Editor's note: Originally published on August 17, 2014
Wait; it hasn’t been so dreadful after all, despite the pundit / media opinion that it would be a train wreck. Not only was it not a train wreck, but the much forecasted and feared spike up in long rates turned out to be a spike down to 2.34% (2.302 % at the Friday, 8/15/2014 low) vs. a high of 3% when the Fed announced its intention to begin tapering (QE) last December.
Who’d a thunk it?
I never imagined that we would see rates lower in August than last December, but I did feel that the potential for a disaster was relatively low. I put it in writing 14 months ago in session 41 (The Dreaded Taper-June, 2013). My contention was that though we were on our way to a 4+trillion dollar Fed balance sheet. The $85 billion in long-dated Treasuries and agency mortgaged backed securities being purchased monthly was a drop in the bucket when compared to the huge aggregate trading volume transacting in those markets. Ergo, the actual impact of QE going into and coming out of the market might be much smaller than expected. Having said this, I still thought rates would be higher.
How to explain the mismatch
One explanation might be that the banks are not using the Fed’s big balance sheet to expand credit. The other, and I believe most important factor, is fear.
Here we are seven years after the previous all-time high for the S&P, 25% above that high, and people are scared to death that the next debacle is just around the corner. And it is not so much about the fear of the economy being on shaky ground, it’s the geopolitical stuff that moves people into so-called safe assets. For example, on Friday, it was reported Ukrainian forces blew away a Russian armored column as it attempted to sneak across the border. The stock market took an immediate hit. After being up 61 points, it swung down 172 points, recovering to a 51 Dow point loss on the day. Meanwhile, the ten-year Treasury spiked in price as investors head for cover, trading down from a high yield of 2.41% to a low yield of 2.302%. It finished the day up 0.06% with the yield at 2.34%.
Now, I know we are due for a sizable correction, but I’m not sure that this justifies purchasing 10-year USTs at a 2.3%; on top of that, I’m not much for trying to time the market. Maybe the only justification might be expecting Armageddon. In that case your Treasuries will be as worthless as your stocks.
Greed is Bad, Fear is Good!
In my world Gordon Gekko’s pronouncement, “Greed is Good,” does not fly. But, fear, not only is good, it is GREAT! Fear is what creates the great buying opportunities. As long as fear continues to be a prime mover in the investment posture of many investors, I believe this bull has further to run. A good correction will only reinforce the fear.
See, the dreadful end of QE hasn’t been that dreadful…has it?
Disclosure: No positions