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The Federal Reserve has finally raised their target for the Fed Funds
rate. In a unanimous vote members decided to raise rates by 25 basis points
to 0.25 - 0.50 per cent. It was the first hike since June 2006 when then Fed
head Ben ‘helicopter’ Bernanke increased the benchmark rate from 5 to 5.25
percent.
How far and how fast will the Fed's rate-hike cycle go? Maybe Federal
Reserve members themselves can tell us that…
Dot plot
Each member of the Federal Open Market Committee (the FOMC is the branch
of the United States Federal Reserve that determines the course of monetary
policy), have anonymously provided their predictions for the future target
fed funds rate. The Fed releases those predictions in a chart with each
member getting one dot at their target interest rate level for each time
period.
The bank's "dot plot," suggests as many as four rate hikes in
2016 and a Fed funds rate of 3.5 to 4.0 percent longer term.
Why am I looking at increasing yields? Read on…
Here’s a chart of the old VSE and the now TSX.Venture.
 
chart two Business Insider
I like chart two for a couple reasons:
1. It shows a bear market, the inevitable rise being a bull market, the top
of the bull market, the bear market or the slide down, the bear bottom, the
rise or bull market.
2. Shows the VSE/TSX.V has not dropped below 500.
Below is a current one year chart of the TSX.V, is the bottom in, maybe
close to in?
chart three
With the majority of companies listed on the TSX Venture being involved in
the resource sector – commodities – it might seem logical to believe, and you
certainly couldn’t be faulted for it, that the TSX.V is a commodities price
driven exchange. When commodities are doing well, the exchange does well and
of course vice versa.
chart four
The TSX.V (chart three) is close to historic lows, commodity prices (chart
four) have literally fallen off a cliff. A logical assumption would be that
the TSX.V is a commodities price driven exchange - but you’d be wrong.
TSX.V bull and bear markets are driven by the Feds overnight rate
increases/decreases and the direction of U.S. Treasury bond yield increases
or decreases.
Look at 1999 or 2009 for the start of two bull markets, (compare charts
5&6 to chart seven). Treasury bond yields started to climb, commodities
started to climb, the TSX.V started to move up. The exact opposite happened
in 2002 and 2011.
chart five 30 year yield
chart six 10 year yield
chart seven
Below is a Commodity Metals Price Index Monthly Price from indexmundi.com.
Included are Copper, Aluminum, Iron Ore, Tin, Nickel, Zinc, Lead, and Uranium
Price Indices.
Chart eight
Fact; The TSX.V almost always moves in the same direction as Treasury bond
yields.
Fact; Treasury yields go up if the Federal Reserve increases its target
for the federal funds rate.
Fact; Treasury bond yields can go up even if investors merely expect the
fed funds rate to go up.
Fact; The Fed’s funds rate is going up.
The U.S. Federal Reserve has been manipulating and holding down rates in
an attempt to stimulate economic growth. Investors, in a search for yield,
bid up the stock market and bought enormous amounts of junk bonds. Management
backed up the truck and filled it with stock buybacks further supporting
stock prices.
Since the wake of the global financial crisis the U.S. has seen its
longest run of historically low interest rates - zero to 0.25%. Now
rates are starting to rise and the free lunch is off the table. Stocks are
going to feel the effects of this sudden no stimulus along with the pain of
overseas earnings being brought home to a strong dollar.
A strong dollar helps Americans by making imports cheaper and curbing
inflation. However a strong US$ hurts U.S. based multinationals who have
overseas earnings in those very same currencies that have taken such a severe
beating versus the soaring U.S.$. The dollar's surge is reducing earnings.
Bringing those declining yen, pesos, dinars, francs etc. home isn’t doing any
good for bottom lines, in fact it could be an earnings disaster in the
making.
Junk bonds are issued by companies with low credit ratings and high debt
levels – they are the higher yielding bonds with most often extremely ugly
credit ratings. Investors fell in love with them when searching for yield
after the 2008 financial crisis.
Junk bonds grabbed headlines in December 2015 when a rout sent prices
tumbling the most in four years. Energy and energy related firms, which make
up the largest chunk of the market, are trying to cope with persistently low
oil prices. With the supply/demand imbalance still growing in the oil market
investors are worried many will default in the coming years. The negative
sentiment has crossed over and hit junk bonds and derivatives in other
industries.
Where’s the hot money going to go when stock markets have lost all support
and junk bonds have sold off?
“I think the economy is on the road to recovery. We’re doing well.”
Janet L. Yellen, U.S. Federal Reserve chairwoman
Whether you agree with Janet Yellen or not the Federal Reserve’s overnight
rate is going up. This will affect the rates charged on credit cards, loans,
savings accounts and yields on short-term bonds as these interest rates
follow the overnight rate in lockstep.
The effect, or yield rise on medium to longer-term bonds will be more
muted and slower to take hold - yields usually move in the same direction as
the fed funds rate, but not in lockstep. As the Federal Reserve implements
more hikes down the road - the Dot Plot projects 4 rate hikes, or a hike
every second meeting in 2016 - the effects on yields will accelerate.
The Fed are raising their overnight interest rates. Longer term Treasury
bond yields *almost always increase during a lengthy tightening cycle by the
Fed. The TSX.V moves in the same direction as Treasury bond yields.
*In 2004 to 2006, the last time the Federal Reserve raised its overnight
rates, long term rates went up, then slipped for a few months. Over that same
time period gold went from US$400 to US$700, a magnificent 75% climb.
Conclusion
We need to keep an eye on the Fed’s overnight interest rate moves, if the
Fed is entering a prolonged rate raising cycle we can benefit. The ahead of
the herd play would be buying shares in junior resource companies at the
bottom of the market, or close to it, before the hot money, and the slow to
catch on money, starts chasing real things - commodities, gold and silver.
I’ve got buying some carefully researched resource (precious metals,
uranium, copper and nickel supply/demand fundamentals offer huge
opportunities) companies listed on the TSX.V on my radar screen. Are they on
your screen?
If not, maybe a few should be.
Richard lives with his family on a 160 acre farm in northern British
Columbia, Canada. He invests in the resource and biotechnology/pharmaceutical
sectors and is the owner of Aheadoftheherd.com. His articles have been
published on over 400 websites, including:
WallStreetJournal, USAToday, NationalPost, Lewrockwell, MontrealGazette,
VancouverSun, CBSnews, HuffingtonPost, Beforeitsnews, Londonthenews,
Wealthwire, CalgaryHerald, Forbes, Dallasnews, SGTreport, Vantagewire,
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SeekingAlpha, BusinessInsider, Investing.com, MSN.com and the Association of
Mining Analysts.
Please visit www.aheadoftheherd.com
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Legal Notice / Disclaimer
This document is not and should not be construed as an offer to sell or
the solicitation of an offer to purchase or subscribe for any investment.
Richard Mills has based this document on information obtained from sources
he believes to be reliable but which has not been independently verified.
Richard Mills makes no guarantee, representation or warranty and accepts no
responsibility or liability as to its accuracy or completeness. Expressions
of opinion are those of Richard Mills only and are subject to change without
notice. Richard Mills assumes no warranty, liability or guarantee for the
current relevance, correctness or completeness of any information provided
within this Report and will not be held liable for the consequence of
reliance upon any opinion or statement contained herein or any omission.
Furthermore, I, Richard Mills, assume no liability for any direct or
indirect loss or damage or, in particular, for lost profit, which you may
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this Report.
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