So, the Fed drops rates to almost nothing ... and the markets rejoice!
Ummm... they do know that the Fed is doing this because the underlying economy is really, really weak and we're at serious risk of deflation, right? Right? Now, I'll never turn my nose up at a nice 4-5% one-day rally in the market (particularly after a year like this), but we're not out of the woods by a long stretch.
If the dollar gets weaker (and with rates this low, there's a good chance of that happening before too long), oil and metals get more expensive. And whatever relief we've all been getting from $1.60/gal gasoline all goes "poof!".
There's a curious (and unenviably difficult) conundrum here. I happen to think we ARE (or were) at risk of Japan-style deflation, and a reasonable solution to that is to drop rates. On the other hand, if we get another round of weak-dollar commodity inflation, that means another python-squeeze to the stressed out consumer. And that's bad too.
I'm still waiting for my crystal ball to get back from the shop, so I'm just going to sit tight and keep on doing what I've been doing. Which, in a nutshell, is "prepare for the worst and hope for the best".
2 comments:
What's up with the yield on the 10Y Bond? Any comments?
Hard to say. If I've learned anything, it's that the performance of an asset in this market may have nothing to do with the security itself, and may have a lot to do with the holders/traders of that security.
Not so long ago, I saw examples of IDENTICAL securities trading in opposite directions. I assume(d) in those cases it was because there was a large position being moved in or out.
(the example I'm thinking of involved two essentially identical inflation-linked securities ... one moved up 15 bp or so in one day, while the other moved down 20bp that same day...)
I would suspect that rates on instruments like the 10yr Treasury are going to stay fairly low; there's a flight to safety AND a flight to liquidity going on and some investors (most particularly those who use Treasuries as margin for futures and will accept even negative rates) are just insensitive to low rates.
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