Here's your playbook for rising interest rates
The Fed may start tapering in just a few months. Here are a few of the likely winners and losers.
Second, the Fed will ease off its massive stimulus program (known as quantitative easing, or QE), which is likely to allow long-term rates to rise to levels that truly reflect global economic activity. (The QE program has kept a lid on long-term rates.) I discussed this notion a few weeks ago in my look at the soon-to-change yield curve.
There are triggers in place for a huge stock sell-off the moment the yield on the 10yr tops 3%.
YOU GUYS WHACK THE CLIENT OFF EITHER WAY -
MARKET UP -
THEIR CLIENT LOSES... IN MAJORITY OF CASES...
The term "interest rate" is irrelevant in the scenario where they increase. Higher interest rates mean more income is required to quality, more out-go is required to pay for life and living. In spite of all the blog comments regarding the TRUE state and nature of the economy, Inflationists have plodded on. It's in the book, boys and girls... Fiat Money Inflation in France by Andrew Dickson White. There is a goofy perception that we have an economy. We don't. We have a nothing.
Some insight on where we are: BIG can't find the skill sets it needs and argues about Minimum Wage labor. The 800 pound gorilla in the room is inept management that can't train, and a growing disdain with not making ends meet for the majority. It's a "business arrangement" really, not a platform, if it exists in total dysfunction. Expect rising rates to sink top-heavy vessels that cannot do enterprise.
It may seem weird but... better homes will rise in value and sell with higher rates. Entry level and estates-- not so much. In fact, estates will stagnate because of credit tightening. There is at least a 4:5 ratio of bad credit lower-income borrowers to stable solvent ones. That means fewer quality in tighter disciplines. Rental rates are already too high. Use your noodle... if you can't earn a good enough living and can't afford to rent-- you quit.
Without QE, every single stock begins the steady ramping into decline. There are no consumers to bamboozle, the I-Phone crowd is broke, 4th quarter retail sales will be dismal, borderlines will file for bankruptcy protection before entering inventory count season and mass-marketed commercial sports merchandising is already sliding. The era of exploitation is shutting down. The era without momentum delusion begins.
Based on days like last Friday, odds are that we now exceed $700 TRILLION in derivative debt. It gets used to fuel rallies. When rallies fail to generate any substance, they turn into debt and those stock shares thin in tangible value. What did you ever actually have? Game tokens, at best.
It isn't rocket science... if a stock or commodity certificate once meant you owned something in the former tangible world, it can only be that possessing them means you OWE something in a world that views derivatives and debt obligations as currencies and GDP. The old rules are long gone. Derivatives prioritize ABOVE stocks in liquidation. READ your fine print.
ActiveRIA gets it!
A good read for an individual who has had PONDX / PIMIX as a mainstay for years.
I am of a mind that a lot of great income plays will be going on sale over the period when the Fed is forced to pull the plug (diminishing returns / unintended consequences).
What bag will you be left holding?
rock-solid, informative, useful, well-researched article David S. thank you for your efforts and financial journalism!
all I would add is a bit more discussion on fixed income diversification. as an example, like a nice cabernet and a blackened rib-eye, pairing the already-diversified/flexible, high-yielding yet rate-sensitive, PONDX with the high-yielding yet non-rate sensitive (but still credit sensitive if market sells-off) "bank-loan" fund SAMBX should prove to be a very palatable combination within a further diversified income portfolio. food for thought ...
anybody seen any NLY-lovers lately??? ouch, that 39% top to trough drop will leave a mark ...
V_L......Most of us have read that already, somewhere else...
The ones that haven't don't really care about the FED nor the Markets; They are not invested.
Or do not understand the implications of FED easing anyway...imo.
"bank-loan" fund SAMBX should prove to be a very palatable combination within a further diversified income portfolio."
How so? Every holding it has is market-volatile in an interest rate ramp up. Tranches are collectives of existing credit. What aspect of a sell-off indicates continuation to settlement? The fact is-- although a majority of platforms are cash-rich, they have substantial debt. A singular move like tapering damages the income and outgo flow. You are saying that an Albatross with it's wings clipped is still capable of running. In fact, it would be extra uncoordinated.
NEW YORK- The vast majority of business economists believe the Federal Reserve will begin to pull back on its massive economic stimulus program in the first three months of 2014, according to a November survey done by the National Association of Business Economists.
The survey also showed a majority of economists believe the United States' economic recovery will accelerate next year. NABE surveyed 51 economists between Nov. 8 and Nov. 19 and found that 62 percent of respondents believe the Fed will pull back on its bond-buying program in the first quarter of 2014. Another 30 percent believe the Fed will begin to reduce its bond buying in the second quarter of 2014. Combined, nine out of 10 economists believe the Fed's stimulus program will wind down next year, after being place in its current form since December 2012."
10 out of 10 is these so-called "experts" get paid salaries born out of QE and most have never worked an enterprising day in their life. From burger maker to college student to number person without stopping to engage is the REAL economy-- at all.
Let's review the facts they missed... no American business platform contains competent skilled people who can run enterprises without QE. They can't find anyone who can. They suppressed the nation to Minimum Wage and under-skilled roles for 5+ years now. They wiped out housing values, then made trillions of dollars worth of too-low-to-service mortgages to people who still think they can walk away and move up-town. The Tech Giants lobby for privacy but never stopped their venues from making job blockades and stonewalls blocking the competent from careers that kept them from destitution.
Validate ANY amount of Kool Aid you choose to, but America DIES next year. QE ruined us and all those contaminated by it through investments need to pay for Holocaust-level crimes against the people of America. We are $700+ TRILLION in debt to derivatives. We have no cooperation among elected Officials and some pledged to ignore the states that elected them for a "party" agenda. That's CRIME. Where is the PUNISHMENT?
Crazy`8:I guess there`s no hope for extreme right wing haters like yourself.The best thing that
those who hate the country,hate Obama,hate the Constitution, is for them to leave the country.
It`s like in school when the cl**** gets kicked out,the class improves.
ACA isn`t perfect but OMG is it needed.I have relatives in sales that couldn`t get insurance
because of pre-existing conditions.They`re thrilled to get ACA.Nobody said it would be free.
Well, maybe the idiots on Fox who wouldn`t know the truth if it hit them in the face.If the right
loved this country as much as the Dems they would work with Obama and try to improve it instead
of spreading their lies.
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