Rod Skyles: The Unconventional Economist

Stocks and Bonds

Stocks have struggled this week over inflation news along with gold and oil prices continuing to price in Middle East tensions. If you remember, stocks in late September last year were trading down near 4,000 on the S&P 500 and have risen about 20% on the expectation that the Fed would lower rates 3-5 times in 2024. We are now in April, and Fed notes released today states they are looking for the CPI to move towards 2% before considering lower rates, and there have been whispers, although from the minority, that a Fed move up in rates may be what we see next.

In this piece, we have mentioned over and over again how stocks remain, historically, overpriced, and risks remain high for equity investors in the near term. We have needed a correction in prices for some time now, as this 15-year bull market has been built on low priced capital, near zero interest rates. At some point, these higher rates will have to impact business, certainly has already hit commercial real estate hard, but it has had no impact on stocks to this point. Maybe it is different this time, although I have heard that uncountable times over the last 35 years.

The bond market is getting some relief today, as some fear about Middle East tensions have driven some investors to rotate out of stocks into Treasuries for relative safety. Still, the bellwether 10-year Treasury has corrected hard in the last few weeks, with prices down almost 10% since mid-March. We would continue to expect this now 2 plus year bear market in bonds to continue indefinitely, and as we mentioned last week, we will see bear market rallies happen in times of market stress (like today). The best hope for the bond market near term is a deep recession with a stock market tumble, as the environment for bonds looks very bad for years to come.

One should not expect the Treasury market to fully escape this long-term bear market until the US government slows spending, which is nowhere in sight. While the House of Representatives are primarily responsible for spending, the will of either house of Congress to cut spending has not been at all present. To add to that, both major party candidates for President have proven in their time as President to be free spending economic liberals, so there is little reason to believe that either would lead Congress to more sensible ways. Bond investors should continue to look to shorter terms for both higher current rates and much more relative safety. Remember, the longer term the bond the more that the price changes with rate changes, while bonds under one year in maturity see prices change very little as rates move.

Commodities

Sometimes I feel as if we should spend more time on discussing commodities in this piece, but it seems like other subjects seem more interesting, at least to me. That last part is only partially true, as I watch the commodity markets at least as much as I do other investable areas, as commodity prices tell us so much about both inflation (value of the US dollar) as well as what the economy may really be doing. Gold prices continue to move to all-time highs and are up nearly 20% year to date. Silver and Oil are also trading much higher this year, but gold has long been the true measure of local currencies. For the US dollar, gold has measured the mass devaluation of the US dollar since the Federal Reserve was established in late 1913.

Since World War 2, the US dollar has been the world’s reserve currency, the principal currency that all commodities that trade internationally utilize to buy and sell, at least in bulk. As the key commodities rise in dollar value, especially in concert, it indicates the relative lower value of the US dollar, brought on by the above-mentioned reckless deficit spending by the US government. If one commodity, say oil, went up alone, it could be indicating just a supply and demand driver, but as all key commodities are moving up, it is an indication of inflation (dollar devaluation).

There are other current influences aside from a weakening dollar that are driving commodities higher, and that is global unrest, especially in the Middle East. Shipping lanes have been threatened, making the movement of oil in particular both more tenuous and more expensive to move, influencing oil price movements upward over and above the weaker dollar. Gold and silver, like US Treasuries, also tend to be “safe havens” in unsettling times, and their price movements are likely a combination of poor fiscal and monetary policy in the US along with global uncertainty. With all that is happening with poor US economic policy as well as geopolitical events, watching commodity prices may be a good indicator of what is really going on in the world.

One might consider adding Bitcoin to the commodity box, at least in its indication of inflation. Bitcoin has risen from under $30,000 just six months ago to over $70,000 in the last few weeks (currently just under that number). Due to the newness of this coin, it is difficult to know for sure what the price movement is telling us, but certainly it is acting as an alternative to fiat currencies that are backed ultimately by nothing. More than just not being backed by anything, currencies like the US dollar are deeply affected by both excess printing (creation of more currency lowers value) and poor fiscal policy by associated governments. These factors do not impact Bitcoin, as there is a fixed number of those coins available and the price is not “controlled” by government policy, making it at least an alternative and potentially a store of value like gold and silver, at least in investors eyes.

Sports

March Madness is over for another year, with the two pre-tournament favorites both coming out on top. UConn, the defending men’s tournament champions, throttled Purdue in Monday’s final, having won all 12 of the last two year’s tournament games by more than 10 points, an amazing display of dominance. This is Connecticut’s sixth championship on the men’s side, having won every championship game they have competed in.

On the women’s side, the magic run of Iowa and their star Caitlin Clark ended abruptly in the national title game. I was asked by a few people what my view of the final was, and my comment was that South Carolina and Iowa were equal in players 1-5, but it was the depth of South Carolina that would make it very difficult for the Hawkeyes to triumph. This turned out to be prophetic, as the Gamecock depth wore down Iowa, and recovered from a great Hawkeye start to dominate in the second half as Iowa was obviously worn down. In fairness, 14 of the 15 scholarship players on the South Carolina squad were 5-star recruits, an insanely talented team.

One last word, the semi-final and final of the women’s tournament set all-time viewership records, thanks mostly to the exploits of Caitlin Clark (who did not disappoint), and the final drew 6 million more viewers than the final of the men’s tournament, a shocking development. It will be interesting to watch and see if this sudden popularity on the back of Caitlin Clark can continue without her in the game. Here’s hoping so.

As I am writing this, in a rare break from writing this piece in a coffee shop, I am being a coach potato watching the Masters. Right now, Max Homa and Bryson DeChambeau lead at 7 under par, Homa through 8 holes in the second round and Bryson through 2 holes of the second round after a 65 on Thursday. The first round was marred by a late start due to an overnight storm Wednesday, that did not allow all groups to finish. Tiger Woods and Homa (paired together) were among those who finished their first rounds early Friday morning. World number one Scottie Scheffler, winner two years ago and pre-tourney favorite, currently lurks one back, awaiting the start of his second round.

While the wind was up yesterday and again today, scoring has been on the lower side to start. With the star-studded leaderboard, the weekend is setting up to be a classic Masters finish, and while I would not bet against either Homa or Scottie, I have a weird feeling we will get a surprising and relative unknown winner.  No matter, it is the Masters, and I will soak up as much as I can this weekend! This is my “most wonderful time of the year”!!!

Quote

“I always said that if they have a golf course like this in heaven, I want to be the head pro. Every shot is within a fraction of disaster – that’s what makes it so great.”—Gary Player on Augusta National, home of the Masters. Having attended the tournament one week a few years ago, hard to argue that.

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