Year to date the U.S. stock market is unchanged. The bond market (fixed income) is down approximately 3%. Our belief is that by the end of 2018 stocks will be 3 to 5% lower and bond funds will be 10% lower. The main reason for this outlook is the probability that interest rates are going higher in the U.S. The budget deficit for the U.S. is moving up to the ONE TRILLION dollars per year level. With this new money demand, plus rolling over maturing debt, the markets will demand a higher interest rate to buy the debt. Couple this with inflation moving higher and the Fed’s intention to decrease the size of their balance sheet and it points to higher interest rates.
We remain positive on energy issues as the demand world-wide for oil continues to increase. Banks should also do well in an increasing interest rate environment. Major pharmaceutical stocks are also reasonably priced for investment. What is grossly over-priced is big technology companies. Particularly the ones losing money and burning cash such as Tesla and Netflix. Amazon generates cash and owns a profitable cloud computing division. The balance of the company, including home delivery, burns cash. The price of the stock is much too high. Bonds and other fixed income investments are a potential disaster. From such current low- low -low levels of interest rates, there will be major reductions in principal values as rates move up. In Europe, interest rates reflect a market controlled by the European Central Bank. When the Central Bank steps aside of the market price discovery will return. The level of interest rates the market will demand is much higher than current level. Two-year Greek bonds, (yes, the same Greece that was and is on the verge of bankruptcy), currently yield less than similar U.S. issues. Does anyone believe the credit of Greece is better than the credit of Uncle Sam? German credit is excellent. However; their ten-year bonds trades will a yield of only 5/8 of 1 %. Historically it trades more in line with U.S. debt currently 3.08%. There is a major price revision waiting when the market begins to set the rates.
Our floating rate bonds are performing well. We continue to expect movement towards this structure. We also favor gold mining stocks of major producers. The spread between the cost of production and the cash price of gold is at historic levels. Thus, gross profit is high.