March 7, 2018

Higher Yields Are Coming

BYTradition Gold

In a fascinating interview that covered many subjects, Jeffrey Sherman, Deputy Chief Investment Officer at Double Line Capital, discusses how he believes that today’s equity market feels like 1987.  With the right nudge, or surprising news, the stock market could suffer such a large loss that it would surprise everyone.  The interview isn’t doom and gloom for the sake of it; Mr. Sherman makes some recommendations to protect oneself in case he is right.

The full interview was done by Finanz und Wirtschaft and can be found here

In the beginning Mr. Sherman is asked about the “nervousness” in the markets and what he makes of it.  His response was: “From a short-term perspective, it sure feels like 1987: a little spookiness in the stock market and yields rising. So there are a lot of parallels to 1987. For example, tariffs, a weak dollar and a new Fed Chairman. And remember, there was the crash before the crash. That year, the stock experienced some jitters already in April and about six months later you had the big crash on Black Monday.”

When asked what’s next for stocks, Mr. Sherman gave the answer that we have been talking about for some time now: Yields on the 10-Yr Note. If yields continues to rise, the next shoe is ready to drop.

His answer: “I think you’ll see it again (large correction). If bond yields rise you are going to see another scare. It’s the velocity, it’s the speed at which this correction happened: 10% in roughly three to four days, that’s a big move. But what’s interesting is that the bond market was not behaving in a manner which is consistent with the recent past. It didn’t seem like it wanted to rally. Bond yields essentially ended flat that week if not slightly higher. To us, that causes us pause. It means that this correction was an equity market story and bonds weren’t even paying attention to it. Basically, the bond market said: look we continue to trade on fundamentals. We have bigger deficits, we have a growth story, so yields need to be higher.”

The interview goes on to cover the tax cuts, mid-term election politics, the Mueller investigation, the new leader of the Fed and more.  The interview circles back to the markets and once again the topic is interest rates.

“I think we’re going to 3.25 to 3.5% on ten year Treasuries. We broke through most levels on the ten year bond and on the thirty year bond. They have broken their downward channels. Coming in the year it was like: ‘Hey, we will probably test 3% on the ten year by the first half of the year. Then in January it turned into: ‘You know, it’s probably the first quarter.’ Now it’s maybe March because the bond market does not want to rally. But it’s not just technicals. We’re talking about the Fed’s balance sheet, we’re talking about expanded deficits and we’re talking about less revenue coming in for the government. Don’t forget tax cuts aren’t free.”

So given the higher interest rates in the offing, the CIO of Double Line Capital is asked how one should protect her investments.  His answer is our favorite: commodities.

“I like industrial metals. Copper is kind of iffy at times. However, there’s a strong case for nickel due to demand from electric vehicle production. And if we get growth, zinc still looks interesting because it’s used in galvanizing steel. So I think industrial metals have momentum. I’m optimistic for the precious metals as well. If we do get inflation signs you will see that in the gold and silver price. What’s more, I still think oil goes higher. I think demand will pick up and we will get back to $80. Maybe not this year. Maybe it takes two years. But if the growth story is true the energy market is too cheap still.”


The rest of the interview was also good and I encourage you to read the rest via the link provided above.  But if we were to boil it down to a few sentences, the CIO of a MAJOR for on Wall Street believes that the market is in trouble.  Higher yields could crush stocks and commodities should do well – especially gold and silver.

Call Tradition Gold today to protect your wealth NOW, before Mr. Sherman is correct!



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