October 1 2017 Warsh?

Risk/Reward Vol. 365

We have been in Cassis for a week.  We have hiked, kayaked, rented a motorboat and beached it (daily).  The weather has been glorious.  Next week we have a few day trips planned.  The economy in France seems much improved since our visit last spring.  Cassis is a beach destination for the French (very little English heard or spoken here) and even though this is the end of the season, business remains quite brisk.

Another week, another record.  The Dow Jones Industrial Average is up 13% year to date and 23% over the past 12 months.  As noted in Saturday's Wall Street Journal, the Trump Rally seems to have found new legs with talk of tax reform, gross domestic profit growth hitting 3% on an annualized basis and an economy sufficiently strong to warrant a Fed funds rate increase come December.  As to this last point, Fed Chair Yellen gave a speech earlier in the week wherein she bemoaned the Fed's inability to jump start inflation, but remained steadfast that inflation or not a December rate increase is in order.  The bond market heard her loud and clear as the yield on the all important US Ten Year Treasury jumped to 2.34% by week's end.  The future's market is now pegging the odds of such an increase at over 80%.

I do not see the stock market rally ending.  As for interest rate sensitive securities (my favorites) caution is in the wind.  The shine came off of these a bit again this week with the 10Year yield spiking, but not so much as to warrant any move.  The monthly dividends that I receive far outweigh the slight hit to capital that I suffered these past two weeks.  And with the futures now anticipating a December hike, all should be peaceful for the next 3 months.  Should be, but may not be.  That is because in the next few weeks The Donald is going to name a new Federal Reserve chair.  Indeed, this week he interviewd Kevin Warsh for the job.  As noted previously, Warsh has been critical of Bernanke/Yellen's easy money approach and is deemed a rate hawk.  If he is the chosen one, it may cause rates to jump.  Consequently, I may collect one more month's dividends and then sell while rates climb to a new "Warsh" normal.