Henry+Horne Wealth Management President Michael Carlin discusses the current capital market environment, and what we can expect from the fourth quarter of 2021.
Good afternoon, everyone. Michael Carlin, President of Henry+Horne Wealth Management with your fourth quarter capital Markets outlook. I appreciate you all taking the time to tune in to do this live. Let’s just make sure we get the ground rules. Great.
Number one, you can go ahead and ask questions. There’s a Q&A bar on the bottom of your screen. Beth’s watching the Q&A, and she’ll send me a little notification. I’ll occasionally look over on my other screen to see what kind of questions you have as I roll through things. I may give an industry term that is new or different, or you’re looking for a little more clarification on something, so don’t hesitate to ask.
I’m going to do what I can to get to the questions throughout. I’ll certainly make an effort to answer all the questions before the end of our time. In speaking of time, we’re going to shoot for this 35 minutes, maybe 40 minutes time slot. So there’s quite a bit of information to get through. There’s a lot of growing consternation, and there’s a lot of growing concern that our clients are having about their portfolios, the market, the economy, what we’re doing to help navigate.
So just as a refresher for those of you that already know that, listen to these every quarter. We actively throughout the year, every day or reading virtually all the information we can get our hands on to create and find data, to make solid analysis and to help guide us, make solid decisions for client portfolios and how we’re guiding them. So this is a look at what we think are the most relevant charts, data sets that we can to help share with you what we’re thinking so that you gain a greater understanding of what we’re doing and what we’re looking at for your portfolios.
With that, I’m going to go ahead and share my screen and take you through our capital market outlook for the fourth quarter, for those of you that are buffs of the old movie Wall Street, this is kind of like it’s a mock up of Michael Douglas. I like this a lot.
It’s got like the old school cell phone, the wind tunnel tested hairdo. And you got this sign up here in the corner BV. And there’s kind of this growing term that you may have heard of now that I’m sharing it with you, may you hear it more a Bond vigilante. And you got to get this Batman Bond Vigilante sign in the sky. You’ve got this archetypal character, Michael Douglas looking to say, Bond Vigilante got to come to the rescue.
The headlines where the bond vigilante is essentially what this means is there’s a growing concern that exists that permeates investment markets, whether it be stock or bond alike. And that is when are you going to have the large groups of institutional investors and other retail investors all working together to do the same thing. And the bond vigilante component of it is will inflation be hard enough and high enough to create the real concern that interest rates are absolutely going to be going higher? And if that is indeed the case, you’re going to have swarms and swaths of people selling their bonds en masse, and you’re going to see interest rates rise.
So you have this kind of call for the bond vigilantes to see when and if this transition starts to take place, because as interest rates rise, it is so connected to so many parts of the economy.
Let’s think of interest rates rising for corporations and that’s going to increase corporations borrowing costs in the future. Let’s think of mortgage backed bonds. Those yields going higher. That obviously spells some troubling times ahead. Potentially, if that would be the case for the residential real estate market, you’ve also got the same thing with, of course, Treasuries, given the fact that we’re going to be at about $30 trillion of total US debt outstanding by the end of the year, interest rates rising is a concern for lots of different areas of the economy and low interest rates.
If you’re looking for the different legs of the stool that have helped support our economy, this is absolutely one of them. And I’ve got a bunch of charts and graphs to show you more. So this really is about the bond vigilantes understanding what they’re looking at and trying to make the determination of when they make that move to sell the bonds for fear that inflation is going to make interest rates skyrocket. So that’s going to be a part of the big conundrum. We’re unpacking for this market outlook.
When we take a look back at this most recent quarter, let’s just kind of look at the popular indexes you’re looking at large cap. That was a .6% or small cap on the international side up one. But it was really in this quarter number. It was pretty flat for most emerging markets had a really difficult quarter that’s specifically related to everything that went on with China really reversing course with their rather harsh rules that they’re starting to put in place for a variety of their different big businesses.
You’re seeing that in education and finance, and that crackdown led to a whole bunch of concerns for emerging markets that sold off heavily in that first quarter, and so much so that emerging markets are now down on the year US large cap stocks, which we all commonly think of as the market through the quarter up about 16%.
Interestingly enough, if you look at the market through today making new highs yesterday, you’ve got the US market that is up about 20% on the year for the US large cap side. And for those of you who have been investing with us for some time, you know, that’s where our focus has been. And it’s interesting to see that bonds largely did what they were supposed to do. And that is they held value. You look at the taxable bonds again because interest rates did rise significantly, which will go through some of the taxable bonds.
Didn’t the high yield bonds did great. Municipal bonds here were relatively flat. Those of you that invest with us. And you see the way that we do municipal bonds. We’ve been doing more tactical and opportunistic bonds.
So our bond portfolios tend to be up about 2% or more for the entire year as well. So bonds largely did what we wanted them to do. You saw a huge rebound in energy, which we’ll talk more about in detail, sold off during the quarter, but had a great run so far for the year. And it’s just interesting to see that those REITs and commodities when you had higher inflation and low interest rates, had huge participation so far. This year.
Question becomes, if this is what has happened, how do we use all the data that’s in front of us? How do we interpret it so that we make good investment decisions for the future? This is a good recap of where we’ve been. We need to start to continue to uncover the pieces to talk about where we’re going. I’ll also mention, by the way, this year’s, this quarter’s Market Outlook, there’s a better part of 70 pages.
I’ve shortened it down quite a bit for this call again, if any of you want our full unredacted version of the Market Outlook, certainly go ahead and send us an email. We’ll zip out our latest Q four to you in its entirety. A couple of things I want you to get out of this chart here in Light blue. This is the SRP P 500 index. You’ve got all the way leading up to the dot com bubble boom and then bust you’ve got leading up to the financial crisis and then the bust, you’ve got the market moving higher, you’ve got other different pockets of time.
There was a flat market here in 15, and then you’ve got covet here the subsequent recovery. So there’s a few things that I want you to take out of this regarding just this light blue line for the S Amp P 500. And that is, this has been since the financial crisis, other than covet a very large, relatively unbroken cycle of moving high of the market, moving higher. And what we have had in coordination with that move higher is a significant amount of fiscal input, whether it comes in the form of stimulus or whether it comes in the form of the Fed putting capital into our economy.
So it’s going to be difficult for us to forecast the ten years moving forward for things like the S Amp P $500, because we don’t yet know what kind of policy missteps we’re going to have from a physical perspective.
And we also aren’t really sure when the Fed’s going to start more meaningfully unwinding some of the support that they’ve had, which has been significant for the stock market. I’d also highlight a couple of other things in this chart. One is this green down here. Lots of people fall in love with residential real estate. Let’s keep in mind, you can look back decade after decade, but residential real estate does not grow as much as equity based investments.
It doesn’t even grow as much as a typical bond based investment. Certainly overtime commodities do better. High old corporates do better. Or even again, REITs have had a particularly nice run, but REITs have also outperformed the residential real estate market as well. So let’s keep that in mind, because there’s lots of people that see what’s happening in the residential real estate market, and I hear clients saying, I think maybe it’s time for me to buy a rental property.
Let’s not get too excited yet about residential real estate. So this chart where we’re over and underweighting certain parts of our client portfolios hasn’t changed much. But let’s talk a little bit about where we’re underweighting intermediate term us taxable bonds. Again, us REITs is an area where we’re underweighting, where we are overweighting and we’re going to start overweighting more certainly over the coming quarter and coming year. And we’ll get to this in a little bit more detail when I go through the ten year forward expected returns is other credit and lending, private credit, real assets and infrastructure.
And you know why real assets and infrastructure, of course, because of everything that’s likely coming down the line with additional government stimulus, there there’s a lot of potential opportunity where we think that there’s a real opportunity for us to lighten up potentially on things like municipal bonds and go into things like lending instead of we are relatively neutral on equity. You saw that at the end of September. What we did is we did tighten our allocations back to target. So that meant for most of you, we did take down equity exposure, stock exposure a little bit to bring things back down.
And again, we’re not prepared to make more meaningful changes yet to our equity allocations until such time as we really see what the new tax plan is going to look like and be until we see and understand exactly what the Fed is going to do, that will help shape the rest of our plan in terms of what we can do with equities.
But for now, we’re maintaining and neutral. There are parts where we’re underweighting a little bit, there’s parts where we’re looking to overweight a little bit, but by and large, this is more industry standard keeping things the way that they’ve been. I thought that this chart, this quote was particularly absurd, and if you read it, you may not get it. So I’m just going to go ahead and read it, my own voice out loud with emphasis. Brian Dees is a White House director for the National Economic Council and trying to do a job where he is calming the greater community at large about what’s going on with inflation, because it is alarming the rate with which costs are going up across the board.
And so he says, about half the overall increase in grocery prices can be attributed to beef, pork and poultry. In fact, if you take those three categories, those category price increases, if you take them out, they’re more in line with historical norms. And if you look at eggs, the prices actually come down in recent months. So it’s shocking you can’t take out beef, pork and poultry when you’re looking at inflation, it’s key and central and kind of myopically focusing on what eggs has done short term is not how you look at inflation. But you can see that the government is having a tough time explaining and calming people down about what is going on with inflation.
So let’s get into what some of the data is about. It here. I’m going to start here. There’s CPI, which is the most commonly publicized measure of inflation that’s here in Teal. We tend not to like CPI. We think it’s in a lot of ways. It’s a flawed index. Those of you who have been listening to us for quarters know that we still track it. We know that it’s something that gets consumer attention, and we know that it affects consumer sentiment more specifically. So we still put that on the chart.
But PCE, we know that the Fed looks at as well. And if you look at this from a historical basis how quickly it has run up and on a historical context, we don’t have anything that has been in and around this range. Really, since the late Seventies, early 80s, it has been a massive surge of inflation. And there are questions about and that is this inflation specifically related to the fact that we had a coveted situation that required manufacturing to shut down or again redirect manufacturing to other things.
Then we had people building up their balance sheet and again, saving. And we had people not spending as much because they literally couldn’t. All of a sudden, you have this growing pent up demand that has to go somewhere on top of the fact that there are record amounts of savings. There’s an extra $2 trillion sitting in the US consumers personal balance sheets, sitting in bank deposits. We know that money is going to find its way back into the market. We know that there’s a tremendous amount of pent up demand as people are coming out of their home in an environment where they feel safer as covet numbers improve.Those two things have increased demand significantly and substantially. That has had a huge impact on prices. We get that. Is it sustainable? We’re going to talk a little bit more about it.
These numbers are alarming. And if you look at things like Google search trends and you look at what’s going on with wages, what we’re seeing, what’s going on with wages, it is significant. And just recently this week, I saw Industry survey showed that across the United States, the average wage increase for the working class folks is over 4%. That’s the highest annual increase to really do nothing other than keep even with inflation that we’ve seen in some time. So we’re seeing that impact.
We haven’t yet seen it hit the business balance sheet, which we’ll talk a little bit more about here in a second as well. And then you look at US GDP. Look at this. The GDP numbers. The rebound was significant and substantial.
But if you look at what’s projected over the coming quarters and by virtue of comparing it to what the quarters used to look like, the rebound is projected to continue and be strong for several more quarters as we continue to rebound. So higher inflation, this real pent up demand, and also, in addition to the fact that we’ve had a tremendous amount of government stimulus, has created some artificial and additional demand. This is looking to if these numbers prove out to be accurate, continue to drive the US economy quarter after quarter, certainly for the next year or more.
So what we have here again with regards to inflation, obviously, we got to take a look at the home price index. This should be alarming. There was a moment here where we eclipsed the old peak of where housing prices were. Not only do we eclipse it, but look at the line that we took straight through. Now, a lot of that has to do with a couple of different components, which we’ve covered in prior quarters, which is we know that there is not a lot of supply of homes, whether it be new bills or whether it be existing homes for sale on the market.
Short supply demand is strong, and there’s a real shifting of the way people are looking to live, looking to work. As all of that has changed. We have seen an incredible spike up in the price of residential real estate. This is absolutely not sustainable. You don’t need to be a Chartist.
You don’t need to be a residential real estate expert to know that, but it is alarming. So we are aware of it. We know it’s a component, and we’re aware that also that the way that they calculate the CPI data, that this full increase of home prices has not found its way into CPI data yet. So if you thought from the previous slide, this CPI number was hot, just wait until we continue to see this home price increase factor into CPI. We’re going to see some pretty eye popping numbers moving forward as well.
So we’re prepared for it. And your portfolios are prepared for it as well. With regards to energy prices. We’ve got to spend a minute there and I’ve got a couple of slides dedicated to it. Obviously, West Texas crude here in light blue.
You can see from 2008 to here. Let’s not forget gas prices for a short second went negative. Oil prices, excuse me, went negative for a short period of time. But oil prices have rebounded significantly. And if you look at the prices as of this morning, they’re at 80, which is the highest that they’ve been in seven years.
And if you look at gas prices, Nat, gas prices have not been this high in about 14 years. So there’s been a huge surge in both of these commodities. You’ve seen it reflected in a huge surge in recovery in a couple of very wounded areas of the market, which was Energy and the MLP Master limited partnerships, the variety of companies that are in and around that area of the market, which I’ve got to slide on later as well. But goodness, it was a huge surge, huge rally, but it’s really related to rig account, which I’ll cover here in another couple of minutes.
If you take a look at what the Fed’s goals are, they’ve got many. The first one is they said, Well, we’re going to keep inflation at 2%. That’s not working. We know that’s not working. We see that that’s not working.
They’re showing you data that indicates that that’s not working. So what the Fed is doing right now? They are not looking at either CPI or PCE data. The Fed is ignoring both, and the Fed is firmly of the belief that I’ll just go ahead and pull the chart off here. The Fed is firmly of the belief that right now the supply constraints are what’s creating the inflation.
And they can point to everything from what’s going on the West Coast and all the ships that are sitting at Bay stuck in the ports. They can point to the fact that we have a lack of shipping and trucking here in transportation once the goods are here to move them from point A to point B, the government has stepped in to try to relieve some of that. But the Fed looks at all those different supply constraints and says that’s the reason why we have inflation. They think it’s going to take care of itself. There’s been some discussion that could happen as soon as the first quarter of 2022, and that’s likely to be pretty optimistic.
From the data that we see, there are a number of inflation components that don’t go away. The Fed points to all of those things. But what we see is we see salaries and wages increasing the way that they are. We know that’s a huge component of inflation that isn’t going to go away. You can’t take back your wage increases.
I’m going to go back to the screen here. The Fed looks at things about the jobs data, and they said well, how about when we get back to full employment, then we can start to normalize our Fed policy. Well, when is full employment? And when is that going to happen. And if you look at from here, it’ll take about a year and a half to achieve the Fed’s goal of full employment.
At this current trajectory. And a couple of the more interesting data points with the job market is the job quits. And what the job quits is indicative of is how safety people feel in their job, meaning that they quit, and they go ahead and get a new, higher paying job. That’s essentially what this is a great measure of. This is a massive, massive number, which is great for consumer balance sheets.
It’s great for consumer spending, it’s good for consumer confidence. It’s not necessarily a great thing for corporate profits. And if you look at job openings, we had massive amounts of job openings. We finally started to see that come down a little bit. As we’re seeing these numbers go hand in hand.
People quitting, job openings go down, which you can expect to see is this number to continue to recede the same thing with job quits. But these are signs that show an incredibly strong job market right now and again at this pace, $250,000 per month puts us at 18 months to get back to where the Fed feels comfortable. It’s interesting because there are reports and expectations that the Fed may start increasing interest rates as early as November. Now, that is not we don’t espouse and share those beliefs. But it is becoming increasingly more likely that the Fed may start to taper sooner rather than later.
And that is by taper. I mean, reduce the amount that they are putting into the economy by purchasing of US Treasuries and mortgage back bonds. For example, you’re seeing again anecdotally all the different things that companies are trying to do with endless amounts of news stories to try to get people back into the labor force. I think what people were expecting is the minute that unemployment benefits started to change and or reduce and or get back to normal as soon as that happened, they expected the job market to start to return back to normal. And that hasn’t been the case.
So why? And as much as what I said before and that is, the workforce has saved much of their stimulus. Still, we know they’re sitting on better balance sheets, and there still is a fear of coping. We’re just getting through Delta. And if you look at the majority of the corporations that are struggling with keeping maintaining their workforce, it’s really in that travel and leisure space.
So you really need to have COVID in check in order for those folks to feel comfortable to come back into the workforce. Which leads me to this slide here. Of course, the COVID vaccination rate. This shows a fully vaccine number. We’re right around 57%.
There are some numbers I saw this morning that having at least one shot of a vaccine. It’s in the 70s here in the United States, there are parts of the world that are doing it better. There are parts that are doing it significantly worse, and if you look at it in total, if you look at the pace of additional new variants coming out and again, Delta being a prime example. And there’s so many other variants there in Delta being the most popular here domestically, there’s a huge consensus in the medical community that they would like to see the world be north of 75% in order for the economy to start to reopen more fully across the world.
And until we have these kind of pockets of lack of vaccination working through the consensus in the scientific community is that variance will continue, and with variance continuing, we will have this general fear of a certain portion of the population coming back to work, which will hold back our economy in a lot of different ways.
So anecdotally speaking, we look at the Covet lot numbers looking a heck of a lot better infections and deaths and things like that with Covet and Delta. So we’re looking at that fairly optimistically right now. So for now, that is an improving number. That’s part of the methodology with which that we are and continue to be neutral with our equity positions right now. That improving covered number.
So it’s interesting we do like to look to see how the classic quarantine stocks you’ve got your Netflix Telecom Dominoes Clorox Zoom as you look at these in blue versus just the SP 500. The SP 500 has a wonderful 2020 is having a wonderful 2021, but pales in comparison in terms of what those the quarantine basket did and how they performed. It is interesting to see that, as you see movements like this here in this year, what that’s indicative of is that the traditional value based companies that don’t necessarily need a stay at home workforce in order to perform well, they’re the economic reopening basket.
This is two pretty good signals that we’re seeing some improvement there. Interestingly enough, the rally that we’ve had this month in October has also been a value based rally.
So as you notice, we made tweaks and repositioning client portfolios with financials. We’ve put a reposition on as well where we are looking in putting our toes in the water in those parts and areas of the market where we see that some of the growth trade that has treated us so well for so long is slowly starting to ebb away a little bit. And we’ll look at that if there’s a more meaningful reversion, we will likely get out of our heavy large cap growth lean, which we’ve been in and look towards a large cap blend.
That is something that we’re potentially doing before the end of the year. We would like to wait until after the end of 2021, because we would hate to realize those capital gains now and have to pay taxes in April if I could wait until the beginning of next year, and we can defer those to April of the year following.
That would be preferable. But we’re weighing that and we’re working through it. If you take a look at what the Fed is doing, the question is, is the Fed device or Hawkish and Hawkish means that they’re really worried about inflation. Dovish means that they are more worried about growth. So this could be a concern for some say, oh, there’s less dovish than there is, Hawkish.
But if you look at who’s falling off in 2021, a lot of Hawkish folks are falling off in 2021. If you look at whether or not Chairman Powell is going to be reelected right now, there’s about an 80% likelihood that he’s reelected. All of that stuff means that it appears that the Fed, which could turn Hawkish and start to increase interest rates and start immediately tapering aggressively to do less to support the US economy. Those things seem to be at Bay. They seem to be at Bay right now.
So we’re comfortable with the Fed not making any dramatic changes. And I’ve got two charts here on manufacturing and PMI. And what these charts and what this data shows is that there’s a lot out there that the government has done so much to push economic growth and activity on both the services side and the manufacturing side. My goodness. We’re seeing that all those efforts increase demand plus everything that we’ve talked about.
And this is something that hopefully the Feds right. And we will see this issue be worked out over the coming months and into the first quarter because the market certainly is pricing that in. If the Fed is right, that this is short term transitory. This inflation bump that we’re having is because of this supply and distribution issue that we’re having right now. Then you know what, then you’re right.
Then maybe this will be something that the market is dead on and we are going to continue to see corporate profit surging in the future. But we’ll have to wait, see and adapt your portfolios accordingly. Again, this is a look at the different parts of the market. See how they did for the quarter. Again, emerging markets having a disaster global stock is not doing so well, either likely dragged down in part one.
Europe had a little bit more of a difficult time dealing with Delta than we did. They handled it differently than we did.
That’s just kind of a brief summary of some of their issues. But you look at these year over year numbers. It’s been a stellar twelve month run from September to September for lots of different areas of the market. We just want to continue to emphasize the parts of the market that are going to work well, moving forward. And that leads us into valuation.
And rarely will I go a week without a client asking me, aren’t you worried about PE ratios? So here’s the good news. Pe ratios have come down. They’ve come down because profits have gone up. So that’s the best reason for PE ratio is too far.
And if you’re looking at things like the PE ratio of forward earnings, we’re probably right around to 20. I’d love to see that number closer to the historical average, which is in the 16th. So if 16s is the historical average and we’re at 20 for forward earnings, is that high? Yeah, but we’re also looking right down the barrel of a really good earnings season that we’re in right in right now. We’re seeing it come through.
We had great financial earnings last week. We’re seeing lots of beats across the board right now. So if earnings continue to outpace and exceed expectations as they have been, you should expect to see this PE ratio continue to go down. We know that all good things come to an end. But if you’re looking out the next several earnings estimates quarter after quarter, that looks particularly favorable.
We look at fix and volatility. If you’re looking at the ideal opportunities to buy during mass chaos, that’s the top right here. If you’re looking at markets where it’s lulling people to sleep it’s down here, we’ve got a fair mix of fear going on right now, so I’m not alarmed by VIX. Sometimes if everyone’s feeling one way or the other, we could tilt and sway a client portfolio because of this. But right now, there’s a fair mix of concern that’s going on.
So we’re not too worried about that in one way or the other.
If you’re taking a look at the different parts of the market small cap leading the charge for where their forward earnings appear to be going in better than large, better than international, better than emerging markets. And price to sales ratio is a little bit different, but from a PE ratio standpoint, we still have a small tilt. We actually increased our small tilt within the past week, and this is part of the data set that we use to help make that decision. If you look to see what companies are doing, we’re seeing just a tremendous amount of share buybacks.
And if you look at the amount of share buybacks and it’s interesting, I saw something share buybacks and dividends paid share buybacks and dividends paid exceed all the interest that’s owed on all the treasury debt and all the interest that’s owned on all the corporate debt that we have combined.
So there’s just been a tremendous amount of very favorable activity to help propel stocks and share buybacks being one of them. Not all areas of the market are behaving and acting the same, but we’re seeing share buybacks. Broadly speaking, they’ve picked up quite a bit. This is another leg of the stool that’s supportive of the market, which again, is an element and part of the reason why we continue to be as positive as we are on our client stock assets. If you take a look at the bond market.
I mentioned this a little bit here with municipal bonds. Taxable bonds is where you had the problem. Taxable bonds is where treasury rates saw a very high move from relative forever lows at the beginning of the year. And you look at things like the ten year treasury moving from 1.1 to currently 1.6% with yields move higher bond prices and bond performance goes down. That’s what you’re seeing here.
Munich have held up a heck of a lot better. Our suspicion is that when there is a formalized tax policy that comes through, that should be another boost of some kind to the municipal bond market as municipal bond demand increases at that time, we’re looking for that. We are not super excited about high yield bonds. Bank loans are okay. And there will be a moment where international bonds will become a real viable investment, certainly from evaluation and yield perspective, but not now.
This is something that I think you can look for us to be potentially adding in the next quarter or two. We are looking at it. But we look at that negative performance as a positive as we actively seek out value and opportunity. So a couple of different things to point out, I mentioned there was a huge change in the yield curve. Here’s what treasury yields look like in December.
Here’s the increase. You can see this increase on 30 year, the increase on ten year. By the way, this is where ten year was ten year is now here you’re seeing this massive increase in interest rates. This is driven by demand buying and selling of these bonds. The Fed controls this part of the yield curve.
It’s stuck at zero. There’s much expectation that you’re going to start to see this increase. And what we have seen anecdotally over the past couple of weeks is we’ve seen the long part come down and we’ve seen this. Not the absolute short Fed part, but this other part of the yield curve here start to creep up. So we’re seeing very small degrees of flattening of the yield curve.
And when I say flattening, it should be a concern to some because a flattening yield curve can give you a greater indication that there’s trouble ahead. You guys know me. I like historical anecdotal data in the 80s. Anytime you have this chart, dips below zero, you have an inverted yield curve, inverted yield curve, inverted yield curve. And what inverted is it’s?
The two year treasury minus the five year treasury. So when you’ve got this pure inverted yield curve, I’m sorry, the two versus the ten year. I’m sorry. The two year versus the ten year here in blue. And this is the five year versus the 30 year.
Two different ways of looking at the inversion point is that when it dips negative, there was a recession that followed when it went negative. There was a recession that followed when it went negative. There was a recession that followed.
I can zoom in, but you just have to trust me. When this went negative, just very granularly speaking, we had a recession that followed.
This is not a perfect series of data, but it’s something on the order of ten out of the last time the yield curve went flat and then eventually negative, a recession followed. So when you start to see the trend move here and when this data is updated with the very latest information, if the trend continues, you might start to see this move down more meaningfully here in this range, I think it gives us cause to pause and say, hey, is this going to be something that’s significant we need to look out for.
We’re looking out for it. We’re watching it. And we’re also watching the fact that again, if you look at the traditional bond market across the board, this gray dot is what I want you to focus on relative to this gold bar.
And this gray dot indicates where we are now, and we are at historical lows in terms of the spread difference, which is saying, these bonds are expensive. These bonds are expensive. These bonds are expensive. And if you look at each of these instances for all these different bond types, you got to shake your head and say, wow, has it ever been like this? And the answer is no, not really.
Not quite like this. So there are other areas where we’ll be looking at the bond market and bond alternatives. We’ll talk a little bit more about that briefly, I’m looking at the time. I’m going to start cranking through some of these slides a little bit faster. And if you look one of the things that’s likely to anchor our US interest rates and prevent them from this bond vigilante, massive selling surge higher is that you’ve got so much of the developed world all down here with negative in red here yielding interest rates where our interest rates look so much more favorable.
And there’s so much more risk in, like, a Czechoslovakian bond than there is the US bond. And this is really not enough of a difference for me to invest in Czechoslovakia. So with this kind of difference in this kind of difference on both the negative and the positive side, many, including us, look at this data and say, you know what? There’s no real reason for us to be seeing a massive surge because this is likely to be an anchor to keep our rates low. This is a good thing and likely to keep the bond vigilantes at bay. So that big thing that I open with in terms of visitors concerned, this is one of the most favorite factors that’s going to keep it at bay.
And the result of all of what the treasury has done to support the market and the economy has been significant. Nice, long dated chart that goes to show the ten year treasury yield going back to the 60s and where it peaked in the 70s. It’s been a 40 year sequential move down in interest rates and sequentially with it, it’s been really a 30 plus year debt increase decade after decade after decade here in the United States.
Gosh as I look at that, the concerning part is that are we going to lose a leg of this stool? This has been very supportive part of our US economic growth. These lower and lower and lower interest rates have allowed us to borrow more and more and more. Is that going to continue? Because if for some reason, the bond vigilantes win, and despite the fact we have this great anchor to keep our rates low, if there is massive amounts of selling, and if that does increase interest rates, we would lose an important leg of our stool, we would have to rather quickly change our investment philosophy because there are going to be different parts of the investing marketplaces that are going to work well, and some of those traditional areas won’t work the way they have.
Well have to certainly be changing that large cap growth thing overnight. There are certain areas we’d have to work down. We could spend a whole hour on that, but just know that we’re watching it. We’re aware of it and we’ll let you know if the data changes. We’re talking about the government potential shutdown.
And it’s interesting to see the treasury cash balance, which once looks so robust with all the treasury issuance. We’ve spent all of it. So the treasury is saying, hey, we’re running out of money here. And there was some debate and question whether the government was going to shut down. It was pushed off to December. And what we’re expecting is treasury issuance to look a little bit like this in the coming quarters. And goodness, there’s so much to unpack here with what the Fed is or is not going to be buying with our Treasuries.
If the Fed tapers Ie buys less at the same time, we have this kind of issuance. It is going to be very interesting to see if at that point without our biggest buyer of our own Treasuries who’s left to buy our Treasuries, at what price are they willing to buy it at? And will that mean at that point higher interest rates? Because this could be a Canary in the coal mine for us to get early notification. The bond vigilantes are winning and we’re going to go ahead and start to change our philosophies.
This is one of the things that we’re looking at very carefully. This is Chairman Powell. He said the odds of the 70s or inflation are very, very unlikely. We have a central bank that’s committed to price stability and has defined what price stability is and will look to use as tools to keep us around 2% inflation. And so this is what he said in June as he’s talking about that in June about a 2% inflation number, inflation was running at 5%.
We know that now and when we talk about this isn’t like the 70s. It’s worse in the 19s, 70s. You look at what inflation was, minus the Fed funds rate and Fed funds rate being zero and inflation running five, you’re running at negative 5%. That’s about as bad as it’s ever been, as bad as it’s ever been. So if the Fed is paying attention to that and they’re really worried about inflation for now, they say they’re not.
For now. They say it’s likely to get better in the first quarter. But to give you historical context, the real Fed funds rate on an inflation adjusted basis is draconian and as difficult as it was in the 70s. And for some, that is concerning because of what the Fed had to do in order to tamp out inflation. Last time, we’ll have to see if this time around, which should be different, is different in what the Fed does and all the tools that they use to help support the market, the economy.
One quick anecdote that I’ll give you is that if you look at the total amount that the Fed’s balance sheet has right now relative to the size of our economy, it’s huge, but it’s nowhere near as big as the European Central Bank or the Japanese Central Bank when you compare it to the size of their economy. So the Fed has done a lot, but they could probably do a lot more certainly start to look to equal what some of the other developed nations are doing with their balance sheets, an area of an opportunity that we are looking at.
This is part of that bond potential replacement is private debt funds. I wanted to show you here that this is the kind of trend we’re looking for, where there isn’t a ton of capital chasing the same thing. This looks like it’s an opportunistic play.
So we are analyzing this. I’ve talked to many of you and I’m saying, well, we’re not going to keep our municipal bond exposure forever. So this may be a way where we’re looking to divest ourselves with some things like municipal bonds and find bond alternatives, something like this. Obviously, the risk parameters are very different, but we look at the risk of losing money as something very seriously. And that’s not something we’re willing to do with any part of our client portfolio.
So this may be something you can look at for an evolution looking at real assets. Here what I would point and indicate is that gold has been not very exciting, and it’s just interesting to see that the price and the price of gold go down and the price of Bitcoin go up. I don’t know, are people that are looking for that gold kind of give me protection for world currencies doing crazy things with their currency. Have they left the gold as their favorite way to express that trade.
And have they put money into cryptocurrencies as a way to replace it? Maybe I’ll talk a little bit about cryptocurrencies. As I wrap things up here. At the end, I mentioned a little bit about the price of oil. I said, I have a chart on that. What’s interesting is that if you look at the rig count here in light blue, I could take this chart back decades.
There’s cyclicality to rig count, and that as prices go up all of a sudden there’s just a desire to have more rigs, to extract more, to sell more at high prices, they overdo it. The price goes down. Price eventually goes back up and they say, oh, we’re going to increase red count, they overdo it. And sometimes it’s the economy that’s creating a sharp lack of demand. Sometimes we create an oversupply.
But what’s interesting to point out is that on both Nat Gas and in particular Nat Gas and oil, the rig count has not gone back up enough to properly offset demand. Thus, the price of oil and Nat gas has gone up significantly. So we have clients that have oil and Nat gas private funds. We haven’t seen these numbers rebound enough to show that the institutional investing community has gotten back into this part of the market yet. We haven’t seen the Exxons and the Chevrons get back into increasing recount enough yet.
So it’s likely at some point with these prices being where they are and the recount being where they are, that this doesn’t improve anytime soon. At some point, you’ll see, rate counts will increase, we’ll overdo it and the cyclicality will return. So we are looking for more transaction activity there. We’re hoping to see it on some of the private funds that we’ve invested in. We’ve even seen some announcements from one of our big private funds Waveland that they are seeking to get an exit, hopefully within the next couple of months, which is exciting.
We’ll have more news on that as it comes through gold miners an opportunity there, potentially, we’re looking at the free cash flow yields that are going up, and we’re looking at the index which hasn’t participated there. So even though the price of gold which has gone down, that gives us a signal like, maybe there’s an opportunity there you’re seeing that reflected in the gold miner index, but we’re seeing fee cash flows improved. So as you guys know, we have been in and out of this gold, this gold miners trade before. I’m just telling you, we may look to get in it again. This is some of the data.
Private real estate is an area where this is different than the public market. So private real estate on a forward ten year basis looks particularly good. There are parts of the market where we would look to avoid. I mean, I can’t see us buying a portfolio of office properties. That’s not where I think we’re at there’s a variety of different private portfolios that we are looking at to invest client capital in.
So you may see some of those areas creep up as a part of our overall investment strategy. We’ll be avoiding things like malls. I can almost assure you there as well. So please, don’t worry. You won’t see malls or office property kind of things in portfolios.
But, goodness, there’s potentially a nice opportunity here, and we’re seeing it certainly in this distressed section. But there are plenty of other things in industrial warehouses, things like that that provide opportunity for client portfolios. And another very thin, small leg of the stool that support our neutral position on equities is that we’re seeing this retail investing mania go down. This is the Google search trend. We’re seeing the Stack index.
Google Search trend go down. Kathy Wood falling off the face of the Earth, the Meme stocks, things like that. These are the kind of things that make us feel better about investing. These are the kind of moments where we feel like this is the kind of thing where you get into an Uber and your Uber driver has stock picks for you. This is the cause for concern.
This is like the VIX index assigned that things are maybe returning to normal a little bit. I mentioned Munich. What I would say here a couple of things. One, we’re going to continue to be opportunistic with our municipal bonds as long as we stay in them. I keep saying we may be looking for an exit in Munich.
We also subsequently may be looking for more of a distressed Muni opportunity fund. We’ve got one that we’ve been eyeing for some time. We just got to assess whether or not we want to take that risk relative to private credit, frankly. And so we’re working through those imaginations right now, and we’ve got the crypto Bull the crypto bowl. What can I say Bitcoin?
As soon as that release of the I got to get through that as soon as that release came out of the Crypto ETF cryptocurrency went crazy. And let’s just be clear what that is. That crypto ETF is really nothing more than our crypto fund based on the future crypto market. It’s built exactly the same way that the USO oil futures ETF was built. And you remember when oil futures went negative, that USO ETF was a disaster.
It was an absolute disaster and it didn’t price oil. Well, it didn’t work, right? It’s like a lawsuit waiting to happen. I’m not saying the exact same thing is going to happen with the crypto ETF, but I don’t think we’re buying it. I don’t think we’re buying it anytime soon.
That’s not the way we would participate in cryptos. I’ve talked to many of you. Likely it’s likely going to be an infrastructure fund. We have one that we have in mind. It’s raising capital between now and the end of the year.
So we’re going to finalize allocations over the coming months for some of you where that risk profile makes sense. Listen, asset allocation is still critical. Remember the way that we do it. We like to lean into parts of the market that are working. You can continue to expect us to do that.
And as we do, we got to continue to look at things like the expected forward returns for areas of the market. And look, I mean, us large stocks after the run that they had where the return, by the way, was way up here, way up here. Over the past ten years, there’s mean reversion or kind of getting back to the way things were return wise that we would expect to see over the coming time forward, where things like venture capital, private equity, private real estate, those parts of the market.
We can get similar volatility to what the US market is providing, but hopefully what we would expect better return. So broadly speaking, if you’re wondering where other areas of the market that you’re looking at, those represent, some of them and how we do it on the forward earnings basis, I’m never going to get this thing down to 35 minutes.
I realize that I will certainly work hard to try to do that next quarter. I know. I said that every quarter. I appreciate for all of you that tuned in and stayed in. If I didn’t get to your questions, I will email you back the answers.
I appreciate all your time and attention. This has been the fourth quarter market outlook for Henry+Horne. Thanks. Take care, everyone. Have a great day.