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Mr. Jamiroquoi Goes to Washington

Updated: Jul 20, 2023

I’m afraid my note this week is going to be pretty boring compared to the national headlines. I don’t have much to say about riots in the Capitol, zip ties and spears, narcissistic sore-loser Presidents, fraudulent elections, the horrendous Covid-19 death toll, teacher sick-outs, attacks on the Bill of Rights, snow in Alabama, the nation’s oligarchy of big tech executives, impeachment, or the Cleveland Browns.


Wait a minute; I take that back. …How ‘bout them Browns, dawg?!?


The Browns. And breakeven inflation. The Dollar has surged since the beginning of the year as the Five Year TIPS/Treasury Breakeven Rate climbed over 2% for the first time since November, 2018. In our December 29 note, we suggested that commodities and breakeven inflation had room to run, and I think we’ve only seen the beginning of that. (However, we did not call for the Browns to finally win a playoff game. Missed that one completely.)


Fiscal stimulus prospects increase our bias toward higher interest rates and a falling Dollar. More stimulus may drive additional upside near-term for stocks, but at some point, inflation and high expectations should begin to give investors pause. Ten year treasury yields are rising, and we think they will be above 2% by year end. That will compress market valuations for stocks as big risk premiums normalize.


A rising interest rate environment leads us to emphasize:

  • Avoiding fixed income mutual funds. Whatever your fixed income allocation is, we recommend filling it with the actual bonds, not the funds that own them.


  • Complementing high quality core bonds with private credit for potentially attractive yield premiums and diversification benefits.


  • Moving down in market capitalization to seek exposure to secular growth themes while reducing the concentration and regulatory risk of current mega-cap growth companies.

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Prices for everything are too high, butwhere do you think stock prices will be ten years from now, higher or lower?

Headlines

Divebombing into stagflation nation.

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