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Winter 2018 Financial Market Update

Published in Articles
Wednesday, 07 March 2018

Interest Rates are on the Move

Published in Blog
Monday, 19 February 2018
February, 2018

Interest rates have moved up significantly.  The yield on the 10-Year Treasury, as of February 15th, stood at 2.9% which is the highest level in four years.  This represents a dramatic upward move from the 1.4% low reached on July 8, 2016.

Many investors are pointing towards increased inflation fears fueled by recently published statistics of average hourly earnings and consumer price indices.1 If the Federal Reserve adheres to its mantra of “data dependence,” then it should continue raising interest rates.

But the impact of any rate hikes by the Federal Reserve may be relatively benign compared to the forces of supply and demand.  As we previously discussed in our last Insights commentary (Autumn 2017), the commitment to “unwind” its balance sheet may curtail Treasury demand while significantly adding to supply – a recipe for lower Treasury prices (and thus higher interest rates).

This action by the Federal Reserve is truly unprecedented.  In a recent roundtable hosted by WindRock, the noted financial expert John Mauldin described Federal Reserve policy as having moved from “quantitative easing” to “quantitative experimenting.”

Worse, at the same time this buyer of Treasuries becomes a marginal seller, other influences on supply and demand are afoot.  Namely:

1) Increased supply due to ballooning deficits.  Budget Director Mick Mulvaney himself stated the recently agreed-upon budget deal should increase government spending by almost $300 billion with the potential for the deficit to increase to $1.2 trillion in 2019;2 and

2) Decreased demand from traditional foreign buyers.  The financial markets were rightfully distressed when Bloomberg recently reported that: “senior government officials in Beijing . . . have recommended slowing or halting purchases of U.S. Treasuries.3  China is not the only other major foreign bondholder to potentially pull back from this market, for both Japan and Saudi Arabia have substantial fiscal issues which could be ameliorated by selling Treasury holdings.

For too many years, investors have assumed that either the stock and bond markets appreciate in tandem, or perhaps, at worst, they act as counterbalances; if one went down, the other would go up.  Financial yin and yang.  But a downturn in the face of rising interest rates may very well result in something like the financial carnage of the 1970s.

Yet, despite these risks, the Federal Reserve appears intent on continuing its “unwinding.”  If so, while it may very well be data dependent, it is also judgement deficient.


1) “The Ghost of Inflation Reappears” Up & Down Wall Street.  Forsyth, Randall.  19 February 2018.  Barron’s.

2) “U.S. Budget Director Warns Interest Rates May ‘Spike’ on Deficit”  John, Arit and Niquette, Mark.  11 February 2018.  Bloomberg.

3) “China Weighs Slowing or Halting Purchases of U.S. Treasuries” 10 January 2018.  Bloomberg.


20 Minutes with Doug Casey

Published in Podcasts
Wednesday, 29 November 2017
Few investment experts have the unique background, opinions, and uncanny timing possessed by Doug Casey.
In this podcast, Mr. Casey discusses: what the future holds for European bonds and the euro given excessive debt levels and active secessionist movements; why the Federal Reserve's planned "unwinding" of its bond hoard is not feasible; what other risks may increase U.S. interest rates dramatically and derail the stock market; and why the future bull market in commodities warrants investment consideration.  November 2017.


Investment Theme Series-Cannabis

Published in Articles
Wednesday, 07 June 2017

Financial Market Update-1Q17

Published in Articles
Friday, 05 May 2017

Irrational Complacency

Published in Blog
Wednesday, 29 March 2017
March, 2017

complacency (noun):

      a feeling of quiet pleasure or security, often while unaware of some potential danger, defect, or the like.

The financial markets feel complacent.  Time and time again, stock market investors merely shrug at adverse financial, economic, and political news.  Even the Federal Reserve’s rate hike on March 15th failed to elicit a negative reaction.  And the statistics support the anecdotes.

Financial markets typically equate risk with volatility.  The greater the volatility generated by stock prices, the greater the risk of the stock market.  The most common measure of risk is the Chicago Board Options Exchange (CBOE) Volatility Index, also known as the VIX.  Constructed from the implied volatilities of a wide range of S&P 500 index options, it purports to measure expectations about near-term (30-day) volatility.

If high VIX levels indicate fear within the stock market, low levels surely suggest complacency.  It is not unexpected, as long bull markets often breed complacency.  But the level of worry and fear of a stock market decline has dropped to unusually low levels.

For much of March (through the 24th), the VIX ranged between 11.0 and 13.1, far lower than its median (17.5) or average (20.7) since the summer of 2008.  And far, far below highs observed as recently as 2015.1

Even the Federal Reserve appears worried.  In its January 31st to February 1st Federal Open Market Committee meeting minutes, the central bank “expressed concern that the low level of implied volatility in equity markets appeared inconsistent with the considerable uncertainty attending the outlook.”2

What are these uncertainties?  To name but a few in the near term:

  • Potential additional rate hikes by the Federal Reserve;
  • Likelihood of a European banking crisis with a probable summertime Greek default;
  • Monetary instability if the European election cycle disrupts the future of the eurozone;
  • Potential trade war with China; and
  • U.S. fiscal issues and legislative stalemates delaying or obstructing tax reform.

In December 1996, then Federal Reserve Chairman Greenspan famously implied stock market levels at the time reflected “irrational exuberance.”3  He was early, but he was right (and, quite frankly, he should have been right as he was almost singularly responsible for the bubble).

If the 1996 stock market reflected irrational exuberance, today’s stock market reflects irrational complacency.  Combined with extreme market valuations, investors should be wary, for while sentiment may move markets, eventually reality moves sentiment.

1) Federal Reserve Bank of St. Louis.
2) Minutes of the Federal Open Market Committee, January 31-February 1.
3) "The Challenge of Central Banking in a Democratic Society."  Remarks by Chairman Alan Greenspan at The American Enterprise Institute for Public Policy Research,
     (Washington, DC) 5 December 1996.


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