My research focuses on what drives the market in the long run, not daily reactions. But in recent weeks we see the effects of the main driver. It certainly is not the economy – 2020 proved that. Overwhelming in the recent years it has become extreme monetary policy.
It is not really surprising how the market struggles when the drugs are withdrawn. With inflation settling in, pumping printed money into the system is not a good look. They have to end their liquidity injections. The markets will struggle.
What forces change, is inflation. Life was good as a central banker when inflation was subdued by mild fiscal austerity and flat wages. Now a threat has “emerged” to their financial markets and they can not sit back and pretend anymore.
It is going to be an interesting battle
The top 1% own 53% of US equity – our policy makers donors. The top 10% own 90% of US equity – most of our policy makers and mainstream media fall in this camp. It is their economy – the financial economy – that the Federal Reserve has focused on for a couple of decades.
Most do not understand what is coming – the battle will determine how it plays out.
Think about how shocking it is the 10-year Treasury yield is sitting at 1.5% today is while inflation is hitting 7.5%. That is a loss of 6% in purchasing power holding Treasuries this year. The TSP G fund would be earning around 8% in the past before the central bank interest-rate-suppression policies were started to fix the balance sheets of wall street banks after the financial crisis they wrought.
Thank goodness, Housing CPI was only reported at 3.4% this last year (LOL) otherwise inflation we would have seen a 10% print on inflation already. (Home prices up 17% YoY).
BTW… mortgage rates have historically run 1.5% above the 10-year Treasury yield, so a 8% Treasury yield would lead to a 9.5% 30-year mortgage rate. Do you think that this would impact the housing bubble? The stock market?
The bond market is straight forward. At 7-year effective duration, every 1% rise in interest rates will lead to about a 7% capital loss in the TSP F fund. Simply pushing interest rates up 1% will wipe out a few years of F fund’s current yield. They need to push, or should I say, allow rates to rise well over 3% to both subdue inflation and normalize policy.
Most investors are not ready for this. We have not lived in an inflationary environment since the last one ended in the early 1980s. And that episode did not start with this level of financial bubbles and this level of global debt. It will not go down the same.
This is the type of commentary my members can follow. Education is part of the service. With the 40 year bond bull market coming to an end, the whole investing community has some unlearning to do.
I hope you Join Us Today. It is going to be an interesting 2022.
TSP Smart & Vanguard Smart Investor serves serious and reluctant investors