Peak real fed funds rate will likely be negative this cycle. Are negative real yields becoming permanent?
“it’s a long road to normal from where we are.”
Fed Chairman Powell
“100% of the time that the Fed tightens into a #Quad4, markets crash.”
Keith McCullough
As debt increasingly replaced productivity as the main growth driver, long term growth has been declining for 70 years to critically low levels.
The chart below shows that historically real rates usually reached somewhere around real GDP in order to contain inflation, but then also initiated a recession shortly after. Remarkably, Volcker took real rates to 11% in 1981 and precipitated a deep recession to break the back of the 1970s inflation.
The chart also shows that ever since 1981 the peaks in real rates have been declining to just 1% in 2018.
The “most reckless Fed ever” took the real Fed funds rate to a record low -8%! Positive real interest rates have never been further away.
The bond market is already indicating that in the current cycle the yield curve not only steepened to a lower peak, it has also inverted even before interest rates rose at all! The bond market is signalling that in underlying terms the economy is weak in the absence of extreme policy measures.
The yield curve inversion is very consequential for equities. Look at the track record and the strength of this signal.
Are Central Banks (BIS) going from extreme policy stimulus to …..cold turkey? Or just impotence? They have certainly changed their language…
“Time to Ignite all engines”
BIS June 2019
“The world economy must learn to rely less on expansionary monetary policies.”
BIS April 2022
Challenging investment conditions favors tight risk management with some quality real assets. The chart below shows that gold performs well when real interest rates are negative and falling. As soon as Treasury bonds can stabilize gold should perform well.
Treasury Inflation Protected Securities now have some positive real yields and the benefit of inflation on top which looks like an attractive option over time.
Currently the outlook is for continued weak grow through Q1 2023 with three of the next four quarters in quad 4, declining growth and inflation. Inflation is more uncertain but should peak in the current quarter and fall to around 5 1/2% by year end.
Inflation likely stays well above most expections for bond yields and Fed fund rates for the remainder of the year.
Weak growth will limit interest rate rises. The Bank Of England mentioned it as a concern on May 5 even as it raised interest rates to 1% and forecast 10% inflation at the end of 2022!
Get used to negative real rates!
Please note these important disclaimers:
Educational use Only. The market update published by CB Investment Management, LLC (“CB Investment”) is intended to be educational in nature and is not intended to be a recommendation for any specific investment product, strategy, plan feature or other purposes. Accordingly, it should not be construed by any consumer and/or prospective client as solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation.
Advertising and Marketing. Communications such as this are not impartial and are provided in connection with advertising and marketing. This material is not suggesting a specific course of action or any action at all. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, insurance, legal or tax professional that takes into account all of the particular facts and circumstances of an investor’s own situation. No person associated with CB Investment is a licensed attorney or tax professional and the information contained herein should not be considered tax or legal advice.
Links to Third Party Content. This Market Update contains links to articles or other information maintained by unrelated third parties. You acknowledge and agree to the following: All such information is provided solely for convenience purposes only because we believe that it may provide useful content and all users thereof should be guided accordingly. We disclaim any responsibility for the link’s performance or interaction with your computer, its security and privacy policies and practices, and any consequences that may result from visiting it. We do not control the content published by the third-party; we do not guarantee any claims made on it, nor do we endorse its sponsor or any of the content, policies, activities, products or services offered by any advertiser on the site. CB Investment assumes no liability for any inaccuracies, errors or omissions in or from any data or other information provided by the third party and inclusion or reference by CB Investment to any third party link should not be construed by any consumer and/or prospective client as a solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet.
Important Information regarding Registration Investment advice is offered through CB Investment Management, LLC (“CB Investment”), 8231 Crestwood Heights Drive, Mclean VA 22102 an investment adviser registered with the states of Virginia and Maryland. Registration with the states of Virginia and Maryland should not be construed to imply that the SEC has approved or endorsed qualifications or the services offered, or that its personnel possess a particular level of skill, expertise or training. Important information and disclosures related to CB Investment are available at https://chrisbelchamber.com.
