Category Archives: Interest Rates

Second Quarter 2018 Cover Letter Review

On the road to nowhere? Or are we?

While capital markets around the globe may seem subdued, especially compared to last year’s movements, looking beneath the surface there is much going on.

Increased Company Earnings

With the corporate tax cuts, earnings are increasing. Public companies are enjoying terrific earnings growth and logging excellent earnings reports as the year continues. With little movement in capital markets and increased earnings, valuations by most any measure, are becoming less expensive. Also, worth notice in our Q3 Newsletter is a detailed article concerning lowered numbers of public traded companies, a possible source of different valuations moving forward.

Financially Happy Consumer

Broadly, the consumer from a financial standpoint is doing well. A happy consumer, leading to a more freely spending consumer, is an important point for the United States since the Gross Domestic Economy is made up of over two thirds consumer spending. Much of this financial happiness comes before a lower tax burden, likely to be felt by consumers next tax season – again in our Q3 Newsletter there are multiple family scenarios detailing the tax savings due next year.

Interest Rates

Market participants have digested multiple rate increases in stride, unlike times before. With gradual rate increases already occurring in the year, and more expected, normalization of interest rates is occurring without the fears of past. Being the first time in almost a decade to have rate increases, we are on Inverted Yield Curve watch (detailed article again in our Q3 Newsletter) as a possible predictor that rates have moved too far, and a signal of a possible recession. So far this has not occurred.

In closing, our patience theme from the beginning of the year seems to be still best suited.

Have a Great Summer!

John A. Kvale CFA, CFP

May 2018 Podcast Video, Financial Planning and Capital Market Update – By John Kvale

Hello and Welcome to our May 2018 Financial Planning and Capital Market Update!

If you are too busy to read, feel free to listen as we describe our post and thoughts in friendly podcast format.

May 2018 Video

Financial Planning Tip (s) –

Social Security Website and Items to check while you are perusing

In our Social Security related post here, we discuss the tons of new options for use as well as the fantastic updates the Social Security Administration has done with their website.

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The most important item to check if you are not already drawing Social Security is your credits… which can be done on this site… recall there is a possible time sunset of loosing your benefits if you do not have the Social Security Office notified, leading to a possible lower benefit.

New Tax Table and Rates – Personal

Here are the new tax tables… if they look complicated, well it is because they ARE !

Marginal-Tax-Rates-Chart-for-2018-1

Expect much more on this throughout the coming months as we dig DEEP into the actual rates and the planning techniques necessary to optimize our tax liability …. One Important five letter word…. CLUMP – more later on this!

Capital Market Comments

Interest Rate Yield Curve – Rates – Inverted Yield Curve

Bottom line, at its most basic level the yield curve should go upward and outward just as our home made chart below (the starting point for our discussion.)

20180424_122733630_iOS

When it does completely the opposite or inverts, as seen below… a recession is just around the corner for as long as the eye can see!

2s 10s Spread W Recession sfredgraph

Expect a complete detailed video over the summer on this phenomenon … along with another review in the coming Newsletter… It can be boring info, not to worry … we will liven it up!

Have a Great Day – Talk to you at the end of June!

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.
www.jkfinancialinc.com
www.street-cents.com

Interest Rates Part FIVE/Final – The FOMC Overshoot, a Recession Predictor – The Inverted Yield Curve

Finally our conclusion to what we have all been waiting for …. The Predictive Value of our discussion …

So we know the FOMC fiddles with rates…

The FOMC Federal Open Market Committee raising the totally controlled short end … recall, they do not totally control the longer end… capital market participants do!

 

FOMC Raises Rates

This following Chart is our sizzle….

This is the difference of the 2 year yield and the 10 year yield for about 5-6 decades…

When the 2 year yield is BELOW the 10 year  yield the line is plotted above zero … think 1% less 3%, would give you a data point of 2 on this chart….

When the short end of the curve is ABOVE the long end — totally backwards to all logic, the plot on the graph would be BELOW zero… areas which we have circled in red…

Grey area are recessions …. just behind the inversions —

Take a moment and check this chart out…

2s 10s Spread W Recession sfredgraph

Here is an easier to see chart from 1999 to present–

2s 10s spread 99 to present - fredgraph

Why don’t they stop raising?

They cannot, it is their mandate – keep inflation under control …. raising rates is their main control mechanism.

Also, it is beyond their control as investors actually pile into the long end of the curve dropping it’s rate while the FOMC raises, in anticipation of the next recession…

Creating the Inverted Yield Curve!

In Never go all in or All out fashion, if the curve inverts we do not pack up our things and leave …. BUT  caution is definitely advised.

There will be excuses …

  • it’s different this time …
  • rates are un-natural …
  • rates are low …

Maybe- worth heeding with a track record shown above….

We will keep you posted!

Hope you enjoyed the Series … Quick links – Part 1, Part 2, Part 3, Part 4

Have a Great “Not Inverted Yield Curve” Day!

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.
www.jkfinancialinc.com
www.street-cents.com

Interest Rates Part FOUR — How the FOMC Fiddles with Rates — Federal Reserve Rate Control

As we near our fantastic conclusion to our multiple part series on Interest rates (next post is the last) lets quickly review where we came from.

In our First Post here, we spoke of the basic yield curve and how it logically moves from lower left to higher right high to account for risk …. Recall if a buddy borrows $100 bucks and promises to pay it back tomorrow its a lot less risky than if he promises to pay it back next year… and you would rightly charge him more for the delayed time… The Basic Yield Curve!

In our Second Post here, we spoke of movement of the yield curve … basically a parallel shift upward in better economic times and a parallel shift lower during slower economic times – all other things being equal, which they of course never are…

In our Third Post here, we discussed the players and assets that might sit along the yield curve, attempting to make for a more REAL world example(s)

Today … Well, let’s get to it

Where the Federal Reserve (FOMC) Fiddles on the Yield Curve

For all practical purposes  the FOMC/Federal Reserve can completely control the short end of the curve as shown on our graph… Special shout out to the 13 year old tennis player working with the new Apple Pencil (neat subject for another time)- for the updated colored graphs…. yea this is our weekend workings during rain on tennis days..haha

Post GREAT Recession of 2007-2009 the FOMC not only lowered their totally controlled short end of the yield curve – but took the unusual action of using government money to purchase assets of the longer term in order to push longer term rates down as well …

Blue is the normal yield curve – Green is the greatly lowered yield curve we have of late most recently been experiencing ….. Yea the short rate was essentially at ZERO – about what all of our checking accounts have been earning until just recently

Here is the lowering of rates graph:

FOMC Lowers Rates and buys longer to lower

 

It is essential that the FOMC eventually normalize the yield curve back to the original lower left upper right as keeping it unnaturally low for too long will likely lead to an overheating of the economy, not to mention over use of risk via leverage/loans …

Here is the Raising or Normalizing Graph we are currently experiencing:

FOMC Raises Rates

Next up our conclusion, and most importantly it’s predictive behavior over the last six decades….

Have a Great “Rising Rates” Day!

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.
www.jkfinancialinc.com
www.street-cents.com

 

Interest Rates Part THREE of a Series – What Asset Type Sits Where on the Curve- A Definition of Players in Each Space

As we venture farther into Yields and the Yield Curve, we will begin to get more descriptive as we come to the final interesting conclusion of our series. In order for this to make the most sense we wanted to lay the ground work carefully … such the multitalented part series –  this subject can be controversial, confusing but VERY important for clues on the future economic situation.

Here in our First Part we discussed the basic yield curve itself, next up in Part Two we discussed the movement of the curve and what may or may not cause such movement.

Assets Along the Yield Curve and Placers in Each Space

Going back to our original chart … let’s take a look at a few specific points on the curve itself … Pardon the hand adjusted graph, but the original was a picture making adjustments/edits tough… but you get the picture…

20180424_122733810_iOS

Point 1, the 1 Year Time Frame – Think money market or even a One Year CD

Point 2, the 5 year time frame – Think car loan

Point 3, the 10 Year Time Frame – Municipality, commercial loans, some mortgage

Point 4, the 30 Year Time Frame- Of course our good old friend the 30 year fixed mortgage

Bond issuers may have issues all across this time frame depending on the need of the project and the timing. Some issuers such as Disney and Coke have even issued 100 year bonds … not kidding…

Our Friends at the FOMC (Federal Open Market Committee) control the overnight rate, which would be, well … at the very bottom left of our hand made graph….

Next Up, what happens when the Fed fiddles with rates! Stay tuned and hope you are enjoying.. promise an interesting conclusion.

Have a Great “Yield Curve Assets” Day!

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.
www.jkfinancialinc.com
www.street-cents.com

Interest Rates Part Two of a Series – Movement along the Yield Curve – Parallel Yield Curve Shift

In our prior post here, we discussed the basic yield curve and why the longer the term, all other things being equal, the greater the risk, AND the greater the cost to finance or lend.

A Parallel Movement of the Yield Curve

Just like the weather or most other items in life, the Yield Curve can change.

Generically, during faster growth periods of time .. think inflation or a faster growing economy, rates are higher.

During slower periods of time, rates may fall or go lower.

Assuming they do this pretty much evenly across the curve, changes look like our hand drawn graph below.

A Parallel Shift Across the Yield Curve.

 

20180430_211733703_iOS

Next up,  real life examples of rates on the Yield curve AND where the Federal Reserve influences rates most on the curve.

Have a Great “Steady Yield Curve Movement” Day!

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.
www.jkfinancialinc.com
www.street-cents.com

April 2018 Podcast Video, Financial Planning and Capital Market Update – By John Kvale

Hello and Welcome to our April 2018 Financial Planning and Capital Market Update!

If you are too busy to read, feel free to listen as we describe our post and thoughts in friendly podcast format.

April 2018 Video

Financial Planning Tip (s) –

With Tax season finally over, here we mentioned how it seemed to never end…but we digress…

It appears the Cyber Thieves are back at it again, and have a new technique involving Social Security. Here in our Social Cyber Post, we discuss just how they are doing this.Cyber Attack

Bottom line, if you see something suspicious, be sure to notify the appropriate agency.

Capital Market Comments

Early Discussions of the Interest Rate Yield Curve – Rates

This is going to be fun …. In the first of a multi-part series here, we discuss the basics of the yield curve.

Bottom line, at its most basic level the yield curve should go upward and outward just as our home made chart below (the starting point for our discussion.)

 

20180424_122733630_iOS

 

Have a Great Day! Talk to you at the end of May!

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.
www.jkfinancialinc.com
www.street-cents.com