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:
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:
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
Ahhh… Today is a Friday, and travels are on the horizon next week, but that is next week… Enjoy your Friday, your weekend, and time with those special!
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
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Posted in Clients/Clients Only, Interest Rates, Investing/Financial Planning, Market Comments, Performance Report Cover Letter
Tagged Consumer, Cover Letter, Earnings, Interest Rates, Inverted Yield Curve, Performance Report