Thursday, December 8, 2016

Post, Post Election (The Really Big Event happened in July)

Will the election of "dark horse" Donald Trump be the biggest event of 2016? Well, certainly it is a "big event" but many, including myself think that the end of falling interest rates (rising bond prices) will be the "biggest" event with the largest financial impact. 

Today, Myles Udland wrote an great article..


"In 2016, the nearly 40-year bond bull market ended. Date of death: July 11.
And this was the biggest economic event of the year.
“The biggest of 2016, in a weird way, was not Trump, was not Brexit, was not the end of the OPEC war back in February, it was July 11,” Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, said at a panel on Wednesday.
“On July 11, 2016, a couple weeks after Brexit, the 30-year Treasury yield fell to 2.088%. On that day, the Swiss government could borrow money for 50 years — out to 2076, a year most of us won’t be around to see — at a negative interest rate.
“And that day was the day that the greatest bull market ever, in the bond market, ended. Since then, yields have been rising. And that without a doubt is the biggest event of 2016."
For many investment professionals, a secular decline in interest rates is the only reality they’ve ever known. Since the Paul Volcker-led Federal Reserve cranked interest rates up sharply in the early 1980s to end US inflation once and for all, bond yields have been on a steady decline. Bond prices rise when yields fall.
Through the decades, however, there have been episodes of yields rising. And this is not the first time strategists have called for the end of the bond bull market. But since the early 1980s — nearly 40 years ago — interest rates in the US, and most major developed markets, have been in decline.
A move towards interest rates rising, not falling, has implications not just for financial markets but the real economy, too. Rising interest rates will pressure mortgages. Rising interest rates also make it more expensive for governments, and businesses, to borrow money."
This sentiment is being heralded by many "gurus" such as Bond Czar, Bill Gross and his former Pimco associate, now Financial Pundit, Mohamed El-Erian.

Ray Dalio is CEO of Hedge Fund, Bridgewater--largest in the world with $150 billion in invested assets. He is very smart and his commentary tells you a lot about how "big money" thinks about investing. He clearly indicates that "things are about to change".

Ray Dalio Commentary

"To clarify the distinction, one could have capable people driving conservative/right policies or one can have incapable people driving them, and the same is true for liberal/left policies. To understand where we are likely to be headed, we need to assess both. To be clear, we are more non-ideological and practical/mechanical because to us economies and markets work like machines and our job is simply to understand how the levers will be moved and what outcome the moving of them is likely to produce."

"Donald Trump is moving forcefully to policies that put the stimulation of traditional domestic manufacturing above all else, that are far more pro-business, that are much more protectionist, etc.  We won’t go down the litany of particulars about the directions, as they’re well known, discussed in my last Observations, and well conveyed in the recent big market moves. As a result, whereas the previous period was characterized by 1) increasing globalization, free trade, and global connectedness, 2) relatively innocuous fiscal policies, and 3) sluggish domestic growth, low inflation, and falling bond yields, the new period is more likely to be characterized by 1) decreasing globalization, free trade, and global connectedness, 2) aggressively stimulative fiscal policies, and 3) increased US growth, higher inflation, and rising bond yields. Of course, there will be other big shifts as well, such as pertaining to business profitability, environmental protection, foreign policies/alliances, etc. Once again, we won’t go into the whole litany of them, as they’re well known. However, the main point we’re trying to convey is that there is a good chance that we are at one of those major reversals that last a decade (like the 1970-71 shift from the 1960s period of non-inflationary growth to the 1970s decade of stagflation, or the 1980s shift to disinflationary strong growth)"

"As for the effects of this particular ideological/environmental shift, we think that there's a significant likelihood that we have made the 30-year top in bond prices. We probably have made both the secular low in inflation and the secular low in bond yields relative to inflation. When reversals of major moves (like a 30-year bull market) happen, there are many market participants who have skewed their positions (often not knowingly) to be stung and shaken out of them by the move, making the move self-reinforcing until they are shaken out."

Is this the time to buy???  Probably not. Opportunity is coming, but it will probably appear after we get the "big reset" in prices that will occur when the reality of increasing interest rates "sinks in" and becomes more certain.