Back before I even got hooked on the sitcom Taxi, as revealed in an earlier edition, my nightly routine included watching reruns of the sitcom The Odd Couple. One of the classic episodes involved Felix throwing a surprise party for his roommate Oscar, who wanted nothing to do with it. Felix convinces Oscar to go through the motions for the sake of his friends who would be attending (sorry, no YouTube clip to be found).
So what does this have to do with our securities markets? The Fed raised interest rates this week. You’ve heard? You’ve been hearing for months. It was a fait accompli. The markets have been telling us. The commentators have been telling us. Heck, once the election was over, there wasn’t anyone left Not telling us. And yet, the markets reacted. Bond futures down (translates to rates up), equity futures up. The S&P keeps making new highs. It seems we all pretended we were surprised. And some people probably lost their ‘bets’ in spite of all the signs. Remember, there was a seller for every equity buyer prior to the announcement, and a buyer for every seller of bond futures.
This move, though, has a great deal of long term implications. An analogy I’ve often used, and I’m sure I did not make it up, is that running the Fed is like driving a cruise ship. Speed boats can zig and zag constantly, changing direction on a dime. And if they want, changing it again if the captain changes his/her mind. Much like asking a kid what they want Most for their birthday. A puppy? A new bike? Ah, an iPhone, since the current one is already a generation old.
But cruise ships? They don’t turn so quick. Titanic, anyone?
A cruise ship picks a direction that it can follow. They don’t want to turn. New York to London does not involve many turns. And this is what I think the Fed has done. I won’t say if there will be 2, 3 or 4 raises coming in 2017. What I will say is that I don’t believe after this second action that there are any quick reversals of opinion or policy coming our way. That ship has sailed, so to speak. OK, too many analogies.
But this is big. Perhaps as big a policy decision for the next few years as our choice for President. There are very few things in our lives, let alone our investment decisions, that are not affected. And if the Fed is indeed more like the Queen Mary than a Scarab, we now have an idea of what the future holds. Not the usual “future” of hours or days we’re now used to paying attention to, but a real future; 5, 10, 20 years or more. Take a look at historical 10 Year interest rates for the last 150 years.
None of the annotations are mine. This is not a revelation of any sort on my part. It is, as my blog tries to be, merely observation. The questions it raises are; how is this interpreted, and what are the ‘downstream’ effects? By downstream effects, I mean “Why does it matter to you?” And we can break that down if we want into two categories; life in general and investments specifically.
By looking at the chart, we can see that rates really do have long term cyclical periods. In fact, the above chart says we’re on a path for the next 20 years or more. The first down move in the chart, which takes us to the middle of the first annotation, shows rates moving down from around 1870 through 1900. Rates show a rise from that low point around 1900 to a peak around 1920. A decline followed until approximately 1940 and then the rise begins; until Paul Volker takes drastic action when Ronald Reagan became President. Since that time, rates have gone down. A few small corrections along the way, but pretty steadily in one direction. Cruise ship.
Every investment decision should now be made with the notion that we are in a rising rates environment. Let me point out that this is a good sign! It signals expansion. It signals economic health. It signals growth. And these are good things. Companies may see this as a reason to gear up for increased demand of their products. Employment slack (yes, I believe there still is some not blatantly shown in monthly numbers) evaporates. Wages go up. These are classic manifestations of an economic expansion. Econ 101, so to speak. And it seems to coincide with President-elect Trump’s positive bias towards business, especially United States business.
And obviously the Fed believes we’re on the right path. It can be argued, and often was by me, that the Fed was not going to raise rates again just before the election. Incumbents like positive stock markets going into an election. It helps the argument that the administration has done well economically speaking, so let’s keep the momentum going. Manipulation is such an ugly word, so I won’t use it. But people have historically voted in a way that they believe will most benefit them financially. We talk and even yell about social injustice and over-reaching government in our private lives, but in the end, we vote for the almighty dollar and our own pocketbooks. So the Fed wasn’t going to raise before the election. And in the words of Oscar Madison in the Odd Couple, “Oh What A Surprise!” when they did.
As to the effect of this rate increase on families? One raise, quarter point, not a huge deal. A few dollars a month on a car or mortgage, but really not much more than one less dinner out. But! If we know that this is now a long term trend we’ve begun, maybe we buy the car or house sooner. Maybe we take on less debt because we don’t want to pay ever increasing rates on our credit cards. This is the early stage. We have a long road ahead, or so history would indicate. Don’t stop buying. Don’t stop investing. And maybe even start saving, since your savings will actually start making money; another plus. Just make sure that when you do make these decisions, you realize what a big change we have just gone through. I’ve never been on a cruise, but I’ve heard they’re great! Economically speaking, this slow turn hopefully indicates we’ve got some good times ahead. Another Volker will come around one day, but history says today is not that day.