Reuters has an article about a potential upcoming interest rate increase from the Fed. The Yellen speech yesterday pretty much cemented a rate increase on March 15th. But the hoopla about anything the Fed does is baffling, because they are followers, not leaders. There are some people who understand this, but most people get caught up in the hysterics of these meetings. However the market is already speaking, with the rates up to the 2 year trading at 8 year highs this week, and the yield curve becoming the flattest since 2008. From this post in December 2015, my belief was we would continue to see a flattening of the yield curve:
“….And explode they have – 3 month, 6 month and 1 year TBills are at 7 year highs – up by 10 -20 times from the lows. And to repeat the Fed does NOT lead the bond market, they FOLLOW. And when the Fed does catch up to the bond market, short term rates will begin to move even higher. Expect to see a flat yield curve within 18 months as the 10 year yield will stay stubbornly low for a while before also exploding higher.”
And expect to see more flattening of the yield curve as we move thru the first half of 2017, second half is a different story. A flattening yield curve is basically monetary tightening, so that slowly becomes a problem. I will repeat that there is no stock market bubble, long term the market is headed substantially higher, but continue to believe this is a horrible entry point. The big selloffs are great buying opportunities. But a flattening yield curve becomes a problem for financials. The US Bank Index (BKX) is nowhere near it’s 2007 high, even with the tremendous financial de-reg Trump rally.
We are continuing to hear about how rising interest rates are bearish for the stock market. But that simple explanation has no evidence behind it. At times stocks do poorly with rising rates, sometimes they do well. And visa versa, sometimes stocks do well with falling rates, sometimes they do horribly. Our most recent examples are: the doubling in the Dow between October 2002 to October 2007 as rates quadrupled; and the Dow falling over 50% into the massive secular low in March 2009 as rates plummeted. And since the 2009 lows in stocks, rates (at the Fed) stayed ultra low, until they started raising rates (way belatedly) in December 2015. But during this time, market-based rates on the short end bottomed in 2011. And stocks have risen for 8 years. So the point is, the correlation between rates and stock prices, in and of itself, is not remotely consistent. It’s monetary conditions (tightening or loosening) which is the key. Rising rates do not necessarily imply tightening, nor does a fall in rates imply loosening. In October 2007-March 2009, rates were falling, yet monetary conditions were tightening. Is that so hard to understand? Apparently if you have an Ivy League PhD it certainly is. Yet for someone who barely made it thru college, it seems pretty straightforward.
But actually gold’s relationship to rising Fed rates is much clearer. And sorry gold permabears, rising rates are not bearish for gold. My post from December lays out several of these rate cycles:
“From February 1971 to July 1974, the Fed raised rates 10% points. And gold rallied about 5x up to around $200. But I thought…. And then it fell during the next rate decrease to $102 in August 1976, even though rates dropped 8% points during that time. But I thought….And then gold rallied to the bubble high of $875 on January 21, 1980. And, you guessed it, rates increased substantially that whole time. But I…. And more recently, rates went from 1.25% in June 2003 (The Maestro era) to 5.25% in June 2006 (Chopper Man Bernanke era). And you guessed it, gold doubled during this time. But…..Once again, so much for the market experts.”
And in December 2015 the esteemed WSJ whiffed again, claiming the Fed rate rise that month was bearish for gold, while my own view was it was finally time to buy gold. Then gold proceeded to hit its’ secular bottom 3 days after the esteemed WSJ article. So once again proving this business is only about working hard and keeping biases at bay.
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