Interest Rates and Other Issues



The current investment environment is concerned with the political environment in Washington, the economy, inflation, the direction of interest rates, the future performance of the emerging markets, and the valuation of the U.S. stock market and earnings.

Political Environment

The political environment has not changed and probably won’t for the rest of President Obama’s term.  Gridlock is here to stay, which creates uncertainty for employers as it relates to hiring and capital expenditures.  We don’t foresee any change.


The high private and public debt to the Gross Domestic Product (GDP) continues to hang over the economy.  As long as the Total Debt to GDP ratio of 350% persists, the economy will not pick up but will remain in the slow growth situation that it is in.  Without excess free cash flow consumers that make up 67% of GDP do not have extra money to spend in the economy.  The increase in government debt is offsetting the gradual decrease in private debt.


Inflation is not a threat at this time even though we all know that food, energy and other essential items have gone up 10% in the last year ending June 30, 2013.  The government manipulates the Consumer Price Index (CPI) so that the cost-of-living increases for entitlement programs stay low.  This keeps the economy from growing as well.  We have no wage inflation, which is what caused the hyperinflation of the 1970s along with the large increase in the price of oil manipulated by the Saudis.

Interest Rates

The interest rate on the 10-year Treasury note jumped from 1.62% to 2.75% in May and June when Federal Reserve Chairman Ben Bernanke suggested that the Fed could start tapering its purchases of Treasury bonds and mortgage-backed securities from $85 billion per month in the Fall.  The market took this to mean that it would start tapering in September.  The sharp rise in interest rates caused disruption in markets not only in the U.S. but around the world.  Then at least four Fed presidents came on television and in newspapers to say that Bernanke really didn’t mean what he said, and that it depends on how the economy is performing.  Bernanke said later in July that the Fed could even buy more if the situation warranted.  We expect that the 10-year rate will rise slowly over the next two and a half years per a report issued by Goldman Sachs recently.  You will find a sensitivity analysis in this section that shows what effect this will have on fixed income returns.  You will also find a “Quarterly Review & Outlook” from Hoisington Investment Management Company that has a different and minority view of the direction of interest rates.  We added this report because of our high regard for Hoisington and because no one knows for sure in the short term where interest rates are going.  The 10-year Treasury has settled in at 2.60% recently.  Our first goal for our clients is to preserve assets and our second, but equally as important, is to grow your assets prudently.  This is why we are recommending that our clients replace their intermediate-term fixed income manager that has a duration in the portfolio of about five (5) years with a short term manager with a duration of about one (1) year.

Emerging Markets

Emerging markets – developing countries like China, India and Brazil – have performed very well since mid-2007 and performed well in 2012.  The momentum has shifted, however, away from the emerging economies to the developed world.  Japan, the U.S. and Europe are contributing more growth than the emerging nations.  Among forces driving the shift is a resurgent Japan.  Japan’s economy expanded 2.6% last quarter on an annualized basis.  The recovering U.S. economy has produced steady, albeit tepid, growth.  Europe still has serious problems but is showing signs of life.  At the same time Brazil, Russia, India and China are ailing or ratcheting back from their stellar performance of recent years.  There is no one reason emerging economies are suffering.  Rising U.S. interest rates have squeezed credit in parts of the emerging world.  Chinese economic indicators show a bottoming out of its slowdown.  But China’s dampened demand for commodities has affected Latin America and Southeast Asia.  Brazil, Latin America’s biggest economy, has stagnated partly due to China’s waning appetite for products like iron ore.  Indonesia, Southeast Asia’s largest economy, is taking a hit from China’s slowdown, with exports of coal and palm oil suffering.  In India, economic mismanagement has led to a plunging economy.  Bankers there are holding back credit, making it hard for businesses to invest and for consumers to spend.  At Monroe Vos we have rarely recommended an alternative allocation to emerging markets because we think that the core international manager is more qualified than we are to make the decision to invest in emerging markets.  Most managers can put up to 30% - 40% of their portfolio into emerging markets.

Stock Market

We continue to like the U.S. stock market over the rest of the world and that is why we have been recommending an overweight since the beginning of the year.  We continue to think that the U.S. is the “cleanest dirty shirt in the hamper”, and we do not think it is overvalued relative to other asset classes, including bonds.

Barron’s Magazine of August 12, 2013 had an article about Master Limited Partnerships (MLPs) discussing how well they have done over the last twelve years and what is expected going forward.  As you know, we have suggested an alternative allocation of 10% to MLPs for some time now with good results.  We continue to recommend an allocation to MLPs for the reasons stated in this article.  You will find a synopsis of the article by Gregg Zimmerman, Director of Manager Due Diligence, following the Hoisington “Review & Outlook”.


There is a very large furniture business in Houston called Gallery Furniture led by one of the greatest business leaders of our time named Jim McIngvale.  He is very, very successful but also one of the greatest inspirational business speakers I have ever heard.  He recently gave a speech to scholarship students about the ten principles of success in life.  One of these was, “Always tell your story.”  You will see a new first page of our quarterly performance reports that shows the Monroe Vos Mission Statement.  You will notice that it says nothing about Monroe Vos but only about you, our clients.  Our only goal is that you have a successful experience with our help.

Please take a look at our new website

Jamison Monroe
Chairman & CEO