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T-Bills, Earnings and the US Dollar

“Davidson” submits:

T-Bill rates on a sharp rise as positive EPS surprise markets. T-Bill rates now at 1.17% and exceed Effective Fed Funds at 1.16%.

The Fed will be forced to raise shortly should T-Bill rates continue this trend. A rising T-Bill rate is a sign of improving investor confidence as capital flows out of safe havens to business and equity investments.

 

The period 2014-2016 witnessed a strong US$ and 5,000yr low interest rates in US Treasuries as fearful investors fled foreign markets with the Russian invasion of Ukraine and the rise of terrorism. Investors sought safety in US Sovereign Debt.. The current period reflects the beginnings of a reversal of investor fears as Western nations mount a defense against anti-Democratic elements. Capital shifting out of T-Bills results in higher equity markets and higher T-Bill rates. No one should be surprised if the Fed raises the Fed Funds rate another 25bps once T-Bill rates reach 1.25%. This could occur the next few weeks at the current trend. Capital is flowing into US and global equities.

 

 

As capital shifts out of T-Bills, the recent lows on the Trade Weighted US$ is a sign that global capital is rebalancing back into foreign markets. Higher global equity markets should be expected. No one should be surprised if $WTI and commodity prices rise with the weakening US$. This has been a relatively strong inverse relationship since 2003.

 

Markets Cycle

 

Markets cycle about long-term economic trends. Cycles always occur. Though when and how far they cycle from actual economic trends has always proven to have been unpredictable. Predicting how quickly a cycle may normalize is equally unpredictable. The best one can do is to measure the long-term fundamentals and make an educated guess as to when one should enter or exit a particular cycle. The US$ strength 2014-2016 had no precedent, but its long-term trend is well documented. As the US$ normalizes which it appears to be doing, investors should expect to experience substantially higher equity markets Domestically and Internationally. Fixed Income markets should experience declines as 10yr Treasury rates normalize to ~5%.

 

I continue to recommend portfolio exposure to Domestic and International Equities with a small exposure to commodity related issues.