YOUGHAL, IRELAND – Yesterday, a small landmark was passed.
A tweet this morning:
For the first time since the financial crisis, the 3-month Treasury yield has surpassed the yield on the S&P 500.
Small investors look for big, risky gains. The big money aims for small, safe ones. As long as the big money could earn more from S&P dividend yields than from short-term Treasury yields, it stuck with stocks.
Now, it’s not so sure.
This is not a new era. But it is the return of an era that has been missing for nearly a decade – a time when you could earn a decent return from your savings without taking the risk of owning stocks.
As investors get reacquainted with this old friend, there will surely be some reminiscing… including memories about what happens when rates rise back to a “normal” range.
Remember, understanding Fed policy since 1987 is as easy as 1,2,3. It consists of the same three mistakes: 1) Make credit too cheap for too long. 2) Raise interest rates until the market crashes. 3) Cut them sharply in a panic.
Investors will recall how stocks plunged when the Fed last made its famous Mistake #2 in 2005–2007 – raising rates after holding them down too low for too long. They will wonder if the Fed isn’t doing it again with its quantitative tightening (QT) program… however timid it may be.
They’ll believe, as we do, that the Fed will come to the rescue with its Mistake #3, reversing QT and taking up quantitative easing again. And they’ll wonder, as we do, how effective their rate cutting will be when they have so few rates to cut.
Painful memories – repressed since the bull market began in March 2009 – will resurface.
Investors will remember how their stocks were cut in half in September 2008… how they tried to refinance real estate loans, but couldn’t find a willing lender… and how they wished they had sold out and retired in 2007.
“Are you out yet?” the old-timers will ask each other, as the rate on the 10-year T-note breaks over 3% and heads to 4%.
“You should be…” will come the advice.
But we leave the markets for a moment to focus on a much-overlooked and poorly understood phenomenon: scale.
Some things work well on a small scale. On a large scale, they don’t work at all.
If you have teenagers, for example, you could let them have a few friends over for a small party. The affair might be passably agreeable, with no broken lamps or bones. But don’t invite hundreds of them. We can almost guarantee it will be a disaster.
Likewise, you may love your spouse dearly and happily. But don’t try to love other spouses at the same time – it will only cause trouble.
We are noticing the effect of scale here in Ireland. It is a small country on a smallish island with a population of less than half the population of Los Angeles county.
The pace of life is different. The quality of life is different. And the news is different.
“We don’t know how lucky we are.”
We were having a drink with an Irish friend, sitting on the terrace of the Cliff House Hotel, when his comment triggered this cogitation.
The Cliff House is perched on the side of a steep hill, keeping watch over Ardmore Bay. On the other side, neat, green fields, squared off with hedgerows and lines of trees, lay in the distance.
It was about 65 degrees. The sun shone brightly in the late afternoon, punctuated by an occasional passing cloud.
“Yes, it is very pretty here.”
“I don’t mean that, I mean… I think it’s hard for Americans to believe that there are places like this, where you’re not afraid of getting murdered.
“When I go to the U.S., I always feel a little nervous. Of course, I’m always in a big city. Like Baltimore. There are police sirens all the time. And panhandlers.
“You have to keep an eye out and make sure you stay in a good neighborhood. And when you read the paper, you’re kind of amazed at how much awful stuff is going on.
“Here, about the worst thing that happens is a couple of guys in Dublin getting drunk and crashing their car into a stone wall at two in the morning. And it’s a national scandal.”
In the Irish papers recently was a story – over several days – of a pair of perverts who were on the loose. They had long criminal records, including sex with minors, and were wanted by the police.
The police – who do not carry guns – put out an alert warning people that the two had been spotted in County Donegal. More reports came in that they had been seen in towns in the north of the country.
At some point, local people seemed to have taken the law into their own hands. The two men were found tied to a park bench, covered with what looked like motor oil.
We pass this along with neither approval nor disapproval. We merely note that it is a different approach to law enforcement than we would find in Los Angeles County or Baltimore.
Some of the difference is probably the consequence of the much larger scale of U.S. society…
…which we will explore more fully anon.
By Joe Withrow, Head of Research, Bonner & Partners
Consumer staples stocks are lagging the overall market…
These are stocks like Coca-Cola… Walmart… and Costco – companies that make products you can find in every American household.
Today’s chart maps the Consumer Staples Select Sector SPDR ETF (XLP) – which tracks a basket of 33 consumer staples stocks – against the S&P 500 from January through today.
As you can see, consumer staples stocks have fallen 13% on the year… compared to a 2% gain for the S&P 500.
– Joe Withrow
Why Interest Rates Will Jump
As Bill pointed out, yields on U.S. Treasuries are rising meaningfully for the first time in over a decade. Now, another unseen reason could cause rates to spike higher.
Would You Buy Your Home on the Blockchain?
Have you ever had to close on a home? It costs thousands of dollars and takes months. But what if it could be completed in minutes for pennies on the dollar? That day isn’t far off…
Big Banks Are Celebrating
The Volcker Rule was enacted after the 2008 financial crisis. It prevents big banks from making speculative bets that aren’t in the interest of their customers. But now, a key provision of the rule is being rewritten, and the big banks couldn’t be happier…
In the mailbag, discussion turns towards the swamp…
In your Diary, “How to Get Ahead in the Swamp,” you made some “interesting” remarks that tell me you are more a part of the left-wing “gang” than I would have ever thought.
Your accusing statements about Gina Haspel – “managed to dodge questions,” “she should be swinging from a scaffold,” and “seems ready to do just about anything without asking questions” – left little doubt that you are nothing more than another member of the “mainstream media” who will do anything you can to bring down Donald Trump and his administration. You pose as an “insider” who will put out the “truth” – as the media mafia does every day with fake “news,” reporting “unnamed sources,” etc.
How disappointing it is for me to have to send this email to someone I once thought was a straight-shooter and truthful.You have lost your way.
– Jack L.
It seems that when our side of the swamp starts winning, Bill starts to cry foul play. Bill obviously doesn’t remember working in tobacco and now only remembers owning the farm. Too bad!
– Paul C.
I’ve been reading your publishings for years now. I want your plays. No one was more right about the swamp and your Trump pick. I, too, called Brexit, as well as a Trump victory.
– Joe C.
Well, when you have a previous president that did things without the Senate approving a treaty, then it’s not really an agreement, is it? Trump would have had a hard time pulling out of a treaty… that he could not do on his own. Obama ruled by the pen, and so, it can be undone by the pen. But you are correct in that the abysmally corrupt Deep State sucks.
– Craig N.
Meanwhile, readers consider if capitalism is “gratuitously cruel”…
Unrestrained, pure capitalism is just as unworkable in society as socialism. Capitalism cannot build interstate highways that prioritize taxpayer needs; it can’t put clean air and water ahead of corporate profit; it is incapable of ensuring that a child requiring half a million dollars in cancer treatments will be treated regardless of socioeconomic status. The only practical form of government combines the best elements of capitalism and socialism.
The observation that government has been inefficient or corrupt doesn’t negate the fact that certain functions, beyond the defense/justice duties that conservatives pinpoint, are best performed by the state. And this can happen without any relevant impairment to individual freedom. It just requires that we be better governed.
– Gary M.
Great Diary on capitalism, Bill. So true. Those who fear and hate capitalism are generally those who want to be taken care of by the government, or the university they work for, or who are usually complaining that they don’t make enough money from the large corporations they work for.
This mindset has been taught in our schools from a young age. It’s called the dumbing down of America, and it’s been going on since the early-’60s. When I was hiring young women to fill secretarial positions in the ‘80s, those from the suburbs had very poor work ethics in general. So I turned to the farms and rural areas to find my best and hardest workers. I’m glad we finally have a capitalist in the White House. He probably scares the crap out of the Deep State and lazy Americans who don’t want to work too hard.
– Steve B.
As always, you hit the nail on the head. Capitalism is the natural state for man when left to his own devices. It’s the meddlers who always want to boss everyone around and take a slice for themselves that are the problem. The Democrats would rather risk war than admit that they lost because they put up a lousy, corrupt, Washington insider who has had her fingerprints on most of the disasters of the last 30 years. It’s why Trump will probably win again unless there is a financial crisis on his watch. The professional class of politicians is the problem, and until we rid ourselves of these losers, we will never move ahead. Keep up the good work, my friend!
– Anthony O.
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