Change is in the (H)air

November 8th was what is known as a “Black Swan” event. A completely unexpected five standard deviation event.

We live in a world bombarded minute by minute with analysis of events by experts. Highly paid, over educated, elite experts. Great job experts! Now go look for another line of work.

We have been getting more cautious over the past few months as earnings growth for many companies has been slowing down. I believe we are in the 6th quarter in a row of reduced earnings expectations for the S&P 500 index. Then the events of November 8th came to pass and the whole game has changed. The financial industry was blindsided. Stocks soared and long-dated bonds collapsed.

“I’ve never seen anything like it,” exclaimed one veteran bond trader shocked at the ongoing carnage across the global bond market.

“When we think through the possible implications of some of Trump’s proposals which have to do with increasing tariffs, the most immediate implication is increasing prices – which is inflation,” Michael Hasenstab, CIO of Templeton Global Macro said.

“We do view the election of Donald Trump as a game changer,” said Adam Donaldson, head of debt research at Sydney-based Commonwealth Bank of Australia. “The strong bias toward fiscal expansion and inflationary policy represents a stark change to the malaise of recent years. This opens the door for the Fed to hike in December, but also more quickly in 2017 and 2018 than previously expected.”

Bloomberg reports “More than $1 trillion was wiped off the value of bonds around the world this week as U.S. President-elect Donald Trump’s policies are seen boosting spending and quickening inflation.”
Bonds getting slammed is the best news I’ve seen in a while. We all own some bonds albeit very short in maturity. The good news is that as bonds are sold off, the interest rate yield to maturity rises. Rising yields equal rising income. We could all use more of that.

So where do we go from here? There are so many moving parts and scenarios that it is impossible to say. Once again the experts are clueless. Extreme caution is the best approach. While there are many positive eventual outcomes there are just as many negative ones as global assets re-price on earnings, inflation and interest rate projections.

30 Year Treasury Bond – Yield Change


I did a quick analysis the other day of the 2.5% May 15, 2046 U.S. Treasury bond. It has declined in price by approximately 16% since its July 2016 high. That’s a big hit and that’s why we never buy any bonds with those extended maturities.

We are in uncharted territory. We have $20 Trillion in debt with record low interest rates and record high stock prices. Volatility is reemerging and opinions are changing by the minute. As we have said before:

“Saddle up Folks, You’re in for a Wild Ride”

J. Brock Hamilton
November 11, 2016