There has been a lot of talk in recent weeks about when the Fed will begin to raise interest rates. We have remained of the opinion that while the Fed may initiate a one-off symbolic rate hike at some point in the next year, a rate hiking cycle is still at least a year away. Last Friday’s weak employment report only served to confirm our long held view and sent the odds of a rate increase at the June FOMC meeting tumlbing to less than 5%, and the odds of a hike between now and the October meeting have fallen from nearly 90% back in January to now less than 50%.
The world’s most successful hedge fund manager, Ray Dalio, is out with a couple of quotes this morning that piqued our interest:
“We are in a secular stagnation, so I believe that the time will come when policymakers will need to provide more stimulation”
“Stocks would be ~66% lower today were it not for interest rate decline to zero, their annualized returns 7% not 10%”
These are two very powerful quotes. Dalio is essentially stating that equity prices have been artificially supported by the Fed’s ZIRP (zero interest rate policy) and that we are in the midst of a secular stagnation (low or no growth). Central bank stimulus is the only game in town which makes the likelihood of any Fed rate-hike cycle extremely low.
Two things that investors should look for over the next 12-24 months:
1. Further Treasury yield curve flattening
The yield curve has already flattened dramatically in the past year, however, we should expect even more flattening for the foreseeable future as expectations for Fed hikes in the front end increase and the secular stagnation continues to weigh on the long end.
2. A resumption of the secular bull market in precious metals. The last 2 times the Treasury yield curve flattened (2000/2001, 2006/2007) were great times to buy precious metals and this time should be no different as investors become more aware of the secular stagnation meme and realize that central bank money pumping is the only game in town.