Unusual Territory

2019-07-23 | TG Watkins

Today’s blog is going to be more of an anecdotal one. As a stock market professional who spends all day seeing, listening, and consuming market related and political information, I thought I would share with you a general summary of the unusual territory we are finding ourselves in. There are some growing divergences in a few corners of our interconnected world that are starting to make people scratch their heads and wonder what it all means, if it’s bad, and when will it matter?

Let me frame this a little bit for you: The stock market has made new, all time highs. Unemployment is at all time lows. The economy, as it is generally accepted, is doing great. And the Fed’s mandate of 2% inflation and low unemployment is being fulfilled.

This all sounds great and as we want it to be. Now, without being too political but needing to include political topics, please be open minded. There are 3 areas that when put together, conflict with each other when all the good things stated above are purring along:

1. Fed rates / Qualitative tightening / stimulus / currency manipulation
2. Precious metals breaking out
3. Bond yield

I imagine most of you have heard about the rock and a hard place that the Fed is finding itself between. They needed to get interest rates back up to a “normal” level so that if the economy had problems, they could lower it again as one of the tools in their tool box. They began raising, and then the market threw a tantrum and so they stopped. Ok fine, maybe it wasn’t handled the best. But now for the scratching of the head: The Fed is most likely going to lower rates at the end of the month while the market is at all-time highs.

“But the Fed lowers rates when the market or economy needs help, and the economy is doing well and the market just hit new highs.” Confused? So are a lot of other people and it’s making them nervous. I’ll try to assuage some of those concerns with this possible idea. Trump has been talking about other countries manipulating their currencies, providing stimulus to their economies, and other government involvement to boost their economies while America is raising rates and generally tightening or unwinding Qualitative Easing from 2008. Trump may just be saying why should we restrict ourselves when the rest of the world is still boosting? By reversing course with the interest rates, the Fed is either trying to preempt something unforeseen, or trying to play to the lowest common denominator.

No one quite knows the reason, and no one quite knows what the longer-term effects will be. This makes me think of my mom saying, “if your friends jumped off a bridge would you too?”. Just replace “friends” with “countries” and I think you see why people are concerned. America was trying to get off the government steroids, but since all the other countries are doing it, do we really need to quit? How long can a junkie survive? Only time will tell since this is unusual territory.

I am also quite confident that you all are aware of the massive surge first in gold and then in silver. These two precious metals are usually looked at as safe havens and a flight to safety when the market or economy have a gloomy future. But the market is at all time highs and the economy is doing well…. So, is this an indication of some yet to be seen turn? Perhaps. However, there is another possibility and it has to do with the bond yield. With interest rates now likely reversing and bonds not paying much, where else can people park money that isn’t exposed to the stock market? Yep, precious metals. In this case, the rise in gold and silver may not be too bad of an omen and may simply be the next place people are rotating their lower risk money. We are never quite sure and this turn of events is also having people scratch their heads.

It is a very weird world out there right now and many are trying to put the pieces of the puzzle together so we know what decisions to make. But in this unusual and uncharted territory we find ourselves in, that may not be possible until it becomes obvious. Despite the out of whack metrics, things do seem pretty good right now and we should just follow what’s working. Be sure to stay nimble and just don’t be surprised by things that come along in the future. Might as well enjoy the good times for as long as they persist.