Every market analysis that I read discusses the deleterious pangs that higher interest rates are due to impose on equity holders. The over-arching sentiment is one that bodes poorly for both bond and stock holders. I never quite understood the need for forced interest rate hikes, controlled by an unelected board of people who rule over America’s middle class like a monarchy. Who the fuck does the Federal Reserve think they are? They can unilaterally toss America’s entire economy into a tailspin with just one rogue statement — cause the deaths of millions with policies that break the fabric of commerce.
Here is the 10yr bond that everyone is freaking out over. Once it surpasses 3%, the world is going to end.
This from the absolute faggots at Merrill Lynch, America’s most prolific boiler room operation.
“You’re on the cusp of leaving the sweet spot, but that being said, the rising rates are not necessarily bad for the stock market. Yes, from your finance courses, a higher discount rate means you’re going to see lower valuations, all else being equal. But the ‘all else being equal’ missing ingredient is a high growth rate,” said Marc Pouey, equity and quant strategist at BofAML.
Pouey said the “sweet spot” for stocks is a 10-year yield between 2 and 3 percent, but the fact that not only U.S. growth but global economic growth is strong makes it more likely that stocks will be able to positively navigate a zone where the 10-year is above 3 percent.
“There is no magic number. You have periods of positive correlations and periods of negative correlations,” Pouey said.
Treasury strategists say the 10-year could make a quick run toward 3 percent and could do that as more information comes out from the Fed. The Fed did not tip its hand, in the January meeting’s minutes, as to whether it would raise rates more than the three times forecast. But some Fed watchers viewed the comments in the minutes as being more confident about the path they are on. After its March meeting, the Fed will release new projections for rate hikes and the economy.
“Now the yield trend is intact. The new high is important,” said Chris Rupkey, chief financial economist at MUFG Union Bank. “It looks like 3 percent is the next stop. … I think [stocks] can get used to this at some point. They certainly didn’t like it today. … I think it’s important for stocks to see how many times [the Fed] will go this year. They signaled yes they are going in March. It’s still up in the air how many times they will go this year.”
As for the market freak out because MUH higher rates.
As for rising rates, Pouey studied 15 periods of rising 10-year yields since 1954 and found stocks generated positive returns 90 percent of the time. “I think what’s interesting in this bull market is the best year for stocks was 2013, when you saw the ‘taper tantrum,’ 100 basis points higher in yield,” he said. The S&P was up more than 29 percent that year.
BofAML said over the past 64 years, the correlation has ranged from negative 63 percent to positive 75 percent. The relationship tended to be negative in some of the 1960s through the 1990s, with rising yields being negative for stocks. The average level of rates then was 7.5 percent.
But in this century, the correlation was more often positive and the average level of rates was 3 percent. The relationship with rates and stock returns peaked about five years ago, but has stayed positive and has been trending higher since the trough of 13 percent in 2015.
Rising rates could hurt corporate margins, but the impact should be gradual since large-cap debt is mostly long term and fixed rate, BofAML said.
“Inflation is probably more important, and the sweet spot is 1 to 3 percent,” Pouey said. The most recent reading was January’s headline CPI at 2.1 percent annualized.
That’s right. The last time rates rose was in 2013, due to the ‘taper tantrum.’ That was the last year stocks were any good under Communist Obama. Remember all of the good times we had back then, playing the game, getting rich?
Bottom line: inflation is a fiction. Rates will not go up too much more, unless the rigged CPI shows inflation greater than 2.3%. After this phase of consolidation passes, expect stocks to break the fuck out to the upside again — just in time for St. Patrick’s Day.
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Rising rates (due to negative supply shocks) did have an adverse effect on the economy and the markets in the 70s.
So, the more precise description is that rates are only one factor that affects prices.
On the other hand, rates went up in the 90s due to real (i.e., inflation-adjusted) income growth. The markets remained strong in spite of the rate increases.
Since late last year, the rate of increase in the money has been slowing. Too brief an interval to say its going to flat line but velocity seems to be at a local inflection too.
Either it’s just a blip or a fundamental shift is coming. I think this has got the markets spooked.
Hint Hint
What did some of us say
3 years ago 4 years ago Et al
If the 10 yr gets much into the 3% range
Interest payments, On the Whoa! national debt,
Start to get, A little, Tricky! Hint hint. The mnuchin-squeeze coming?……
At what point does national debt become unsustainable?
https://www.quora.com/At-what-point-does-national-debt-become-unsustainable
https://www.pgpf.org/analysis/2016/12/higher-interest-rates-will-raise-interest-costs-on-the-national-debt
Higher Interest Rates Could Explode Budget Deficits and Our National Debt March 11, 2017
https://www.nationalreview.com/2017/03/interest-rate-hikes-explode-budget-deficits-national-debt/
Net Interest on Debt (in $Billions)
Historical
1998: 363
2003: 318
2008: 451
2013: 415
Congressional budget
2018: 453
2022: 698
2026: 903 (Thank god we have fiscal conservatives running Congress)
https://www.congress.gov/bill/115th-congress/senate-concurrent-resolution/3/text
https://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm
Note that is just the **interest payments**, not the total budget deficit and no principal.
This is why a perfect storm for downsizing government is coming. The Federal budget (ignoring state and local) has more-or-less doubled in the last 10 years.
As interest rates rise, it will be impossible to raise the taxes needed. We’re going to see really serious cuts in spending. There is no other choice.
So has the size of Washington DC. Anyone else notice this ? Been driving down to NC Research Triangle for the past 10 years and the Gubmint sprawl is astonishing in the DC Metro area.
The higher interest rates the more foreign capital will start flooding into USG debt adn the peripheral economies will start collapsing like dominoes creating unprecedented world crisis (depression) in the form of bankruptcy of sovereigns. This is when USD hits 140. Most likely this year. Big war is a given.
Also I think these periferals could dump their shit-currencies into bitcoin and other cryptos which could give more strength to the USD
Venezuela is a good example
“This is when USD hits 140.”
That USD dynamic happened in 2001 but the exact opposite happened in 2008. I expect a repeat of ’08 only with a more brutal collapse in the market given the variables cited by others (e.g., the anchor of debt and it’s drag on the economy is far greater).
I expect we’ll revisit the dollar lows of ’08 which is exactly half of your estimate.
The ’08 version culminated in only a 55% “correction” in the Q’s, and the ’01 version resulted in an 84% “correction,” both of which will be mild in comparison to what’s coming.
Just as people get confused between high prices and high inflation (ie, high rate of change of the prices), people see present interest rates as low, and hence plenty of room to move up.
As a simple example compare these three scenarios and imagine their effect on the housing market:
1) Rates going from 8% to 9%
2) Rates going from 4% to 5%
3) Rates going from 6% to 5%
Your forgot one…
4) Rates going from .25% to 6%.
That’s a problem…
How about margin call, is that good for the stocks.
https://www.zerohedge.com/news/2018-02-21/chinese-companies-forced-halt-trading-amid-avalanche-stock-loan-margin-calls
Higher tariffs on steel,aluminum, washing machines, lumber etc will end up with higher prices at the cash register.
When Nafta talks collapse, vehicle prices will rise dramatically.
Inflation is coming, the bad kind caused by protectionism, not the good kind from a rising economy.
Only inflation the system cares about is wage inflation.