For at least 4 years the consensus of top analysts have called for the bursting of the Bond Bubble. Translation: Bond prices had risen so far and yields so low that such extreme levels of investment in Bonds in an of itself would cause a speculative collapse in Bond prices and interest rates would soar. With Central Banks around the world massively inflating their balance sheets as never before it kept the Bond Bubble crowd in the headlines calling for higher inflation and growth that never came. More well known analysts merely claimed that interest rates on the 10 Year Treasury would at least move above 3% toward 4% in 2013 – 2014. Somehow they missed the fact that we have been in a massive global debt deflation phase that was prevented from unwinding naturally due to central bank monetary inflation. Instead of understanding the new paradigm, financial experts merely claimed that Quantitative Easing (QE) is no longer working. If we didn’t have QE the past 6 years then debt deflation deleveraging process would have ended far more painfully a few years ago. We will not know the true outcome of this grand experiment in Global money creation for another 5 to 10 years we suspect.
Now with Oil falling over 50% in 6 months and fears of renewed slowing in the global economy it is far easier for many to say that near term yields will stay low, yet the clamor with near 100% consensus that rates will rise in 2015 as the economy picks up steam and the Fed begins to sell its $4 Trillion portfolio. Some day the overly compensated pros will be correct, but as we have said clearly since the 3rd quarter of 2013, rates will not rise past 3% and the technicals have persistently warned of lower yields and higher Bond prices and lower yields this past year.
For the past year interest rates have fallen steadily from 3% to almost 2%.
It’s hard to imagine the 10 year falling below a 2% yield, but our price chart warns of yet another rise in prices and fall in interest rates in the 1st quarter of 2015. Perhaps this will coincide with even lower Oil prices and more deflation fears. In late January the ECB is widely expected to finally adopt an aggressive QE policy. Should they fail – again – to stimulate then that decision could spur even lower energy prices than most think possible – stay tuned! We can’t predict what the ECB or more importantly what Germany’s Merkel will do, but with German 10 year rates just over half of one percent yield, possible deflation and an economy with almost no growth it seems absurd that Germany would maintain austerity for the sake of balancing a budget. Balancing a budget in a contractionary environment of course risks a self sustaining contraction spiral. US is the crutch for the world so far.
Still today Credit Suisse represents many that state our US 10 Year Treasury yield will rise to 3% before mid-year – before the Fed even begins to hike rates. We remain open to rising rates which would be a normal phase of a self sustaining economic cycle which has yet to be confirmed. For now watch for rates to stay low or even new lows until economic growth is stimulated.
US job growth leads the world
More US jobs are being created than in all of Europe. The good news is US and global capacity along with pent up demand remains high allowing for cheap credit – low inflation fueled growth over the next few years. When Quit rates rise to levels just above the current surge then typically we would expect a sharper rise in wages and income during an acceleration phase of the economic cycle.
The fact that wages have not accelerated is a clue we still don’t have strong growth conditions, but we are getting close.
With job creation reaching 7 year highs and by some measures over 14 year highs, we can see here that job openings are jumping ahead of other metrics like Quit rates and imply an acceleration in wages is coming along with even higher quit rates and job confidence.
With the majority of consumers feeling as if we are still in a recession, with the record 11.4 year age of our car fleet, 7 years of low construction and low capital expenditures we would expect significant job creation and pent up demand remains. Wage growth and consumption trends will follow jobs higher for a few more years before a flatter yield curve signals the next recession.
Summary: We continue to expect this debt deflated economy stimulated by monetary inflation to extend the economic cycle length toward a record 9 to 11 years. Unemployment should fall under 5% by 2016 even if our growth remains at the modest 2 to 3% rates of recent years. Aging demographics, excess central bank reserves, replacement cycles, pent up demand and European growth cycles should keep this recovery going and sustain job growth and corporate earnings longer than most expect.
A quick glance at stocks reveals that our late November warnings of a pullback in December culminated in a 2 week drop of 5% that scared markets as falling Oil prices raised fears of Junk Bond defaults. While High Yield Bonds remain a near term concern should Oil fall to fresh new lows under $54 a barrel, we can see that some of our technical indicators supported this rally and are still weeks away from a potential new short term Sell warning. Long term our investors remain heavily invested at 90% equity exposure. The divergence in foreign markets and our Nasdaq are a concern. We will need the German DAX30 to hit record highs in January and Oil prices to stop falling before another strong leg up is warranted in US stocks.
We will have an expanded view on the stock market in January.