Carty Capital Management
CFP | Fiduciary



What Can You Say?

Good Morning,


Hoping you and yours are still enjoying the beginning of the 2017 Holiday Season.


A quick review of the retail chatter suggests shoppers were out in force.  The better news?  Retailers are sending strong signals that shopping results have come with far fewer sales and price reductions seen in previous years.


My hunch?  Once again, the "obvious" assumption of the death of retail will end up being mostly a farce.


While I could only find my way through enough traffic to get to a couple spots, here are a few photos taken on my trusty iPhone:




Yes, the one above is the Apple store.  Now what is interesting here is the sections you do not see.  To the left of this shot is a line that looks much like the lines at Disney World, where you are roped off going back and forth to wait to get into the store to buy an iPhone.  It is 7 layers deep.  If you wanted to by an iWatch - you stood to the right in the same manner - just out of camera range.  We were in this mall for about 4 hours - the picture did not change, the lines only got longer.


The photo below was the sleeper shot of the day.  I did a bad job of getting the stores entire name in the picture.  It was a line to get into GameStop.  They were selling the new Nintendo Switch platform.  It was not on sale.  Max was number 352 in line when he started.  We left him there for roughly 1 hour and 25 minutes.  He was number 15 when we returned.


All in all, I would say from the highly scientific research I was able to endure on Friday, it was a good day in America - and the US consumer is doing well in general.




But Mike, The Media Says....


Yes, I know - the world is ending for any number of reasons.


I read no fewer than a dozen reports over the long weekend suggesting that the new time-frame for that buzzer to go off is somewhere between right now and "mid-2018."  This once again proves what it takes to get a click - and good news just doesn't do it anymore.


I also read a very scary piece about Silicon Valley by one of its own.  It delved deeply into the "news" we see today.  It suggested strongly that our world is shaped by what we click.  We click bad news once - and our phone or desktop is fed with more bad news.  We click more of it and before you know it, our perception becomes that almost everything really is bad news.


Try it for yourself.  Start looking for good news stories and click on those.  I bet your headlines change.


"Self-fulfilling prophecy" has likely never been more real than today given the dangerous side of technology.  It is up to us to understand it can cut both ways.  We are all still responsible for being able to understand what is real - or not.  And yes, I know that should be obvious - but sometimes it isn't.




Yes - they are fine too.  Forward and reported show us hitting records on all fronts.  Next quarter should be as well.  With inventories tight and sales strong, one finds it hard to imagine a way we can actually get a recession going....but worry the masses must.


Keep this close at hand:  As much as the human psyche tends to only recall the painful elements related to investing and its own wealth management journey, the 1982 to 2000 US secular bull market run had just one year with a negative S&P 500 return, and that was 1990.  Then, the S&P 500 fell just 3% after Saddam Hussein rolled into Kuwait in August 1990.


What a deal that war did bring.


Pray for more my friends.....pray for the things that we fear - they create long-term opportunity.


Boom....and this one is just starting


The chatter about Gen Y is they are lazy, don't like to work and started late.  Add the idea they prefer to live at home and not go out and build something for themselves and you get really confused.


Besides, just like when we boomers were kids, it's all horsesh$$ anyway.


Yes, they were late in getting started.  Instead many got two degrees and now they "start late" with six-figure incomes.  Here is the deal though:  Being late simply means we have quite a few catch up years ahead.


Wake up and smell the Holiday-spiced coffee:






Yes indeed, 685,000 annualized home sales - a 10-year high.


But here is the real issue:  we are miles and miles and miles away from where we will need to be in the future  The latest release this morning shows about a 4-month supply on hand.


Over the next 5 to 10 years, over 60,000,000 Gen Y kids are moving out.


You get the drift.....pray for corrections.

About that Yield Curve Thing


Ok, so most of what I read over the weekend was tied somehow back to the latest act in the on-going Armageddon financial theme.


All the other items have so far failed, so it is time to find a new Black Swan.  I bring you - the yield curve.  It is flattening.  "Experts" are telling us it will soon invert - and then, as sure as the sun will rise tomorrow - the world ends.


Stop fretting over this please.  Let others lose more money over this fear.


Some tidbits and charts to consider and then enjoy the Season:


We are told "millions" are worrying about the flattening of the Treasury yield curve, the breathless stories about how the nation's malls are emptying, how subprime auto loan defaults are surging, and students by the truckloads are defaulting on loans.  While these are all disturbing developments, many more things need to unfold - at the same time - before the economy is at risk of falling into another recession.


On the flip-side, note that credit spreads are still relatively low even as GDP and earnings hit record highs, swap spreads are very low, real yields are very low, inflation and inflation expectations are right where they should be, and the financial system has tons of liquidity.


The following charts can help to put you at some ease the next time you see these blaring headlines:




Bond market players are not nice.


Rest assured, if the world was coming to an end or liquidity was drying up or the curve was inverting, they will be the first to charge you for it.


And 2.34% over 10 years is not charging you for it.




The 2-yr swap spreads (above) are among the most widely-followed and favored indicators, because they have been good leading indicators of economic conditions.


In normal times, swap spreads are 10-30 basis points. Today they are 18 bps.


Just about perfect. That means that liquidity is abundant and systemic risk is low. The financial markets are not worried at all about widespread defaults or a liquidity squeeze.


By this measure - the markets are telling you in today's world, the Fed hasn't tightened at all.


Now, if you want to assume we are living in an economy like we were back in the 60's, 70's or 80's, well I am sorry - these are the wrong morning notes.




Scott's chart above shows us the real yield curve in action.


"Real yields" are the true measure of how high or low interest rates are when one assumes the current rate of inflationary pressure.  We have often noted this is the current fly in the ointment - and it will get even more forceful (in a good way) as Gen Y moves deeper into the business world and corporate structure.  They are the most deflationary business force we have witnessed to date.


Seen a better way:  A 10% yield in a 10% inflation environment is not a big deal, but a 10% yield in a 2% inflation environment is a killer.


The blue line on the chart above is the Fed's real short-term interest rate target. Currently it is about zero.  Well, it will be in December, when the Fed will almost surely announce that rates will rise another quarter point to 1.5%.


Now, that's just below the current underlying rate of inflation (1.6%), according to the PCE core deflator, which is the Fed's preferred measure of inflation. (PCE Core inflation is typically about 30 to 40 bps less than CPI inflation.)


As the chart also shows, the front end of the real yield curve is pretty flat.  What that means is that the bond market does not currently expect the Fed to tighten much more after their December meeting. (Keep in mind, if growth picks up, and fears fall, rates will rise a little further and the Fed will follow it upward as covered before.)


The 5-yr real yield on TIPS (red line) is effectively the market's expectation for what the real Fed funds rate will average over the next 5 years. Note that prior to the last two recessions the real yield curve inverted: the blue line rose above the red line. That meant that the market expected the Fed to start lowering interest rates in the foreseeable future, because the market sensed that monetary conditions were beginning to undermine the economy's fundamentals.


That's not the case today.


Until we see (collectively) the yield curve actually invert, until we see real yields move substantially higher, until we see swap and credit spreads moving significantly higher, and until inflation expectations move significantly higher, a recession is very unlikely for the foreseeable future.


I provide you this snapshot again to remind you we have seen only 8 years since 1933 where GDP growth has fallen YOY - and each year was followed by new gains:





In Summary


So, once again, just ponder all this in the midst of the insanity sometimes.


And always remember, as boring as this is going to sound...this is not about beating some index.  It is about meeting your goals and addressing your plans and needs.


The dirty little secret of successful, long-term investors is this:


He/She who moves less wins.


Long-term thinking always wins out over short-term trading.  Worrying about the next setback sells lots of ads but makes almost no money for you.  History proves it.


Forget economics - think demographics.


It's the big picture.  It's the current under the emotionally-driven waves.


Demogronomics keeps us on the leading edge of that long-term direction - but it also demands a much larger, far more patient view of the economic elements at work.


Pray for that correction.


Generation Y is set to do much greater things - far beyond what the Boomers accomplished - or what can be defined today.


Until we see you again - may your journey be grand and your legacy significant.


InvestingMike Williams