Gyroscopic Investing

The markets experienced a broad sell-off this past Friday on fears that the Fed will increase interest rates as a result of a strong jobs report.  It appears that no asset class was untouched by the sell-off.  Equities, bonds, and commodities all fell.  The market reacted in the absence of any new information from the Fed, or any direct indication of a rate increase.

While we can all agree that the Fed will increase rates at some point in our lifetime, the questions that remain are "When?" and "How much?"

I believe "When" is less important than "How much?"  The current Federal Funds Rate is about 0.11%.  When the Fed is ready to increase interest rates, what will they raise them to?  0.25%?  0.50%?

Absent an increase in inflation, I do not see the Fed driving a dramatic increase in interest rates.  In my opinion, increasing from the current 0.11% to even 0.50% would be a dramatic increase, and one where the markets would likely react negatively.  In this sense, Friday's downturn was a knee-jerk reaction (Aren't they all?).

What is your opinion?  When the Fed finally increases interest rates, what do you think the increase will be?

Edward, one of the reasons I got into the PP is so that I would not have to try and make predictions.  When I did I was easily >50% wrong, which meant when I listened to my own opinions I almost always lost money!

MangoMan wrote: When I actually start getting busier at work, I will know the economy is really improving, and I will let you know.

Ditto. When you are working for yourself you have a pretty good idea about whether or not the economy is getting better. The new jobs are barely staying ahead of population growth and they are mostly crappy jobs. In my view the "improvement" is minimal. The world economy has never fully bounced back from 2007-2009.

I don't think the Fed will actually raise rates this year but I also think that a certain amount of the potential that they might do so is getting factored into investment decisions. I expect Yellen to start hinting that maybe they'll push the increase back to September, then December or early 2016, etc.

MangoMan wrote: When I actually start getting busier at work, I will know the economy is really improving, and I will let you know. 

Well stated.

Ed

barrett wrote:

MangoMan wrote: When I actually start getting busier at work, I will know the economy is really improving, and I will let you know.

Ditto. When you are working for yourself you have a pretty good idea about whether or not the economy is getting better. The new jobs are barely staying ahead of population growth and they are mostly crappy jobs. In my view the "improvement" is minimal. The world economy has never fully bounced back from 2007-2009.

I don't think the Fed will actually raise rates this year but I also think that a certain amount of the potential that they might do so is getting factored into investment decisions. I expect Yellen to start hinting that maybe they'll push the increase back to September, then December or early 2016, etc.

When the FED actually raises rates it will be a non-event. The market reacts to the expectation that rates will increase with each positive economic report. It is likely that rates continue to rise without the FED making any adjustments to the overnight rate.

Cortopassi wrote: Edward, one of the reasons I got into the PP is so that I would not have to try and make predictions.  When I did I was easily >50% wrong, which meant when I listened to my own opinions I almost always lost money!

My understanding is that the pp does not fare well when interest rates rise.  Would love to see this disproved.

MangoMan wrote: I think the market reaction is overblown. The jobs report is a fantasy, because the drop in unemployment is more a result of people giving up on looking for full time work even though there has been some anemic hiring. When I actually start getting busier at work, I will know the economy is really improving, and I will let you know. 

This is great news if true, because the economy is booming like mad in the SF Bay Area.  Would love to see it continue until the rest of the country catches up.  But just because your little corner of the world isn't experiencing growth doesn't mean the nation as a whole isn't.

EdwardjK wrote: The markets experienced a broad sell-off this past Friday on fears that the Fed will increase interest rates as a result of a strong jobs report.

If the markets had instead gone up, the financial headlines would have read, "Strong jobs report gives markets a boost."

Daily financial news headlines are just-so stories: they attempt to make the markets seem more predictable and understandable than they really are.

MangoMan wrote:

dragoncar wrote:

Cortopassi wrote: Edward, one of the reasons I got into the PP is so that I would not have to try and make predictions.  When I did I was easily >50% wrong, which meant when I listened to my own opinions I almost always lost money!

My understanding is that the pp does not fare well when interest rates rise.  Would love to see this disproved.

MangoMan wrote: I think the market reaction is overblown. The jobs report is a fantasy, because the drop in unemployment is more a result of people giving up on looking for full time work even though there has been some anemic hiring. When I actually start getting busier at work, I will know the economy is really improving, and I will let you know. 

This is great news if true, because the economy is booming like mad in the SF Bay Area.  Would love to see it continue until the rest of the country catches up.  But just because your little corner of the world isn't experiencing growth doesn't mean the nation as a whole isn't.

I doubt the tech heavy Bay area is representative of the country as a whole. There may be lots of IT and engineering jobs, but the rest of the economy is another story. I am in Chicago and  IIRC barrett is in Connecticut, which is essentially distant suburban NYC. Those are two of the largest three cities in the US.

Oh so my locality is an outlier but your s isnt?  If only there were some national report we could refer to instead of anecdotal evidence

dragoncar wrote: My understanding is that the pp does not fare well when interest rates rise.  Would love to see this disproved.

Long bonds do not do well, period. Whether the PP does well is another issue, and really, who knows?

The 40-year bear market in fixed income investments is one of the primary reasons why equities have outperformed bonds and bills over the past 75 years. In the United States between 1939 and 1969, equities outperformed bonds by 9.8% per annum!  Between 1969 and 2001, the equity-bond premium was only 2.7%.  To a large degree, these differences were a result of Keynesian economic policies that favored lower interest rates and government deficits, but resulted in a long-term build up in inflation.

When Paul Volcker decided to fight inflation in 1979, the days of the high equity premium came to an abrupt end.  This is why it is important to break apart the data from the past.  Any extrapolation from the past to the future that fails to recognize how changes in government policies can affect future investor returns will be misleading. 

Starting in 1940, fixed income investors lost money in real terms as they entered into a 40-year bear market of rising inflation and interest rates. The bear market in fixed income investments that occurred between 1940 and 1981 was a global phenomenon. 

The basic facts of life for investors should be remembered here. Different factors drive the supply and demand for stocks, bonds and commodities.  Stocks are primarily driven by earnings expectations, which depend upon the business cycle.  Bonds depend primarily upon nominal interest rates, which are driven by inflation and by default risk.  Periods of long-term declines in interest rates, between 1865 and 1900, provided high returns to bond investors, while periods of rising interest rates, between 1940 and 1980, provided negative returns to bond investors


One could probably safely say (bet) that the odds for the next long term bond cycle being positive are not good...though it is anyone's guess when the tide might turn. Contrary to popular belief, while cash does lose its value over time, T-Bills manage to break even historically. If you have a belief that is deeply held about the next bond cycle yet believe in PP basically then do a tilt with slightly less LTTs...but you have to stick with it.

I wouldn't mind making some money in a savings account or short-term notes once again. For now, I have no complaints, except this minus 0.1% inflation is eating me alive! 

MangoMan wrote: I think the market reaction is overblown. The jobs report is a fantasy, because the drop in unemployment is more a result of people giving up on looking for full time work even though there has been some anemic hiring. When I actually start getting busier at work, I will know the economy is really improving, and I will let you know. 

F.E.A.R.

dragoncar wrote: My understanding is that the pp does not fare well when interest rates rise.  Would love to see this disproved.

It doesn't fare well when there are expectations of tight money.  The Fed doesn't actually cause tight money, that is just the perception.  And the Fed is not the only source of tight money.

Kbg wrote: One could probably safely say (bet) that the odds for the next long term bond cycle being positive are not good...though it is anyone's guess when the tide might turn. Contrary to popular belief, while cash does lose its value over time, T-Bills manage to break even historically. If you have a belief that is deeply held about the next bond cycle yet believe in PP basically then do a tilt with slightly less LTTs...but you have to stick with it.

Contrary to popular belief, T-Bills are actually the best inflation hedge.

MachineGhost wrote:

Kbg wrote: One could probably safely say (bet) that the odds for the next long term bond cycle being positive are not good...though it is anyone's guess when the tide might turn. Contrary to popular belief, while cash does lose its value over time, T-Bills manage to break even historically. If you have a belief that is deeply held about the next bond cycle yet believe in PP basically then do a tilt with slightly less LTTs...but you have to stick with it.

Contrary to popular belief, T-Bills are actually the best inflation hedge.

Not sure what you mean, but what I mean is that a buck invested in a T-Bill will end up still having its same purchasing power...i.e. keeps pace with inflation but does not exceed it to add value in real terms vice nominal.

MachineGhost wrote: Contrary to popular belief, T-Bills are actually the best inflation hedge.

That's an interesting thought.  What I understand you to mean is that market forces will drive the T-Bill rates to exactly match real inflation - and that regardless of whatever published numbers we might read, the T-Bill rate is intrinsically more truthful.

Let me think about that...

If I haven't completely misunderstood you, that resonates with me.

MachineGhost wrote:

dragoncar wrote: My understanding is that the pp does not fare well when interest rates rise.  Would love to see this disproved.

It doesn't fare well when there are expectations of tight money.  The Fed doesn't actually cause tight money, that is just the perception.  And the Fed is not the only source of tight money.

Good point.  Although lets admit that sometimes the Fed tries to cause tight money to stem inflation?