Wow…things are certainly happening faster than I expected. As January kicked off the new year, I posted my outlook for 2016 in which I discussed why, despite views of Goldman Sachs and many others, interest rates were going lower rather than higher.
“With the Federal Reserve raising interest rates on the short-end (Fed Funds), it will likely push the long-end of the curve lower as the economy begins to slow from the effects of monetary policy tightening.
From a purely technical perspective, rates have been in a long-term process of a tightening wedge. A breakout to the upside would suggest 10-year treasury rates would soar to 3.6% or higher, the consequence of which would be an almost immediate push of an economy growing at 2% into recession. The most likely path, given the current economic and monetary policy backdrop, will be a decline in rates toward the previous lows of 1.6-1.8%. (Inflation will also remain well below the Fed’s 2% target rate for the same reasons.)”
“Of course, falling rates means the ongoing “bond bull market” will remain intact for another year. In fact, if my outlook is correct, bonds will likely be one of the best performing asset classes in the next year.”
Here is that same chart today:
With interest rates now at my target levels in February, and bonds now extremely overbought, this is an opportune time to take some profits out of interest rate sensitive investments.
However, what the plunge in rates also suggests is that the economy is FAR weaker than Ms. Yellen, the mainstream financial media or the bullish blogosphere realize. Unfortunately, by the time the economic data is revised to reveal what rates are already telling you, it will be far too late to protect your investment capital.
But that is just my view. This weekend’s reading list, as usual, is a compilation of reads that provide both sides of the market and economic debate. Our job, as investors, is to reduce our confirmation bias in order to make more logical decisions with our money even though our emotions may be trying to lead us elsewhere. Hope, optimism and greed are all emotions that have led to far greater destructions of capital than negativity and fear ever have.
1) The Greatest Bull Market Of All Time by Ben Carlson via Wealth Of Common Sense
“How many hedge fund managers would kill for the following performance characteristics over a 40-year time frame?
- Annual Returns: 7.7%
- Volatility: 6.9%
- Number of Up Years: 37
- Number of Down Years: 3
- Annual Win %: 93%
- Worst Annual Loss: -2.9%
- Average Annual Loss: -1.9%
- Max Drawdown: -12.4%”
But Also Read: Equity Bubble Update by Jeremy Grantham via GMO
2) I Was Too Bullish by Matthew Belvedere via CNBC
“I was far too bullish last December,” Siegel admitted, referring to his call on “Squawk Box” that “valuations can stay on the high side.” He also had predicted on CNBC in November that Dow 20,000 was a “real possibility” in 2016. It was above 15,900 on Monday.
The Wharton School finance professor on Monday summed up his view on the headwinds to the market. “Those deflationary forces … from China, from commodities are really, in the presence of debt that so many of these energy and other companies have, … causing the market turmoil right now.”
Also Read: Just A Bullish Pause by Avi Gilburt via MarketWatch
Opposing View: Deteriorating Liquidity by Luke Kawa via Bloomberg
And Also: America’s Earning Recession Deepens by Alex Rosenberg via CNBC
3) Global Growth Fraying At The Edges by Gavyn Davis via FT
“The weakness in global risk assets that started in May 2015 raises a major question for macro-economists. Is market turbulence foreshadowing – or perhaps causing – a much broader weakening in global economic activity than anything seen since 2009?
Until now, the Fulcrum activity nowcasts have failed to identify a major turning point in global growth. This conclusion is still just about intact, but is subject to much greater doubt in this month’s report. There are some signs that growth in the advanced economies may be fraying at the edges, and China may be embarking on another mini downturn.”
Also Read: Clueless Economists & The Coming Recession by Arron Layman
4) EVERYTHING YOU NEED TO KNOW ABOUT NIRP
- An Explanation Of Negative Rates by Econobrowser
- Negative Rates: A Giant Policy Failure by Narayana Kocherlakota
- The Fed May Follow Japan’s Path by John Mauldin via Fortune
- The Futile Negative Rates Club by Daniel Gros via Project Syndicate
- Why Japan Went NIRP by Jeffrey Snider via Alhambra Partners
- Bizarro World Of Negative Rates by Marc Chandler via Real Clear Markets
- The New Frontier Of NIRP by Clive Crook via Bloomberg
- NIRP Confirms QE Failure by Jeffrey Snider via Real Clear Markets
5) Why Stocks Could Fall By 10-20% by Jack Bouroudjian via CNBC
“The market tone began to shift in December — and the warning signals started to flash red.
We started to witness a contraction in earnings for a couple of quarters in a row, which resulted in the price-to-earnings ratio of the S&P 500getting rich. We watched crude oil have a parabolic move to the downside as producers couldn’t pump fast enough. And we started to see the Federal Reserve move rates at a time when all the other central banks were doing the exact opposite which created risk aversion.
As it turns out, this became an I.O.U. market: interest rates, oil and uncertainty.”
But Also Read: 16 Charts The Explain The Market by Sam Ro via Business Insider
MUST READS
- Markets Disappointed By Fed by Louis Woodhill via Real Clear Markets
- Wall Street Strategist Still Full Of Bull by Salil Mehta via Statistical Ideas
- 5 Questions To Ask Yellen by Mohamed El-Erian via Bloomberg
- Fed Made Recession Worse by David Beckworth & Ramesh Ponnuru via Bloomberg
- Why You Can’t Afford To Buy A House by Joel Kotkin via The Daily Beast
- Faster Growth Is A Panacea by Steve Chapman via Reason
- Easy Money No Help by John Hussman via Hussman Funds
- KISS – Applying It To Investing by Joe Calhoun via Alhambra Partners
- Jobs Report Full Of Oddities by John Crudele via New York Post
- 70% Of Obama’s Budget Is Writing Check To Individuals by Editorial Staff via IBD
- Recession Ahead by David Stockman via Contra Corner
- Pro’s Are Just Like Us by Meb Faber via Faber Research
- Comparing Yields To Rates Is Stupid by Jesse Felder via The Felder Report
- Shades Of 2000 & 2007 via Dana Lyons via Tumblr
- Effects Of Buybacks Exposed by Michael Lebowitz via 720 Global Research
“A good player knows when to pick up his marbles.” – Anonymous
Questions, comments, suggestions – please email me.
Lance Roberts
Lance Roberts is a Chief Portfolio Strategist/Economist for Clarity Financial. He is also the host of “The Lance Roberts Show” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report”. Follow Lance on Facebook, Twitter, and Linked-In
