KESSLER: TREASURY BOND CONTRARIAN TRANSCRIPT

July 10, 2015

On this week’s WEALTHTRACK, our guest is taking on the Wall Street consensus. The overwhelming sentiment from economists, analysts and strategists is that the great bond bull market, particularly in U.S. Treasuries, is over. Treasuy bonds have been described as extremely overvalued, risky and undesirable. Not so says global bond manager Robert Kessler. He is sticking with his decade long, bullish view on Treasuries and says the Federal Reserve is in “no position to raise interest rates.”

CONSUELO MACK: This week on WEALTHTRACK, rock climbing bond manager Robert Kessler continues to chart his own course and reach for U.S. Treasury bonds, while other investors say they are too risky to own. Why Kessler says Treasuries are the safest route in a treacherous climate, next on Consuelo Mack WEALTHTRACK.

Hello and welcome to this edition of WEALTHTRACK, I’m Consuelo Mack. Ever since WEALTHTRACK was launched ten years ago Wall Street has consistently gotten one prediction wrong. How many times have you heard economists, analysts, strategists, columnists and yes even Federal Reserve officials warn us to prepare for rising interest rates?

The overwhelming sentiment has been that the great bond bull market, particularly in U.S. Treasuries was over. Treasury bonds have been described as extremely overvalued, risky and undesirable.

And on occasion they appeared to be right. There have been several periods, some recent when yields have gone higher, or “backed up”, as they say in the bond world.

The one lone and dependably contrarian voice against this anti- Treasury chorus has been a WEALTHTRACK guest since the beginning. He was correct back in 2005. He has been through the years since, and he might prove to be right still.

He is Robert Kessler, Founder and CEO of Kessler Investment Advisors, a manager of fixed- income portfolios with a specialty in U.S. Treasuries, for institutions and high net worth individuals globally. Now for years Kessler and his team have been tracking several indicators that continue to convince them that rates will remain low. One is not widely followed by the public, but it is by Federal Reserve officials. It’s called the “Output Gap” and it measures the difference between the economy’s actual growth and its potential. In this case between real GDP, that’s ex-inflation and the congressional budget office’s measure of potential GDP growth. The gap is currently about 2.5%.

For an economy growing around 2.2% throughout the recovery that slack in the economy is sizable. As the New York Fed wrote recently: “Resource slack by this measure seems larger than that implied by most estimates of the unemployment gap. Historically, inflation tends to be restrained if the economy is operating below potential.”

Restrained it is! Another key piece of evidence cited by Kessler for continued low rates is inflation. As you can see from this chart of a measure of Consumer Price Inflation – in this case the core PCE, or Personal Consumption Expenditure Price Index, excluding food and energy prices, inflation has been running well below the Federal Reserve’s target of 2%.

I began my conversation with Kessler by asking him why, in his opinion, the Fed is in no position to raise interest rates.

ROBERT KESSLER: The Fed would raise interest rates if in fact their mandates were at the levels they should be at, and their mandates are inflation or the stability of rates.

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