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Payden & Rygel: CEO Message
CEO Message

January 2015

Joan Payden, CEO Dear Clients,

Nobel Prize winning physicist, Richard Feynman, once said: “science is the belief in the ignorance of the experts.” Experts operate under the assumption they have the world all figured out. Scientific discovery happens when the scientists assume they don’t have all the answers and digs deeper. We think the idea applies as well to investing as it does to scientific research. Often the key market themes touted by experts (the Bloomberg consensus) turn out to be wrong.

2014 was the perfect example. The 10-year US Treasury yield started the year at 3.03%. The median forecaster guessed interest rates would be 3.5% by December. But, as of December 15, the 10-year Treasury yield had fallen to 2.06%. Meanwhile, of the 37 oil forecasters surveyed by Bloomberg, all had the year-end 2014 oil price pegged at or near, $100/barrel. But, once again, as of mid-December, oil prices were under $60/barrel.

Once it becomes apparent that the prevailing market view (the expert opinion) is wrong, asset prices move. Contrary to the textbook representation that investors are rational, when lacking a sure explanation of what changed, investors are often neither patient nor rational. The clients call, and the experts suddenly offer revised forecasts. The mood shifts and changing sentiment compounds the market reaction.

Take oil as a case study. As recently as June, with oil prices still hovering around $100/barrel, the worry was that higher oil prices might hurt the world economy. The reality was that supply was touching record-highs while global demand was beginning to slow. As this information seeped into the market, oil prices declined. Once the decline became more severe, the price cascade forced investors to rethink their views. Investors began evaluating the winners and losers in an extended period of low oil price environment—a situation unthinkable just months ago!

So, what are the experts saying for 2015? Once again forecasters are predicting higher oil prices and higher interest rates. Our view is that unless inflation revives, it will be difficult to see interest rates zoom higher. Low inflation likely means low interest rates across the developed world. We also find the return to $100/barrel oil unlikely. With inflation low, the US economy on firmer footing and the Federal Reserve moving slowly toward tighter monetary policy, the tide has turned in favor of the US dollar and against the commodity bull market that characterized the world economy much of the time since 1999.


Warmest wishes to all,


Joan Payden
Joan A. Payden
President & CEO