That’s my short-hand way of describing one of the most serious threats to your wealth. And this morning, Chairman Janet Yellen all but confirmed that it’s coming soon … very soon.
First, some background: Short-term interest rates have been pegged essentially at zero since late 2008. The Federal Reserve hasn’t raised them once … not once … since 2006.
Neither has virtually any central bank elsewhere on the planet. Most have been cutting rates, flooding their economies with newly printed money, and otherwise catering to the easy money crowd. In fact, the Bank of Canada just lowered rates by 25 basis points to 0.5% this morning.
But two years ago, I started warning that the Fed was nearing the end of its rope with Quantitative Easting (QE) and that bonds were in trouble. I forecast that the Fed would start dialing QE down – long before Wall Street expected at the time – and sure enough, that’s what the Fed did starting in December 2013.
More recently, I forecast that the Fed was laying the groundwork for actual interest-rate hikes. Since Fed meetings conclude on Wednesday now, I said we were getting closer and closer to a “Bloody Wednesday” – a day where the Fed would shake the financial markets to their core by finally changing the cost of money.
|Janet Yellen: A rate hike ‘appropriate’ this year.|
It has taken a bit longer than expected. But today, Yellen went before the House Financial Services Committee in Washington and said you better batten down the hatches – because the first rate hike is right around the corner. Yes, it was couched in her traditional “Fed-speak” manner, but the message from the following statement should be clear …
“If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal-funds rate target, thereby beginning to normalize the stance of monetary policy.”
This year. As in 2015. A year that only has five or so months left. Yellen is far from alone, either. A large majority of Fed policymakers – 15 out of 17 – said at last month’s meeting that they thought it would be time to hike before year-end.
What’s more, the bond market isn’t even waiting for the actual increases to begin! It’s front-running the Fed like always, with 30-year Treasury yields surging from around 2.22% in January to 3.18% today.
Even more Fed-sensitive 5-year yields are closing in on the top end of the range that has persisted since September 2013. If they clear 1.85% or so on a closing basis, you could see all heck break loose in the bond market!
So you need to take steps to prepare for Bloody Wednesday-related turmoil in the markets.
|“Make sure you get out of long-term Treasury and other bonds.”|
First, make sure you get out of long-term Treasury and other bonds, if you haven’t already. They offer way too little yield, and way too much risk, for a rising-rate environment.
Second, if you’re looking for yield, I recommend you mostly avoid traditional “bond-like” sectors like Real Estate Investment Trusts (REITs) and utilities. Focus instead on companies that can grow their dividends even as rates rise, and that have more economic sensitivity. I have several of my favorites in the Safe Money Report.
Third, put some of your capital in sectors that have already been beaten down dramatically – and which have a lot of the risk wrung out of them. Energy is clearly in this category.
Fourth, realize that the very low volatility, “up and to the right” stock market environment we’ve been in for the past few years is over. This is going to be a much rockier road going forward — one where solid guidance from experts who have seen many an interest rate cycle over their decades in the business will come in handy.
Lastly, understand that I’m forecasting a Bloody Wednesday process that will play out in stages over a couple of years – not just a one-off, one-day problem. Different strategies will make sense at different points in that cycle. So be sure you stay tuned to Money and Markets for guidance on how your investment strategy should evolve over time.
In the meantime, let me know your thoughts on Fed policy going forward. Is Yellen signaling that a hike is right around the corner, and if so, what are you doing to prepare? What should it mean for bonds, stocks, and the currency markets? Have you already implemented the strategies I highlighted, or do you have others that you’re putting into place? Be sure to share your thoughts at the website.
The anti-nuclear proliferation deal between the U.S., other advanced powers and Iran set off a furious debate at the website in the wake of my column on it yesterday. Many of you disagreed with the parameters of the deal, and with the pro-detente approach toward Iran. But some supported the policy as a way to improve relations between the U.S. and avoid further conflicts in the Middle East.
Reader Mike S. said criticisms of Obama are misguided, and that previous administrations should share the blame for our country’s problems. His view:
“Where was all the criticism of the Cheney/Bush administration when it was taking us into an unjust war based on phony Intelligence? Where was this site when Cheney/Bush were taking us into the Crash of 2007 and its follow-on Depression? What is wrong with giving negotiations and treaties a chance, before we go to war?”
Reader M said that we eventually made our peace with Japan, Germany and Vietnam after going to war with them over the years, and losing many American lives doing so. He also pointed out that the deal will ensure U.N. inspectors are on the ground making sure Iran sticks with the program, a victory for nonproliferation.
Finally, he said that we actually need Iran as a counterbalancing force against even more egregious enemies like ISIS. His additional comments:
“The idea that Iran is sponsoring the killing of Americans ended when the U.S.-led allies in Iraq realized that, without Iran, it would have been impossible to expel the Islamic State out of Tikrit earlier this year (the birthplace of Saddam). And it was confirmed when U.S. military spokesmen unofficially admitted that, without Iran’s help, expelling Islamic State out of Fallujah and Ramadi, would also be far more difficult.
“The pragmatic reality: Without Iran-supported Hezbollah, Islamic State would be holding Damascus; without Iran-trained Shia militias, Islamic State would be in Baghdad. We are now undeclared allies on those battlefields and have an urgent need to make the alliance official, formal and far more effective. It is the only realistic pathway to defeat ISIS and counter the global chaos they create. Despite denials on both sides, the obvious reality is that the nuclear deal with Iran is a key step in that direction.”
Reader John weighed in as well, saying that warmongering doesn’t do anyone any good, and that any deal is better than no deal. His view: “It’s pretty obvious that you’re speaking as a member of the Israeli lobby and are probably a card-holding member of AIPAC. You may not care, but I don’t want to pay for another war in the Middle East just because Netanyahu and his ilk own most of the U.S. government.
“Netanyahu guaranteed the U.S. that if they overthrew Hussein, there would be peace in Iraq and the Middle East. How did that promise work out for you? This is a good example of how diplomacy can work better than wars. A better result would be to end nuclear power and weaponry in the whole world. We could start with the U.S. and Israel.”
But Reader Paul took a completely opposite view, saying: “This president has been a foreign affairs disaster. Now he is trying to turn our back on Israel and our other ally, Saudi Arabia, in favor of a dedicated U.S. enemy. Hopefully, Congress will head this one off at the pass.”
Reader Jeff agreed, offering this take: “The Iran nuke deal is a farce for everyone but Iran. We have all been sold down the river by the Progressives one more time. No one knows how close to a nuke Iran is, but if they were willing to sign this, then it most certainly is 1) good for them and 2) they’re probably a lot closer than anyone thinks and 3) they just need to buy a little more time.”
Finally, Reader Thomas argued “the world has just become a more dangerous place to live in” as a result of the deal. Why? He said: “I wonder who is fooling who? It is actually Iran that got the better deal on most of their terms, and not Obama.
“When will we learn that freedom goes hand in hand with responsibility? History is full of lessons that taught us that freedom without responsibility and accountability will always end in a mess. Iraq is a good example. So is Afghanistan and Libya.”
Clearly, with almost 200 comments coming in overnight, this issue raises concerns and passions on both sides of the debate. If you haven’t added yours to the mix, please feel free to do so using this link.
From a financial or markets standpoint, we’ll have to see if and when Iran’s oil, financial, and other sectors are opened back up to foreign investment and involvement – and how much capital flows in. Energy is obviously a key area of focus, and it’s worth nothing that oil prices haven’t really budged since the landmark deal was announced.
I believe that confirms my long-held view that it’s going to take a long time before significant amounts of Iranian oil hit the market. By then, demand will have increased by more than enough to absorb those additional barrels.
Moreover, the biggest global energy giants aren’t going to write huge checks and commit significant resources toward enhancing Iranian output unless prices rise substantially from current levels. So a lot of the mainstream media commentary on that subject is nothing more than ill-informed claptrap.
But again, I always welcome comments from you whether you agree with me or not. So hit up the website and share them when you have time.
As we go to press, Greek legislators are still debating the latest European bailout program. They need to approve several measures in order to obtain aid from Greece’s creditors, so we’ll have to see how the vote goes.
In the meantime, one interesting side note to the Greek bailout drama is the increasingly large split between the International Monetary Fund (IMF) and eurozone creditor nations.
The IMF believes Greece needs actual debt write-downs or massive interest rate cuts and/or term extensions on its outstanding loans. That’s because it expects Greece’s debt to balloon to an unsustainable 200% of GDP in the next couple of years — even with a bailout. But Germany and other countries keep pushing that issue off out of fear their citizens will rebel. Some form of compromise will be necessary to ensure the IMF doesn’t back out of future bailout programs.
Biotech continues to be a hotbed of M&A, with Celgene (CELG) announcing plans to buy Receptos (RCPT) for $7.2 billion. Celgene is eyeing Receptos’ ozanimod drug, which is in late-stage trials to treat autoimmune diseases. It could generate as much as $6 billion in sales if approved.
Bank stocks are doing fairly well these days, with Bank of America (BAC) the latest to rally after the company reported that second-quarter profit surged to $5.32 billion, or 45 cents a share, from $2.29 billion, or 19 cents a share, in the year-earlier period. That topped estimates, helped along not only by substantial cost cuts but also strong revenue of $22.3 billion.
Eureka! NASA’s rendezvous with the last of the solar system’s planets (or “former” planets, as the case may be) was successful, according to data sent back to earth late yesterday. The New Horizons probe contacted earth to confirm it survived its Pluto flyby, whose closest approach was roughly 7,750 miles from the dwarf planet’s surface. Data on its observations will stream back over the next several weeks.
Any big banks you like after seeing these numbers? Let me know over at the website.
Until next time,