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We Are Not In Kansas Anymore

Apr. 11, 2018 2:25 PM ETAMJ, AMLP, KYN, SPY, TBT, TLT9 Comments
Tyson Halsey, CFA profile picture
Tyson Halsey, CFA


  • Rising interest rates are changing everything.
  • The stock market is at a tipping point.
  • A bullish commodity cycle would hurt stocks, bonds and real estate.

“Toto, I have a feeling we are not in Kansas anymore,” Dorothy famously said in the children’s classic The Wizard of Oz. In the same vein, this letter cautions investors that important changes are occurring in the markets and, while much feels as safe and predictable as Kansas, things are fundamentally shifting. Most importantly, rising interest rates are steadily undermining the valuation cases for stocks, bonds and real estate.

  • Since January, the stock market’s increased volatility indicates a major turning point in this 10-year-old bull market in equities.
  • Bond legends Bill Gross1 and Jeffrey Gundlach2 have called a bear market in bonds—with Gundlach calling for 6% 10-year US Treasury yields in 2021.
  • The real estate market is softening as illustrated by a 25% decline in sales of all condos and coops in Manhattan—the worst decline since 20093.

The chart 4 below graphically displays the cycle of unprecedented financial accommodation since the financial crisis of 2008. The chart below shows how Fed Fund rates dropped from over 5% in 2007 to nearly zero and are now rising with the Federal Reserve signalling further hikes. 10-year Treasury rates fell from 5.3% to 1.36% in July 2016 and now are headed over 3%. In recent years, the yield on safe liquid investment options like money market instruments and Treasuries, dropped so low that they offered virtually no return and forced investors into risky assets. Now increasingly attractive yield instruments are undermining the stock, bond and real estate markets.

What is profoundly different, in this cycle, is that interest rates are rising from extreme and artificially low levels. In response to the 2008 financial crisis, the Federal Reserve and global central banks provided unprecedented accommodation by buying nearly $15 trillion in securities. This unprecedented action artificially lowered interest rates such that there are currently $9.7 trillion in negative interest rate

This article was written by

Tyson Halsey, CFA profile picture
Tyson Halsey, CFA, founded Income Growth Advisors, LLC, a South Carolina based Registered Investment Advisor. Through his career, Halsey has researched and invested in technology, energy, quantitative strategies, been a shareholder activist on behalf of shareholder rights, and invested in Master Limited Partnerships (MLPs) since 2000. . Halsey has appeared in major media including The Wall Street Journal, Barron's, Charleston Post and Courier, South Carolina Public Radio and CNBC. Halsey won the USA Today CNBC Investment Challenge in 1992 in the options division.Halsey formed Optima Process Systems, Inc. in 2018 and used economic cost modelling for ESG solutions. We analyzed heavy oil upgrading in South America, bunker fuel desulfurization for IMO 2020, and biofuel and biomass processing. Halsey has moderated panels on the energy transition "ESG 2.0" for the Ivy Family Office Network (IVYFON).

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Comments (9)

Tyson; Your thoughts on AMLP "shrinking" and inevitable price decline due to MLP's migrating into corporate entities?
Looking forward to your input - thanks Tyson
richardsok profile picture
Tax-reporting complications are easily bypassed if you accumulate your MLPs via closed end funds. There are a bunch to consider: FEI, CEN, CEM, SZC, NDP, JMLP, SRV, to list but a few. Many of them pay out 10% (+) yields and some are monthly payers selling at good discounts. For a good place to start your due dil, use the screener on cefconnect.com.
For the past week or so I have been aggressively buying these funds (and also GGN) so I evidently agree with the author, T. Halsey. Good article. Good luck.
MLP's and REIT's are about the only two sectors of the market that offer any decent yields. With oil prices firming I am surprised that the MLP's have not shown much improvement. Of course the hedge funds can't trade them because it screws up their record keeping and many people are afraid of the tax reporting. Nevertheless i think anyone with a little patience will do well if they buy them now.
Agree I think the market is concerned about the amount of debt help by many energy companies including MLPS as well as projecting a belief or potential for "peaking demand". Hence the choppy pricing and recovery in valuations. IMHO nonetheless they offer some inflation protection and obviously income. Long thru a variety of different funds.
Are starting to show wear.
FROGBERT profile picture
I agree that MLP's are very attractive at this stage of the cycle and am positioned accordingly, but almost didn't get down to that part of the article after the contention that Manhattan Condos are a proxy for the US real estate market...seriously?
I think the author was hinting that the froth in (indicator)real estate markets is starting
Tyson Halsey, CFA profile picture
I am suggesting a start to what could be a major top. Real estate is not homogeneous. I do fear we have had massive leverage built into the system after 36 years of declining rates. If interest rates move appreciably higher even 6% per Gundlach, that could have a big impact.

The point I wanted to convey is that if rates do move a good bit higher, it could be very rough.
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