield curve is flattening (which would project recession)?  Probably a bit of both. The important point is that the Fed absolutely cannot do what they are doing if they think they will push the 10 year yield up to 3.5%+, and fast.

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