The Dividend Cafe - The Week the Fed Muscled its way back to the Front Page

Episode Date: July 13, 2017

The Week the Fed Muscled its way back to the Front Page by The Bahnsen Group

Welcome to the Dividend Cafe, financial food for thought. Hello and welcome to this week's Dividend Cafe podcast. This is David Bonson, Chief Investment Officer at the Bonson Group of Hightower Advisors. And here we are into the getting close to middle of July earning season, getting ready to launch and markets sitting at new all time highs. I'll tell you, there's a lot of kind of heavy stuff we're discussing this week, and that's not normally the direction I like to take the dividend cafe. We want it to be very readable and listenable and comprehensible. We want it to be very readable and listenable and comprehensible. But sometimes the topics that are most important to investors and to commentating competently about the lay of the land requires a little deeper dive.

I hope you'll be able to bear with me this week. I want to start off with a couple of comments on the first half of 2017. We gave a lot of those recap numbers last week. But there's a chart at DividendCafe.com that is really fascinating, looking through the first half of the year and the movement up in the markets and all of the different policy things and newspaper headline things that were going on along the way. And if you just took out the chart of the markets and kept in the occurrence of FBI investigation and Middle East tensions with Qatar and terrorism funding, the Syria bombing, the executive order on immigration and the controversy

in the courts around that, the failure to repeal and replace Obamacare at this point, the really incredible reversal of fortunes for the Conservative Party in Britain, of fortunes for the Conservative Party in Britain, and the Prime Minister's humiliating loss there, the manner in which the French election went. You just had a lot of uncertainty in the political side, and you had a market that did nothing but go higher. There was a very small amount of volatility on a couple of occasions. And yes, those generally were somewhat headline driven. But the reality is that the sell offs were extremely short lived and frankly, from peak to trough rather insignificant anyways. As a matter of fact, the volatility level in terms of average daily move in the market, up or down, in the first half of 2017 is the lowest it's been in 52 years.

We've moved an average of 0.32% per day, 32 basis points and that amounts to the lowest level of daily price change that we've seen in well over a generation. So the political volatility and the market volatility are in extreme disconnect right now. We think that's an incredibly important story. The jobs report came out last week for the month of June, and there's few sayings or cliches more dangerous in investment finance than the old idiom that the trend is your friend. It's a kind of imbecilic way of saying that something going up in price will continue to do so, which is patently false. But the reality is that trends are your friends until they are not. And even though that maxim has no practical or actionable wisdom whatsoever, there is a trend at play in the jobs market that's worth commenting on. And it does

explain why the May jobs report, a very underwhelming one, was not worth responding to, report, a very underwhelming one, was not worth responding to and why the extraordinary jobs report in June bore this out. You had 222,000 jobs created in the month of June. We've been averaging about 185,000 new jobs per month for well over a year. And in May's report, we were way below the number. And in June's, we come in back over it. That ability to just sort of average things through, certainly if we went a quarter or four or five months where the trend proved itself to be reversing, there may be some economic takeaways in that. But for the time being, one print here or there is dangerous to respond to because the jobs number is moving. And we think that ultimately what is really helping things is that the labor participation force is growing. And it's one of the reasons you can get 222,000 new jobs created and have the unemployment rate go up from 4.3% to 4.4%

because you add 361,000 people re-enter the jobs force, which is a good thing. Can this still be true? Pundits are speculating that the recent rise in global bond yields has created havoc on trading desks because risk parity funds and leveraged hedge funds are unwinding positions and got caught on the other side of the interest rate trade. Listen, if you don't know what a risk parity fund is, don't worry about it. You don't

need to know. The whole market is a big risk parity fund. There's massive actors that represent every scenario under the sun. And there are folks in the market that are positioned for low inflation, others for high inflation, others for different growth expectations, etc. That's all a risk parity fund is, is the attempt to try to be all weather in that regard. in that regard. But anytime there's a big change in a macroeconomic element, some parties are going to be affected. So it makes a market. And the obsession of some in the media or punditry class to label a culprit whenever you have an event is really counterproductive. But speaking of those interest rate moves and global bond yields in particular, we put a chart up at dividendcafe.com of German bond yields and really, I think, establishing the proof that that German tail is wagging the U.S. dog. The U.S. interest rate market is really held somewhat captive right now by the European rate market. When Draghi and the ECB kind of ushered in a little more hawkish tone a couple

weeks ago, and we saw the U.S. drop of bond yields reverse and then play catch up on the other side and expectation of potentially higher rates in Europe. There's a relative value at play and there is a pickup in yield to be gained from being invested in U.S. bond markets versus global bond markets that are at lower yields. As those come higher, the U.S. then has to respond and the market responds for it. And that's what you're seeing. A lot of volatility, but really volatility that is driven by what is happening in the European markets which are playing catch up. Be careful what you call tight monetary policy you know as all the talk about the three interest rate increases the Fed has done in the last eight months and there's either another one or two to go this year you're still talking about a short-term Fed rate that is below zero after

inflation. The real Fed funds rate is still running negative to what our own expectations of inflation are. A few things happening this week that I think were quite interesting. We did get the Trump administration selection of Randall Quarles to serve as the Fed vice chair of supervision. You have an extremely competent and well-liked and respected guy with plenty of private enterprise experience. I think this bodes well for financial markets. Have a smart guy regulator combined with fondness of the wheels of private enterprise. And that could be very bullish for the financial sector. Certainly the emerging market bond world kind of has recovered.

It had sold off in the last couple of weeks. And we just believe that there's a scenario there where really strong global growth would be good for the em debt market um very kind of bounce along tepid muddle through global growth uh where where central banks are not able to get real hawkish tighten very dramatically that would be very strong for EM debt. The one scenario that could be very hurtful to the asset class would be a real deceleration, a real disappointing weakness in global growth right now that has not been on the horizon. I'll close you out with Citigroup's sort of global bear market checklist.

There's other ones from other analysts we'll use. They go back and look at a number of different metrics from March of 2000 and October of 2007, the last two significant bear markets we've had, and evaluate all the different indicators and what those metrics were like at that time and what they look like now. what those metrics were like at that time and what they look like now. And 16 of the 18 signals they use point to a continuation of the bull market. There's only two that indicate some frothiness in price. These things are never perfect. You have to pick which indicators you think are more applicable and whatnot.

There can also be contrary data. are more applicable and whatnot. There can also be contrary data. But all that to say that on a net-net basis, an effective tool to look at the state of markets and why there is a belief that this bull market can continue, albeit likely at a slower pace. We'll leave it there for the week. I hope this was too heavy.

I hope you read dividendcafe.com. I hope you'll subscribe to the podcast. Any questions at all, reach out anytime and let us know. Anything we can do to answer your questions and grow your knowledge base as an investor. Reach out if you're interested in talking to somebody at the Bonson Group about your own portfolio and financial needs. And thank you again for listening to Dividend Cafe. Thank you for listening to the Dividend Cafe, financial food for thought. The Bonson Group is registered with Hightower Securities LLC, member FINRA, MSRB, and SIPC, and with Hightower Advisors LLC, a registered investment advisor with the SEC.

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