Weekly Comment - August 12, 2019

Aug 12, 2019 | Nick Foglietta


Extremes Everywhere

Markets across the globe made outsized moves during the past five trading sessions.

The causes were:

  • The US Federal Reserve moved (only) 0.25% down on the Federal Funds Rate.
  • President Trump tweeted about new tariffs on China due to lack of progression in the trade talks.

The most amazing moves were in the credit/bond markets, but stocks and commodities were pretty crazy too.

The most important moves, I believe, are with interest rates.

The next section will deal with what is happening there, but I do want to show a few charts to illustrate the other areas impacted by the Fed decision and “tariff Tweets.”

As you can see in the preceding three charts; precious metals higher and economically based commodities lower in general.

Stock markets also got very choppy.

Bottom line: These sharp moves shown in the charts above “may” be the start of some long term trends. They need to have a few weeks to digest their new levels and then decide if trend change is real.

The following chart is technical in nature. It shows new lows reaching 9% of total issues traded within seven days of an all-time high for the S&P500.

I could show you three or four of the same types of correlating charts that produced the same warning signal in the past two weeks.

These rare signals are meaningful about 50% of the time and never right away. We will see how this one plays out.

More on Interest Rates

The media dwells on reporting stock market news. Fair enough but for long term investors, the bond markets are telling a much larger story.

Let’s start with the basic yields on 10 year bonds and work our way to what really catches my attention.

The chart above shows the yield in per cent on the US 10 year Treasury bond. Note the large decline that ensued after the US Federal Reserve cut interest rates 10 days ago.

The next chart, yield for the Canadian 10 year bond, is the same.

Same overall chart shape with a lower actual yield.

The next graphic shows what RBC World Markets is anticipating the US Federal Reserve will do for interest rate adjustments in the coming 18 months.

So this all begs the question: How low can interest rates go?

The traditional answer of ZERO no longer applies. As stated in these comments before, negative interest rates are now a thing.

The chart below shows the cumulative amount of “negative yielding debt” from around the world, which topped $15 trillion US dollars last week.  This equals 27% of the total sovereign debt outstanding.

The next chart shows the growth in CORPORATE issued bonds with negative yields around the world.

I can’t even wrap my head around negative corporate debt.

So here is the “occum’s razor” driven conclusion to what all of this negative yielding debt is saying: Financial markets cannot function without the manipulation of central banks.

At first it was a “little bit of central bank tinkering” to stave off a global recession in 2009, but now, investors cannot separate the organic functioning part of the financial market from the central bank manipulated part.

If you tried to separate the two, you would kill both!

Let me add one more chart to get you thinking.

Here, the black line is the global purchasing manager’s index (PMI), and the coloured in part of the graph is the GDP weighted global central bank policy rate of change year over year.

What you need to see is that, even with $15 trillion in negative yielding bonds in place at present, the central banks still need to drive interest rates lower to catch up to the drop in the PMI.


Let me apply the commentary above to your personal situation with a question.

What is the lowest interest rate you would accept on a GIC or bond investment?

If you can answer that question…great. I’d be interested to hear your process to arrive at your answer.

If you cannot answer that question, let me help you with a thought.

What is the lowest interest rate your financial plan can withstand to achieve you desired goals?

Megan and I have been hard at work getting these types of questions answered for clients. If you don’t feel your financial plan is in order then give us a call. We are happy to help.

Caveat: Whenever you see charts like the one posted above where there is a huge move in one direction realize the short-term odds of a correction back against the trend are extremely high. The commentary is considering an 18-month window of time, not the next four to six weeks.