Today, we have an inverted yield curve, meaning that yields in the short end of the US Treasury market (one month bills are 2%) are higher than yields in ten years (1.7%) though we are slightly positive from there to the 30 year maturity.
Typically, inverted curves portend recession. Why? Because there is a theoretical lack of demand for capital, meaning fewer are borrowing for projects, and thus more capital is available at relatively lower prices.
Said differently, in times of growth, when there is a strong demand for loans, lenders can ration capital at relatively higher prices. A corollary is that in such times of growth, there is typically more inflation, which leads to lenders demanding a higher interest rate to compensate for the higher inflation.
So is today's inverted curve suggesting recession? In my book, absolutely not. This in part is a function of the modern, technological economy, where, as I have noted in earlier posts, I believe enormous buffers of dramatically heightened efficiency has led to equally dramatically higher levels of productivity, and thus, a lessened demand for capital for a given level of growth.
On top of all of that, interest rates around the world are negative; a phenomenon that is hard for many of us to rationalize, but creating, already, some element of fear that the significant positive spread in the US to these international rates may continue to decrease. That is another way of saying that though rates are absolutely, historically low in the United States, they are higher than on trillions of dollars of debt around the world and there is an underlying anxiety that this trend can lead to lower rates, and even the possibility of 0% interest rates in America.
Wow! Other than government mandate, as in Germany, where institutions I think feel obligated to invest, the negative rates around the world, though engineered to try and stimulate economies, must be speaking to something. It suggests that there is huge value to certainty. What certainty? The certainty of getting your money back, even if needing to pay insurance (ie receiving a negative interest rate) is the cost of doing business. It is true that we are all accustomed to insurance, but paying insurance in a world where inflation does exist is still impossible so far, for me to rationalize when there are aternatives.
But I do not expect flat or negative rates in America. Ultimately, I remain confident that today's rates are an aberration. But in the meantime, the trends seem to be moving strongly in the direction of locking down the positive rate structure that exists here in America. I don't give much credence to Trump's interest in dropping rates further, nor do I believe that Powell pays serious attention to these request/demands, and indeed, I do believe our economy is strong, without any need for further rate reduction. That direction to me is also a mystery, other than as an effort to remain competitive in the international markets, with a theoretically lower dollar as a result.
In the meantime, WHAT DOES MAKE SENSE IS HIGH DIVIDEND PAYING COMMON STOCKS WITH GREAT BALANCE SHEETS; GREAT MANAGEMENT; AND GREAT PRODUCTS. THE DISPARITY BETWEEN TREASURY LEVELS AND STOCK DIVIDEND YIELDS IN MY VIEW, CREATES A MASSIVE OPPORTUNITY TO LOCK IN THESE DIVIDENDS BY OWNING BOTH THE STOCKS AND EXTENDING YOURSELF BY OWNING LEAPS IN YOUR SELECTED NAMES.
OF COURSE, TODAY'S LOW RATES ALSO SUPPORT THE PRECIOUS METALS MARKETS, WHICH I THINK ARE MOVING UP IN ESSENCE, SOMEWHAT INDEPENDENT OF THE RATE ENVIRONMENT, AS MUCH AS THE MARKET ON THE SURFACE IS REACTING TO INTEREST RATES. GOLD IS ANOTHER WAY OF EXPRESSING THE LOGIC THAT SOMEHOW SUPPORTS BUYERS PURCHASING DEBT AT NEGATIVE RATES....IE CERTAINTY OF RETURN OF CAPITAL... IN THIS CASE IN THE FORM OF GOLD AND PRECIOUS METALS THAT HAVE HISTORICALLY PLAYED SUCH A PIVOTAL ROLE IN MAINTAINING PURCHASING POWER.