Yes, I understand the argument, but it's completely wrong...
Will bonds crash cause stocks melt up?
- Thread starter kashirin
- Start date
I can't believe anyone is trying to rationalize with her, or argue with you for that matter.
Higher rates are going to axe any recovery we have. There's no way in fighting it. Option ARMs and Alt-A's reset into 2011 and we're going to be pushing the limit if the FED feels like playing their games with rates @ 0 until then (which is what looks to be their definition of an "extended period").
This time it is totally different with interest rates. Government has totally screwed up our economy almost beyond recognition.
I have been through interest rate wars probably ten times in the last thirty years. Two schools of thought always scream out their warnings. The first group shouts that all of this money is going to come out of the bond market and cause the stock markets to have a false rally. All the while the second group is screaming that as interest rates increase that are tied to these bonds it is going to cause economic problems. This general economic principal does not always works as they predict and has a number of fallacies associated with it.
One fallacy by the experts in this scenario is that all people will jump between assets classes in their brokerage account. Huge numbers of people at Y2K pulled out of stocks and bonds altogether and invested in real estate. This could easily happen again with baby boomers buying âcheapâ retirement properties.
Another fallacy is that people after a major crash will automatically jump back into the stock market and buy âlong termâ once the market appears to have calmed down. With the size of crash we have had many former investors will sit on the sidelines for an extended period in cash until they are comfortable with the direction that the economy and equities are taking.
And still another fallacy is that people will not want to stay in cash after selling bonds and the proceeds have to go in to stocks. This one has confounded these so called experts. Todayâs investor may fool them all and buy all gold and commodities.
Could you ask for a wilder economy than todayâs? I donât think so. These are just a few of the crazy factors that are hitting us from all sides:
- Artificially low fed rates to entice banks to lend. Many of those who receive these low interest rate loans are pumping this free money back in to the stock market.
- Deflation threats are keeping scores of home owners under water in their mortgages. Deflation is still a threat.
- Inflation threats are taking hold from the fed buying up over $1.25 trillion dollars of subprime mortgages. Who knows where this money is headed for? Hyper-inflation is a good possibility.
- This year and next are filled with interest rate rollovers of sub primes that the fed is trying to keep rates low for.
- Treasury auctions are faltering which is a contributing factor causing bond yields to rise.
- Rising bond rates are causing corporate bond auctions to raise their rates. This could shut off the recovery. Since banks are stingy with loans this is the corporations main cash funnel today.
- Commercial loans are coming due in the middle of this debacle that may be the next big crisis. Rising interest rates could send this sector into a tizzy.
- That giant sucking noise you hear next to your wallet is government raising taxes and health care costs.
- And no we wonât forget the dollar or what is left of it after this mess is over.
- Tack on to this the biggest unemployment numbers since the great depression.
- Local and state governments are facing big deficits. This could be the first time in history that states default when the Obama money runs out. The tax free bond market may have its butt on the line as well.
So from a picture painted this bleak it is easy to see that it may not take much of a push from interest rates to cause this current bubble to pop. This is why Bubble Ben is so paranoid. A second rescession is a real possibility.
I have been through interest rate wars probably ten times in the last thirty years. Two schools of thought always scream out their warnings. The first group shouts that all of this money is going to come out of the bond market and cause the stock markets to have a false rally. All the while the second group is screaming that as interest rates increase that are tied to these bonds it is going to cause economic problems. This general economic principal does not always works as they predict and has a number of fallacies associated with it.
One fallacy by the experts in this scenario is that all people will jump between assets classes in their brokerage account. Huge numbers of people at Y2K pulled out of stocks and bonds altogether and invested in real estate. This could easily happen again with baby boomers buying âcheapâ retirement properties.
Another fallacy is that people after a major crash will automatically jump back into the stock market and buy âlong termâ once the market appears to have calmed down. With the size of crash we have had many former investors will sit on the sidelines for an extended period in cash until they are comfortable with the direction that the economy and equities are taking.
And still another fallacy is that people will not want to stay in cash after selling bonds and the proceeds have to go in to stocks. This one has confounded these so called experts. Todayâs investor may fool them all and buy all gold and commodities.
Could you ask for a wilder economy than todayâs? I donât think so. These are just a few of the crazy factors that are hitting us from all sides:
- Artificially low fed rates to entice banks to lend. Many of those who receive these low interest rate loans are pumping this free money back in to the stock market.
- Deflation threats are keeping scores of home owners under water in their mortgages. Deflation is still a threat.
- Inflation threats are taking hold from the fed buying up over $1.25 trillion dollars of subprime mortgages. Who knows where this money is headed for? Hyper-inflation is a good possibility.
- This year and next are filled with interest rate rollovers of sub primes that the fed is trying to keep rates low for.
- Treasury auctions are faltering which is a contributing factor causing bond yields to rise.
- Rising bond rates are causing corporate bond auctions to raise their rates. This could shut off the recovery. Since banks are stingy with loans this is the corporations main cash funnel today.
- Commercial loans are coming due in the middle of this debacle that may be the next big crisis. Rising interest rates could send this sector into a tizzy.
- That giant sucking noise you hear next to your wallet is government raising taxes and health care costs.
- And no we wonât forget the dollar or what is left of it after this mess is over.
- Tack on to this the biggest unemployment numbers since the great depression.
- Local and state governments are facing big deficits. This could be the first time in history that states default when the Obama money runs out. The tax free bond market may have its butt on the line as well.
So from a picture painted this bleak it is easy to see that it may not take much of a push from interest rates to cause this current bubble to pop. This is why Bubble Ben is so paranoid. A second rescession is a real possibility.
Good post, Rabbitone, in laying out SOME of the factors that have to be weighed in forecasting market direction. Of course, this complexity is what leads most traders to default to technical analysis and chart trading. I'm not sure that even the most intelligent, experienced, and educated human beings can get ii right more than about 60% of the time. Of course, that is enough to make a good living. Unfortunately, not many of us are that smart....so we get it right about 50% of the time. Stosh
I posted this image in another thread already, but it is relevant to this discussion. The image shows the yield on 1 yr treasuries as a percentage of the yield on 10 year treasuries from 1962 until April 2nd, when I took this snapshot. Since the 1 year yield is so close to zero, the spread to the 10 year yield is enormous.
Most of the yield curve also looks like this, but this is the cleanest image I could get with the data I collected from the treasury website:
http://www.ustreas.gov/offices/dome...ent/interest-rate/yield_historical_main.shtml
Most of the yield curve also looks like this, but this is the cleanest image I could get with the data I collected from the treasury website:
http://www.ustreas.gov/offices/dome...ent/interest-rate/yield_historical_main.shtml