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Affluent Investor | July 27, 2017

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Interest Rates, the Dollar, Stocks, and You

Volatility in the BOND market has exploded in recent weeks as German BUND yields have blown out from NEGATIVE territory to .84% (using the 10-year). We should note that the 2-year yield remains negative. This move in the German BUND market has had implications for U.S. rates as well, with our own ten-year moving from a recent 2% level to 2.4% last Friday the 5th of June. These are significant moves in the rate market, but one need not look further than stock prices, commodity, prices, and most importantly, currency exchange rates, to conclude that there is not a lot going on to force investor action. Stock prices have been volatile and had some down days, but they had plenty more volatility when rates were unchanged and even more volatility when rates were moving the OTHER way. The reality is that bond markets and interest rate markets are not leading to crazy action in any other market (yet). If someone went long a German BUND a month ago, then yes, something bad has happened to their portfolio. But the reality is that there is little macroeconomic significance to anything, yet.

The things I am watching now are for a REAL disconnect between the Fed and the bond market. A ten-year at 2.4% suggests no such thing (yet). If the ten-year were to blow out to 3% or above, that would be far more meaningful. In the meantime, I believe we are in the peculiar vicious cycle (or virtuous cycle, depending on your school of thought) where the dollar increases because it believes the Fed will raise rates, and the Fed believes the dollar increase means they don’t need to raise rates, et cetera, et cetera. Paradoxical, yes. Sustainable, no.

I am sympathetic to the media’s need to make ANY financial event the equivalent of the Space Shuttle tragedy in terms of newsworthiness. But a German yield that is UP to something less than 1% is, ummmmm, not such a story. Investors need to know three things, and I had to work to create just three crucially important principles to hold on to out of all this commotion:

(1) Short term movements in the dollar (up or down) are NOISE; they are not fundamentally significant. LONG-TERM U.S.-based investors WANT a strong dollar

(2) There are four central banks who run the world (U.S., Japan, ECB, China, basically in that order), and they have all the ammo they need to hold rates down and flood the world in liquidity. I shake in fear to think there are serious pundits who WANT them to do that, but I also am blisteringly confused to think there are pundits who do not know that is exactly what they will be doing for the foreseeable future. Moves up and down are to be expected, and I have NO INTEREST in timing or forecasting rate movements, but the idea that we face an imminent paradigm shift in central bank monetary maturity is silly.

(3) The 30-year (plus) bull market in bonds is over. I believe that. But that is different than forecasting an imminent and violent bear market. Prudent allocation will mean a long-term focus, strategic biases, and watching for bond market rebellion against central banks.

Seven years of reflationary accommodation has all sorts of policy implications, some good, some bad. And right now I sympathize with the desire to make short term market calls around the EuroDollar one day and the 10-year yield the next. Those short term calls will end in pain. Longer term, I highlighted a few principles and perspectives here that will suit investors well.

“Moral Capitalism”
David L. Bahnsen, CFP®, works as a Senior Vice President in the private client group of one of the premier Wall Street firms in the country where he provides financial planning and investment management services to individuals and families. He and his wife of nearly eleven years (Joleen) reside in Newport Beach, CA with their seven-year old son, Mitchell, five-year old daughter, Sadie, and 2-year old baby boy, Graham. He is an active board member of the Lincoln Club of Orange County where he serves on the Executive Committee and chairs the Program Committee. He serves on the Board of Advisors of Dr. Art Laffer’s California Recovery Project with the Pacific Research Institute. He has recently been appointed to the Board of the Concordia University Center for Public Policy. He also serves on the Blackstone Faculty of the Alliance Defense Fund and is a Cooperating Board member of the Center for Cultural Leadership where he is the Senior Fellow of Economics and Finance. He is a member of the Investment Management Consultants Association (IMCA), and holds numerous financial designations and licenses.

David is a disciple of Milton Friedman, a lover of Ronald Reagan, and a “National Review kind of conservative”. His writings strive to reflect an ideology of freedom principles integrated with transcendent truths. His hero is his late father, Dr. Greg Bahnsen, but he is pretty fond of John Calvin, Abraham Kuyper, F.A. Hayek, Winston Churchill, C.S. Lewis, William Buckley, Margaret Thatcher, George Gilder, Steve Forbes, and Larry Kudlow as well.

Hobbies include travel, fine dining, golfing, and sports. His true passions in life include anything pertaining to USC football, the financial markets, politics, Palm Desert, his gorgeous and brilliant children, and his lovely wife, Joleen.


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