Growing up on Long Island, my Mom often told the tale that when I was a preschooler I used the term “yestermorrow”. Apparently. it was an inter- changeable (non-word) in my young mind to mean days beyond tomorrow, or last week. From the political, social, and financial our World is going through a ton of pain today. Perhaps Yestermorrow allow us to reflect, back, while we prepare forward, with a perspective of optimism overcrowding the pain.
A Person of Interest
In our view the Federal Reserve closed the hatch on the 40- year old bond bull market at the end of 2021. A paradigm change is underway for interest rates and the yield curve……a good time to visit an old- time friend. From our archives February 26, 2010:
Harry Laubscher (actively retired) was a technical analyst on Wall Street for several decades. I first met Harry while interviewing him as part of an internal marketing project at PaineWebber in early 1982. My working knowledge of technical analysis was limited, at best, having joined PaineWebber from college in 1980. My vivid memory of our first meeting was of Harry pointing to a rather large interest rate chart on his office wall. He pointed at a September 1981 timeline and illustrated a break in both the short and long treasury bond yields (then 16.8% and 15% respectively). He boldly pronounced that “these rate levels will not again be seen in my lifetime and ultimately will drop to 4-5% yields”. I recall he ventured that could take 10 to 20 years. This was a spot on market call if there ever was one! Harry was always available, dispensing rapid fire answers to broker inquiries over the squawk box in the PaineWebber branch system. I learned a great deal from Harry during my PaineWebber years. While composing this writing over the past week, and after reading research touting hyperinflation with double digit bond yields imminently ahead, I reflected on Harry’s prescient call on interest rates back then. I decided to track Harry down and reached him by phone on the second ring yesterday. First, he remembered me and that 1982 meeting which impressed me since I last spoke to him about 1990. He retired in 2001 shortly after his building was destroyed by the terrorists on September 11th. My question to him was “could we be looking at a mirror opposite of that call in 1982”? The reference being to rates escalating to double digit yields any time soon. He offered that he just looked at bond charts last week and his projection is that while we may be at the bottom of treasury yields of 4-5%, he expects no significant upward yield pressure before 2012, possibly 2016. We finished our conversation discussing the historic transformation of Wall Street due to the 2008 meltdown, importance of watching the Fed moves monthly, and exchanged e-mails to keep in touch. Harry Laubscher is a wise man.
On October 2, I took the chance to call Harry again (13 years later, mind you) he picked up on the 4th ring in his Brooklyn Heights apartment. He volunteered he is now 95 years of age. I reminded him of our conversation back in 1982, and again in 2010…he did not miss a beat. First, he opined that indeed rates are going higher for longer, and he concurs that the 40- year run is behind us. He did offer he expected a Santa Claus rally in the stock market, but does see some head winds for the stock market in 2025-2026. He reminded me of one of Laubscher’s Laws: the 91.5 rule. Basically, if an instrument crosses over 91.5 it has a 7:1 probability of crossing over 100. That was a new one for me. He further added the “charts tell the whole story”. I recommended the Price of Time, by Edward Chancellor. I thanked him for his time and wisdom over the years, and on my next trip to NY it would be a privilege to take him to lunch. An hour later Harry emailed back: “Thanks for the call. Nice to know I have not been forgotten. The library has put a hold on the book I should have it next week, thanks for the idea.” My 2010 comments remain unchanged, Harry Laubscher is a wise man.
Back to Normal
In the aftermath of the 2008 Great Financial Crisis, and has Fed Governor Ben Bernanke implemented quantitative easing of money (QE), I believe a PIMCO bond trader coined the term the “new normal”. Basically, low interest rates, low economic growth and low inflation. Post 2014 the QE part of the new normal was put on steroids , affectionally called Zero Interest Rate Policy (ZIRP). Personally, I never embraced the term new normal, I thought it was abnormal, and it carried on longer than anyone forecasted. ZIRP ended 18 months ago, and in our view, we are returning to normal. It will be painful but in the end a return to 2-4% short rates; mortgages priced north of a T-bill rate and a positively sloped yield curve is a good thing because it is normal.
Bonds have a place in our portfolios, on balance we are thoughtfully adjusting the average maturity risk (duration) ever mindful of credit quality. Have a Happy Halloween and enjoy the early days of Autumn.