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Some people are angry, very angry, about our economic situation. Sure we have had one of our worst rebounds from a recession possibly ever. Some young people are asked to assume more and more debt while facing an insecure economic time. But angry?

The Coming Change

October 15th, 2016 by Kurt L. Smith
  • If you frame the world in the context of long-term financial trends, you may see a world without change. Thirty five-plus year bull markets for stocks and bonds are where we have been and where we currently are. Not only have interest rates fallen from all-time record highs in the early 1980’s to all-time record lows lately, but the prospect for lower interest rates longer is the consensus for as far as the eye can see.

    Market moves of this historic magnitude are what books are made for, not a monthly letter. After thirty five-plus years, what’s another one year, or five years? The consensus is lower longer. In other words, the consensus is for no change.

    Yet the conditions for change continue to swell. Some people are angry, very angry, about our economic situation. Sure we have had one of our worst rebounds from a recession possibly ever. Some young people are asked to assume more and more debt while facing an insecure economic time. But angry?  We are discovering the business model for pension funds is not working.  Older workers, increasingly teachers, police, firefighters and other municipal workers are becoming increasingly aware how the ongoing lower longer outlook will impact them dramatically.

    We are weeks, merely days away from a presidential election. The likely narrative is we are not ready for a dramatic change and we continue to muddle along. This was also the expected narrative for the Brexit vote, but surprises do happen.

    Tipping points are hard to predict. Whether you bought long-term bonds in 1980, 1981, 1982 or anytime in the 1980’s –whenever IS the point!  Whether you did it at the top of the interest rate cycle is not. Likewise, NOT buying long-term bonds now in 2016 (or last year or next year) is also the point.

    As the 1980’s ushered in dramatic change so too may the 2010’s. Interest rates didn’t remain high forever, nor will they remain low forever. What is dramatically different now is the amount of debt in the market place. Size does matter.

    When a trend has been in place for so long, everyone tends to be blinded to the risks that exist. In 2007- 2008 the consensus continued to be that the problems were small and contained. We know better now.  But wait, weren’t investors rewarded by sticking it out? Didn’t the bailouts spur asset prices to go back up? Sure they did. But at what cost?

    While the stock and bond markets may be better than 2007 prices, the central banks, led by our Federal Reserve Bank, continue to build their bloated balance sheets into the trillions of dollars. We are not in 2007; we are in 2016 with higher stock and bond prices along with a tremendous amount of greater debt.

    Obviously time has its own schedule. As I have sorely misjudged how long stock and bond prices would remain high (lower rates longer), this will also be troubling for all of those in the lower-longer camp that believe stock and bond prices will remain high and higher. The trend will change and those who are betting it won’t will probably be hurt the most. We are not in their number.

    The time for making money in stocks and bonds may be over. We continue to find municipal bonds that make sense, but better yet, we do not have to make our bets in the lower-longer camp. While lower may indeed be longer, I believe its days are numbered. The historic highs for interest rates did not last in the early 1980’s; the historic lows for interest rates will not last today. Things change…they always do.

    Victoria Independent School District, Texas Refunding

    Moody’s Aaa (Aa2 Under) S&P AAA (AA- Under)

    Permanent School Fund Guaranteed

    Due 2/15 Dated 2/15/16 Maturity: 2/15/2038

    Sale Amount: $129,175,000

    YEAR MATURITY COUPON YTM*
    1 2017 2.00% 0.65%
    2 2018 3.00% 0.96%
    3 2019 3.00% 1.06%
    4 2020 3.00% 1.17%
    5 2021 3.00% 1.26%
    6 2022 5.00% 1.37%
    7 2023 5.00% 1.49%
    8 2024 5.00% 1.64%
    9 2025 5.00% 1.77%
    10 2026** 5.00% 1.89%
    11 2027** 5.00% 2.00%
    12 2028** 4.00% 2.31%
    13 2029** 4.00% 2.47%
    14 2030** 3.00% 2.83%
    15 2031** 3.00% 2.95%
    16 2032** 4.00% 2.76%
    17 2033** 4.00% 2.81%
    18 2034** 3.50% 3.05%
    18 2034** 4.00% 2.86%
    19 2035** 3.00% 3.17%
    22 2038** 3.125% 3.29%

      *Yield to Worst (Call or Maturity) **Par Call: 2/15/2025

    Source: Bloomberg

    This is an example of a new issue priced the week of 10/10/16

    Prices, yields and availability subject to change

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