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On My Radar: The Secular Low in Yields is IN

Time:2016-11-21 23:20wine - Red wine life health Click:

expansion Bond Dividends Dividend Yields

“To be clear, we are more non-ideological and practical/mechanical
because to us economies and markets work like machines
and our job is simply to understand how the levers will be moved
and what outcome the moving of them is likely to produce.”

— Ray Dalio
Reflections on the Trump Presidency, One Week after the Election

What are the most important investment implications that you and I and your clients might consider post last week’s election? My intention is to avoid a political discussion and look deeper into what the outcome means for the economy, the direction of interest rates and the direction of the stock market.

Let’s keep the intro short and jump right in. Grab a coffee and find your favorite chair. Included are some pretty cool charts (well, at least I think they’re cool). I hope you find this week’s post helpful.

Included in this week’s On My Radar:

Dalio – Reflections on the Trump Presidency, One Week after the Election

U.S. Recession (Probabilities), Global Recession (Probabilities) and Inflation

Equity Returns During Rising Interest Rate Environments

What You Can Do About Your Bond Market Portfolio Exposure

Trade Signals – Trend Evidence: Equity Market Bull, Bond Market Bear

Dalio – Reflections on the Trump Presidency, One Week after the Election

In my impatient “get to the point” way, I share with you the key points that Ray Dalio shared in a LinkedIn article this past week. You’ll find the full link below. It is worth the read. What follows are my highlights.

As you read, look past any particular political view you might hold and think in terms of inputs and outputs. Pull this lever and x will likely happen, pull that lever and y will likely happen. To this end, we require all of our interns and research team to read “How the Economic Machine Works.” I also make my young adult children read it… and have gone as far as asking them to share it with their economics teachers. OK – you get the point.

Following are my bullet points:

We think that Trump’s policies will have a big impact on the world.

Over the last few days, we have seen very early indications of what a Trump presidency might be like via his progress with appointments and initiatives, as well as other feedback that we are getting from various sources, but clearly it is too early to be confident about any assessments.

What follows are simply our preliminary impressions.

We want to make clear that we are distinguishing between a) the sensibility of the ideology (e.g., one leader’s policies might be “conservative/right” while another’s might be “liberal/left”) and b) the capabilities of the people driving these policies.

To clarify the distinction, one could have capable people driving conservative/right policies or one can have incapable people driving them, and the same is true for liberal/left policies.

To understand where we are likely to be headed, we need to assess both.

To be clear, we are more non-ideological and practical/mechanical because to us economies and markets work like machines and our job is simply to understand how the levers will be moved and what outcome the moving of them is likely to produce.

The Shift in Ideologies

As far as the ideology part of that assessment goes, we believe that we will have a profound president-led ideological shift that is of a magnitude, and in more ways than one, analogous to Ronald Reagan’s shift to the right.

Of course, all analogies are also different, so I should be clearer. Donald Trump is moving forcefully to policies that put the stimulation of traditional domestic manufacturing above all else, that are far more pro-business, that are much more protectionist, etc. (emphasis mine)

Whereas the previous period was characterized by 1) increasing globalization, free trade, and global connectedness, 2) relatively innocuous fiscal policies, and 3) sluggish domestic growth, low inflation, and falling bond yields, the new period is more likely to be characterized by 1) decreasing globalization, free trade, and global connectedness, 2) aggressively stimulative fiscal policies, and 3) increased US growth, higher inflation, and rising bond yields.

Of course, there will be other big shifts as well, such as pertaining to business profitability, environmental protection, foreign policies/alliances, etc.

…the main point we’re trying to convey is that:

There is a good chance that we are at one of those major reversals that last a decade (like the 1970-71 shift from the 1960s period of non-inflationary growth to the 1970s decade of stagflation, or the 1980s shift to disinflationary strong growth).

To be clear, we are not saying that the future will be like any of these mentioned prior periods; we are just saying that there’s a good chance that the economy/market will shift from what we have gotten used to and what we will experience over the next many years will be very different from that.

To give you a sense of this, the table below shows that:

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