Int. Rates

S

ShoeshineBoy

Today's headlines are saying that the market would rather see unemployment staying south so that interest rate increases would not occur, i.e. interest rates are really the "Great Satan".

http://biz.yahoo.com/cbsm-top/040305/89b6771a6c99a73200aeba7d67c171a5_1.html

Does everyone buy into this? I know interest rates are hard on the markets, but are they that devastating? I've always found it hard to believe that a half point here or there really slams capital and earnings that much.

I know that the yield curve, etc. is a good predictor of broad trends in the market, but does everyone really buy into the idea that slight shifts in interest rates can massively change the climate? Is this all psychology?
 
Deflation...once it starts....tough to turn around...the war has been won against inflation...it hasn't been won against deflation...

Look at Japan...has printed huge amounts of money to buy US obligations...their interest rates are lower..and their economy is smaller...and its been how long since their "bubble"...???

Secondly...politics are stronger than economic rationale...politics is "make us happy now" or we won't vote for you now....

Politics won't allow house prices to drop now just because of wanting to normalize economic settings...

America...and the rest of the world....in debt like never before...politics likes low cost debt...no matter where you are...

Professional traders will adapt and increase in number because technology and other efficiencies such as edat and high speed internet...and worldwide job realignments...
 
Shoeshineboy:
I strongly believe that the rise in interest rates will cause the economy to slow down, if not to come to a complete halt.

1. The rise in interest rates leads to slowdown in investments (not the stock market, but investments from economic perspective), which leads to slower growth of GDP.
2. The other side of the coin is that rise in interest rates may cause savings to increase, which again may lead to slow GDP growth.
3. Have you looked at the total debt lately? The credit cards debt is at record high, so is the mortgage debt. What is scary is that the mortgage industry was really pushing for ARMs and variable “interest-only” loans for the last year or so. When interest rates go up, guess how it is going to effect the consumer’s spending, when he is in debt to the hilt?

The problem is that if the Fed starts tightening, it will not be a half a point. You will be looking at a couple of a percentage points over the term of a couple of years. They just don’t stop after one rate hike.

As far as market is concerned, I would think that it prefers relatively high unemployment to high interest rates. Unemployment creates a downward pressure on wages, which even in a moderate economy leads to higher corporate profits. And that’s what the market is after, isn’t it? At least that is what the economics and finance books claim, but as I mentioned in a different post, I haven’t found any significant long-term relationship.

My long-term fundamental view is that the expectation of higher interest rates will derail this rally.

Regards,

DVB
 
Quote from DVB:

Shoeshineboy:
I strongly believe that the rise in interest rates will cause the economy to slow down, if not to come to a complete halt.

1. The rise in interest rates leads to slowdown in investments (not the stock market, but investments from economic perspective), which leads to slower growth of GDP.
2. The other side of the coin is that rise in interest rates may cause savings to increase, which again may lead to slow GDP growth.
3. Have you looked at the total debt lately? The credit cards debt is at record high, so is the mortgage debt. What is scary is that the mortgage industry was really pushing for ARMs and variable “interest-only” loans for the last year or so. When interest rates go up, guess how it is going to effect the consumer’s spending, when he is in debt to the hilt?

The problem is that if the Fed starts tightening, it will not be a half a point. You will be looking at a couple of a percentage points over the term of a couple of years. They just don’t stop after one rate hike.

As far as market is concerned, I would think that it prefers relatively high unemployment to high interest rates. Unemployment creates a downward pressure on wages, which even in a moderate economy leads to higher corporate profits. And that’s what the market is after, isn’t it? At least that is what the economics and finance books claim, but as I mentioned in a different post, I haven’t found any significant long-term relationship.

My long-term fundamental view is that the expectation of higher interest rates will derail this rally.
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Makes sense.
 
I believe that we are in some sort of disinflation and perhaps on the edge of deflation.

The stockmarket would welcome some upward pressure on rates at some point because it would stop the dollar from tanking and show that there was some pricing power by Corporate America rather than the continued pressure that we see on margins.

Right now, the Bond Market couldn't care less about Crude Oil at $37.00 or Copper at 6.5 year highs . . .

Thus, the 10 - year at 3.83%
 
At some point, Corporate America can no longer show good margins just because they have layed off tons of their workforce and are incredibly productive. At some point, there are no longer anymore wage concessions to gain, or cuts in the workforce that you can make. Remember, lay-offs and leaner companies have been going on for over 3 full years now.

At some point, you actually have to sell some "widgets"

:)
 
Quote from waggie945:

I believe that we are in some sort of disinflation and perhaps on the edge of deflation.

The stockmarket would welcome some upward pressure on rates at some point because it would stop the dollar from tanking and show that there was some pricing power by Corporate America rather than the continued pressure that we see on margins.

Right now, the Bond Market couldn't care less about Crude Oil at $37.00 or Copper at 6.5 year highs . . .

Thus, the 10 - year at 3.83%
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I can go either way on prices but it's clear that the weak dollar has given U.S. producers the elasticity that you're pointing to. IMO todays strong rally off the lows was as much a response to the $ selloff as it was to the hope that credit markets were pricing out Greenspan's tightening warning earlier in the week.
 
Quote from DVB:

Shoeshineboy:

3. Have you looked at the total debt lately? The credit cards debt is at record high, so is the mortgage debt. What is scary is that the mortgage industry was really pushing for ARMs and variable “interest-only” loans for the last year or so. When interest rates go up, guess how it is going to effect the consumer’s spending, when he is in debt to the hilt?

The problem is that if the Fed starts tightening, it will not be a half a point. You will be looking at a couple of a percentage points over the term of a couple of years. They just don’t stop after one rate hike.



Yes, the mortgage industry pushed for ARMs and interest only products and yes that can create problems later when rates rise. But it makes sense to do a variable rate in many cases. Alternatively, great long term fixed rates are available too and many people are in these so rising interest rates won't affect that segment of the market.

People refinance for many reasons and last year many cashed in on their equity and took advantage of the low rates. ARMS are a way to keep your payment where it is now or get it lower while taking out say $50,000 for other investments on your equity. These great rates are still available to refinance. Now a 30 yr fixed is 5.25% avg. check www.bankrate.com

After a prepay expires or before, borrowers with ARMS can then move into a fixed rate if they so desire, but the ARMs and i-only rates are for people to save money in the short term. 5,7 and 10 year ARMs have lower rates and most people aren't in one house for over 10 years these days anyways. With house prices gaining substantially in equity over the last 5 years. loan amounts are much greater now and to be affordable, they must be issued on shorter terms for the average consumer. Interest rates are not going to rise drastically in the short term. We are at 40 year lows and the economy is not running full steam- just look at today's unemployment report- all our jobs are being outsourced. It is a dangerous situation as the average debt load is so high now- a rise in rates would be devastating and cripple the progress of the economy. This is an election year and I would expect an accomodative monetary policy by the Fed and that they will not be quick to hike rates. Many things must happen and the economy must be much stonger to sustain a rise in interest rates. We will have to see how it plays out, but I expect rates to jump only slightly by years end.
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my vote, stagflation

Less traders are going to be, regardless of world job re-alignment

will be like the recession of the 70s, all though mis=information and hope will cloude the facts for a few more quarters.

Election year yes, BUSH strong enough to stop stagflation and high umemployment...........NOPE.....
 
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