Crossroads...to zero and back.
(BONUS VIDEO: Kickin' it old school with Eric Clapton)
From WKND notes, by Eric Peters of One River Asset Management, which is the most thought provoking writing I read every Sunday AM:
"...And as global asset prices continued to reset higher, the rates on the debt that supports these historic valuations reset lower. Begging the question, how will this swing of the pendulum someday reverse? Because if we've learned one thing, it's that highly-leveraged economies do not function properly when asset prices decline. And if leverage is exceptionally high, asset prices decline when interest rates rise. Which means they must not. But if rates can't rise, then any country that resets its debt stock near 0% is trapped. Like Japan. Which surprised many forecasters by not increasing QQE or cutting rates negative. Which of course, would have raised asset prices, but tightened the trap further still. Which is what the Fed seems desperate to evade. And tiptoed back toward the possibility of a December hike..."
Mitch here: Investors are at a crossroads. The Fed has tamped down the Fed Funds rate to near zero since 2008. It hasn't raised rates in almost 10 years. How much of the stock market performance since the 2009 Great Recession bottom has been driven by low interest rates? We're about to find out. But I can tell you it is a lot. To Zero and Back sounds like it could be the name of a sci-fi movie, but in reality, it describes the gradual process that the Fed will have to navigate for the first time. It's the FED's NASA equivalent of landing a man on the moon.
My own notes from August 5th:
The FED: Whether lift-off (the name given to the first official FED rate hike since 2008) happens in September, December, or early next year is not as important as is the glide path of future rate hikes. Yellen & Co. hope to move slowly enough to convince all economic participants that they'll barely notice the rate hikes while simultaneously convincing the same participants that the FED will not overshoot with rates that are too low and hence, inflationary. This is an extraordinary balancing act that is as original as it is sure to introduce uncertainty. Can the FED be both dovish and hawkish at the same time? That is the 64 Trillion Dollar question. My take is that the FED will be more dovish because of a very shallow glide path for rate hikes. The futures market indicates a very low Federal Funds rate going out two years. That certainly is dovish. If things change and we know the FED is data dependent, as I believe it should be, the futures market will adjust and will send a signal out to the rest of the yield curve (shortest term Treasury's to longest dated Treasury's), which is what the entire spectrum of asset prices and the cost of money is priced off.
Change is in the air. My view from August 5th hasn't changed. Everything from currency, stocks, bonds, housing, to automobile sales; it's all tied to interest rates. An old expression rings loudly in my mind - Don't fight the Fed. When the Fed eases, you buy stocks. But when the Fed tightens, you sell stocks. This Fed, though, doesn't want to pick a fight and it wants us to know that. It's the "win-win" Fed policy. Above everything you read and hear, how the Fed executes it's To Zero and Back mission is our crossroads. Let the countdown begin.
CROSSROADS: [Video] Kickin' it old school with Eric Clapton!
I opened ClientFirst Strategy, Inc. in order to offer unbiased advice and investment management expertise. To find out how I may help you improve your potential to succeed in reaching your financial goals, please call or email me.
All the views expressed in this report/commentary accurately reflect our personal views about any and all of the subject securities or issuers and no part of our compensation was, is, or will be, directly or indirectly related to the specific recommendations or views we have expressed in this report. This material is not intended as an offer or solicitation for the purchase of sale of any security or other financial instrument. Securities, financial instruments, or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from securities or investments mentioned in this report may fall against your interests, and you may get back less than the amount you invested. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. You should consult with your tax adviser regarding your specific situation. Diversification is a method of managing risk and doesn't protect against loss in a down market. This email is intended to reach only those in the following states: AZ, CA, CO, CT, FL, IL, IN, KS, KY,LA, MD, MT, NJ, NM, NY, PA, TX, VA, WA. If you are a resident of a state not included in this list, please reply email so I may add your state or please opt-out.