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$9 Trillion Reasons

$9 Trillion Reasons


     Today, the widely anticipated commentary from Janet Yellen was delivered. I listened to the majority of her statement, until I couldn’t stay awake. All said, I think the Fed’s position on interest rates and the possibility of a September rate hike is about exactly the same as it has been all year. December is still likely/ possible but we’ll see.


Talk, Talk, Talk


     It seems, the Federal Reserve is purposely trying to talk the markets into believing that a rate hike is possible, even imminent. I don’t really understand why, as there is really very little pressure coming from inflation (yet) and the urgency to reload the interest rate gun is simply not present. Their position all year has been the same. In plain speak they want the markets, credit markets specifically, to know that they could raise rates and would like to stay on a patient track of doing so starting last December. Nothing has changed from that stance as far I heard today. Today the markets are selling off a bit, interest sensitive sectors are leading lower (utils and consumer) while those sectors that benefit from, or unaffected by, higher rates, are still in the green (Banks, select tech and healthcare). I don’t really see anything dramatic either way. Interestingly, Gold, high yield bonds and emerging market bonds are all up today at the same time indicating that the markets aren’t really taking the threat of a September rate hike very seriously.


$9 Trillion Reasons 


     Today, there is $9 Trillion worth of developed market sovereign debt held at negative interest rates. Returns for these bonds if held to maturity are negative, as implied. Crazy I know. These are mostly the domain of Japan and Europe. Negative rates in these countries drive their investors to sell and alternatively buy US Treasuries , which are still paying something positive (1.5%). In the process, all of this purchasing of US Treasuries leads to a stronger US Dollar and even lower interest rates. When the Fed raises short term rates, even more money would flood into the US with the relatively more attractive yields. In the process, the US Dollar gets another push higher which is very notably bad for many of our fortune 500 companies who derive more than 50% of their revenue overseas. So you begin to see why the Fed is a bit trapped. They don’t want foreign investors to literally own the entire Treasury market, they don’t want to see the US Dollar rising, but they also recognize the risks of overinflated asset prices under a monetary policy that is too lose for too long (like the days of Greenspan). They are stuck in prison of non-action, so they will do their very best to talk, talk and talk us down (see above).


Small Window Remains for Returns in 2016


     If the markets don’t bite too hard on the Federal bait by selling off sharply now, there is a high likelihood that prices will resume the uptrend and make another all time new high in the first two weeks of September. AFTER THAT, worries of an actual rate hike during the next Sept 20th Fed meeting will reemerge, then we are only 45 days from election drama, then we have the more real possibility of a rate hike at the December Fed meeting. All of this happens in a new earnings reporting cycle as well. It seems prudent to say, make hay while you can.


Just a quick note to give our take on “the news”.




Sam Jones