Q: In his review of the markets this week Jeff Miller suggests that the rate rise is a spike and not the beginning of an inexorable upward move. I would appreciate your thoughts on the recent interest rate rise.( I copied his comments below)
My own investing is firmly linked to economic fundamentals. The market disparities cited this week mostly reflect trader or pundit lore. Here are the key points:
•The interest rate spike has nothing to do with the Fed and little to do with liquidity. (See Ben Carlson).
•Interest rate levels have only minor implications for stocks – at least until they move much higher. Stocks do very well in the first portion of interest rate increases, especially when stronger economic growth is reflected.
So why the bond mystery. I have offered this hypothesis in the past. It still deserves a more complete explanation, but I will share the outline.
Many players have a “carry trade” where US Treasuries are the investment, not the “funding currency” as has often been the case in the past. Some funds have put it on explicitly with leverage, maybe 15-1. Some have it without leverage. Some merely choose an “unusual” asset allocation. Some have a currency hedge, but others are “going commando.” This explains a lot.
Whenever the dollar drops, some of these players are stopped out or get a margin call. Here is some evidence from 361 Capital:
06_macro_small
Whenever US rates rise more than the funding currency, we see a similar effect. Traders are stopped out or get a margin call.
None of it really has anything to do with the strength of the US economy or the prospects for stocks, but it provides plenty of grist for the media mill
My own investing is firmly linked to economic fundamentals. The market disparities cited this week mostly reflect trader or pundit lore. Here are the key points:
•The interest rate spike has nothing to do with the Fed and little to do with liquidity. (See Ben Carlson).
•Interest rate levels have only minor implications for stocks – at least until they move much higher. Stocks do very well in the first portion of interest rate increases, especially when stronger economic growth is reflected.
So why the bond mystery. I have offered this hypothesis in the past. It still deserves a more complete explanation, but I will share the outline.
Many players have a “carry trade” where US Treasuries are the investment, not the “funding currency” as has often been the case in the past. Some funds have put it on explicitly with leverage, maybe 15-1. Some have it without leverage. Some merely choose an “unusual” asset allocation. Some have a currency hedge, but others are “going commando.” This explains a lot.
Whenever the dollar drops, some of these players are stopped out or get a margin call. Here is some evidence from 361 Capital:
06_macro_small
Whenever US rates rise more than the funding currency, we see a similar effect. Traders are stopped out or get a margin call.
None of it really has anything to do with the strength of the US economy or the prospects for stocks, but it provides plenty of grist for the media mill
