Your Portfolio Watch Weekly Update – July 22, 2019

Weekly Market Update by Retirement Lifestyle Advocates

Stocks declined last week.  The Dow fell .65% and the S&P 500 declined 1.23%.

Metals rallied with gold advancing .66% and the more volatile silver jumping more than 6%.

The Morgan Stanley Diversified Select Index advanced slightly.  US Treasuries also advanced as yields fell.  The US Dollar Index also advanced.

Chart One is a chart of an exchange-traded fund that tracks the price performance of the US Treasury long bond.  Notice the rise in the long bond over the last 9 months as US Treasuries rallied more than 25%.

If you are a new reader to “Portfolio Watch”, as bond prices rally, yields decline.

We have been monitoring yields of US Treasuries over different time frames.  Historically speaking, when the yield curve inverts, it signals a recession most of the time.

An inverted yield curve simply means that shorter term Treasuries are yielding more than longer term Treasuries.

As of July 18, the one-month Treasury Bill was yielding more than the three-month, the six-month, the one-year, two-year, three-year, five year and seven year.

Chart Two, taken from Mish Shedlock’s excellent blog (Source: https://moneymaven.io/mishtalk/economics/fed-panic-10-year-vs-3-month-yield-curve-spread-un-inverts-IaLQEqPUP0yPX1d4rfhyKA/), illustrates.

When reviewing Chart Two, note that the yield curve is inverted completely for three years.

Essentially, an inverted yield curve means that bond investors see more risk in the short-term than in the long term. 

The Federal Reserve has taken note.

The odds are now high that the Fed will cut interest rates soon.  “Fed Watch” now puts the odds of a rate cut on July 31 at nearly 100%.

John Williams, President of the New York Federal Reserve, made some controversial comments last week that he later tried to “clarify”.  Actually, he tried to walk back his comments.

This from “Market Watch” (Source:  https://www.marketwatch.com/story/trump-piles-on-fed-after-williams-slip-up-2019-07-19):

President Donald Trump on Friday kicked the Federal Reserve when it was down by highlighting a communications snafu featuring New York Fed President John Williams late Thursday afternoon.

In his remarks and subsequent walk-back, Williams seemed initially to support aggressive easing, only to have a spokesman step up to downplay his comments.

In his speech, Williams argued that his research on the “zero lower bound” showed the Fed should act to cut interest rates at the first sign of illness and not wait for a disease to spread with benchmark interest rates low.

Investors took the comment as evidence the New York Fed president supported a half-point rate cut at the Fed’s next meeting on July 30-31. Fed funds futures quickly priced in greater than 50% chance of a 50-basis-point move.

After the sharp reaction, the New York Fed put out a statement trying to walk back the comments.

A spokesman said Williams’s comments were “academic” and not about current policy.

Neil Dutta, head of economics at Renaissance Macro Research, called the episode “amateur hour at the Fed.”

“We have not seen anything like this before,” Dutta said in a note to clients, “and honestly, we are not sure what they were thinking.” He said the prospect of a half-point cut can’t be ruled out. 

Trump jumped into the fray Friday and tweeted that he liked Williams’s initial stance and not the reversal:

“I like New York Fed President John Williams first statement much better than his second. His first statement is 100% correct in that the Fed “raised” far too fast & too early.”

We have been stating for a very long time that the Fed will have to cut interest rates and eventually resort to more money printing, a.k.a. “quantitative easing”.

The reality is the deficit, debt and unfunded liabilities of federal programs such as Social Security and Medicare dictate that it’s the only politically feasible option.

These fiscal issues cannot be solved by raising taxes.  The numbers are simply too large.

While cutting spending is an option, all government spending would need to get slashed by nearly 50% across the board.  That would include spending for Social Security, Medicare, defense, education and everything else.

Spending cuts of that magnitude would thrust the country into a deflationary depression.

The only other option is to maintain easy money policies through low- interest rates (which tend to increase the money supply) and outright money printing.

While these policies never end well, the consequences could possibly be a little way off yet.  While interest rates here are low and going lower, much of the world’s public debt is yielding negative interest rates.  Negative interest rates mean that when you buy a government bond, at maturity, you get back less than you invested.

That makes low interest look pretty good.

This week on RLA Radio, host, Dennis Tubbergen, does a show on IRA and 401(k) tax liability.  He asks, if much of what you have been told about IRA’s and 401(k)’s could be wrong?

The podcast version of the program is now available at www.RetirementLifestyleAdvocates.com.

 “An investment in knowledge always pays the best interest.”

-Benjamin Franklin

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