The beginning of my career in finance overlapped with the presence of morning suits on the floor of the London Stock Exchange. Mullens & Co, founded in 1786, held the privileged role of “government broker”, meaning they transacted directly with the UK Treasury and were an important intermediary in financing the UK government.  As recently as 1980 when I started work, their brokers still wore top hat and tails, supposedly to ensure their visibility across the exchange floor but also to emphasize status.

Mullens hired from the most exclusive public schools (confusingly for Americans these are actually private) and I recall their people were all snobs, rarely acknowledging my scruffy presence in a mere business suit. In 1986 Mullens was acquired by SG Warburg which was later absorbed by UBS. Sartorial standards in finance have been sliding ever since.

The London Interbank Offered Rate (LIBOR), another anachronistic vestige of old school Britain, is also on its way out after its weaknesses were slickly exploited by derivatives traders 15 or more years ago. It seems odd today, but this benchmark of money market rates was not derived from actual transactions.

Banks indicated where they “would” lend eurodollars (an offshore deposit) to a high quality credit for periods of one month to one year. But such highly rated banks rarely needed to borrow at LIBOR. So it was based on theoretical trades, and most eurodollar business was transacted at rates other than LIBOR.  It was that quintessentially English invention based on unwritten assumptions and reliant on fair play all round.

The enormous growth in the derivatives market and shrinking need for banks to borrow from one another eventually led to far more trading profits relying on the benchmark than were involved in actually setting it. Being unmoored from transactions left LIBOR vulnerable to exploitation by unscrupulous traders who conspired to obtain favorable settings. There were prosecutions and jail terms for the miscreants, and naturally hefty fines imposed on the banks that employed them.

LIBOR was broken and never recovered, but so integral was it to vast numbers of derivatives trades, US residential mortgages and other contracts that its phase out has been slow. However, it now has less than a year to go and is generally being replaced by the Secure Overnight Financing Rate (SOFR).

A good portion of my career was spent analyzing the eurodollar futures curve for imperfections. To show that your blogger can similarly move on from the 20^th century, I have therefore switched to SOFR futures to measure the yield curve and market expectations for Fed policy.

Which brings us at last to Fed chair Powell’s speech at Jackson Hole last Friday. Only two years earlier, the Fed unveiled a newly interpreted mandate which sought full employment while tolerating inflation temporarily above target. It’s fair to say events since then have exceeded expectations. The FOMC’s mandate could more correctly be expressed as addressing whichever of their two metrics has strayed farthest from its optimal level.

Hence, we were warned to expect, “a sustained period of below-trend growth” that will “bring some pain to households.” Those unfortunate enough to find themselves unemployed as a result can claim their sacrifice is for the greater good. They took one for the team. In case it wasn’t already clear, Powell added that “estimates of longer-run neutral are not a place to stop or pause.”

The yield curve is close enough to the “dot plot” from the Summary of Economic Projections that the FOMC and the market are in reasonable alignment. They’ve warned us that the policy rate will be moving higher because, “Our responsibility to deliver price stability is unconditional.” We are reminded that, “The historical record cautions strongly against prematurely loosening policy.”

The expressway to higher rates already offers an exit ramp in the form of persistently modest long-term inflation expectations. The University of Michigan survey expects five year inflation of 3%. Ten year Treasury Inflation Protected Securities (TIPs) yields imply 2.6%.  The Fed retains the faith of investors even if their forecasting record is consistently poor.

Which means rates will go up until they don’t; FOMC officials will be pestered to define “vanquished inflation”; success in bonds will require identifying the inflexion point.

Rarely short of opinions, friends and clients may be pleasantly surprised to find no trade recommendation in this blog post. For once the Fed and the yield curve are in harmony.

Given the market’s serene inflation outlook, prudence surely dictates that investors plan for an upside miss. According to research from Wells Fargo, around half the EBITDA of the pipeline sector reprices its tariffs based on an inflation index, often PPI. With 6% yields amply covered by free cash flow, we believe it remains attractive.

We have three funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

Real Assets Fund

Please see important Legal Disclosures.

Important Disclosures

The information provided is for informational purposes only and investors should determine for themselves whether a particular service, security or product is suitable for their investment needs. The information contained herein is not complete, may not be current, is subject to change, and is subject to, and qualified in its entirety by, the more complete disclosures, risk factors and other terms that are contained in the disclosure, prospectus, and offering. Certain information herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. No representation is made with respect to the accuracy,  completeness or timeliness of this information. Nothing provided on this site constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments.  Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.

References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and do not reflect the deduction of the advisor’s fees or other trading expenses. There can be no assurance that current investments will be profitable. Actual realized returns will depend on, among other factors, the value of assets and market conditions at the time of disposition, any related transaction costs, and the timing of the purchase. Indexes and benchmarks may not directly correlate or only partially relate to portfolios managed by SL Advisors as they have different underlying investments and may use different strategies or have different objectives than portfolios managed by SL Advisors (e.g. The Alerian index is a group MLP securities in the oil and gas industries. Portfolios may not include the same investments that are included in the Alerian Index. The S & P Index does not directly relate to investment strategies managed by SL Advisers.)

This site may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involves a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of SL Advisors LLC or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made. r

Certain hyperlinks or referenced websites on the Site, if any, are for your convenience and forward you to third parties’ websites, which generally are recognized by their top level domain name. Any descriptions of, references to, or links to other products, publications or services does not constitute an endorsement, authorization, sponsorship by or affiliation with SL Advisors LLC with respect to any linked site or its sponsor, unless expressly stated by SL Advisors LLC. Any such information, products or sites have not necessarily been reviewed by SL Advisors LLC and are provided or maintained by third parties over whom SL Advisors LLC exercise no control. SL Advisors LLC expressly disclaim any responsibility for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on these third-party sites.

All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio.

Past performance of the American Energy Independence Index is not indicative of future returns.