It's all about interest rates

At least that is what the markets are letting known is the driver and that is certainly part of the story.

Traders see through the stories but pay attention to them as well as the larger picture. Here is the TLT, an ETF representing 20 to 30 year bonds; rising interest rates have been killing it price:

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If, that linked article is right, 10-year rates are going to 3%, that could put mortgages and the 30-year up towards 5% -- without the FED moving the overnight rate (the only rate they really control).  The market may see that as a way to keep Fed rates low longer (Bernanke threatened an increase on May -- see the result on the chart above).  All rates are linked together from short to long - see the yield curve here.  The "longer term rates" must stay above the "short term rates" for banks to stay profitable -- they make a lot of their money from the "carry" between the rate times, borrowing short and lending out long.  Play with the graph on the right and move a vertical line (that appears when you click on it, or you can animate it with the button) across the time scale.  Note the inverted curve (shorter rates higher than long term rates)  at the 2000 stock market peak and the similarly flat curve at the 2007 stock market peak.  Compare that to our current yield curve, held artificially low by the emergency (going on 6 years) federal policies, anchoring it at 0%.  Normal economic cycling has been suspended by the 5-year emergency measures!

 

"So we want stocks to go up for years?  Well hold down interest rates -- a crappy economy will help.  So what if it cripples growth to a crawl?  We will worry about that later.  What a juvenile selfish approach to managing our economy!   

 

Note the move to near 0% (bottom of the yield curve at the origin of the graph) overnight rates in 12/07, carrying through the present -- what makes that possible is the almost unlimited printing of money (TARP, QE1, QE2, Operation Twist), massively inflating the US money supply (To make matters worse, most foreign countries are in the same boat or even worse off!). While stocks may retrace in price somewhat, until that policy is rescinded (or at least there is an announcement of a time-table for rate adjustment (up), stocks should be buoyed at some intermediate level.  If they start to drop very low, despite the extremely loose money policy, that would be a very very bad sign for the market as well as the economy.

 

TLT should bottom out around 90 to 100.  If stock prices fall steeply, bond prices are likely to rise again.

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Comments

  • Government now actively subsidizes CONSUMPTION and non productivity as top priorities.    Individual savings are punished by zero interest, hammered by runaway inflation that devalues saved purchasing power into pennies on the dollar, plus taxed and into oblivion!

    should read:

    Government now actively subsidizes CONSUMPTION and non productivity as top priorities.    Individual savings are punished by zero interest, hammered by runaway inflation that devalues saved purchasing power into pennies on the dollar, plus taxed and regulated into oblivion

  • Today's stock market is basically an aneurism that hasn't reached its fatal breaking point.    Of all the wealth stocks generated, there’s an obvious absence of increased tangible productive wealth creation within the USA FOR MANY YEARS!    In fact, one can't count the endless productive infrastructure of finance, mining, raw material processing, factories, etc. that have disappeared by bulldozing or left to rot in Hiroshima settings like Detroit, Chicago, and other endless cities now infested with absolute poverty!

    The greatest gift to humanity is capitalism where savings investment and productivity are rewarded in a free competitive environment.     The greatest threat to humanity is monopoly, be it evil individuals or the curse of socialism, communism, etc!

    Government now actively subsidizes CONSUMPTION and non productivity as top priorities.    Individual savings are punished by zero interest, hammered by runaway inflation that devalues saved purchasing power into pennies on the dollar, plus taxed and into oblivion!   Our corrupt progressive socialist government has rewarded US "global monopolist corporations” with trillions best described as crony capitalist corruption that included massive "pac-man" attacks that “bankrupted and swallowed” smaller banks, in unbelievably massive quantities – like whales sucking in plankton!   Similarly, interest free capital and “unneeded infrastructure assets” were “relocated” to Communist China slave labor camps, free from taxes, regulations, unions, Constitution and law!

    The progressive monopolist government takeover of our country includes restricting the US owned supply of oil to force the population to buy foreign oil at monopolist prices.   Forcing the US to import roughly 2/3 of its crude oil supply further put our nation at mortal risk!   We can’t defend ourselves from enemies!   Big cities absolutely can’t survive without transportation supplying life sustaining supplies!

    We are a nation with a Constitution and law that is being undermined and overthrown by subversive government officials.   Constitution and law enforcement remains obstructed because the senate majority of progressive democrats and republicans freely violate oath and duty of office!

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