First, It seems like the market has stabilized from the recent problems cited in Ireland, but the burning question is, are things that complex, this easy to fix with a couple of meetings and a bucket of money? The fact remains there is a debt crisis, and everyone panicked. The European Union puts together a make believe bailout over a weekend or two and expects the rest of the developed world to believe “all systems are go.” As you might have noticed, the bailouts in the U.S. didn’t exactly fire up the economy over a weekend, and they can’t solve the problems in Ireland, Greece and other Euro Zone countries that have similar problems in short order either. The stock market is telling us something else, or at least trying to – don’t worry, be happy.
Do you really think the problems went away? There are other countries standing by for their share of bailout money, and when they come forward and raise their hand, everyone will look totally surprised. Nothing has been fixed, just delayed.
Second, the market is ignoring one of the most important proxy’s, the Treasury bond market. You see, rising interest rates are typically never good for anyone. Especially rates that rise really fast, really high as compared to where we came from. Let’s look at an example:
In April 1987 the interest rate on the 30-year treasury bond was about 7.5%. About 5 months later the yield went up over 20% and nobody was paying any attention. The stock market was up almost 15% in that same time frame and everyone invested in stocks thought it was great. People generally don’t pay attention to any warning signs that can derail the happy days, they just keep on keepin’ on until it’s too late. Then in October 1987 the stock market lost 30% of it’s value in a few days.
Again, a similar event took place in 1999. Between April and December of that year the 30-year Treasury yield rose over 21%. Same scenario, nobody noticed and the stock market was still on a tear from the dot com craze where the new normal at the time was buy high and sell higher. The stock market was up almost the same as bond yields during that period. By March of 2000, the gig was up and we know the rest of the story. This time the market lost about 40% before it finally bottomed.
Right now, we have a similar situation, the 30-year Treasury yield is up about 25% in the last 3 1/2 months. In the same period, the stock market has gained almost 20%. Not too many people are paying attention to this proxy, as the folks on CNBC and their guests are all forecasting another solid year in 2011 – up at least 10% from current levels.
There is no way to know exactly who will be right, the pundits in the media who sell advertising to fund their paychecks, or the Treasury bond market that is much larger and more liquid than the stock market, by far. You decide.
The European debt problems, the U.S. debt problems and rising interest rates seems to be a combination that cant’ be ignored. Higher interest rates alone increases the cost of our debt, and has a negative affect on new borrowing by corporations, individuals and yes, the U.S Government. How can the market ignore these items for long?
Maybe the Fed will come to the rescue again, but their track record is to come with full guns blazing after the panic, not before. Their current spending program of $600 Billion doesn’t seem to be working, in fact it seems to be having the opposite affect from what the intention was.
Invest with vigilance.
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