If I had access to Doc Brown’s DeLorean, I’d take it back to the summer of 1972 and catch the Rolling Stones’ American tour in support of “Exile on Main Street.”
I was around to catch the 25th anniversary “Steel Wheels” tour in 1989, early in my freshman year at U.C. San Diego.
That album ranks nowhere near the “Beggars Banquet”/”Let It Bleed”/”Sticky Fingers”/”Exile on Main Street” quadriptych that represents the Stones’ and, arguably, rock and roll’s apogee.
But it does include the track “Rock and a Hard Place.”
“Rock and a Hard Place” would add great atmosphere to Martin Hutchinson’s talk in this weekend’s Saturday Spotlight.
(I Can Get Some) Satisfaction
Here’s a conundrum to accompany our opening dilemma.
The U.S. Federal Reserve announced its first interest rate hike in nearly a decade on Wednesday, but U.S. Treasuries rallied on both Thursday and Friday.
Indeed, yields are falling because signs of global economic weakness abound.
Equities, after rallying in the immediate aftermath of the Federal Open Market Committee’s announcement of a quarter-point increase to the federal funds target rate, are selling off hard as of midday Friday.
The most interesting thing in the financial world right now, though, is that the yield on the 10-year Treasury note is down to 2.2% from 2.3% earlier in the week – before the FOMC’s long-anticipated move.
Sure, this is a purely short-term reaction.
And it’s impossible to predict with any degree of certainty the trajectory of interest rates over any meaningful timeline.
We’re hearing from pundits all across the financial media making predictions based on comparisons to past rate-hiking cycles. But the data is thin – there’s no statistically significant comparison to be had.
Another problem is that these comparisons assume some similarity to these past economic and financial environments.
But present circumstances are, if nothing else, unique.
So we have to think about the Fed’s rate hike in a context still defined by the Great Financial Crisis of 2007-09 (GFC) and the policy decisions it triggered.
That’s actually one of the driving themes of Martin’s new premium service, Currency & Capital.
Among the many outcomes of the GFC is what Martin describes as a “Currency Cold War.” Under such circumstances relative currency positions change quickly and affect economic outcomes, corporate earnings, and stock prices.
Such circumstances also support a lot of opportunities for investors to profit from currency imbalances.
Martin’s been at this particular great game for nearly three decades. His durability only approximates the Stones’ five-decade career.
But Martin, whose Doc-Brown-DeLorean-ride would take him back to September 30, 1791, at Schikaneder’s Theater in Vienna for the premiere of Mozart’s “The Magic Flute,” has this much in common with Mick, Keith, Charlie, Bill, et al.: They’re hallowed by time.
And yet they’re still current.
Click here to learn more about profit opportunities Martin’s identifying right now in Currency & Capital.
Street Fighting Man
Context is everything.
Sure, the Fed has finally raised interest rates – but it’s about three and a half to four years too late, as Martin notes in today’s Saturday Spotlight.
With regard to inflation, “The reaction to the interest rate level became pathological in 2012.”
“Pathological” is a loaded description. Not only are present inflation conditions a result of prevailing monetary policy. They’re also manifesting disease.
Poor policy ideas – including zero interest rates and quantitative easing – have consequences.
Wall Street loves easy money.
But according to Martin, “Everything that’s happened since  may well be over-investment and liable to crash back on our head.”
At the same time, low interest rates are likely to persist.
Other countries’ central banks remain in “accommodative” mode, including Japan. And Europe is thinking about expanding its bond-buying program.
The U.S. dollar has been strong recently in anticipation of a rate hike. But that may reverse, because the Fed’s move was small. And Janet Yellen doesn’t seem inclined to go above 1% on the fed funds rate before the end of 2016.
So interest rates have been, are, and will continue to be low.
As Martin notes, the Taylor Rule suggests the fed funds rates should be about 2%.
“We’re quite a long way from 2%, and, further, I’d suggest that the Taylor Rule itself is a rather wimpy way to run interest rates. It’s no gold standard.”
Martin thinks there’s a strong case for the fed funds rate to be closer to 3% or 4%, given that inflation is very nearly 2%.
The big danger is that we get the next recession before interest rates have been raised. Because then there’s nothing we can do about it.
“I don’t know when the next recession’s going to come,” he admits. “But I have a feeling it could be before the end of next year – in other words, while interest rates are still at zero or 1%.”
Another problem Martin identifies is that “fiscal policy is still way out of whack.”
The U.S. is running a $450 billion budget deficit. And current budget negotiations on Capitol Hill suggest an increase to the deficit “that will make matters worse.”
You Gotta Move
In short, Martin’s advice is to “be very careful about U.S. equities and indeed U.S. bonds over the next year. The dollar could well weaken because it’s been very, very strong.
“If I was going to buy anything, I’d buy the one set of countries that hasn’t had these problems.”
And that’s the major emerging markets, the better-run ones, places like the Philippines, where monetary and fiscal policies have been better. They tend to be running surpluses.
The currencies in emerging markets have been whacked. A lot of them are down 20%, 30%, 40% in the case of the Brazilian real, against the U.S. dollar.
There’s a very good case for buying emerging markets and being very careful about the U.S. in 2016.
It’s a case Martin is making on an ongoing basis in Currency & Capital.
It’s definitely Martin Hutchinson Saturday.
Analyzing, understanding, and providing context for geopolitical and macroeconomic developments is the very purpose of Currency & Capital.
And we have three essays this weekend that demonstrate Martin’s value in this respect.
Our Global Markets Analyst explained the process and the substance of the Chinese renminbi’s inclusion in the International Monetary Fund’s Special Drawing Rights calculation.
Martin sees the move as “good news” for both China and investors.
He also updates us on the good news coming from Latin America, as recent political events have made the region, particularly Argentina, Venezuela, and Brazil, ripe for investment.
“In short,” Martin notes, “Latin America’s governance appears to be improving rapidly – and that means there must be a decent chance that its economic performance will improve as well.”
Martin is also on top of developments in Europe, where “the political status quo” is under siege.
“For investors,” writes Martin, “the main worry is that nationalist parties will replace those of the free market right, leaving only statist market-interfering alternatives.”
And yet, “In moderation, Europe’s nationalist surge is a useful corrective to the politically correct statism of the EU bureaucracy and many European governments.”
Martin’s conclusion is relatively optimistic: “As investors in Europe, we should regard it with only modest concern.”
Turning to our non-Martin portion of the weekend, Chief Income Analyst Alan Gula takes us back to early 2007 to enlighten us on current conditions in the credit market.
His conclusion for 2015 and 2016: “Ultimately, credit distress isn’t contained. The credit cycle has turned, and a default wave in corporate bonds approaches.”
Finally, Chief Technology Analyst Louis Basenese identifies three viable opportunities for investors in the $210 billion near-field communication (NFC) market.
“Suddenly,” says Louis, “the couple of seconds it takes to process an NFC-powered payment represents a major “delta” and benefit for consumers.
“And wouldn’t you know it? The readers required for the new microchip cards come with NFC capabilities already baked in.”
And thank you for spending part of your weekend with Wall Street Daily.