How Many Negatives Make a Positive?


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Rabbie Gill

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How Many Negatives Make a Positive?

For all intents and purposes US and Canadian real interest rates are now negative across most of their yield curves.  Should investors listen to the bond market which sits at historically low and negative interest rates or the S&P500 that is again flirting with all time highs?  TRI advises caution for risk assets, as the topping process for equities continues and we do not yet have enough negatives to make a positive risk/reward profile for risk assets.

The business cycle is declining and on the cusp of contraction.  The Federal Reserve and the European Central Bank confirmed this as they lowered there key short-term lending rates again and are again implementing various forms of Quantitative Easing.


Longer term (10 and 30 year) US nominal interest rate now average around 2%. As seen below, US inflation is averaging about 2%.  Two minus two equals zero. The 10-year term real interest rates are -0.3%.   Even the 0.25% countertrend bounce higher in interest rates since early September has not put a dent in the downtrend in rates.


Daily and monthly cycles and trends are bullish for the bonds, while the weekly cycle and trend is bearish.  TRI believes the weekly bearish trend is a countertrend correction only.  TRI expects higher prices for bonds as yields should continue to fall.

OECD Downgrades Global Growth

On the heels of the Fed & ECB cutting short-term policy interest rates, the OECD has just reduced its global growth projections.  If we look at the arrows in the 2020 column, all we see are further downgrades from their May expectations, with exception of Japan and Turkey which are flat.  Growth trend is clearly negative and will not likely bottom until mid 2020.

Source: OECD

All the While the S&P Continues to Levitate

In our last commentary, TRI noted the S&P500 was set up for a downside follow through. The set up did not take hold as prices have bounced higher and the S&P500 flirted with all-time highs.   However, Friday saw prices form a daily swing high with a turn down in our Cycle Turn Indicator, triggering another daily bearish trend change. TRI remains patient in letting the topping process complete. If readers recall, last September the equity markets also had a last thrust higher, before turning down in October.


Trump’s Not Happy, Nor is Half the ECB

Trump is not happy with the Federal Reserve and wants more stimulus and lower rates.  TRI believes this is very dangerous territory and there can be many unintended consequences of political influence along with ultra low and negative interest rates.

Source: Twitter

As Trump bashed the Fed Chairman about not cutting rates enough, the ECB cut interest rates and expanded QE.  This was met with unprecedented internal revolt.  The Bank of France Governor joined his Dutch colleague and Bundesbank President pressing against an immediate resumption of bond purchases, people said. They spoke on condition of anonymity, because such discussions are confidential.  Those three governors alone represent roughly half of the euro region as measured by economic output and population. Other dissenters included, but weren’t limited, to their colleagues from Austria and Estonia, as well as members on the ECB’s Executive Board the officials said.


Source: Bloomberg

The Problem of Low Interest Rates

TRI came across a fascinating and research paper Low Interest Rates, Market Power, and Productivity Growth which provides an objective analysis of the effect of low and falling interest rates.  Traditionally, low interest rates have been viewed as a positive for economic growth because they encourage business to invest and thereby enhancing productivity. This may not actually be the case.  It appears, extremely low interest rates, may lead to slower growth by increasing market concentration and thus weakening firms’ incentive to boost productivity over the long run.

In other words, over the long term the economy is left with fewer and less productive companies because of low interest rates… is North American and Europe following Japans lead…

Limited Demand vs Unlimited Supply

Another blog TRI found with excellent analysis is “The Disease…A Finite Population of Consumers Versus Economic / Financial System Premised on Infinite Growth”  A clip from the blog states

“In our current system, the goal is growth. Growth on a quarter over quarter and year over year basis. The absence of growth is recession or depression. And this growth requires ever greater consumption (not just production) and consumption at prices that make the production of these things possible and profitable. The current economic, political, and social systems are dependent on this growth. But what if the basis of this growth has no basis? Or said more simply, the growth of the under 65 year old populations that does nearly all the work and nearly all the consumption are in secular decline.”

In other words, the economy has a limited population and such only a finite level of consumption … but the powers that be are printing (QE) money.  They believe expanded supply of money will create more “demand and consumption.”  Seems to TRI the central banks are pushing on a string trying to create this extra demand and consumption…

Risk of Recession?

BAML highlight the biggest tail risks from their Global Fund Manager Survey.  Since 2011, a potential risk of recession has not been top of mind for investors.


Source: BAML

But the odds of an upcoming recession are at levels that preceded the last 5 recessions, according the NY Fed Recession Odds indicator.  We must not forget the economy has still not felt the full impact of the Fed rate tightening cycle.  There is likely another 6 months before the impact is fully digested into the economy.

Source: Bloomberg

 The Change in Cost of Money & Goods

PMI’s fell again in September consistent with TRI’s projection of lower PMI’s into mid 2020.

Source: Bloomberg


US Industrial Production

Production of motor vehicles fell 1%, the most in four months leading overall manufacturing production lower on a year-over-year basis of -0.4%.  The second month in a row to see year-over-year declines.

Source: Bloomberg

Oil Spike & Impact

The attack on Saudi Arabian oil refinery facilities last weekend reduced its output by 3 to 5 million barrels daily.  As a result, oil spiked between 15 and 20% at Monday’s market open.  The spike in prices, while large, is not yet big enough to have any long-lasting impact.  Prices are currently in the middle of its year-to-date range.


From a Cycles & Trend perspective, oil is on a weekly bullish trend, but the daily and monthly trends remain bearish.

The chart below implies a negative economic impact from oil prices in the $80-$85 range for WTI. A 30+% sustained increase in oil prices would be needed from the current level of ~$60.

Source: Princeton Energy Advisors

Still Need More Negatives, Before TRI Becomes Positive

The bulk of evidence from TRI’s analysis supports defensive positioning, even as Central Banks cut rates and the S&P500 flirts with all-time highs. The business cycle has more downside ahead, as interest rates are likely to go lower and risk assets valuations need to correct lower. Having said that, TRI is positively waiting for the right risk/reward entry point for risk assets in mid 2020.


Thoughts, comments and critique is always welcome. Please don’t hesitate to reach out in confidence to


TRI Cycle & Trend Signals*

The TRI Cycle and Trend Signals are shown below.  These signals are as of market close on Sep 19, 2019.  Please see the TRI Overview document for further information.

Source: Fieldhouse Capital Management


* TRI Cycle and Trend Signals are dynamic and may change on a daily, weekly and monthly basis, without notice. The indicators are at a point in time and do not imply that the current trend will persist and should not be considered investment advice.


Disclaimer: This material has been provided solely for information purposes for the use of the recipient and Fieldhouse Capital Management Inc. (FCMI). This material does not constitute an offer or an invitation by or on behalf of FCMI to any person to buy or sell any security. It should not be assumed that the methods, techniques, or indicators presented in these pages will be profitable or that they will not result in losses.  Any reference to past performance is not necessarily a guide to the future and the value of investments may fall as well as rise.  FCMI accepts no liability for any direct or consequential loss arising from investments made in accordance with the attached material. The research and analysis contained in the attached material has been procured from sources which are believed to be reliable and accurate.

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