I’m trying something new. I’ve diving into Randall Forsyth’s weekly column in Barron’s magazine, Up & Down Wall Street. The hope is that this will be a great way to learn a lot about investing from a well respected voice of experience.
First, I’ll give an overview of the article, then my talking points and explanation.
Overview
- Undercurrents are driving sudden market movements, but not the ones everyone is blathering about.
- Fed comments don’t fit the bill for the blame:
- Short-term treasury yields typically are most sensitive to Fed talk, but they have shown little reaction
- Fed Gov Lael Brainard reinforced her dovishiness, the opposite of what was expected
- So, what is behind the fits in the stock market?
- Unanticipated bounce in yields (little to do with Fed)
- This is likely linked to expectations related to BOJ meeting this week
- Another factor is the dramatic tightening of the U.S. presidential polls
- Trump has pulled even with Clinton, erasing a 5-7 point deficit
- A Trump victory would raise the odds of a more aggressive fiscal policy (ex: tax cuts, expanded spending, trade and regulatory changes)
- Markets sense the potential of higher deficit spending
- “Significant, sophisticated investors” have been positioning for a rise in bond yields which have been at the core of the stock market’s turbulence
- Some are also making long-shot bets that the FOMC might actually raise rates this week via option trades that risk $1 to make $10 if the Fed hikes
- Perhaps they’ll react to Trump’s critic that the Fed is politicized and raise despite no quality data to support a hike
- August retails sales falling short
- “Core” sales are down
- Industrial production is down
- Manufacturing index is sub-50 (bad)
- Weaker than expected nonfarm payroll gain
- On top of that, a rate hike would be too disruptive to global markets, particularly global banks with uncomfortable financial stress levels
Talking points
- Look beyond the surface noise to find the real problems/issues
- Fed has no good reason to raise, except to shirk Trump’s critiques
- Stock market disturbances most likely due to expectations out of Japan and the tightening presidential race
- A trump victory would likely bring even larger deficit spending
- The phrase “significant, sophisticated investors” makes me think of the stock market mafia or something
- If you’re like me, you hear: ““Significant, sophisticated investors” have been positioning for a rise in bond yields which have been at the core of the stock market’s turbulance” and you think, “okay….”
- According to investopedia: “Inflation is a bond’s worst enemy. When inflation expectations rise, interest rates rise, bond yields rise and bond prices fall. To that end, bond prices/yields, or the prices/yields of bonds with different maturities are an excellent predictor of future economic activity.”
- Essentially, “smart money” is anticipating inflation, which show up in rising bond yields, falling bond prices, and all of this is causing some shake-up in equities.
- It’s okay if you’re confused, I’d be lying if I didn’t admit that it makes my brain hurt as well.
- DEFINITION of ‘Long Bond‘ The 30-year U.S. Treasury Bond. The long bond is so called because it is the bond with the longest maturity issued by the U.S. Treasury. It pays interest semi-annually, and is the most actively traded bond in the world.
- The “big money” is betting long bond yields will rise as they are currently mispriced
- Predictive power of the yield curve
- Only reason I can see Fed raising rates is simply to save face, can’t see it happening before the election, regardless of Trump accusations.
- Big news is Japan and the presidential race, both are amazing case studies in desperation and no good options
I hope you enjoy the show.
087 – Eye-Opening Polls Threaten Stocks [Randall Forsyth – Barron’s]