Posted on 02/07/2018 8:13:25 AM PST by SeekAndFind
The pullback in stocks the past two trading days is both long overdue and healthful. But after nearly a decade of easy money engineered by the Fed and other central banks, is the sell-off in the bond market simply a short-term tantrum? Or is it the start of a secular bear market in bonds, due to higher inflation, that can only end in tears?
If one thinks about interest rates as simply the price of money, one could argue that the correction in stock prices would be more worrisome if accompanied by significantly lower bond yields than higher ones. In that regard, higher rates suggest that the economy is no longer so fragile as to require the “extraordinary monetary accommodation” that has kept the federal-funds rate lower than inflation since June 2008.
With the consumer price index running at only 2.1%, higher rates appear to indicate that investors expect a stronger economy and corporate profits rather than impending inflation. The historically modest current increase in the cost of money tends to validate the rally in stock prices since President Trump was elected.
While we all naturally tend to view our most recent experience as typical, the low interest rates some of us have enjoyed since the financial crisis have been anything but normal. They are atypical of a healthy economy that allocates capital properly. Even odder than the low level of interest rates since the “expansion” started in 2009 has been their invariability. Historically, the yield on a 10-year Treasury note has been roughly equivalent to the level of nominal growth in gross domestic product (real growth plus inflation). That would imply that the rates should have averaged 3.4% since 2009 and should be roughly 5% today. Instead they have averaged only 2.45% and are now 2.71%. Why?
(Excerpt) Read more at wsj.com ...
If the Fed sells off $10 billion a month from their balance sheet like they said they’re going to do, that will eventually have an impact. Rates will rise, and stocks will fall.
Higher interest rates will also induce a healthy correction in housing prices which are extremely irrational.
My multimillion-dollar home may take a 25% haircut in value. I don’t care as I am not planning on selling and it better be good for lowering my property taxes.
I’m also fed up with real estate agents invading my privacy trying to see if I will sell. Somehow they are able to get my personal email, personal phone number.
Ah, you're joking, right?
When your value drops then the greedy schools and local governments raise the mill rate to ensure they don't do without. When they crow about reducing your mill rate it is usually because your home value has increased and you then pay more property tax anyway.
Half-joking, half-serious. Actually not joking but aware that it’s not going to happen without a massive fight.
True, but according to Rick Santelli and the guy he was interviewing at the time, the one to watch for CB activity os Mario Draghi (ECB) and to a lesser extent on Haruhiko Kuroda (BOJ).
They suggest all that money is ‘fungible’ and may find its way into US markets, even as our own Fed scales back.
If investors use Euros to buy US treasuries, the Euro will go down and the US dollar will go up. The Europeans would not like that in the long run.
I suppose.
But it wouldn’t be so bad for those of us on this side of the Atlantic.
I don’t claim to have it all figured out; just passing on what I heard on CNBC.
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