‘Once people realize the Fed doesn’t have to keep increasing rates and will soon take rates down…that will be a buy signal for markets.’ (story link)
— Bill Ackman
One of the clearest signals that the Fed has reached it rate cycle peak – no, let me say it differently. When the two-year Treasury rate falls below the Federal Reserve Funds Rate, the “market” is telling you the rate hikes are over or no longer a threat. Equities will rally when treasuries fall, not when the Fed reduces rates.
The two-year Treasury note rate is a forward looking signal on what the Market thinks. The Fed Funds rate itself is a lagging indicator that is data driven. Therefore, the data driven signal to act is published numbers and not a forward looking view.
The ten-year Treasury is also an important interest rate to watch as a forward looking interest rate.
Here is what the interest rates above look like now:
Sept. 5.22 |
||
Fed Funds Rate |
2.33% |
|
2-year T-Rate |
3.51% |
|
10-year T-Rate |
3.26% |
Expectations are for a 0.50% to a 0.75% Fed rate hike this month.
Sources to watch for a Fed Funds Rate check-up:
- https://www.bankrate.com/rates/interest-rates/federal-funds-rate/
- https://fred.stlouisfed.org/series/FEDFUNDS
Two-year Treasury Note Rate check-up:
Ten-year Treasury Note Check-up:
It appears from the layoffs that are now starting. Corporate America sees a sharp slowdown coming soon.
Demand for workers is still high but now we have supply meeting that demand. Something new Vs the past few years.
It is estimated by Raoul Pal, Luke Gromen and Cathi Wood (in recent interviews), that the period between November 2022 and April of 2023 will have the worst economic headline news. This is the Data Dependent news, stated by the Federal Reserve as signals for action. These are lagging indicators that will drag out the length of the recession.
- “If you bullish on equities, you have to be bullish on bonds first.” David Rosenberg July 28, 2022.
Dave’s call on ten-year T-note, (linked here 1:11 hr.) as a low, is in the 1.65% to 1.75%. He believes while the Fed will pause sooner than later. The Fed will be very slow to start lowering the Fed Funds Rate. His call for a low on the S&P 500 is 2,200. Currently the S&P 500 is at 3,908. Ouch! Rosenburg thinks the recession will be long because we are already in a recession and the Fed has only started to raise interest rates. Any number of pro’s are saying bonds first as the safest place to be at the moment.
“The US Dollar Losing World Dominance | Here Is Why – Matthew Piepenburg” July 11, 2022 – 25 minutes
Piepenburg, presents his case for the US$ gradually losing its status as the global reserve currency. He is also very direct in his view on the outcome of the current Rate hikes and recession. In case you don’t want to review the video, Matt is a cynic concerning the Federal Reserve. He is confident the Fed will default to printing more dollars even while saying they are fighting inflation. An economic historian, Matt quotes multiple examples of past global leading companies and how they dealt with identical situations and the eventual outcomes.
There is a lot packed into the 25 minutes. No surprise, at this time, Piepenburg is hard asset investor and gold is the core hard asset. Turkey sent gold to Russia for rubles to buy Nat Gas. Saudi Arabia is willing to work with China in Yuan for Oil. United States using the US$ as an international weapon against Russia will mark the end of the US$ as the primary global reserve currency.
Author of the 2020, Amazon #1 Release, Rigged to Fail, Matt is fluent in French, German and English; he is a graduate of Brown (BA), Harvard (MA) and the University of Michigan (JD). His widely respected reports on macro conditions and the changing behaviour of risk assets are published regularly at SignalsMatter.com.
The conclusion is that the United States will have to reinflate. There is no other option other than civil war and a crushed population. The only question is if we have a financial breakage of size sooner and have a V shaped bottom or we have a longer and shallower stagflation recession.
Holding liquidity (two to five year treasuries) and hard assets seems to be the best path forward at this time. One might also acquire dividends in rock solid companies as they will benefit from the eventual decline of interest rates. There could be a liquidity crunch between now and them. Precious metals are typically one of the first assets to appreciate coming out of a recession. LOTM still thinks Nat Gas and Oil pipelines for dividends are a good place to have money.
Written Sept 6, 2022, by Tom Linzmeier, editor of Tom’s Blog, at www.LivingOffTheMarket.com
LOTM Research & Consulting Service
* An account related to LOTM holds a position in this security.
Neither LOTM nor Tom Linzmeier is a Registered Investment Advisor.
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