Taper Off = Risk On.
If you follow financial markets, you know that the Federal Reserve {Fed} yesterday decided not to end the "Taper" by voting to continue their asset purchases of both Treasury and mortgage securities at the same level for an indefinite period of time. If you really don't care about these things {which likely means you're not reading blogs such as this} then you may have noticed that the stock market staged a huge rally yesterday afternoon. Very few investors saw yesterday coming and were caught with expectations leaning in the wrong direction. When that happens, when investors are caught wrong sided, then for good or bad you getting violent market swings.
First in regards to what the Fed did yesterday, there are other commentators that can do better justice to that. I'll post a smattering of their commentary here, here, here, here and here. Below, are a few bullet points on what I think this means for investors and the economy.
Fed was likely surprised by the market's negative reaction last spring when they floated the trial balloon of reducing the "Taper". Interest rates shot up. That's impacted many sectors of the economy, especially housing. While I am in the "Things Are Getting Better" camp. It is obvious that the "Fed Heads" became worried that current interest rate levels are having a negative impact on the economy. The best form of economic stimulus then is to keep rates at attractive enough levels that economic growth continues to expand. Gotta keep those 60 month 0 percent car rates on the table to move vehicles. Mortgage rates at something close to 5% induce a significant slowdown in that world. Right now the Fed doesn't think we can afford that, hence yesterday's decision.
Much talk about the trickle down wealth effect yesterday. That is that the Fed hopes to jump start economic activity by making Americans feel wealthier as their investment portfolios continue to rise. One of the ways to do this, as reason says, is to keep interest rates artificially low so that asset prices continue to inflate. I think some of this is valid but I also think we sometimes miss the bigger picture of balance sheet repair. Courtesy of the Fed, we've been able over the last five years to either buy or refinance everything at historically low rates. To that point I purchased a car this year at the above mentioned 60 month 0 percent interest rate level. That means I'm likely saving myself $3-5,000 over the life of that loan versus what I would have paid five years ago. Corporations are taking advantage of this as well, witness Verizon's recent $49 billion dollar bond deal. Borrow when you can not when you have too. The Fed obviously feels that the economy is not done with this balance sheet repair right now.
Interest rate sensitive stocks took off yesterday and we were low scale buyers of these assets in appropriate accounts among a few other things. These stocks have significantly underperformed this year due to the belief that we were at the beginning stages of a tightening cycle. That is off the table for now and there is a higher probability that these type of assets will perform better in the coming months than they have for most of the year.
There are other implications from yesterday which I want to sit back and think about over the weekend but this is a quick take away from what just occurred.
First in regards to what the Fed did yesterday, there are other commentators that can do better justice to that. I'll post a smattering of their commentary here, here, here, here and here. Below, are a few bullet points on what I think this means for investors and the economy.
Fed was likely surprised by the market's negative reaction last spring when they floated the trial balloon of reducing the "Taper". Interest rates shot up. That's impacted many sectors of the economy, especially housing. While I am in the "Things Are Getting Better" camp. It is obvious that the "Fed Heads" became worried that current interest rate levels are having a negative impact on the economy. The best form of economic stimulus then is to keep rates at attractive enough levels that economic growth continues to expand. Gotta keep those 60 month 0 percent car rates on the table to move vehicles. Mortgage rates at something close to 5% induce a significant slowdown in that world. Right now the Fed doesn't think we can afford that, hence yesterday's decision.
Much talk about the trickle down wealth effect yesterday. That is that the Fed hopes to jump start economic activity by making Americans feel wealthier as their investment portfolios continue to rise. One of the ways to do this, as reason says, is to keep interest rates artificially low so that asset prices continue to inflate. I think some of this is valid but I also think we sometimes miss the bigger picture of balance sheet repair. Courtesy of the Fed, we've been able over the last five years to either buy or refinance everything at historically low rates. To that point I purchased a car this year at the above mentioned 60 month 0 percent interest rate level. That means I'm likely saving myself $3-5,000 over the life of that loan versus what I would have paid five years ago. Corporations are taking advantage of this as well, witness Verizon's recent $49 billion dollar bond deal. Borrow when you can not when you have too. The Fed obviously feels that the economy is not done with this balance sheet repair right now.
Interest rate sensitive stocks took off yesterday and we were low scale buyers of these assets in appropriate accounts among a few other things. These stocks have significantly underperformed this year due to the belief that we were at the beginning stages of a tightening cycle. That is off the table for now and there is a higher probability that these type of assets will perform better in the coming months than they have for most of the year.
There are other implications from yesterday which I want to sit back and think about over the weekend but this is a quick take away from what just occurred.
posted by CR English at 9:04 AM
<< Home