US and International Stocks, Bonds, CD’s, REIT’s, Bitcoin, you name it – just about everything went up in the first half of 2019.
During this time, the narrative from the Fed completely changed. In January, the two-year US Treasury note hit 2.62%. As we rolled into the second half of 2019 it dropped to 1.75%. This moved prices on most domestic fixed income assets higher. The drop in the two-year US Treasury yield helped push a normal 10-year CD ladder up between 5-6% over this time frame.
Arbor’s princeps portfolio of more risky bonds also gained just under 7% in price over the same time frame.
Let’s get back to the Fed. Its narrative toward rate hikes has changed for any number of reasons. As we posted on this blog in April, one can pick a reason from the list below that best fits the desired narrative (political or otherwise)
- POTUS leading the Fed
- POTUS mandating the Fed
- Data showing a weakening US economy
- Is Fed Chair Jerome Powell still learning the ropes (is he on the ropes?)
- Fears of foreign economic slowdown coming home
- Maybe we need a breather in rate hikes (see chart below)
Now there is talk of rate cuts, although as I write this the likelihood of a cut this month are muted. As it stands, the US economy seems to be in decent shape relative to the world. It is growing (3.1% Real GDP in Q1 2019), we innovate better than most and we embrace failure – learning and relaunching start-ups and new companies which ultimately leads to better allocation of resources, instead of protecting old industries. This is an important characteristic of the US economy, one that is underrated.
As we look to rebalance portfolios, these are the things we keep in mind – how much should we allocate to the US stock market, how much to the rest of the world?
Rising Asset Prices: Money, the Fed, and Crypto
More than a generation of Americans have grown up knowing that money is created, controlled and distributed by a central authority. This wasn’t always the case. In the United States, the current Federal Reserve traces its roots back to Alexander Hamilton’s desire to create a First Bank of the United States to provide financial stability to a very young country. The First Bank of the United States was controversial at the time and only operated for 20 years, from 1791 to 1811 after Congress failed to renew its charter.
After the War of 1812, the U.S., deep in debt and facing inflation, re-authorized the bank, this time creatively called The Second Bank of the United States – for another 20 years. After its charter wasn’t renewed, the US operated without a central bank until the current Fed was created in early 1900’s.
Why bring this up? The media, economy and politicians place tremendous (and growing) importance on the Fed and what it says. The Fed expanded its powers and actions significantly in the 2008-2009 Great Recession, so it seems natural and prudent that politicians will challenge this.
Decentralized Payment Systems Enter the Scene
Into the fray stepped Bitcoin. It continues to grow and further embed itself as not only as a medium of exchange, but now a store of value and potentially a platform to build on. Facebook, realizing the significance of a decentralized, fast electronic payment system (relative to check writing, clearing and wiring), recently announced the launch of Libra. Libra initially won’t be a decentralized platform like bitcoin, but what Facebook and Libra have is access to billions of Facebook, WhatsApp and Instagram users, a very large and established network of people.
The bottom line is that money and how people move and store it is changing. PayPal, Venmo, Bitcoin, Libra, (WeChat in China) and many other payment/money alternatives have been built on the internet infrastructure.
 https://www.bea.gov/news/glance Bureau of Economic Analysis