Quote:
Originally Posted by camcojb
So the Fed and QE are keeping the interest rates low. The market was down this morning in advance of the Fed meeting, and as soon as they said no tapering it's off to the races. Every time there's talk of cutting back by the Fed the market seems to stumble a bit, and as soon as they squash that talk it takes off again. I don't think the market is as related to the economy as it once was.
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Well -- the FED is between a rock and a hard place. They've driven into the corner so deep that lifting is going to cause issues. Interest rates are artificially low -- so the minute they "lift" (back off buying bonds) interest rates are going to rise and they'll rise quickly. So much is based off these low rates -- that anything UP from here will seem like a shock. Obviously -- home mortgage rates at 5% should be seen as a gift from heaven --- but when people get used to 3.5% --- 5% will be shockingly high. It takes time for businesses and people to adjust. They will --- and they can --- but it doesn't lessen the shock value.
The market is related to the economy --- but more so to individual businesses and their profits and GOING FORWARD what they have to say. Now everyone that has a brain can figure out that if interest rates rise --- that will come straight out of the bottom line... no different than a house payment that rises... and wall street is all about profits. It will take time for businesses to adjust to higher costs --- and then the suppliers will raise prices because they have higher costs --- and then the next guy and the next guy --- and we WILL have an inflation problem.
When I was in the importing biz in NYC --- during the late 70's and early 80's --- we couldn't raise prices as fast as our costs rose... and we ended up with "surcharges" for freight costs etc. It was cheap to rubber stamp a surcharge on an invoice vs reprinting the price list monthly! Everyone was doing it. I can tell you that is a very toxic business environment.... and it's what all the economists have been warning about.
This is why you've seen anything that is interest rate sensitive - getting hammered. I warned about this months ago! I sold all my bond portfolio (for a nice gain) well in advance --- and sure enough --- muni bonds have been getting hammered in face value as the "thought" the FED might ease (buy less bonds than the current 85 BILLION per month).
We have a free market --- except that we've had one player creating all the rules! The minute the rule maker stops making up the rules -- we'll go back to a free market... and the problem with that is nobody wants that to happen -- even though they really don't want the FED loading up the balance sheet with debt so it's a real double edged sword.
Think about it this way --- real simple..... everyone was grousing about the cost of cars SOARING on Barrett Jackass..... 150K for "clone" cars. REMEMBER? It was crazy --- but people also LOVED it because it made them feel good about their "investment" (in their own car). So it was fun -- and people bitched because they were being priced out of the market -- but it also meant they could sell their average '69 Camaro for 75K so they were happy too. THEN THE REAL MARKET CAME BACK - and suddenly the 75K they could have gotten was back to normal and they would be lucky to get 40.... Now they hate the world and everything in it.... yet it also brought down the stupid money prices being paid --- so really --- it's almost an even exchange. What people want is to borrow for a house at 3% and earn interest at the bank of 6% --- but it just doesn't work that way does it.
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