CAMS Weekly View from the Corner - Week ending 8/4/23
August 7, 2023
In society/markets if you can identify and then monitor the big trends – the really big trends, i.e. the mega trends you will be far better positioned than the oblivious to or hell bent against crowd of X developing mega trend.
The oblivious to or hell bent against crowd: We are not sure which is more troubling but we have to lean toward the hell bent against crowd.
To be hell bent against a developing mega trend means it is recognized and identified by the person in question. What makes this aspect worse is if they are ardently against it (think, fighting it) they have themselves in a bad psychological position.
They see it but enter a closed mind to it and hence “fight it” if you will.
The problem in that mix is the closed mind. As a logical conclusion surely a reduction in wealth will follow as it usually does when such a mindset is overlaid onto markets. Absolute certainty in mindset is the death knell of capital when it comes to market(s) participation.
Mega Trends
Mega trends are long term structural backdrops that are created and stick solidly on their trend line paths. Because they are structurally embedded coupled with their rock solid trend path the masses, understandably so, become completely hardwired to the trend in place. It simply can be no other way – it’s all we know.
The trend becomes so immersed in society it becomes a bedrock foundation belief system to the point of rarely if ever being discussed. It’s the way it is and will always be via belief systems.
It is so ingrained into collective consciousness through societal experience that a contra experience is rarely if ever considered. If it does reach the point of consideration it seems so far out from reality that it is nearly laughable.
Enter 1982
Pick an adult age bracket back in 1982 and employ empathy toward what they had as a lived experience for years/decades previous relative to the well established mega trend of interest rates. In a Back to the Future sense you whisper in their ear that said rates had peaked and they were about to experience a relentless multi-decade downtrend.
After they collected themselves from a bout of involuntary laughter they offer you a shoulder tap and walk away as residual laughter continues.
As a general backdrop they had a decade-plus of relentless price inflation, the Misery Index had been popularized and monitored as a thing, tumultuous societal backdrops had been experienced, periods of wage rates growing less than the price inflation rate were lived through all while interest rates themselves went consistently higher.
Then a person shows up with a suggestion that interest rates themselves had peaked and will do nothing, on a trend basis, but go lower for a far as the eye can see. A laugh or a smirk is an understandable collective psychological response. It is easy to understand how they would be psychologically convinced no other outcome was possible relative to interest rates.
To underline their mega trend interest rate experience we first offer the below chart with a focus on pre-1982.
Above is a near 100 year chart of the Ten Year Treasury bond on an interest rate (yield) basis. This bond is a benchmark type interest rate vehicle in the sense that it impacts many other interest rates. This rate is established by collective market participants in their buying and selling of these securities.
Focusing on the left side of our vertical red line we see what this interest rate had done dating back to 1940. Via our red arrow we see an uptrend that had been in place since the mid 1940’s. Bottom line, for four decades interest rates, on a trend basis, moved higher.
Importantly, like all trends, there was an ebb and flow of the uptrend but through it all the trend of higher and higher rates remained solidly in place.
How could the citizenry conclude anything other than rates would remain elevated as a way of life? Circa 1982, the idea that interest rates had peaked and were about to begin a new trend after their multi-decade experience that rates only went higher would seem ludicrous.
Current Day
Succinctly stated, relative to the mega downtrend we have experienced since 1982 – forty years – how can the masses of current day experientially believe interest rates can go consistently higher?
Similar to the psychological backdrop painted above for the masses in ’82 we find ourselves collectively at an inverse position whereby we cannot imagine a backdrop whereby interest rates trend higher for a long period of time.
Above is the same Ten Year Treasury bond on an interest rate (yield) basis as shared in our first chart. This chart reduces the timeline to the early 1980’s in order to focus on the details.
Our red line identifies the rock solid downtrend of interest rates dating back to the 1982 peak. Like all long term trends we seen numerous attempts along the decades of testing the trend line from underneath in an attempt to break the downtrend. Along the path the line held and the downtrend remained in place.
Then in 2022 it all changed.
Will 2022 be referenced in the future such as we are referencing 1982? It is too early to offer but the trend has been solidly broken with a new uptrend in place. That trend break is a crucial piece of information offered by collective market participants.
We have monitored this megatrend for many years now with an understanding that one day it would end and when it did it would be vital market information to honor while participating in the economy at large as well as markets generally.
Mega trends do not change by the day or even week so it will be slow moving but yet crucial to market landscapes.
We will share along the path but for now we invite you to an open mind that what we have all known as a societal backdrop of ever lower interest rates seems to have past us by. If this new trend holds this will be crucial to understand and accept while participating in markets for years to come.
And btw, if your psychological kneejerk reaction to this trend change is “ah nonsense – impossible!!” welcome to the shared mindset the masses experienced circa 1982.
I wish you well...
Ken Reinhart
Director, Market Research & Portfolio Analysis
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