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Charles H. Dow, Father of Value Investing
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When Dividends are Canceled
Cyclical and Secular Markets
Inflation Proof Myth
What is Fair Value?
Issues with P-E Ratios
Beware of Gold Dividends
Gold Standard Myth
Lagging Gold Stocks?
No Sophisticated Investors
Dollar down, Gold up?
Problems with Market Share
Aim for Annualized Returns
Anatomy of Bear Market Trade
Don’t Use Stop Orders
How to Value Earnings
Low Yields, Big Gains
Set Limits, Gain More
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Historical Data
1290-1950: Price Index
1670-2012: Inflation Rate
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1846-1895: Gold/Silver Value
1853-2019: Recession/Depression Index
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1870-2033: Real Estate Cycles
1871-2020: Market Dividend Yield
1875-1940: St. Louis Rents
1876-1934: Credit-New Dwellings
1896-1925: Inflation-Stocks
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1900-1903: Dow Theory
1900-1923: Cigars and Cigarettes
1900-2019: Silver/Dow Ratio
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1903-1907: Dow Theory
1906-1932: Barron's Averages
1907-1910: Dow Theory
1910-1913: Dow Theory
1910-1936: U.S. Real Estate
1910-2016: Union Pacific Corp.
1914-2012: Fed/GDP Ratio
1919-1934: Barron's Industrial Production
1920-1940: Homestake Mining
1921-1939: US Realty
1922-1930: Discount Rate
1924-2001: Gold/Silver Stocks
1927-1937: Borden Co.
1927-1937: National Dairy Products
1927-1937: Union Carbide
1928-1943: Discount Rate
1929-1937: Monsanto Co.
1937-1969: Intelligent Investor
1939-1965: Utility Stocks v. Interest Rates
1941-1967: Texas Pacific Land
1947-1970: Inventory-Sales Ratio
1948-2019: Profits v. DJIA
1949-1970: Dow 600? SRL
1958-1976: Gold Expert
1963-1977: Farmland Values
1971-2018: Nasdaq v. Gold
1971-1974: REIT Crash
1972-1979: REIT Index Crash
1986-2018: Hang Seng Index Cycles
1986-2019: Crude Oil Cycles
1999-2017: Cell Phone Market Share
2008: Transaction History
2010-2021: Bitcoin Cycles -
Interesting Read
Inside a Moneymaking Machine Like No Other
The Fuzzy, Insane Math That's Creating So Many Billion-Dollar Tech Companies
Berkshire Hathaway Shareholder Letters
Forex Investors May Face $1 Billion Loss as Trade Site Vanishes
Why the oil price is falling
How a $600 Million Hedge Fund Disappeared
Hedge Fund Manager Who Remembers 1998 Rout Says Prepare for Pain
Swiss National Bank Starts Negative
Tice: Crash is Coming...Although
More on Edson Gould (PDF)
Schiller's CAPE ratio is wrong
Double-Digit Inflation in the 1970s (PDF)
401k Crisis
Quick Link Archive
Category Archives: Interest Rate Monitor
Reader Question & Answer
Q: “Wondering if the key is to watch for divergence w commodities and equities?”
Posted in inflation, Interest Rate Monitor, interest rates, Pandemic, Pandemic Roundtrip, Q and A, Wholesale Prices
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When the Fed Tried But Couldn’t Crush Stocks
By the logic of many, the stock market is being propped by the Federal Reserve. How is the Fed propping the stock market? Pushing interest rates down and keeping them down and possibly considering going negative on rates.
As we’ve consistently maintained, the Fed doesn’t matter. The following is an example of when it appeared as though the Fed was doing everything in their power to undermine the rise in the stock market.
The standard arguments to the increase of the Dow Jones Industrial Average include the New Deal programs implemented in 1933 and/or WWII which began in 1939. These claims sound good but don’t quite explain the reversal of the Dow Jones Industrial Average in July 1932.
If the claim is that the Fed is propping the stock market now then it is because an examination of the extensive history of rate increases from 1942 to 1968 hasn’t been reviewed.
Finally, if the claim is that the Fed is bound and determined to use every tool in the playbook to increase the stock market, then by the record of the period from 1934 to 1971, we should see the discount rate increase ten times and a constant fiddling with the margin rate.
It is possible that the low rates and unlimited “stimulus” measure is actually capping the rise of the stock market.
Interest Rate Cycle Comparison
1940-2020: The Full Interest Rate Cycle
Reasonable assumption on interest rates should be done based on relative or comparable starting points. With interest rates at secular lows, we should only compare rate activity from the 1940 to 1980 period which was a secular rising trend while avoid comparing rate activity to the 1980 to 2008 period.
Fastest Rate Increase, From the Low
Below we compare the rate increase of the 3-Month Treasury from the secular low in 1940 at 0.01% to the rate increases from the 2011 low at 0.01%.
From the level of 0.01% to 2.39%, the rate of increase was exaggerated for the period from 2011 to 2019 compared to the period of 1940 to 1956. The currently level of volatility is not unexpected for the early phase of the secular rising rate trend.
Interest Rate Monitor: September 2020
Secular Trend Review
We have been consistent in our view that the secular trend in interest rates is up rather than down and that increasing interest rates are good for the market. Our view preceded the Federal Reserve’s policy of rate increases starting December 15, 2015.
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“A single rate increase by the Federal Reserve in no way makes for a trend. However, markets often lead the way and what initially seems “bizarre” is only a natural change in regime, a change that we haven’t seen since the early 1940’s (December 16, 2015.).”
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“We’ve only included the point in the interest rate cycle that corresponds to the phase that we are entering, coming from an all-time low to an eventual all-time high (November 15, 2015.).”
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“Investors anticipating a general rise in interest rates should feel some comfort in knowing that most manager(s) in the utility sector are ready for what is to come. Rising interest rates are not an automatic death sentence for utility stock prices or earnings. In fact, the early stages of rising interest rates may see utility stocks match or exceed the returns of non-interest rate sensitive stocks, on a total return basis. Only when the outlook is cloudy will it become difficult to offer projections that are in line with prior expectations (September 4, 2014.).”
Cyclical Trend Review
In spite of the secular trend, we have also called the rate decline based on “price action” irrespective of the talk about what the Fed should or shouldn’t do.
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On January 23, 2019, we provided our first downside targets for interest rates. At the time, we had the 3-month treasury slated for a potential downside (in the extreme) of 0.83% from the level of 2.45%.
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On April 23, 2019, with the 3-month Treasury at 2.45%, we said the following: “If the current run of stability in rates is anything like the period of 2015 to 2016, we should see a sharp drop in rates as was seen in the period from September 12, 2016 to September 22, 2016. At that time, the 3-month treasury dropped from 0.37% to 0.18%, a decline of -51%.”
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On December 6, 2019, with the 3-month Treasury at 1.53%, we said: “If the November 1, 2019 low, at 1.52%, is broken then we can reasonably expect at least another decline to the 1.30% level and maybe more before another rate cut by the Federal Reserve.”
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On March 3, 2020, when the 3-month Treasury sat at 0.95%, the Fed decided to do an “emergency cut” in interest rates.
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On March 16, 2020, when the 3-month Treasury sat at 0.24%, the Fed cut rates to zero.
All of the actions of the Fed were preceded by the change in the overall trend of the 3-month Treasury. Our take on what is next is below. Continue reading
Rising Secular Trend in Interest Rates
As we have long advocated, the declining trend in interest rates is coming to an end and the secular trend in rates is up. To provide a decent level of analysis on what might happen going forward, we have a comparison of the Dow Jones Industrial Average to the 3-month Treasury from 1934 to the peak in May 1981.
Conventional wisdom says that as interest rates rise then stocks should underperform. However, when contrasted to the interest rate sensitive Dow Jones Utility Average, we see that the index increased +1,321% from the April 1942 low to the March 1965 peak.
We contrast the change in the Dow Jones Utility Average to the 3-month Treasury to highlight what happened to the price of Silver in the same secular trend.
Historically, it is understood that rising interest rates mean rising commodity prices. In the last secular trend, the price of silver increased modestly until, in the late stage of the cycle, all commodity prices go wild. We believe that such a trend is likely to occur again.
Our general conclusion on the secular trend in rising interest rates is that the best alternative in the initial stages is stocks and commodities in late stage of the same trend.
“For the past 25 years the commodity market and the stock market have moved almost exactly together. The index number representing many commodities rose from 88 in 1878 to 120 in 1881. It dropped back to 90 in 1885, rose to 95 in 1891, dropped back to 73 in 1896, and recovered to 90 in 1900. Furthermore, index numbers kept in Europe and applied to quite different commodities had almost exactly the same movement in the same time. It is not necessary to say to anyone familiar with the course of the stock market that this has been exactly the course of stocks in the same period ( source: Dow, Charles H. Review and Outlook. Wall Street Journal.February 21, 1901.)”
Interest Rate Monitor: March 2020
For the last 40 years, interest rates have been in decline. So people can be forgiven when they have the view that the trend is down, it should be down, and if it ever goes up and something goes wrong then the solution must be to cut interest rates.
Unfortunately, during a secular rising trend, cutting interest rates aren’t the solution. Worse still, falling rates ARE THE PROBLEM. Adding QE and stimulus to rate cuts compounds an already bad situation.
Review
We have been unanimous in our view that the secular trend in interest rates is up rather than down and that increasing interest rates are good for the market. Our view preceded the Federal Reserve’s policy of rate increases starting December 15, 2015.
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“A single rate increase by the Federal Reserve in no way makes for a trend. However, markets often lead the way and what initially seems “bizarre” is only a natural change in regime, a change that we haven’t seen since the early 1940’s (December 16, 2015.).”
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“We’ve only included the point in the interest rate cycle that corresponds to the phase that we are entering, coming from an all-time low to an eventual all-time high (November 15, 2015.).”
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“Investors anticipating a general rise in interest rates should feel some comfort in knowing that most manager(s) in the utility sector are ready for what is to come. Rising interest rates are not an automatic death sentence for utility stock prices or earnings. In fact, the early stages of rising interest rates may see utility stocks match or exceed the returns of non-interest rate sensitive stocks, on a total return basis. Only when the outlook is cloudy will it become difficult to offer projections that are in line with prior expectations (September 4, 2014.).”
Current Rate Environment
As we have stated well before rates started to increase, in a secular rising trend in interest rates, going up will be good for stocks and the economy. What this also means is that in a secular rising trend in interest rates, going down will be bad for stocks and the economy. We have depicted the change below.
Rates Going Up
Rates Going Down
We have used the Daily 3-Month Treasury for one simple reason, when it goes up or down, the Federal Reserve ALWAYS follows.
Conclusion
The door has been closed on the rate cutting tool that the Federal Reserve has wielded like a force field against any perceived threat to the economy. However, the reality is that we’re in a secular rising trend in interest rates. ANY additional stimulus (fiscal or monetary) should be looked upon as prolonging the problem rather than improving or fixing the problem.
Posted in Interest Rate Monitor, interest rates
Interest Rate Monitor: March 2020
Review
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On January 23, 2019, we provided our first downside targets for interest rates. At the time, we had the 3-month treasury slated for a potential downside (in the extreme) of 0.83% from the level of 2.45%.
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On April 23, 2019, with the 3-month Treasury at 2.45%, we said the following: “If the current run of stability in rates is anything like the period of 2015 to 2016, we should see a sharp drop in rates as was seen in the period from September 12, 2016 to September 22, 2016. At that time, the 3-month treasury dropped from 0.37% to 0.18%, a decline of -51%.”
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On December 6, 2019, with the 3-month Treasury at 1.53%, we said: “If the November 1, 2019 low, at 1.52%, is broken then we can reasonably expect at least another decline to the 1.30% level and maybe more before another rate cut by the Federal Reserve.”
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On March 3, 2020, when the 3-month Treasury sat at 0.95%, the Fed decided to do an “emergency cut” in interest rates.
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On March 4, 2020, the 3-month Treasury sits at 0.72%.
Update
Slow and steady is the pace of our analysis. So far, we’re on track. The chart below says it all.
Posted in Interest Rate Monitor
Interest Rate Monitor: December 2019
On October 7, 2019, when the 3-month treasury sat at 1.75%, we said the following:
“Tentatively, we expected the 3-month Treasury will decline into the range of 1.62% to 1.39%.”
By October 30, 2019, the Federal Reserve lowered rates when the daily 3-month Treasury was at 1.62%. Since that time, a pattern has emerged which is worth a quick take. Continue reading
Posted in 3-month, Interest Rate Monitor
Interest Rate Monitor: October 2019
On November 21, 2015, we said the following:
“While a Fed rate increase is what everyone is waiting for, history suggests that Fed policy (government regulated) follows short-term Treasuries (market driven).”
We made the commentary because we saw that the 3-month Treasury rate was advancing higher.
Since that time, we’ve watched as the Federal Reserve Bank continues to followed the short-term market rates both up and down. After the November 21, 2015 posting, we saw, in December 15, 2015, the Federal Reserve increase the Fed Funds Rate for the first time since June 29, 2006. Again, the Fed Funds Rate increase followed the action of 3-month Treasury.
As with the rate increases in the 3-month Treasury followed by the Fed Funds Rate shortly thereafter, so too did we see the Fed Funds Rate decline after the 3-month Treasury reversed to the downside. As we said in our April 23, 2019 posting:
“If the current run of stability in rates is anything like the period of 2015 to 2016, we should see a sharp drop in rates…”
The chart above highlights the point of our April 23, 2019 claim relative to the actual rate activity that has followed. Most important is the fact that Fed Funds Rate policy did not take place until four months after the peak in the 3-month Treasury. Even after the rate decreased in July 2019, it was clear that the Fed would have to catch up for lost ground which is reflected in the September 18, 2019 rate cut.
Below are the targets that we have set for the 3-month Treasury which will be reflected, in direction only, with the Fed Funds Rate. Continue reading
Posted in 3-month, Federal Reserve Bank, Interest Rate Monitor, interest rates
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Interest Rate Monitor: June 2019
On April 23, 2019, we said the following of interest rates:
“If the current run of stability in rates is anything like the period of 2015 to 2016, we should see a sharp drop in rates…”
At the time, rates had been in a trading range, as seen below.
The drop in the 3-month Treasury has been nothing short of phenomenal. However, the question on everyone’s mind is, how far down? We attempt to address this in the following commentary. Continue reading
Chart of the Day: Inverted Yields from 1800 to 1965
Below is a chart of inverted yields of American bonds as published in Richard Russell’s Dow Theory Letters on May 25, 1965. What is most conspicuous about this chart? The overall trend of lower highs (yields) and lower lows (yields).
Interest Rate Monitor: April 2019
Below are the downside targets for the 3-month Treasury from the beginning of the Fed’s interest rate increasing campaign. Continue reading
Posted in Interest Rate Monitor
Interest Rate Monitor: January 2019
Below are the downside targets for the 3-month Treasury from the beginning of the Fed’s interest rate increasing campaign. Continue reading
Posted in Interest Rate Monitor, interest rates
Interest Rate Monitor: November 2018
On November 21, 2015, we said the following:
“While a Fed rate increase is what everyone is waiting for, history suggests that Fed policy (government regulated) follows short-term Treasuries (market driven).
“In a barely perceptible way, the chart above demonstrates that all Federal Reserve rate increases were preceded by a rise in the 3-month Treasury. The blue arrows indicate the reversal in the declining trend before 3-month Treasuries increased. From this point, we can easily see that the Federal Reserve’s discount rate follows to the upside not long after. We’ve only included the point in the interest rate cycle that corresponds to the phase that we are entering, coming from an all-time low to an eventual all-time high.”
We are clearly in the early stages of a secular rising trend in interest rates. As noted above, the direction is up for the foreseeable future. What concerns us now, as always, is the cyclical declines which can be dramatic. Below we trace out the first decline in the previous secular trend and see what that would look like in the current rate environment. Continue reading