BWC Market Update - April 17, 2018
“The future’s uncertain and the end is always near.”
-Jim Morrison (The Doors, in “Roadhouse Blues”)
The end of what I don’t know, but something has got to give. Seemingly lost in the ever-increasing news flood Monday (April 9) was a release by the Congressional Budget Office about its expectations for interest rates. Before addressing this report, it’s worth reflecting on the relative importance it was given by the media. Over the past two days it seems as if all the air in the room was sucked up by the Mark Zuckerberg hearings in Washington. Interesting? Yes. Of much importance to investors? No! It gets harder and harder with so much information available (3 full-time business channels, 6 all news channels, Bloomberg, etc.) to separate the wheat from the chaff. It’s not so much that there is “fake” news out there, but that there is too much news to process in real time and the talking heads often mis-direct us to what is unimportant (read: Mark Zuckerberg hearings, Stormy Daniels, et al.).
The CBO report is the important news this week. In it, they expect the Fed to raise rates (the Fed Funds Target) four more times this year and four times next year, primarily in response to inflation finally breeching the Fed’s 2% target level (filled up your gas tank recently?). If enacted, those increases would push the Fed Funds Target to 3.75%. Three-month LIBOR would have to rise to near 4.50% (currently Fed Funds are at 1.75% and 3-month LIBOR is 2.34%). For the yield curve to maintain an even modest upward (non-recessionary) stance will require the benchmark 10-year yield (currently 2.80%) to rise to about 5% and the 30-year yield (currently 3%) to rise above 5%. Such a yield move would cause the current 30-year bond to fall more than 30% in price!
This scenario is consistent neither with a healthy stock market or economy. The increased borrowing costs will most likely pressure earnings. Companies refinancing medium-term debt issued in the good (low-rate) years of the past decade will face sharply higher costs, as will already stressed states and municipalities. Even the Federal Government’s interest costs will soar; they are already approaching $500 billion annually and will soon eclipse defenses spending, even in the current low rate regime. Investors will find the higher yields in bonds attractive after so many lackluster years, furthering pressuring stocks. There isn’t much rosy in this story, and the history of fast-rising rate regimes bears this out.
The alternative is that the Fed does not raise rates so aggressively. This might mean allowing inflation to run above its 2% target for a while, but this is probably preferable to the pain from the above. As we have argued before, inflation is ultimately the only way out of our debt problems in the long run (default is completely unpalatable and “growing” our way out of it just impossible). History, particularly the post-war period from 1946-1980, also bears this out. Inflation might also spur wage hikes that might appease workers (voters?). That this is also ultimately inflationary can take a back seat for a while. While I’m sure many smart and well-educated economists and policy makers worked on the CBO release, it’s our bet that two years from now we’ll have seen significantly less activity from the Fed than they expect, four hikes (five tops) are more likely.
Beirne Wealth Consulting Services, LLC (“BWC”) is a growing, privately owned, SEC Registered Investment Advisor* with just over $2 billion in assets under advisement and 21 employees in Connecticut, Pennsylvania and Florida. BWC provides independent, fee-based investment management services and customized financial planning solutions. Our institutional business provides consulting expertise to defined benefit and defined contribution plans, endowments, foundations and non-profit organizations. Our private clients include high net-worth individuals and prominent families, many of whom bring complex wealth management challenges and multigenerational planning needs. For more information, please visit www.beirnewealth.com or give us a call today at 888-231-6372
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