My take: hands down, it is the ‘Stewpud Markit’. I have never, ever seen the expenditure of intellectual energy that has gone into the stupid pursuit of the meaningless questions, ‘when will the Fed begin to raise rates for the first time after an 8 year hiatus and what will be the resultant economic impact?’ It is amazing, especially since the messaging coming out of the Fed has been, ‘whatever we do, whenever we do it, will be low and slow.’ How many times do you have to hear it? There is no question that this will NOT be a tightening or precipitous event. It may even be a complete non-event, very much akin to the much dreaded end of Quantitative Easing (See “The dreadful end of Quantitative Easing” 8/17/2014).
Why is this so difficult for the market to get its arms around?
It seems as hard as the Fed works to beam this message out, loud and clear, the media is working even harder to portray it as a big deal, dangerous occurrence or mistake. The attached clip/argument is typical of the constant carping on the topic. Kudos to Brian Sullivan, CNBC anchor, for being the voice of reason in this mini melee (his message is, ‘Just do it!’). “U.S.Stocks drop sharply as jobs report intensifies Fed rate debate” .. this headline from MarketWatch (9/4/15), exemplifies the angst-building process going on in media land.
My Perspective
After much complaining last year over the lack of volatility in the market and a meaningful correction not having happened in over two years (10% or better), we are finally getting both. Again, it is that old admonition, ‘be careful what you wish for.’ All of a sudden market participants and the media are trying to pin the decline on something more onerous: China imploding or a Fed rate increase throwing us and the world into recession. You can observe this fear in the action of the 10-year US Treasury note. The yield should increase and the price should drop on bullish economic news. That did not happen yesterday.
In the face of another drop in the unemployment rate (to 5.1% from 5.3%), ostensibly good news that might trigger a 1/4 point Fed Fund rate increase in September, the 10-year price/yield remained virtually unchanged (although the yield did jump to 2.16% right after the employment data was released) at 2.1314%. Stocks dropped, yields dropped on a flight to safety. But, again, I ask the question, if you thought rates were heading North with any speed, why would you buy anything with a long-dated maturity? It is just plain stewpud!
The market will figure this out one of these days and come to realize that Pfizer with a 3.57% yield or GE with a 3.83% (for that matter the S&P 500 with a 2% yield) might be pretty good deals versus those treasuries. If rates do increase, those treasuries will drop in market value, only to retrieve their full value at maturity.
Let’s talk China (the other bugaboo)
What do actor/economist/social commentator, Ben Stein and the government of the People’s Republic of China have in common? They have both tried to clear the air about China recently. In the case of the Chinese Government, they ordered hundreds of high-polluting factories around Beijing to be closed several weeks ago, so that the massive military parade they staged in Tiananmen Square, Thursday September 3, could be viewed against the backdrop of a crystal-blue sky.
Ben Stein, in a commentary on CBS Sunday Morning (8/30), attempted to clear the air about the potential fallout from a much-feared economic slowdown (collapse to some) in China. Stein made two points: one addressing the economic impact of a slowing China not importing as much from the US as in past years, the other China, under economic duress, being forced to liquidate its $1.23 trillion horde of US Treasury securities.
Point One — In 2014 we exported to China $120 billion in goods and services. This represents .0066% of our nearly $18 trillion GDP. Certainly, we would not want to lose it. The number might be less in future years; but, truly, this is just not a big deal.
Point Two — China owns about 8% of US sovereign debt ($1.23 trillion). At 2.134%, we are one of the most attractive liquid rates available in the world, versus Japan (.364%), Germany (.80%), plus we have a big enough market to handle that type of liquidation, which is probably a very low probability event. We continue to be the best house in a bad neighborhood.
Maybe I’m stewpud, but this seems to be ‘Much Ado About Nothing.’
What’s your take?
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