“I will be the first to say that it is always difficult to get monetary policy just right. But the Fed's analytical prowess is top-notch, and our forecasting record is second to none." Janet Yellen
Looking at Mrs. Yellen’s leading quote, clearly, those who help set monetary policy have an elevated opinion of their capabilities. Keeping this in mind, let’s remember that over the last six to twelve months, Chairman Powell and the Federal Reserve Board have been quite firm about having a policy stance that is based on raising interest rates, consistent with full employment and low, stable inflation. Last week, the head of the European Central Bank, Mario Draghi, he of ‘whatever it takes’ policy, proclaimed that the ECB was ready to do more to help counteract poor economic growth and potential deflation. In doing so, he essentially was saying further interest rate cuts and bond buying (quantitative easing) of all different instruments (sovereign bonds, corporates, municipals, agencies) are on the table.
Back in the States, Chairman Powell left interest rates alone on Wednesday but strongly inferred rate cuts could be imminent (meaning at the July meeting), which was widely anticipated. Some believe it is a weakening industrial sector, others point to the trade and tariff spat with China, while conspiracy theorists see Jumpin Jay as caving to Donald’s directives on the policy. Speaking of our bold and humble leader, he was faced with a difficult circumstance when the Iranian Revolutionary Guard decided to shoot down an unmanned drone U.S. drone, one that costs over 100 million big ones and was manufactured by Northrup Grumman. Donald was ready to retaliate but made it a point of saying his cooler head prevailed. Bond yields immediately reacted to both situations and fell below the 2% level (on the 10 year Treasury). For stocks and bonds, lower interest rates as a policy is a massive deal. Assets are worth the discounted value of their cash generation. If the discount rate is the denominator, and it is going down, well, a fifth grader can figure out that 6/3 is less than 6/2. Bond prices are already through the roof, and many believe stocks are as well. Where to turn? Yup, the market decided, gold and oil. Gold and oil had their best weeks in a long time, and stocks loved the lower interest rate. How long will this continue?
If you look at the landscape, Powell and those forecasting Feds seem to be saying lower rates is now the primary policy stance, at least for the foreseeable future. The United States and Iran don’t look like they are going to be attending any tea parties any time soon, probably far from it, especially if the leaders at Northrup and the other military-industrial giants have anything to say about it. Oil leaders have been pretty consistent that oil might trade in a range of 50-70 because of the floor being set by US shale production and the production cuts of OPEC. It is based on the assumption of very few serious geopolitical problems between major countries. Over the next few weeks, the world will find out if the US and Iran situation will calm down or escalate, but certainly, the importance of global oil supplies, shipping locations, and conditions will be under close scrutiny by market participants.
Elsewhere, Facebook’s big announcement with heavyweight partners about the creation of a global platform for cryptocurrencies helped Bitcoin broach the 10,000 dollar mark. With ever increasing regulatory supervision all over the globe, Amazon’s emergence in advertising, and higher operational costs for security, adding another potential revenue generating business seems like a smart move by the already shrewd Mr. Zuckerberg. Like so many issues business related, execution will prove to be the difference maker or not. In the meantime, interest rate and geopolitical concerns remain front and center.
Disclaimer: Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one's overall financial situation. The fact that Yale Bock has earned the right to use the Chartered Financial Analyst in no way means or guarantee performance better than market indexes.