BOND MARKET'S CALMING MESSAGE "ADV" | CROUCH CONNECTION| NOVEMBER, 7th 2021

BOND MARKET’S CALMING MESSAGE

We are still fielding questions and concerns about the inflation all of us are seeing in the price of everyday purchases like gasoline and food as well as the crazy prices we have seen in the real estate markets. There is no disputing that we are seeing inflation unlike any we have seen in many years and none of us like to pay higher prices for life’s necessities, but let’s explore whether that is good or bad for investors.

The reason we fear inflation as investors is because many recessions have been caused by rising interest rates, first in the bond market and then by a Fed decision to choke off inflation with a sudden hike in short-term rates.

INFLATION AND HISTORY

As a bond market watcher for 40-plus years, first as a real estate broker and then as a financial advisor since 1990, my experience has been that the interest rate on the 30-year US Treasury bond seems to float about 1½% above the anticipated long-term inflation rate. With the interest rate on 30-year Treasuries currently slightly under 2%, that would suggest that bond investors are not expecting inflation to be a threat over the long term.

One thing that irritates stock portfolio managers (including me) is the common belief that bond investors are smarter than stock investors! Unfortunately, the evidence would probably support the case that the bond guys and girls seem to do a better job at projecting the direction of the economy, but we would also point out that the evidence indicates that in the long run you can make more money in the stock market than in the bond market, so that’s our way of getting even. 😊

Jim Paulsen, chief market strategist at Leuthold Group recently pointed out:

“Going all the way back to 1870 the bond market hasn’t been inclined to runaway inflation rhetoric and has largely ignored transitory inflation bursts…bond’s prowess in signaling a temporary or sustained inflation problem has been very good. Consequently, based on US history, investors can take some comfort in the calming message from the bond market.”

Since the recovery from the Covid Correction, the highest rate that the bond vigilantes have been able to produce in the 30-year Treasuries is 2½% back in March as inflation fears were first causing some panic. Since then, rates have been gradually falling except for a spike in late September when the Chinese real estate crisis first made the news. This indicates to me that we can expect inflation to level off as the supply chain constraints are dealt with and the stimulus money begins to dissipate.

Economist David Rosenberg echoed that sentiment in an appearance on CNBC:

“Hyperinflation talk is totally ridiculous. Hyperinflation warnings are irrational. To say that they’re (inflation headwinds) not going to be resolved at some point, I think, is actually absolving yourself of being respectful of what history tells you.”

Rosenberg served as Merrill Lynch chief North American economist from 2002-2009.

As my friend Linda Duessell from Federated Hermes recently reminded us:

“Higher rates and energy prices may be viewed as headwinds, but they are products of economic vibrancy. While inflation is on the front pages, there are tons and tons of goods waiting offshore to be unloaded, shipped and put on retailers’ shelves---a big pending deflationary force, particularly with pandemic pulled-forward demand waning.”

LOOK FOR THE SILVER LINING

So, look at the silver lining, not the cloud. Barron’s newsletter writer Al Root summed it up:

“The economy has a supply problem, not a demand problem. A supply problem is much better than a demand problem. The former is annoying, but the latter causes recessions. For now, we’ll consider this a short-term problem.”

We still believe a balanced, well-diversified portfolio is the best vehicle to deliver a solid retirement income. Stick with your plan and call us for any encouragement you may need. We always enjoy hearing from you.

Sincerely,

Dave Crouch Kim Blackburn Kay O’Connell

Registered Principal Branch Operations Manager Financial Advisor

Financial Advisor

Buffett Quote:

“Basically, the single-most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. If you’ve got a good enough business, your idiot nephew could run it.”

Warren Buffett

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Dave Crouch and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.