market views

Waning Optimism, Waxing Opportunity

Frank Trotter | May 1, 2016 3 MIN READ

With the major league baseball season now just underway, hope and optimism reign supreme at stadiums across the country. But as we all know, only one set of fans will be left smiling at season’s end. For the rest of us, well, “there’s always next year.” Through the study of baseball statistics (sabermetrics), we’ve learned that in the playoffs, the long-term quality of teams as measured by their results over 162 games doesn’t matter. In the end, a seven game series will produce random results. Similar to my baseball fandom, as a U.S.-based participant in the global marketplace, I maintain an optimistic outlook as a core belief.

The U.S. remains the most stable, highest producing, highest standard of living economy in the world. On paper, the best team in the league. But there are a lot of warning signs appearing in the statistics and the market. Does this constitute a mid-season losing streak for a great team, or a slide into recession?

Unless inflation unexpectedly picks up, it appears to be extremely likely that the Fed will continue to hold short-term rates very low and may even introduce more radical actions in an effort to stimulate inflation.

My Response to Negative Interest Rates? Negative.

During the recent Investment U Conference in Carlsbad, California, Marin Katusa of Katusa Research noted that before imaginary numbers were entered into the lexicon of mathematics, we had no way to deal with the square root of negative 1. In parallel right now, many of the major world economies—including the U.S.—are considering the concept of negative nominal interest rates as a solution for stimulating growth. (I certainly hope this is not as hard to explain as imaginary numbers, although some quip that it is an imaginary policy.)

In February, Fed Chair Yellen voiced that the Fed was in fact looking at negative interest rates as an option and that she would not take it off the list of alternatives for action. If you look to Japan for evidence of how well this could work out, you’ll observe over two decades of recession or depression. If you ask the Fed the purpose and intent of such policy, they’ll tell you it’s to accomplish one of the following:

  • Provide a pathway of wealth transfer from household to government since households earn much less on their savings, and governments pay much less on their debt
  • Induce inflation so that government can pay down debt with cheaper dollars while households retain less buying power

I wouldn’t hold my breath as to either coming to fruition. Moreover, with short term rates holding at or near zero, and with longer term yields below 2%, the market continues to make clear its belief that there will be no or low growth for ten years, and that there will be no or low inflation over that same period.

So Is All Opportunity Lost? Not Quite.

Taking off my darker glasses and switching the lens to rose, there are a number of areas that may prove interesting to consider if you believe, as I do, that rates and growth will stay low for some time to come.

First, of course, could be an extension of the recent gains in the U.S. stock market. It is a core objective of Fed policy to boost asset prices—in this case housing and the stock market—by the use of QE, ZIRP, and NIRP. Literally dozens of commentators and analysts have pointed out the positive impact that each new Fed easing has had on share prices generally.

Second, both foreign currencies and precious metals have my interest. With the prospect of continued low rates, the implied carrying cost of metals is reduced, which may make them a more desired asset. As for currencies, during the first quarter of this year, the U.S. dollar declined significantly against many foreign currencies, thus benefiting those owning currencies directly.

Finally, one of the chief causes of low inflation has been the massive decline in the price of most major commodities. It appears that OPEC nations are likely to continue to hold prices down for the time being, but in the end the world needs energy to move forward. Prices must eventually rise closer to the net cost of production. Other resource prices may also be seeing a change in direction. As these shifts occur, will opportunity also surface?

Frank Trotter
Frank Trotter
Executive Vice President, Chairman Global Markets
Frank Trotter
Frank Trotter
Executive Vice President, Chairman Global Markets
Frank has over 35 years of experience in banking and global markets. When not in the office, you might find him speaking on the financial conference circuit, giving an interview on the latest world economic news, or at the nearest ice rink playing pick-up hockey.

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