For more than a year, I have published opinions that credit spreads could widen as the Fed prepares to tighten, rather than narrow as has been more common in previous cycles.
My reasoning was and still is; the Fed is tasked with tightening later in the economic cycle than usual. That corporate bond yields are rising while Treasury yields fall (a classic sign that the bond market is worried about the economy and asset prices) is not my fault. It might not be what readers wish to hear, but it is the truth.
Looking for TIPs
I could publish “cheery” reports and tell readers to buy TIPS or that the rout in emerging markets is a buying opportunity, but I have no evidence to support these strategies. I will not make strategy calls based purely on what happened in the past. This is because I know the past. There is little today which is similar to recoveries of the past 30, or even 50, years. I am referring to changes in technology, demographics and globalization.
My take on oil prices is that they are probably overdone to the downside. However, this does not mean that oil prices might not fall further, nor does it mean it is going over $50 a barrel anytime soon. In retrospect, knowing what we know now about oil production and consumption, $100 a barrel oil seems silly and $80 or $70 a barrel makes little sense.
I believe that small, overleveraged drillers could continue to fail while the better small drillers are absorbed by larger producers, probably at discounted prices. This should make oil profitable at low prices. The result could/should be low inflation for an extended period of time.
Housing comes back
There is good news in the U.S. economy. We had Housing Starts rise to the highest level since 2007, coming in at 1,206,000 in July. Yes, Starts were largely (but not totally) driven by multi-family and luxury single-family, but instead of bemoaning that single-family demand is not what to which we have become accustomed, how about reveling in the fact that consumer demand is causing builders to address the mismatch between housing stock and consumer preferences. It is better than building ghost cities, don’t you think?
China “permitted” the yuan to fall again last night. Yes, this is deflationary/disinflationary. Yes, it is bad for commodities prices. Yes, it is bad for highly-paid oil field workers, but it is not necessarily a growth killer in the U.S. economy. Economists have been disappointed that lower oil prices have not resulted in more robust consumer spending.
I believe that economists are looking in the wrong places. Traditionally, lower energy prices have resulted in more spending at retailers, such as Wal-Mart and Target. Using this as a measure of benefit, the effect of lower oil prices on consumers looks disappointing. However, when one considers increased spending at fast casual restaurants, mobile telecom, video streaming/content downloads and home improvement retailers, lower fuel prices have indeed helped.
About Thomas Byrne
Thomas Byrne brings 26 years of financial services experience to Wealth Strategies & Management LLC. He spent the last 23 years as Director of Taxable Fixed Income for Citigroup, Inc. and predecessor firms in New York, NY. During the course of his long fixed income career, Mr. Byrne was responsible for trading preferred stock, corporate bonds, mortgage backed securities, government debt, international debt and convertible bonds. Mr. Byrne was also responsible for marketing, sales, strategy and market commentary within the taxable fixed income markets.