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iTrust Daily Insight

iTrust Daily Insight
Edition 10.2.2019

October 2, 2019: Scouring market data for what might move markets going forward

Market data as of about 8am PT, 11am ET

  • Bitcoin:  $8,282 (down 15%+ in last 2-3 weeks) (Source: Coinmarketcap.com)
  • Digital currency price movement today: generally down about 1% (Coinmarketcap.com)
  • Number of digital currencies with market cap over $1 billion: 12 (Coinmarketcap.com)
  • Market Capitalization of Bitcoin: $148.8 billion (Coinmarketcap.com)
  • Gold “F” futures contract: $1503 (source: Yahoo Finance)
  • Copper “F” futures contract: 2.5740 (Yahoo Finance)
  • Oil “F” futures contract: $52.66 (Yahoo Finance) (Iran hawk John Bolton leaving job)
  • DJIA: $26,103  (down about 470 points, or about 1.7%) (Yahoo Finance)
  • S&P 500: $2,890 (down about 1.7%) (Yahoo Finance)
  • FTSE (main London stock index): 7,125 (at time of writing) (Yahoo Finance)
  • Shanghai stock index:2,905 (Yahoo Finance)
  • US 10 year Treasury yield: 1.600% (down 15+ bps in last 2-3 weeks) (WSJ.com)
  • US 2-10 yield difference: +0.10% (i.e., positively sloped — normal — yield curve) (WSJ.com)

Today’s Big News:

The Dow Jones Industrial Index of 30 large-cap US stocks is down 470 points so far today.  Headlines surround release of ISM (Institute for Supply Management) and sister organizations’ data showing warnings of manufacturing sector slowdowns in German, China and the US.  We believe that comments overnight from a Federal Reserve “dove” (a voting member who has historically favored lower interest rates) said the Fed may have to raise interest rates.

Today’s Morning Commentary:

In our continued efforts to educate and help traders and individual investors with their investment decisions, we wanted to point out a particularly good tool we found.

There are many ways to infer from market sources what “the markets” believe the US Federal Reserve is going to do regarding forward interest rate policy.

All banks, savings & loans and credit unions are all regulated.

Such deposit-taking institutions are regulated for lots of reasons, including the government’s interest in protecting depositors whom governments protect via deposit insurance.

Banks must maintain minimum levels of capital to back their loan portfolios and protect depositors.  They also have to maintain cash levels and balance the cash needs of their customers.  These needs created the very large market for overnight loans from one bank to another — banks with excess cash lend to banks who need cash.

Through the control of money and overnight lending and borrowing actions, the US Federal Reserve directly manages the interest rates on these overnight loans which lending institutions and deposit-taking institutions pay each other for such loans.

Through such “monetary policy” the Fed indirectly influences all interest rates in the US as well as the value of the dollar.  The fluctuating value of the dollar and the level of interest rates, in turn, contribute to the value of all financial and real assets — including the $30 trillion US stock market and much larger fixed income (bond) and real estate markets.

Think about interest rates this way: if I lend you $300,000 for 30 years at an 8% interest rate and we assume you aren’t allowed to refinance your loan, you need to pay me 8% a year on the outstanding balance, every year, for the next 30 years.  Now, suppose, the next year you get a better job so even though last year I was only willing to lend to you at an 8% rate, everyone now agrees that this year your credit risk has improved so much that you should only have to pay 7% a year in interest.  But you are still actually paying 8% a year in interest on the loan you borrowed the year before.  If I want to sell the loan to a different investor, that other investor will now pay me about 112 cents on the dollar so that you would pay him the 8% interest rate.  (The math is 8% / 112 = about 7%.)  Similarly, when interest rates go down, the value of future rental income on real estate and the value of future profits or dividends on companies all also go up.

So, when the Federal Reserve of the US lowers interest rates, the value of all stocks, bonds and real estate go up (all else equal and the to the extent such lower interest rates are not already “baked in” or “priced in” to current market prices).   The value of gold, digital currencies and other stores of wealth, though, will go up or down based on why  interest rates changed.  If interest rates are going up to reduce the risk of future inflation, then less people will be worried about the future value of paper / fiat currency and gold and digital currency values may go down.  However, if interest rates are going up because the economy is growing really quickly and the Federal Reserve wants to induce more saving to pay for sustained investment then gold and digital currency prices may go up.

That’s why paying attention to what the Federal Reserve plans to do going forward is such a big deal.

With that, we want to introduce you to the tool at the below link:

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html/

The CME Group is the company that owns the Chicago Mercantile Exchange, where securities tied to future interests trade.

According to the CME Group’s website, the probabilities of overnight US interest rates after their December 11, 2019 Fed monetary committee meeting are:

  • 50 bps lower than now (ie 1.25%-1.50%): 39.5%
  • 25 bps lower than now (ie 1.50%-1.75%): 48.5%
  • unchanged from now (ie 1.75%-2.00%): 12.0%

According to the same website, there is currently a 76% probability of a 25 bp rate cut to 1.50%-1.75% at the Fed’s October 30 FOMC meeting.

As these dates approach, we strongly suggest investors and traders pay attention to these tools and assess the world and probabilities for themselves.

To the extent any parts of the gold or digital currency or stock markets are surprised by any such rate changes, markets will react and may react with large price changes.  We would encourage investors and traders position their portfolios accordingly.

Very best regards,

iTrust Capital’s economics team

Tim Shaler is Chief Economist of iTrust Capital.  He is a published Real Estate economist, was a portfolio manager and asset allocation expert at his previous firms and is an adjunct professor at Webster University. His MBA (Finance) and MA in Russian Economic History are both from the University of Chicago.

For all media inquiries, please contact Blake Skadron at b.skadron@itrustcapital.com

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