Blog | CB Investment Management

Pricing In Peak Cycle Interest Rates and Inflation. Gold Begins to Outperform Equities.

2023 Will Likely Begin With A Profit Recession
See video below

The Economic Growth Downturn Is Both Cyclical and Secular

There was a time when markets tried to force the Fed’s hand by crashing. Now markets are enabling the most hawkish Fed in 40 years.
~ Wolf Richter

“If you can’t describe what you are doing as a process, you don’t know what you’re doing.
~ W. Edwards Deming

The equity rally since October can be attributed to peak cycle inflation and improving interest rates prospects. These are necessary but insufficent conditions for a durable equity market rally. Corporate profits, consumer sentiment and balance sheets, and economic growth are not in a good place.

This Weekly Insight reviews allocations and examines the prospects for the three key cycles that have to play out to get to a durable equity rally. Interest rates, earnings, and growth cycles.

Historically the equity market usually bottoms only well after the first actual interest rate cut, and the Fed is clearly not close to that. Even then equities need much more than just interest rate cuts for a bull market. They also need earnings and growth to become favorable on a rate of change basis.

Peak Interest Rates

First the good news. Peak interest rates may not be far off. The chart below shows the record rise in two year treasury yields this year. It also shows the record amount of short speculative positions in two year treasuries. It is increasingly likely that the worst prospects have been more than priced in. The record shows that this is often when yields begin to fall.

Speculators just went RECORD short US 2-Year Bonds as a % of Total OI at -25.8%!!! The only other reading anywhere close was back in May 2007… Back then, yields fell 3.8% over the next nine months… What’s that saying? Be wary when everyone is on the same side of the boat…
~ Julien Bittel, Head of Macro Research at GMI

Two year yield volatility has begun to decline and, for the first time, a credible consensus peak Fed funds rate target seems to have been reached at around 5%. With inflation possibly falling below 5% in Q2 2023 this would reach the Fed’s objective of a positive real yield. The ongoing weakness of the economy may make it very difficult to realistically expect rates could get any higher, let alone to 5%.

In that scenario the peak in the two year yield could well be somewhat below 5%. Short term treasuries seem to have limited downside, they offer the highest yields in over a decade, and eventually the prospect of capital gains.

For Equities The Earnings Cycle Looks Problematic

S&P 500 real earnings have never been further above the average long term growth level, which is 50% below. Is it likely that equities can hold up as profits start declining, while the Fed continues to target a 2% inflation objective?

Last week Hedgeye took a detailed look at the immediate outlook for profits. Long story short, the timing and scale of the earnings down cycle looks problematic in the near term.

The Economic Growth Cycle Has A Double Problem:
Cyclical and Secular Declining Trends

The current US cycle manufacturing decline has fallen into recessionary territory and is declining on all key metrics.

November ISM Manufacturing down to 49 (contraction territory) vs. 49.7 est. & 50.2 prior; new orders dropped to 47.2 vs. 48.5 est. & 49.2 prior … prices paid sank to 42 vs. 46.6 prior; employment fell to 48.4 vs. 50 prior
~ Liz Ann Sonders, Chief Investment Strategist, Charles Schwab & Co., Inc

The current global economic cycle is in a similar place but is more established in its downturn, and there remains no indication of any upturn even in the leading indicators.

The 70 Year Secular Growth Problem

Following the record stimulus for the recent bubble, policy makers need time for reflection on the next policy stimulus. If that stimulus only produced inflation, a further debt explosion, and only temporary growth, can it be called a success? How does swinging from extreme policy setting to the opposite create a stable basis for economic development?

Investors should take account of the substantial decline in the average economic growth rate over the last 70 years. This poor growth performance has mirrored the explosive growth of total debt as a percentage of GDP. There is no sign that debt growth will reverse and productivity is reaching a record low, as recently discussed.

If there is no review or change in policy, one can only assume the outcome will be more of the same that has been experienced over the last 70 years. This means weaker long term growth with increased inflation risk, and an increasingly unmanageable debt problem.

To paraphrase Edward Denning, if policy makers can’t describe what they are doing as a process with 70 years of data, they don’t know what they are doing.


Gold has become a very attractive alternative and gold miners have begun to significantly outperform equities.

Gold held up well during 2022, and Gold miners have significant room to run.


Investors need to consider carefully the prospects for the current down cycle. The scale of the bubble over the last 2 years, on most metrics, was a record over the last 70 years and the downcycle is far from complete. The experiment initiated by the BIS in 2019 to boost growth through maximum policy stimulus appears to have had at best only short term benefits, while leaving even greater debt, instability, and long term growth and inflation challenges. Increasingly, real assets should play an increasing role in a portfolio, and risk management will be increasingly important.

Transform Your Investment Experience

The room for policy manoeuvre, and the stability of the current system should not be taken for granted. Volatility has increased and is likely to continue to stay high. The outlook has rarely been this uncertain. Investment management needs Best Investor metrics and techniques as never before.

Market and economic events are moving fast at this stage. If you need a quick review of the issues that you may need to know about for your own circumstances, schedule a FREE consultation today.

Please note these important disclaimers: Educational use Only. The market update published by CB Investment Management, LLC (“CB Investment”) is intended to be educational in nature and is not intended to be a recommendation for any specific investment product, strategy, plan feature or other purposes. Accordingly, it should not be construed by any consumer and/or prospective client as solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation.Advertising and Marketing. Communications such as this are not impartial and are provided in connection with advertising and marketing. This material is not suggesting a specific course of action or any action at all. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, insurance, legal or tax professional that takes into account all of the particular facts and circumstances of an investor’s own situation. No person associated with CB Investment is a licensed attorney or tax professional and the information contained herein should not be considered tax or legal advice. Links to Third Party Content. This Market Update contains links to articles or other information maintained by unrelated third parties. You acknowledge and agree to the following: All such information is provided solely for convenience purposes only because we believe that it may provide useful content and all users thereof should be guided accordingly. We disclaim any responsibility for the link’s performance or interaction with your computer, its security and privacy policies and practices, and any consequences that may result from visiting it. We do not control the content published by the third-party; we do not guarantee any claims made on it, nor do we endorse its sponsor or any of the content, policies, activities, products or services offered by any advertiser on the site. CB Investment assumes no liability for any inaccuracies, errors or omissions in or from any data or other information provided by the third party and inclusion or reference by CB Investment to any third party link should not be construed by any consumer and/or prospective client as a solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet.
Important Information regarding Registration Investment advice is offered through CB Investment Management, LLC (“CB Investment”), 8231 Crestwood Heights Drive, Mclean VA 22102 an investment adviser registered with the states of Virginia and Maryland. Registration with the states of Virginia and Maryland should not be construed to imply that the SEC has approved or endorsed qualifications or the services offered, or that its personnel possess a particular level of skill, expertise or training. Important information and disclosures related to CB Investment are available at

Best Practice is a matter of your Best Interest.

Education and a Commitment to Informed Consent is an Obligation.

Chris Belchamber is an IRMAA Certified Planner

Medicare’s IRMAA impacts every retirement plan. Learning how to mitigate it is available via IRMAA Certified Planners designation.

Sign up to receive the best practice community insights directly into your inbox

Leave a Comment

Your email address will not be published. Required fields are marked *

Related Posts

Sign up to receive the best practice community insights directly into your inbox