What Does Volatility in the Dollar and Bond Markets Mean for Investors?

Transcript

Ken Fisher:

So in the period just before, and since the introduction of the tariffs on April 2nd of this year, there's been a lot of chatter about volatility in the bond market and then also in the US dollar—and concern about how important is that in terms of what somebody, depending on who the body is: the president or Federal Reserve or this, that or the other, should be doing. And in a lot of ways, this is much ado over very little. And I'll show you how to see that while yes, it's true, there's been some wiggle there, and the wiggle has not necessarily been good, it also wasn't very bad. And there's just a really easy way to see that.

Now, I'm not trying to pump up any particular financial website. But if you just go to a standard one, like Yahoo Finance or CNBC or one of your choosing that has bonds on it that you can chart back over time to cover the interest rate part of long-term interest rates—as well as separately currency. You see something if you do it right. That's just telling.

So if you look at the short term, it looks like long-term interest rates had a big move. If you extend that back to just look at the last 12 months, it looks like we're about where we started then. If you extend it back four or five years for interest rates, you see the significant upward sweep of interest rates. I guess for you guys watching me, it'd upward sweep this way of interest rates.

That started from the very low interest rates pre-COVID. And yet, if you then go back and extend further and further and further, you'll see that we're where we were oh about, let's say, the later mid-90s. 1990s. It's really hard to argue that this is quite so extraordinary. We're in the same place we were basically about a year ago. And the same place we basically were many times before that.

Now, you can actually, in some of these websites, extend much further back than that and see that these rates are not very high by historical standards. Let me put that to you in terms of long rates a different way, and we'll come back to currencies in a moment. When we think about what should a long rate be? Well, it should be some combination of a real return for the lender —who otherwise probably doesn't want to lend if they don't get some kind of real return—and an inflation factor, because there's always been inflation that whole time—a little more, a little less.

So you take your estimate of what you think inflation is moving forward and what you think the real return on the bond should be for a lender —in a competitive world, of course. And that's going to tell you that's what you think maybe the long bond's interest rates should be. So you say, "Okay, well if the central bank says we're supposed to have," which they do, "2% average annual inflation."

I don't know why that's the right number. I actually got my reasons why they think that. But that's neither here nor there. I've written about that before at times and places. "And if there's a real 2% return—and if there's not a real 2% return, why does the lender really want to do that—then the long rate ought to be somewhere around 4%." Where are we? Well, we're somewhere around 4%, not very far off. And we've been wiggling around that—up in the last year as high as about five. And down below that into the low three into the high threes.

So I've given you that. If you put it in longer term perspective, these wiggles are not actually very large. And the five-year suite that's up so much? That sweep got there a couple years back. In the last couple of years, we've just been doing doing a lot of wiggle, wiggle, wiggle. And I don't know why you get excited about wiggling where you've been wiggling many times before. If you take the so-called weakness in the dollar, which also isn't terribly good but also isn't terribly bad.

The theory about why some people like a weak dollar is they think it helps the United States with trade versus other countries. And there's a very long history of currency wiggles, and actually there's very much less impact of that than people think there is. They tend to think theoretically, which is: Shouldn't a cheaper dollar make things be cheaper for American product compared to a competitive product? And President Trump does seem to want a weaker dollar. Although it's often hard to tell exactly what the president's thinking about a given thing at a given point in time. But we play the same game.

You take those same websites like CNBC, and you look back a year. And then you look back five years. And then you look back 20 years. And you compare it against things like the euro, which goes back to 1999 and not earlier—in a real sense, because the euro as a currency was created then out of the European currencies—or British pound sterling, which goes back further, or yen, or to more specific smaller countries, like let's say the Australian dollar. And you see that you get, again, this kind of sine wave effect. And we actually are in the same basic place we were back in the mid 1980s.

Their sine wave around going nowhere fast. Why? Because at the end of the day, or I should maybe say the end of a few weeks or months or even longer, currencies are kind of like water hitting different levels of elevation. All running down with gravity over time into the same pool effectively evaporating. Going back up into the sky and raining again. Just raining in various places. And they all tend to equalize in the longer all—that's not right. What I started to say is not quite right. The major developed nations tend to equalize over time in these sine wave-like patterns. Going nowhere fast. Lesser developed nations— all kind of crazy stuff can happen, including woohoo! But that isn't what happens in the kinds of countries that I was citing before, including the eurozone.

You tend to get this sine wave pattern, and we're just right in the middle of that long-term sine wave pattern. So it's very hard to argue that the dollar is particularly extreme one way or the other. Even though people get very excited about it in the short term. And this is just one more example, in my opinion, about people being too myopic and reading too much into a fairly small shift and extrapolating its significance.

So do I think this is all a big deal? No. Do I think it's just kind of pretty normal? Yeah. Do I have any prediction about where these currency and where interest rates go over the longer term? I don't think the long-term interest rates have much reason to go much of anywhere. Currency's a little harder to predict still, but it going to vacillate around that sine wave. And it's not going to go much further.

So thank you for listening to me. I hope you found this useful. I hope you found it educational. I always enjoy speaking and talking about these things and look forward to another time. Thank you.

Voice of Ken Fisher:

Hi, this is Ken Fisher. Subscribe to the Fisher Investments' YouTube channel. If you like what you've seen, click the bell to be notified as soon as we publish new videos.