Happy Holidays, dear readers! Believe it or not, the vast majority of the newsletters we write are not, in fact, for our own entertainment. A couple of them definitely are - notably the April Tin Foil Hat series and the October Halloween series - but apart from those semiannual gems, most of the time we are trying to educate, inform, amuse, explain, entertain, and/or deobfuscate.
This one, however, will likely turn out to be none of that. If you’ve been paying attention to those trade confirmations that hit your inbox at the stroke of midnight, you’ll have noticed that we’ve been busy headed into year-end. The following is a glimpse into what we’re thinking, and why. Fair warning, it may feel a bit like climbing up an Escher staircase. But like we said, this one’s for us.
It’s the most wonderful time of the year. To only slightly paraphrase Andy Williams:
There’ll be parties for hosting
Marshmallows for toasting
And frightening kids don’t you know
There’ll be scary ghost stories
And tales of the gories of
Halloweens long, long ago
It’s the most wonderful time
Yes the most wonderful time
Oh the most wonderful time
Of the year
There’s nothing quite like the combination of that crisp chill of fall in the air, the sight of millions of leaves dying a fiery death (because of the colors, not because they’re in California), and the earthy scent as they start to decay and crunch underfoot for raising the spirits. Figuratively. But also perhaps literally.
Do you ever find yourself pulled back through history and imagining what life was like for a particular group back in the day? Like the Mayans, or the Romans, or the French aristocracy? Or maybe you looked at the Super Blood Wolf Moon eclipse this January and wondered how many past regimes had been overthrown and leaders axed (literally) because such things were perceived as having lost the favor of the gods? Or maybe not and we’re just weird like that.
In any case, this is an April newsletter, so dust off that aluminum foil and let’s pull back the curtain on the collective solipsism behind the not-so-invisible hand that guides our markets. Also, put 1984 back on top of your summer reading list. Ready? Let’s go.
Happy Spring! The clocks have all been changed, the equinox is behind us, and summer fast approaches. The Fed apparently decided to get a head start on flip-flop season, however, by going full Left Shark this week.
As a reminder, this is what the Fed said just three short months ago, back in December (italicized parentheses our own):
Well, that certainly escalated quickly. The third quarter ended with the US market at pretty much all time highs (again) and the early February gyrations long forgotten by most. But then the calendar rolled over to October, the witching month, and much hell has broken loose. Not all hell, but much. As of last Friday, markets were down about 10% overall - and we mean all markets. Large Cap, Small Cap, International, Emerging...even bonds fell this month. In point of fact, in the last sixty years, this is just the 13th time US markets have sold off by 10% or more within a month after reaching all-time highs. (And yes, that stat is completely cherry-picked because it let us use “Friday” and “13th” in making the same point, and how else would we work a Jason Voorhees reference into this note?) Pretty much the only things that haven’t gone down this month are gold and cash. There has been a little bit of a recovery these last two days, but we are still well on track for all major asset classes to close the month below their average price level for the last year.
So. What was it that solved the puzzle box and unleashed the Cenobites on the market? According to anyone who gets paid to make up explanations for the daily movements of the stock market (and don’t kid yourself, they are made up), the proximate cause was rates going up.
From CNN: “simply put, stocks are sinking as Treasury rates rise...the 10-year hit 3.24% on Wednesday for the first time in seven years. That’s an about-face from 2.85% at the end of August.”
From USA Today: “the catalyst was the recent spike in the yield on a closely watched government bond to a seven-year high.”
There are some tangential things thrown into the mix as modifiers, usually about trade tariffs or geopolitical uncertainty or tech stocks falling, but the main culprit is this nasty “about-face” “spike” that happened in Treasuries. Let’s look at that for a second, shall we?
Check out a graph of the yield on that “closely-watched” 10-year government bond for the last 50 years. Hoo-boy! Take a look at that spike. No, not that first one, that’s the 70s. No, not the big one either, that’s the 80s. Yeah, it does kind of look a bit like a seismograph for the duration of the 80s. That spike? Nope, that’s 1995. Can’t you see it? On the far right-hand side of the graph? Okay, zoom in on just the last two years, since the most recent bottom.
Huh. Well, we’re not sure what that looks like to you, but to us there is neither a spike nor an about-face in that. An actual “about, face” is a two-step, 180-degree change of direction. This is more like “gradual sweeping arc around the entire parade ground, face”. The Fed has raised rates 7 times, or 1.75%, over the last two years. So yeah, yields are higher than they have been since 2011 because rates are higher than they have been since the Bear Stearns bailout in 2008! And what was the yield on the 10-year the last time the Fed Funds rate was at this level you ask? Between 3.5% and 4%. Versus the 3.25% that supposedly precipitated this market correction. If Freddy ever came after us, that would be our nightmare - stuck listening to market commentators whose entire world resets every weekend until our head explodes.
Okay, gratuitous sarcastic rant over. Let’s get to the rotting meat of this Halloween note - Zombies!
First off, an apology. We hear that there were some formatting issues which prevented the Venn diagram in last month’s newsletter from showing up for anybody. That’s a shame, because it was pretty hilarious. But, lesson learned. No more Venn diagram jokes. We'll stick to .jpg based humor.
The Fed met again this month, in a quarterly show that has become increasingly Rocky Horror-esque. No rate hike at the moment, though they expect to hike again in December and 3-4 times next year as well (I’ll take the under on that one if anybody’s interested…). The bigger news out of the meeting was that they are (finally!) starting to reduce the size of their balance sheet.
In response to the Financial Crisis, in 2009 the Fed launched their Quantitative Easing “QE” program, whereby they bought US bonds with money they created out of thin air. About $3.5 trillion (that’s trillion with a “t”), to be exact. The thought was that you could avoid a repeat of the 1929 depression by expanding the amount of money in circulation. And, yay, no depression as of yet, but also no sign of the inflation the Fed has been trying to ignite. Why? Because most signals point to QE not working at all, and in actuality perhaps even hampering the recovery of the last 8 years. All that $3.5 trillion ended up...where exactly? Not circulating in the general economy you say? Ah yes, that’s right, it’s pretty much all held as “excess reserves” at the banks. Fun fact - the Fed pays banks interest on these excess reserves. So, to recap, the Fed creates $3.5 trillion dollars and gives it to the banks. The banks don’t lend it out, they hold on to it. And by “hold on to it”, they say, “Oh hey Fed, we have more cash than we need to at the moment, why don’t you keep some of it safe for us and pay us interest on it”. Brilliant.
All that to say the biggest news of the Fed meeting was probably Janet Yellen herself saying it was a “mystery” why inflation hadn’t been picking up. Yes, that was her exact word. That means that either 1) nobody at the Fed has any clue how the experimental monetary policies they’ve been engaging in actually transmit through the economy, or 2) they know it doesn’t work but can’t actually come out and admit that, so it gets explained away as a “mystery”. Dammit Janet indeed.
Sigh. Now, after that inordinately long introduction (we can be a little prone to ranting about Fed policies), here is what we actually wanted to talk about this month: what to do when you’re on your own. Fitting, perhaps, for the back-to-school season, but this really came about through conversations with multiple clients and prospects in the last couple months. If your employer doesn’t offer a 401(k) plan of any type or you are perfectly at home in the “gig economy”, what should you be doing for yourself and your future?
So much for the summer doldrums! Three big things happened this month that probably went unnoticed by most of you reading this. And please note, when we say “big things that went unnoticed”, we mean “big” in that super geeky personal finance way and not “unnoticed” because we think you are all ostriches.
Those three things are, in no particular order of importance: our one-year anniversary, passage of the DOL fiduciary rule, and a Fed announcement of quantitative tightening. If you caught all three of those things this month, give yourself a gold star! And if not, well that’s what we’re here for...just keep reading.
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