Peter's Perspective
30th March 2015 by Tama Churchouse

Revisiting our 1st Investment call for 2015

“Forecasting is the art of saying what will happen, and then explaining why it didn’t”
~ Anonymous

Earlier this year we published our 2015 Investment Outlook for The Churchouse Letter. In it, we made 5 broad predictions for what we think this year will bring.

(If you don’t have a copy, just click here to download it)

Throughout the year we will periodically look back on how our predictions are panning out. It’s a helpful discipline for anyone to keep revisiting their views on the world. And we hope it will give our readers a little insight into our thought processes.

The first call we made was on U.S. interest rates.

I have to confess that when my colleague Tama and I sat down and discussed our outlook, he pushed for this one very hard so let me hand things over to him.



[Tama] Our calls on U.S. rates went like this:

“The Fed will not raise interest rates in 2015, and if they do, at MOST it will be just 0.25%.”

“The 10 Year U.S. Treasury yield will be under 2% at the end of 2015.”

These calls were and still are very much against prevailing consensus.

To give you an idea of just how much we stray from the pack here, see the below survey tables from Bloomberg for the Fed Funds Target Rate and the 10 Year U.S. Treasury yield.

They poll around 80 analysts from every major investment bank and research house throughout the world on their predictions for these 2 key interest rates.

These were the results at the end of last year.

Bloomberg's analyst polls for Federal Funds Target Rate and U.S. 10 Year Treasury Yield from December 2014

As you can see, the average/median forecasts for the fed funds rate was approximately 1.00% by the fourth quarter of 2015.

And the average/median 10 year treasury yield forecast was over 3.00%.

Yes, I know we’re only just approaching April so it’s early days with only the first quarter of the year under our belt, but thus far we feel pretty comfortable with our view on U.S. interest rates.

Here’s two reasons why:

Firstly, both realized inflation and inflation expectations remain low.

At the risk of a little ‘death by charts’, just take a look at the below.

  1. Annual Wage Growth is still running at just 2%. We’ve seen barely an uptick in over 5 years.
  2. Inflation, as measured by the Consumer Price Index (or CPI), is practically non-existent.
  3. Inflation, as measured by the Personal Consumption Expenditure (or PCE) hasn’t been above 2% in nearly 3 years.
  4. Inflation expectations, as measured by the implied 5 year inflation rate in starting in 5 years time, remains well below the long term average.

Annual average hourly earnings growth, U.S. Inflation (Consumer Price Index), U.S. Inflation (Per. Consumption Exp.) and U.S.5y5y Forward Inflation from March 2007-2013.

So, wage inflation pressure is minimal, prices are barely rising, and the market’s expectations of future inflation are at multi-year lows!

Does this strike anyone as an optimal time to be tightening? I struggle to see the rationale…

[Ray Dalio, one of the greatest investors of all time who runs over US$100 billion at his fund Bridgewater recently warned about the potential damage that a premature rate hike could cause.]

And secondly, the global economy is in the midst of a massive escalation of monetary easing (i.e. cutting interest rates, letting currencies depreciate against the dollar and buying bonds to suppress yields…)

It’s not just Europe we’re talking about here…

It’s Russia, South Korea, India, Thailand, China, Poland, Denmark, Australia, Sweden, Singapore, and Canada to name just a few…. the Central Banks of two dozen major countries and monetary regimes have enacted monetary easing policies in 2015 already!!!

What does this mean? It means U.S. assets look very attractive to everyone else, particularly U.S. bonds.

A 10 year treasury yielding 2.00% looks pretty good next to a 10 year German bund yielding 0.20%… or a French bond yielding less than 0.50%.

As a result we expect demand for U.S. treasuries to remain firm and hence yields should remain low.

Ultimately, we think you should remain long U.S. treasuries, long the dollar, and maintain broad U.S. equity positions (although ‘bargains’ are few and far between at these valuations).

Good investing,


Peter Churchouse Peter Churchouse is a widely respected analyst and commentator on financial markets with well over 3 decades residing in Asia. He spent over 15 years as Asia Strategist and Head of Research for Morgan Stanley as well as running a hedge fund. He shares his knowledge, insight and investment recommendations through his subscription publication The Churchouse Letter, along with his free newsletter Peter’s Perspective.
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