April 1, 2018 Easter

Risk/Reward Vol. 387

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

The holiday shortened week ended better than the one before, but it sure wasn't a smooth or pleasant ride. I am certain that high frequency traders are enjoying this volatility, but it is wreaking havoc on the rest of us. The two major indices are down for the quarter experiencing their worst three month stretch since 2015. As far as what to expect next quarter---honestly I haven't a clue. Who knows what The Donald will visit upon us in the coming days---heck in the coming hours.

Frankly, I spent this past week more attuned to the bond market which has been at once predictible and confounding. On the short end, rates have escalated with the US One Year Bond now yielding nearly 2.1%. Less than a year ago that same instrument was yielding below 1%. This rise was to be expected given the Fed's past and anticipated future hikes in the overnight interest rate (Fed funds). Activity on the longer end, particularly in the bellwether US Ten Year Bond, has been another matter. Because the Fed is no longer as active a bond bidder as it was during the height of quantitative easing and because more bonds are being issued and sold to compensate for the anticipated revenue shortfall attendant to the tax cut, one would think that the demand for bonds would lessen and thus yields would go up. (Remember, rates/yields are inverse to price/demand. That is as the price/demand of a bond goes down the yield/rate goes up). Just the opposite has occurred however. Indeed, the rate on the 10Year ended the week below 2.75% as low as it has been since January. As such, the 10Year is signaling that Mr. Market does not anticipate much inflation or economic growth. And he may be right. Despite record low unemployment and jobless claims, wage increases have been modest and inflation as measured by the Federal Reserve's favorite yardstick, the PCE Index, remains well below the Holy Grail of 2% (1.8% headline inflation, 1.6% core inflation---minus food and energy prices). This past week, Mohamed El Erian wrote a thought provoking piece on why the rate on the 10Year is so stubbornly low, and I recommend it to you. https://www.bloomberg.com/view/articles/2018-03-29/why-10-year-treasury-yields-continue-to-defy-conventional-wisdom

And so I close. Gut Yomtov and Happy Easter.