If the FED truly stops asset purchases, either the stock market has to go down or interest rates have to go up. Or both. It’s mathematically impossible for interest rates to remain low and the stock market go up. There won’t be any new money to prop things up. The only caveat is if foreign central banks print and the money flows to the US, but, I think that’s unlikely.
Who, in his/her right mind (aka a reasonable person) would lock up ‘money’ for 30 years for an overall yield of 1.78 percent? (Note, not inflation-protected bonds).
With zero risk premium, an expected risk-free rate (approx the growth in real GNP) for the next 30 years, and an expected inflation premium for the next 30 years, 30-year T-bonds should yield… I’d expect AT LEAST 6 to 7% based on historical yields, alone. Less that that results in a massive wealth transfer, or such a miss-pricing of risk that irrational capital markets (thanks to the Fed) will, at some point, implode.
For the first time in a long time, I’m reading some pundits that think that rates really will have to rise, and devil take the hindmost in markets. And the national debt will just have to balloon. Not sure how that would work out. Sounds very messy to me.
The BOE governor recently said that even though inflation is clearly becoming a problem, raising rates wouldn’t fix it because it’s due to supply problems. I doubt he’s the only CB head thinking along these lines so I think they’ll hold off for some time before they actually hike. It won’t stop the market pricing one or two in though.
When they do raise rates, they can’t do it by much because it would cripple households with large mortgages, over here anyway. So they have a real problem if inflation gets out of hand.
I doubt anyone intends to “lock up” money for 30 years at 1.78, they just hope to sell it to someone else at a later date at a lower yield. Or perhaps park some money in a safe haven whilst other risk assets decline in price.
Intention is NOT an issue, unless you think you know better than the rest of the market. Price and yield is ‘locked’ in at purchase. You are gambling against rational behavior to think the yields will be lower than they are currently. For example, negative yields imply a lender will pay you to borrow. That is irrational (gov’t policy excepted). At zero interest rates, money is ‘free’–it has no value over time. This is a last ditch effort to save the sinking welfare-state ship.
As for ‘safe haven’, when risk assets decline in price, it means yields have increased, which means your bonds are worth less…
“You are gambling against rational behavior to think the yields will be lower than they are currently”
Yes I agree, you’d be gambling.
I wasn’t trying to justify the low yields, I agree, they don’t reflect the risk and they’re lower than otherwise because of the Fed’s QE.
By park in a safe haven I was referring to selling equities and buying bonds for example. Bonds being a temporary safe haven whilst stocks were falling.
I calculated a 6.6% decline from peak. The peak was just 3 weeks ago
Scooot
2 years ago
“Coming up next, the Fed buys stock market indexes.”
They should realise high stock market prices aren’t good for everybody. Paying high prices for an income stream makes it harder for youngsters to invest for their future and pension managers to generate sufficient income to meet their pension liabilities.
At the end of the day, it is all about the expected ‘income stream’, although it is not always visible. Amazon will eventually have an income stream, unless it completely misses the market and goes the way of Sears. The income stream was crucial for the dot-com boom–the companies with income potential survived, the rest did not.
eg. Can Tesla produce enough cars in a competitive market to justify its stock price?
“Another Operation Twist is a good bet for the next phase.”
…
They’ll be chasing rates down. If they go for this, a good chance 10yr yield goes negative.
Tony Bennett
2 years ago
“You break it you own it. Coming up next, the Fed buys stock market indexes.”
…
At SOME point, but not next. At SOME point everyone will realize US been drafting Japan all along. As for buying stock indices, not allowed by Federal Reserve Act. Even Yellen admitted that a few years ago and said she wished Congress would alter Act to accommodate. In absence I imagine some work around (BARELY skirting the law) like last year with Treasury. Treasury put up $75 billion (first loss position) which Federal Reserve levered up to buy corporate bonds.
Having said that I’m going to channel Hussman here. Makes (good) point that schemes like this work when appetite Risk On and encourage Animal Spirits. Buying a few hundred $billion (in domestic equity market near $50 trillion) not going to turn the tide when EVERYONE heading for the exit.
Crash FIRST.
Maximus_Minimus
2 years ago
The yield curve indicate there will be a short uptick, followed by a crash.
As boats sink, risk skyrockets. Panic sets in. What happens then? I’m betting gold is the last-resort asset, then land, income-producing real estate, utilities, food, energy…
Bam_Man
2 years ago
Sure looks like a “Taper Tantrum Crash” is now underway.
S&P lost 140 points from its intraday high right into the close.
Mortimer: Turn those machines back on! Turn those machines back on!
Eddie_T
2 years ago
Oil is responding to both Omicron lockdown fears and Biden’s meddling in the market. The technicals were smashed on Friday and I expect lots of volatility, for weeks or even months. It’s actually not terrible yet, but it could sure get worse. Today, markets were expecting OPEC to tighten supply. If the results of their meeting have been announced I haven’t seen it.
For the long term this is noise, imho. We still have the winter ahead.
As far as the broader markets, it’s too soon to tell if we’re topping. My best trader friends seriously doubt it, just because we haven’t seen the typical blow-out manic phase in stocks. Doesn’t much matter to me.
Uranium had a great year but has been in correction phase for a month already. Nothing changes the long term outlook there either, imho.
Well duh. The universe is full of fusion generators, we call them stars. But it’s hard to build a star inside a containment capsule.. The search for fusion is like searching for the Holy Grail. There are plans right now to try to build one (Canada I think, I was just reading about it) , but I wouldn’t hold my breath waiting for cheaper electricity.
Small modular fission reactors are actually being built now. Every day I read about plans for a new generation nuke to be built. In China, Canada , and Korea and elsewhere…..here eventually. The sooner the better.We need to decommission all those fast breeder plants.
In the short run, we ( as in our politicians) have totally misjudged our true need for fossil fuels, and shortages and bottlenecks and lots of price volatility is going to be the norm….probably for years.
Meanwhile I’m reading about oil companies with so much free cash they will be able to go private in 4-5 years if the management teams were to want that.
“…we haven’t seen the typical blow-out manic phase in stocks…”
What is the mean and standard deviation of the long term trend? if we think of the ‘blow out’ phase as a six-sigma deviation, we might already be there
I don’t know, but I read some cycle counters who have watched a lot of tops, and none of them are calling a top. They’re calling this a move down into a normal DCL.
For every seller there is a buyer. I think investors are fleeing to cash, and consumer speculators are buying the dips. I remember back in the day I chased Eastman Kodak all the way to zero. I thought I could catch a falling knife based on the value or their patents and such. Kodak had too many legacy costs and sold off their profitable chemical division to keep their film division alive.
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I doubt anyone intends to “lock up” money for 30 years at 1.78, they just hope to sell it to someone else at a later date at a lower yield. Or perhaps park some money in a safe haven whilst other risk assets decline in price.