There is much talk about 2008 and many comparisons between then and now. It has been my experience that most of the pundits who shout: “2008!” have little knowledge and even less understanding of what caused the Financial Crisis. Ask them to describe what a SIV, CDO, Synthetic CDO and CDO-squared are, chances are you will get a blank stare in response. That stare is usually indicative of their knowledge of the subject. (4) (5) (6) (7)

Fixed income market pundits often discuss risk premiums (credit spreads) to judge relative value. If risk premiums are narrower than the historic average, credit products, such as corporate and municipal bonds are said to be rich. If wider than the norm, they are said to be cheap. A similar discussion is now occurring in the bond market regarding the spread between the yield of long-dated U.S. Treasuries and the current, and expected rates of inflation. Many pundits claim that the bond market is underpricing inflation. What this ignores is the principal of supply and demand. The organic demand for U.S. Treasuries is such that investors are willing to accept a lower inflation risk premium than they had in the past. It is not so much that the bond market is wrong, but that these fixed income market commentators and strategists are ignoring the context in which this phenomenon is occurring. (5) (6) (7)

Global sovereign interest rates also play a part in UST yields. The Japanese Government Bond Curve has negative yields until the 9-year area. The 10-year Bundesobligation is yielding about 0.30%. How high can the 10-year UST yield trade when it is the most attractive high-quality sovereign benchmark on the planet? Backward looking interest rate and inflation models are failing investors and portfolio managers alike. (2) (5) (6) (7)

Who judges the success or failure of long-term strategies bases on annual performance? Apparently investors and advisors do. Judging the price performance of long-term assets, such as bonds, based on annual price performance is ludicrous. Under Tom Coughlin, the New York Giants made the playoffs five times in eleven seasons. During that same time, the Cincinnati Bengals made the playoffs seven times. However, the Giants won two Super Bowls during that time while the Bengals did not win a single playoff game. Few would argue that the Bengals were a more successful team than the Giants, but based in annual performances, the Bengals would appear to have been the better team. The point is to achieve your long-term goals. Annual performance/volatility is usually just noise, if one is appropriately positioned along suitability lines. (5) (6) (7)

Many pundits like to draw conclusions between job growth, potential economic growth and risk asset performance. However few will entertain the notion that the relationship between these components has probably changed. Job growth no longer results in wage growth the way it had in the past. This has led to higher savings rates by consumers and more judicious consumer spending. This has helped to keep GDP growth relatively modest. The truth is that the relationships between data sets have changed much throughout history. Demographics, technology and fiscal policies all play roles in data correlation. (5) (6) (7)

There is much concern that the U.S. economy is sliding toward a recession. Many of those who disagree point to the yield curve and say that a recession is not coming because the yield curve is neither flat nor inverted. These professionals cannot be that dense, can they? How can the yield curve realistically go flat or invert when the Fed has the Fed Funds Rate in a range of between 0.25% and 0.50%? We would need the 30-year U.S. government bond to yield 0.375%. That is unlikely. Fed policy has rendered the yield curve useless as a forecasting tool for the bond market’s assessment offorthcoming economic conditions. One should understand why rates are where they are, at the present time and why the curve occasionally goes flat or inverts. I do not believe that the U.S. economy is heading into recession, but it has nothing to do with the yield curve. (5) (6) (7)

Economists have been puzzled for nearly two years regarding why lower oil prices have not resulted in U.S. consumers embarking on a wanton spending spree. Besides the facts that household incomes are near 20-year lows, consumers are dealing with higher healthcare costs and aging demographics, and debt laden millennials augur for relatively conservative spending habits. Auto sales may offer some clues as to where fuel savings are going. Early January SAAR auto sales indicate that SUV sales surged (again) in January, but sales of passenger cars (sedans, coupes, etc.) are down about 12%. Cheaper gasoline is encouraging drivers to buy or lease larger, more expensive and less fuel-efficient vehicles. Economists missed that one. (5) (6) (7)

Stop waiting for the broken clock to be right. For years (decades in the case of Japan), market participants and economists have waited for monetary policy accommodation to boost economic growth and consumption. However, monetary stimulus appears to have lost its mojo. The reason? The problem is not the cost or even the supply of credit (although there are some signs of credit availability tightening, according to Fed data). It is the structural demand for credit. You can bring a horse to water, but you can’t make him drink. The same can be said for consumers and credit. (2) (5) (6) (7)

There is a sense in the market that retail investors are shunning stocks and bonds of large energy companies. The fear that persistently-low energy prices could result in dividend reductions appears to be the driving force. Yet, investor and advisor sentiment has shifted to where they are looking for bargains in the beaten-down small shale drillers. The reason? Oil prices cannot stay low forever and these companies could rebound. Hold on there, Sparky. If oil prices rebound, the large companies should benefit as well. If oil prices do not rebound as much as expected or remain low, the larger companies are better positioned to deal with that situation and could even gain market share. If larger companies can gain market share by acquiring some smaller producers and letting others fail, that could be a catalyst for a moderate rise in oil prices. My thesis is: Unless you are very risk tolerant, the phrase; “go big or go home” comes to mind. (1) (5) (6) (7)

I remain cautious on the EM story. I am not a believer that the EM middle-class is on the rise, at least not as previously anticipated. However, I do believe specific countries might offer opportunities. The “I” in BRIC could be one of them. However, it is best to contact be directly for deeper discussions on the topic as suitability trumps all other concerns. (1) (2) (5) (6) (7)

Investors are pushing back against the Puerto Rico debt restructuring offer. Some believe that owning General Obligation bonds gives them an iron-clad right to full repayment. I would argue against that, but such arguments are pointless when the math does not work. Iron-clad or not, one cannot receive money which is not there. It is the old blood from a stone scenario. (1) (3) (5) (6) (7)

J.P. Morgan published a report which indicates that sovereign wealth funds have been selling high-quality U.S. assets to raise cash for the purpose of covering budget shortfalls, due to low oil prices. This is not surprising as signs of this have persisted for several months. (2) (5) (6) (7)

(1)  High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

(2)  International and emerging market investment involves special risks, such as currency fluctuation and political instability and may not be suitable for all investors.

(3)  Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values may decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Many Municipal bonds are federally tax-free but other state and local taxes may apply.

(4) Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

(5) The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

(6) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. 

(7) All indices are unmanaged and may not be invested into directly.