Torsten Asmus
While the rate increase yesterday was in line with expectations, it still had ramifications. The future looks none too bright, with the Fed indicating rates rising to 5.10%. Sure, we got all of the “data-dependent” hype, but we also got, again, that the Fed is heading on, not stopping with its fight against inflation until we get to their much-ballyhooed 2.00% number.
We presently have a 1-year LIBOR rate of 5.53%, and this is a clear indication, to me, of where we are heading. The press keeps touting some sort of pivot, but I see none on the horizon. Then we have a flummoxed bond market where the height of the yield curve is the six-month Treasury Bill at 4.67%. This is 120 basis points higher than the 10-year Treasury bond and 115 basis points higher than the 30-year Treasury bond. The inversion is just remarkable and virtually unprecedented.
In fact, MarketWatch states that “U.S. bonds are coming off their worst year in a half-century.” The problem, in my view, is that it is only going to get worse from here. Even now, Bloomberg shows that Treasuries are down -10.81% for the year, while IG Corporates are down -13.61%. There are two factors to consider here. One is the Fed’s continual push on raising rates, and two is that all of the secondary bond markets continue to widen against Treasuries as “credit risk” intensifies as a direct result of the Fed’s actions.
In the High Yield Corporate market, you may expect more ratings downgrades and bankruptcies in the forthcoming year. I find this segment of the bond markets to be quite troubling and one in which serious caution is advised. Refinancings, in my opinion, are going to become more and more difficult due to our rising rates and the increasing “credit risk.” This market is getting leaned upon from all sides.
Business loans, based upon the Prime Rate, will now be in the 7.50-8.00% range, which will be the highest since 2007. This is going to push up these commercial loans to 10.50-11.00%, in my opinion. This will also have a significant impact upon corporate revenues and profits. Moreover, it will dent many mergers and acquisitions, as the numbers no longer make any sense.
Our higher interest rates will also cause problems for individuals as well, with mortgages, home loans, credit cards, and any type of individual borrowing up substantially. This will dent the economy, in my estimation, and may totally offset any decline in inflation. The Fed is playing a very dangerous game, in my opinion, as they do not seem to be considering all of the ramifications of their actions. Raising interest rates, in the manner that they are proceeding, has collateral damage, and this should also be taken into consideration.
Then all of this will have a major impact upon the equity markets, in my view, and my outlook is not optimistic. As of the close yesterday, according to Bloomberg data, for the year-to-date the DJIA is down -6.53%, S&P 500 is down -16.17% and NASDAQ is down -28.60%. No joy in this market either.
I deal with both institutional and retail investors. I can report that a good many of both are seriously worried about both the bond and equity markets. Recession or no recession, everyone is getting hammered. Inflation may be down slightly but the cost of money is outdistancing the fall, and the Fed seems to be paying no attention at all to just what is actually happening. Lower inflation may help the economy but higher borrowing costs will hurt it, and this seems to be no part of their thinking.
The Fed, in my view, needs to have a balanced approach to both interest rates, and borrowing rates, and what each is doing to both businesses and individuals. However, it is clear to me that they are not following this approach. They are entirely focused upon inflation and nothing else it seems, and I believe this will be a major detriment for our economy. Just watch what happens when bills cannot be paid and both people and individuals panic as well as stock and bond holders.
“The courage to press on regardless – regardless of whether we face calm seas or rough seas, and especially when the market storms howl around us – is the quintessential attribute of the successful investor.”
– John C. Bogle
Original Source: Author
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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