India’s rising middle-class to drive energy alternatives in the long run

India’s rising middle-class to drive energy alternatives in the long run

We have another confirming data point that India is poised to become one of the key economies when it comes to driving global growth. The underlying reason ties with the other data points that point to this – India’s expanding middle-class, which will spur demand for a variety of goods and service. And yes, India and its evolving demographics is one of the geographies associated with our  Rise of the New Middle Class investing theme.

Longer-term, it also appears it could be a meaningful driver when it comes to the adoption of alternative energies that are a part of our Clean Living investing theme at the expense of oil. Something to watch in terms of the adoption curve for electricity, solar, wind and other alternatives as they continue to move down the cost curve. We’ll also be watching for the adoption of other aspects of our Clean Living investing theme – food, snacks, beverages, and other products – as that middle-class continues to swell and the accompanying increase in disposable income opens numerous doors for consumers in India.

 

India is set to overtake China as the biggest source of growth for oil demand by 2024, according to a forecast announced Monday by research and consultancy group Wood Mackenzie.The country’s oil demand is set to increase by 3.5 billion barrels per day from 2017 to 2035, which will account for a third of global oil demand growth. India’s expanding middle class will be a key factor, as well as its growing need for mobility, according to Wood Mackenzie.

On the other hand, China — currently the second-largest oil consumer in the world — may soon need less oil. In 2017, it overtook the U.S. as the biggest importer of crude oil, but it’s set to see a decline in oil demand growth from 2024 to 2035, Wood Mackenzie Research Director Sushant Gupta told CNBC.That’s due to two trends: Alternative energy sources such as electricity and natural gas are displacing the need for gasoline and diesel. And, a more efficient freight system and truck fleet will also result in sluggish road diesel demand, Gupta said.

Source: India set to overtake China as top driver of global oil demand growth

Consumer Sentiment Closer to Economic Reality than Blankfein?

Consumer Sentiment Closer to Economic Reality than Blankfein?

The CEO and Chairman of Goldman Sachs (GS), Lloyd Blankfein, is arguably one hell of a sharp fellow, which leads us to believe there are reasons behind this that go beyond a straightforward assessment of the economy.

Perhaps consumers see something different than what we hear in the mainstream financial media. The University of Michigan’s Consumer Sentiment Index dropped to 94.5 in June, which was well below expectations for 97.1.

Let’s start with a look at the Citi Economic Surprise Index, better known at the “CESI,” which has hit a multi-year low.

While US stocks look to have decoupled recently from this measure.

But we’re sure that stock prices aren’t anything to worry about. 🙄

The Cyclically-Adjusted Shiller P/E ratio today sits at 29.95, just shy of the 32.54 peak from 1929. The fact that this metric has only been at these levels twice in history, just prior to the Stock Market Crash of 1929 and again before the bursting of the DotCom bubble, is likely immaterial – so say those who derive their paychecks from investors staying fully invested. 🙄🙄

One other thought for those so inclined, in 1929 the Fed rate was at 6 percent – that’s a lot more room to move than we have today.

As we head into the summer driving season, US crude oil stockpiles declined much less than expected while gasoline inventories have actually increased over the past two weeks versus expectations for a decline. Gasoline stockpiles are now above the 5-year average for this time of year as gasoline demand has unexpectedly fallen to well below last year’s level.

According to a recent Bloomberg study, back in March, 31 percent of economists were boosting their GDP forecasts. Today 27 percent are cutting them.

US CPI recently disappointed to the downside, coming in at 1.87 percent versus expectations for 2 percent. Core CPI came in at 1.73 percent versus expectations for 1.9 percent and the 3-month moving average of year-over-year change for Core CPI indicates that this key measure of inflation is rolling over to an impressive degree. This puts that Fed rate hike into a different light!


Used car and truck prices have rolled over hard and are continuing to drop significantly.

Housing has also rolled over, both for multi-family…

and single family…

 

According to the U.S. Commerce Department, housing starts declined 5.5 percent in May, after falling in April and March. Building permits fell 4.9 percent.

The cost of putting a roof over one’s head rolling over has rolled over as well.

The cost of medical care has also rolled over.

While retail sales growth is still pretty decent, it has been declining since early 2015.

Restaurants and bars are having a hell of a tough time, with their businesses experiencing a more severe decline, over the past two years.

Manufacturing inventories remain frustratingly elevated. That is basically capital sitting on the shelves, earning nothing and in many cases wasting away.

 

With elevated inventory levels, not a big surprise to see that U.S. factory output fell in May as manufacturing production dropped 0.4 percent, the second decline in the past three months. Overall factory output was lower in May than in February. Output fell across a wide range of industries, from motor vehicles and parts production to fabricated metal. Manufacturing capacity utilization fell 0.3 percent in May with overall industrial capacity utilization falling 0.1 percent. Where’s the accelerating growth?

There is some good news for a segment of the economy. Online sales continue to command a greater and greater portion of retail sales as our Connected Society intersects with the Cash Strapped Consumer where online shopping is not only fun from one’s couch, but it is a lot easier to compare prices and get the best deal for families concerned with watching their pennies in an economy with weak-to-no wage growth.

The bond market is not telling a tale of accelerating growth, with the 30-year Treasury yield now back where it was in November.

30 Year Treasury Rate Chart

While the 10-2 Year Treasury yield spread is back down to where it was in late 2007.

10-2 Year Treasury Yield Spread Chart

The 30-10 Year Treasury yield spread is also showing a flattening yield curve – more signs of an economy that is do anything but accelerating to the upside.

30-10 Year Treasury Yield Spread Chart

Finally, we have the Bloomberg Commodity Index heading back towards those lows from early 2016, not exactly an indicator of accelerating demand.


Here at Tematica, we are a fairly jovial bunch, with innately optimistic personalities, but we let the data first do the talking and that data is giving us a plethora of warning signs.

Turns out, we aren’t alone in our skepticism as the New York Federal Reserve now expects the economy to grow at an annualized rate of just 1.9 percent in the second quarter!

I’m all about that base when it comes to inflation

I’m all about that base when it comes to inflation

Last week on our Cocktail Investing podcast, Chris and I spoke about how I’m not so much on board with the rising inflation camp because of the base effect, (Ok, so not quite bass, but close) which has become the phrase of the week in some circles. So what am I looking at that all those who buy into the reflation trade aren’t seeing?

First, let’s look at oil.

By mid-February 2016, the price of oil had fallen nearly 76 percent and was finally finding a bottom around $26 a barrel.

WTI Crude Oil Spot Price Chart

WTI Crude Oil Spot Price data by YCharts

In response, production cuts continued so that by the end of May 2016, rig counts in the U.S. had fallen almost 80 percent from their highs.

US Rig Count Chart

US Rig Count data by YCharts

With such a low base, under $30 a barrel, it didn’t take much for the price of oil to experience enormous gains on a percentage basis. By late February of 2017, the price had risen 108 percent from its February 2016 lows.

WTI Crude Oil Spot Price Chart

WTI Crude Oil Spot Price data by YCharts

Oil is a key input to nearly everything, giving it an outsized impact on prices. Thus a 100 percent increase in the price of oil is going to have an effect, but looking over the past 10 years, today’s price is still relatively low.

WTI Crude Oil Spot Price Chart

WTI Crude Oil Spot Price data by YCharts

To get an idea of where oil prices may head in the future, we like to look at what is happening with rig count, as that tells us about future production coming online. Remember that rig counts had dropped nearly 80 percent as the price of oil plummetted to below $30 a barrel.

US Oil Rig Count Chart

US Oil Rig Count data by YCharts

Unsurprisingly, as the price of oil rose, companies brought more and more oil rigs online, where today we are up over 108 percent from the May 2016 lows. However, we are still well below where we were in October of 2014 when oil was in the $80 range. Keep in mind though that all that pricing pressure has led to cost reductions, such that many extractors can be profitable at lower prices today than just a few years ago. We’ve been reading reports that many shale oil producers can now be profitable at as low as $30 a barrel.

US Oil Rig Count Chart

US Oil Rig Count data by YCharts

More rigs are coming online, and we are just 6 percent below the record high crude inventory levels, which tells me that we are unlikely to see crude prices rise substantially from this point, particularly on a percentage basis, barring any geopolitical shocks. Keep in mind too, that any regulatory rollback by the Trump administration on energy is likely to further reduce the break-even levels and could spur even more domestic production.

It hasn’t been just oil that has seen a dramatic rise in prices since the early parts of 2016.

^SG3J Chart

^SG3J data by YCharts

Copper, Aluminum, Natural Gas, Heating Oil, Lead, Zinc, Silver are all up well into the double-digits on a percent basis from January 2016, after having taken a serious beating early last year. However, it looks as though we may now be starting to see prices level off, which means these inputs would no longer be having an outsized impact on prices due to their exceptionally low price levels back in early 2016.

We’ll be keeping a close eye on these as we head into earnings season and get more insight into what companies are experiencing versus the sentiment that has been blowing the doors off.

Finally, when it comes to the ISM Manufacturing PMI, if we look back at historical norms, this indicator is likely to start rolling over soon, which will really give the market’s reflation narrative a conniption fit!

Oil Creating a Bright Spot in the Energy Sector Market… For Now

Oil Creating a Bright Spot in the Energy Sector Market… For Now

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Last Thursday when Tematica’s Chief Investment Officer Chris Versace appeared on America’s First News hosted by Matt Ray, one of the topics was what’s going in the oil market. One of the few bright spots when it comes to earnings picture is the energy sector, which his benefitting from higher oil prices in and easier comparisons to lower earnings in Q1 2016.Those higher oil prices reflect OPEC production cuts, but those same cuts have spurred US production back on line. As of March 24, data from Baker Hughes (BHI) put the total number of US rigs at 809, up  20 compared to the prior week and a staggering 345 compared to the same time last year.

Despite the OPEC production cuts that have taken more than 1 million barrels per day off the oil market, the added US capacity and less than booming global economy have led to US crude oil inventories to swell. The result has been a reversal in oil prices from roughly $54 in February to just below $48 exiting last week.

 

In short, we have a situation in which shale output is surging too quickly before OPEC has had the chance to balance the market. Keep in mind too that technology refinements have likely lowered the breakeven cost for US shale producers and that could move even lower should industry regulations get dialed back under the Trump administration.

Interestingly enough is the Bank of Russia’s view on all of this as on Friday it updated its guidance that calls for oil to average $50 a barrel this year, but falling to $40 toward the end of 2017 and then staying near that level in 2018-2019. As we wait to see what’s next on the regulatory front, the next known catalyst will be the OPEC meeting on May 25 that will likely center on the current production cut and whether it should be extended. Given the continued glut, the growing view is the initial six-month product cut did little to restore balance to the oil market and this likely means OPEC is poised to extend those cuts into the back half of 2017. The growing view is if OPEC doesn’t extend its production cuts, oil is likely to tumble to $40. Should this come to pass, we could see more downside to be had in United States Oil Fund LP (USO) shares as well as those for Energy Select Sector SPDR ETF (XLE) and  Vanguard Energy ETF (VDE), both of which have outsized positions in Exxon Mobil (XOM).

This means this aspect of our Scarce Resource investing theme is bound to get a little wobbly between now and late May. The positive in lower oil prices is consumers, especially Cash-strapped Consumers, are likely to see a less than seasonal move higher in gas prices this year as we switch over to summer gas blends that burn clean and result in lower vehicle emissions. Will consumers pocket the difference or look to spend it? We’ll be watching the data to see what’s what.

Brexit

Brexit

Brexit. It’s all the rage these days. The word is whispered over candlelight glasses of wine in dark corners at swanky post-market-closeBrexit, Symbol of the Referendum UK vs EU cocktail bars. It is spit out over conference room tables amongst such phrases as “contingency planning” and “hedging strategies.” It has everything a news agency drools over, drama with the dark horse effect as the yes vote gains unexpected traction on the very last loop around the track.  It provides angry rants that skirt around xenophobia or at least a level of indignant nationalism that can generate eye-catching headlines. It paints the image of a battle of wills between the confident and worldly intellectual, gazing with vague annoyance over wire-rimmed glasses at the rough and tumble, calloused working man who is damn tired of those immigrants stealing jobs. It is a story filled with fear, hope, anger, frustration, isolation and unity.  Whatever version of the story attracts you the most, as an investor a “yes” vote for the UK to leave the European Union has two major impacts, currency and uncertainty.

Currency Effect

The currency effect means a stronger US dollar relative to the Euro and Pound Sterling. This would make american exports more expensive and imports relatively less expensive. The United States is the second largest exporter in the world, so when our exports become more expensive, that’s harder on everyone buying our stuff so it becomes a headwind to growth. With imports relatively less expensive, Americans are more likely to purchase an imported product than they otherwise would have been, which can also hurt american producers.

The currency effect can also be a problem for emerging markets where companies have issued unprecedented levels of debt denominated in US dollars. As the US dollar rises in value, that debt become more and more expensive, resulting in everything from reduced investment in growth to defaults which are further headwinds to global growth.

The currency effect can also have a secondary impact in its correlation with oil. With oil denominated primarily in dollars in the global marketplace, strengthening dollar means weaker oil prices. This can then affect the sovereign wealth funds from those oil-dependent nations as they are pressured to sell assets in order to pour more back into their domestic economies. This is a headwind to global asset prices.

Overall the currency effect is essentially deflationary for the US, which makes it more difficult for the Federal Reserve to return us to a more normal rate environment, prolonging the negative side effects from low-to-zero interest rates.

Uncertainty Effect

The uncertainty effect is all about the impact on companies. Although the word sounds easy enough, Brexit, short, simple and comfortably straightforward, the reality is no one really knows just how this darn thing will pan out! If there is in fact a yes vote, unthinkable a few weeks ago but now looking increasingly like it just might happen, no one is clear as to just how it would be implemented. Then there is the reality that the vast majority of politicians in the U.K., regardless of party, are all against a Brexit, so these folks will find themselves having to enact legislation based on a vote by their constituency that goes against what they believe is best; rock meet hard place.

With the realities of the actual implementation unknown, companies will be much less likely to invest which means less spending/less growth. There will be less M&A activity and the potential momentum of this vote with respect to rising nationalism is a further headwind to already falling levels of global trade which means even slower growth across the globe.

Brexit, the end of french kisses along the Thames?

Market Recap May 27th

Market Recap May 27th

Markets Meh DogSince the start of the month, the U.S. equity markets, to use a technical term, have been pretty much mehhh. By Friday’s close the S&P 500 (large cap) was up +0.85%, the Russell 2000 (small cap stocks) was up +0.84% for the month. Tech stocks finally started to show a little hutzpah with the Nasdaq up +2.41%. While Yellen and company at the Fed have been giving lots of lip service to raising rates at the June meeting of the Federal Open Markets Committee (FOMC), longer dated treasuries, as measured by the iShares Barclays 20+ Year Treasury Bond ETF (TLT) rose +1.6% since the start of May.
Even year-to-date stock indices have been mostly meh with oil, gold and bonds giving us a lot more to cheer about:

  • S&P 500 +2.7% (thanks to a 2.3% gain last week)
  • Nasdaq -1.5%
  • Russell 2000 +1.3%
  • Dow Jones Industrials +2.6%
  • Gold +14.0%
  • iShares Barclays 20+ Year Treasury Bond (TLT) +7.7%
  • Brent Crude Oil Spot +30.5%

This chart of the S&P 500 shows how the major market index continues to oscillate within a fairly narrow band and is right back where it was about 18 months ago.

2016-05 SPX

Taking a look at the broader market, the Dow Jones Transports remain in a steady downtrend (green line).

2016-05 Trans

The Russell 2000 (small cap stocks) had been in a steady downtrend for much of the past year, but recently broke above that trend line in April, which is often a positive sign.

2016-05 Russell 2000

Oil (Brent Crude) is now well above the 50-day and 200-day moving averages and has been on a bull run for 103 calendar days with a gain of 89%, which is the ninth biggest gain in any oil bull market since 1983 and is nearly 27% stronger than the average and over 50% stronger than the median. All that has been accomplished over a period that is just half as long as the average bull market and nearly 40 days shorter than the median bull run. That’s a hell of a gain in an exceptionally short period of time, so a pullback here wouldn’t be surprising. Inventory levels still remain over 50% above their historical average for this time of year and oil rigs are now down to their lowest level since October 2009. We’ll be watching closely to see how crude responds if/as the dollar strengthens with the Fed taunting the markets about a rate hike.

2016-05 Brent

Freeze in Oil Production? Not buying it.

While on Mornings with Maria, we talked about the agreement between members of OPEC and Saudi Arabia to freeze oil production at January 2016 levels.

First off, I am highly skeptical that this freeze will stick. Historically any cuts, and this isn’t even a cut, have been rather notoriously violated, with quite a few such “cut” announcements necessary to get anywhere near stability in oil prices.

With the proxy war between Saudi Arabia and Russian ongoing in Syria and OPEC’s understandable desire to significantly knock back production by frackers, coupled with Iran’s new ability to sell on the global markets, there are entirely too many reason to keep pumping. I suspect we won’t see much stability in prices until a materially amount of production capacity is taken offline with the associated defaults and bankruptcies.

 

http://video.foxbusiness.com/v/4757949185001/?#sp=show-clips

Falling Prices

Looking out into the future, markets and economies will driven in large part by falling prices in a few major areas:

  • Falling Oil Prices
  • Crashing Prices and Excess Capacity in Commodities
  • Diverging Monetary Policies and the Strong Dollar

Falling Oil Prices

Last week oil fell to $36/barrel, going below $40 for the first time in six years. Earlier in December OPEC had its final meeting for the year, and at this point I think it is fair to say OPEC has become completely irrelevant.  A cartel that has no ability to control the production of its members is no cartel. OPEC can’t control its members because Saudi Arabia already learned its lesson in the 1980s, when it cut production in response to falling oil prices and ended up mostly just losing market share. Other nations paid attention. On top of that, these countries’ budgets are in dollars, as oil is priced in dollars, and they need to keep up their spending in order to maintain control over their citizen – the perpetual challenge for countries in which the primary source of national income is owned by the State.

So why are oil prices falling? Simply because while demand is growing, it is growing at a slower rate than supply. The high oil prices from years ago combined with the Fed’s ZIRP (Zero Interest Rate Policy) and technological breakthroughs in oil extraction technology, led to an influx of investing in oil production capabilities which was funded in part by a lot of high yield debt. As the price of oil continued to fall, many of the companies have found themselves in violation of debt covenants. This is leading to rising defaults, (although the default rate today in aggregate is not at historically high levels) which then leads to tightening of credit conditions as lenders are forced to rebalance their lending portfolios. This make conditions even more challenging on these distressed firms, as credit is increasingly less available, which will eventually lead to bankruptcies for many of the more highly-levered firms. We saw a similar pattern back in the financial crisis as the real estate investing boom blew up in spectacular fashion when borrowers were unable to refinance on major portions of their real estate portfolios, even on properties that may have had more than 50% equity, resulting in a complete wipeout of their clients’ invested capital in those properties.

The good news for investors is that this is also reminiscent of the heady days of the Dotcom boom when all the rage was broadband infrastructure, with high-fliers such as Global Crossing, which eventually flamed out in headline grabbing bankruptcies that wiped out most debt and equity holders alike. However, that led to the ability for those that survived the carnage to be able to pick up that infrastructure for pennies on the dollar, leading to materially lower broadband pricing, which facilitated the next wave in the Internet evolution. I think oil is likely to experience something similar, with those companies that have healthy balance sheets being able to pick up production capacity at pennies on the dollar, greatly improving their overall margins and providing the economy with lower-cost energy into the future, which will be a much appreciated tailwind.  For now, I think it best to avoid this sector, but at some point in the near-to-mid future it will provide spectacular opportunities.  This lower-price oil will also be a fantastic boon to those emerging economies that are big energy importers, helping their economies grow at a faster pace than was previously possible, providing investors with yet another great opportunity. U.S. lawmakers are also expected to lift the ban on oil exports as part of the current spending bill legislation, which will provide additional support for domestic producers.

For now, the defaults and struggle in oil will be a strain on the overall economy. For those who point out that oil and gas drilling accounts for only around 4.6% – 6.5% of GDP, residential housing makes up around 5% of GDP and we all recall just how much damage excessive investment and use of debt in that sector did.

Crashing Prices and Excess Capacity in Commodities

Commodity prices have been falling for years, with the CRB commodity index down 21% from just its May 2015 highs. An entire book could easily be written on this topic, so I’ll narrow it down to just a few illustrative points in the interest of preserving your sanity! The last major commodity super-cycle began when China was allowed entrance into the World Trade Organization. Thanks to the enormous shift in its population from rural agrarian to industrial manufacturing, it was able to supply the world with cheap labor, which meant cheaper products for exports. The money it took it was funneled into gobbling up commodities to use in its eye-popping infrastructure build out; for example, China accounts for about half of the world’s aluminum consumption.

During and after the financial crisis, the world greatly benefited from China putting its pedal to the metal on its infrastructure build out, effectively creating a floor under commodity prices and protecting commodity producers from what would have been a much more painful fall without China’s purchasing. To put in it context, in 2009, with the markets crashing, oil stood around $100/barrel and steel plate was at $600, today oil has fallen below $40 and steel is at $260.

Today China’s steel production capacity is around 400 million tons a year, which is nearly four times the U.S.’s capacity at 120 tons. With China’s slowing economy, and more importantly rapidly slowing infrastructure build, it has more and more excess capacity.  China’s steel consumption is declining for the first time in two decades, with the nation’s steel sector experiencing layoffs in the tens of thousands.  Year-to-date the one hundred largest steel companies lave lost around $11 billion with 37 steel plants closing so far.

Most of China’s excess capacity cannot be shipped to the U.S. as it is of lower quality and is barred by tariffs, but it can go to Europe where prices are crashing and has caused quite the crisis in the U.K.  European players have been forced to continually lower prices and unlike China, they can export to the U.S.; despite the tariffs, U.S. steal producers cannot be totally insulated.

Many of these steel and oil mid-cap companies have “crossover” bond ratings, which means they are in-between investment grade and junk status, (BBB and BBB-).  All it takes is one little nudge and they will be in junk territory, which means then that the funds that hold them will have to rebalance their portfolios which in turn affects the credit market as a whole. Here too, those producers that maintain healthy balance sheets and do what they can to raise cash, will be able to goggle up bankrupt production capacity at below-cost, lowering their margins and allowing for lower cost steel into the future, which will help not only domestic users, but will be particularly beneficial for those emerging market, commodity importing nations. While I’ve only talked about oil and steel in depth here, similar dynamics have and are occurring in other commodity markets across the globe.

Diverging Monetary Policies and the Strong Dollar

The strong dollar continues to be one of the most common problems cited by companies in their quarterly reports. So what does it mean, why is it happening and is it likely to continue to strengthen?

The dollar began strengthening when the Federal Reserve first pulled back on its quantitative easing programs. This directional shift marked the first step. Then it ceased quantitative easing altogether, whilst other nations continued or even accelerated their programs. Now the Fed has raised interest rates, which further strengthens the dollar against other currencies. As other nations around the world engage in stimulative monetary policies, the dollar will further strengthen against them.

Commodities are globally priced primarily in dollars. I just walked you through falling oil and steel prices and as those prices have fallen, dollars have essentially been disappearing into thin air. By that I mean, imagine you have drilled an oil well or built a steel plant. When you did so, you forecasted a certain productive capacity that would result in a dollar value of sales based on an assumption of price. Falling prices have cut your expected sales enormously, meaning dollars you expected to have in your pocket will never show up. This means that your investors and/or creditors are not in the same position they expected to be – you don’t have the dollars you were expected to have, so no wonder there is an increased demand for dollars.

This brings us to the $9.5 trillion dollar carry trade which I’ve talked about before in the October 2014 issue, where I explained how the carry trade works, and again in August of this year. The higher the dollar goes, the greater the demand for dollars to pay back that dollar denominated debt. If we look at history, there are two main dollar bull markets. The first one was in the 1980s that only ended after the world’s central bankers got together in the Plaza Accord to weaken the dollar after it had risen about 100%. In the late 1990s, we experienced a second bull run which ended in the Asian Crisis after the dollar had appreciated about 50%. During both, the dollar experienced pullbacks, but never of more than 10%, which gives us a potential metric to mark this bull run. Today, we have the largest global carry trade ever seen, which makes the bigger picture look closer to the 1980s. Looking at the data, there is a material probability that the dollar strengthening process could start to accelerate again, which will put more downward pressure on commodity prices. I think being long the dollar and even owning longer-term bonds while either being short or just staying away from the commodity complex would be the wiser move here. (Hat tip to Raoul Pal of Real Vision Television for some of the research on the dollar bull runs.)

As for longer dated bonds, if the Fed continues to raise rates and the economy is in fact slowing and the rate hikes weaken the economy further, then growth expectations will slow which will cause longer-dated bond yields to drop and bond prices to rise. If the Fed continues to raise short-term rates, an inverted yield curve, (in which short-term rates are higher than long-term rates) is possible, which would be very damaging for banks as they borrow short-term and lend long term. If the dollar continues its rally, demand for bonds will rise as well, which will push up bond prices and push down bond yields. Bond prices could however get hit if the Fed hikes, but hikes much more than is expected, which given the reasonably dovish commentary Wednesday, currently seems unlikely.

Bottom Line: We are in unchartered territory in many areas; higher levels of sovereign debt than during the financial crisis, a bigger U.S. dollar carry trade than the world has ever seen, more excess reserves at the federal reserve than ever before, tectonic shifts in global economic power and rising political tensions throughout much of the world coupled with challenging demographic trends, (aging populations) in the U.S., Europe, China and Japan while many emerging economies are blessed with a much lower median age in their populations. Never before in the modern era of high-yield bonds has the Fed hiked rates when the high-yield bond spread was greater than 6.25%; today it is 7%. Over the next decade the “it” places to invest are likely to be economies that were previously not on many investors’ radars. We are likely to face some challenging times, but those inevitably lead to wonderful opportunities. 2016 will probably give us some