What a Crazy Week

It was a pretty wild and crazy week a number of days this week with some of the high flyers in the markets taking quite the thrashing. Fortunately I own essentially no common stocks so for me it simply was something interesting to watch.

Most interesting to me was watching Jay Powell on Wednesday and observing how markets reacted to the Fed statement and then the Chair press conference. Honestly I thought the Chair did a great job of walking a fine line between being perceived as too dovish and being to hawkish. Of course in the end even though he did a good job of laying out the plans the bond and stocks markets heard something else–recession ahead.

So now we know we have significant tapering ahead and they will wrap up the taper by March–seems to me that may be a bit aggressive. I thought the Fed was very late to the taper party–and now that they have joined in they have immediately increased the taper amounts because of the ugly inflation stats that have been released recently. I understand the urgency, by about the time the taper ends inflation will be flattish to moving a bit lower (all my opinion of course which means nothing at all). Certainly we will have wage pressures all through 2022, but I suspect some of the supply chain issues will be letting up in the next few months. This assumes that the new Covid strain is controlled and a new variant doesn’t pop up.

Anyway the 10 year treasury yield ended the week at 1.40% which was down by 8 basis points on the week. Common sense says the bond is extremely over priced (price too high and yield too low). We are in the midst of pulling $120 billion in demand from this market yet the tremendous liquidity drives the yield down.

In the past we had global money moving into the U.S. debt markets and this is certainly still the case, but the Bank of England nudged rates higher this week and the European Central Bank is curtailing their QE bond buying. Other more minor countries such as Brazil, Chile and Mexico have begun raising interest rates. It is only a matter of time before U.S. debt funding becomes more difficult if other competing rates become more competitive.

I think that 2022 is going to be a very interesting–if not downright dangerous to financial markets. Do we have a recession? Will the Fed ever raise interest rates? No one really knows–most certainly not me.

9 thoughts on “What a Crazy Week”

  1. wrapped up my “Crazy Week” not completely satisfied. I was cleaning up ”
    my year end” tax planning and continue to map out my plan for 2022. Two of my preferred’s in the thought process. Psa-e officially called and gdv-g still in limbo. “Tim” mentioned he essentially has no common stocks as I’m sure others here are in same position but not being skilled in flipping, and risk sensitive, and with investment grade’s few and far between I personally go beyond strictly preferred, this includes stocks dividend etfs, a closed end funds and muni bonds, an a couple MlPS, I include treasuries and cd’s when rates cooperate, looking for advice from others “in same boat” for asset % allocation for diversification in their portfolio’s thanks to all. Merry Christmas Go Colts

  2. QE buying reduce (taper) historically has slowed inflation and lowered Interest rates.

    Do not understand this relationship.

    1. Increasing the money supply increases Inflation and the availability of money. Slow down the increase, slow down Inflation.

      1. QE is the fed buying up treasuries on the open market. Aka fed put. Meaning they become the bidder of last resort.

        If new supply does not keep up with fed buying interest rates have to go down as treasury values get bid up.

        Slowing the velocity of money creating deflation. As the money is no long in the economy and trapped in club FED.

        When the FED buying slows down or stops it should have the opposite effect but the chart shows the opposite. Meaning there is even less velocity of money than before.

  3. With the size of the federal debt and with it increasing rapidly, the Fed can’t raise interest rates dramatically. Especially if the U.S. can’t rely on other countries buying the bulk our debt. The Fed is hoping and praying that inflation slows down somewhat and that a few small raises in rates will suffice to kick the debt can down the road for a few more years.

    Also, we count on China funding our debt to a large degree. This fact alone will restrict/constrain our current tough political situation from getting much worse. He who has the gold, makes the rules. We need China to continue buying our debt. A reduction in U.S./ China tension will definitely be good for all markets.

    I go back and forth in my own mind as to whether to keep a lot of cash or just go ahead and buy preferreds and baby bonds at current rates. I remember the stagflation 80’s very well and it’s not a good memory.

  4. It looked like the yield curve is flattening and about to invert, which means crash coming…..just don’t know from what yet..
    it was covid last time. The fed always raises rates at the beginning of a recession and drops them to zero once it’s over…..completely backwards if you ask me….but that’s what they do. Pepare for some nice fire sales!

    1. Inverted yield curves have always been followed by lower rates. So there’s that.

      Plus looking at the 10 and 30 yr rate vs MM is like crazy. I know the long end likes it when he fed raises MM rating showing a resolve to fight inflation. But seriously with 8 trillion in QE we are in uncharted territory.

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