The start of the February was certainly eye‐opening to many investors. We saw the Dow Jones Industrial Average fall more than five percent in the first week and interest rates surged upward following an above average jobs report. It was particularly remarkable to witness the Dow lose more than 600 points in the wake of a positive job growth report. This is disconcerting and could lead to a further repricing over the next few months; when interest rates move lower, asset prices move higher. The famous “Qualitative Easing” programs of the Federal Reserve during the last six or seven years created an environment of easy borrowing that facilitated investment in all assets (stocks, real estate, bonds, etc.). Recent events, however, have marked a reversal of those policies. The current economy is accelerating in growth and interest rates are likewise adjusting upward. This will likely create a powerful, suppressive pressure on asset prices for the near‐term future. We will continue to monitor these developments, reporting to you with our findings and analysis.
On other economic fronts, personal savings rates are hitting decade‐long lows. As the chart below demonstrates, the low percentages that we are now seeing aligns with personal savings rates just prior to the Great Recession—the end of 2007.
As savings decline, credit card debt is spiking relative to income. Overall, households are paying about 5.8 percent of their disposable personal income to stay current on their nonmortgage debts, according to the recent Federal Reserve data. This figure—the highest since the end of 2008—bottomed out at 4.9 percent in 2012. We believe this indicates that consumers may be financially overextending once again.
A consumer with low savings and excessive debt in a period when interest rates are rising (making debt more and more expensive) is going to have a hard landing sooner rather than later.
Gold and equity prices rarely move with one another but over the last several months they have moved together with a positive correlation. The US Dollar and US Treasury yields are moving in opposite directions. This too is exceedingly rare and occurs, fundamentally, when domestic interest rates rise and foreign capital comes flowing into the country to generate better yields than what can be attained elsewhere. Historically, there has never been a sustained period with both a positive correlation between gold and equity as well as a negative correlation between the US Dollar and US Treasury yields.
As always, please feel free to reach out to us with any questions that you may have. We are grateful for the trust that you place in us.