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“Yellen’s statement makes a rate raise in two weeks a virtual lock… ”
Mega Trends Investing Editor Teeka Tiwari sent me an urgent email. He’d just learned of Federal Reserve Chairwoman Janet Yellen’s speech to the Economic Club of Washington on Wednesday.
MarketWatch had this to say about it:
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Yellen suggested that she thinks the two requirements set out by the Fed for a rate hike—further improvement in the labor market and confidence that inflation will move higher—have been met. |
Folks, it’s here… barring a “black swan” event, the Federal Reserve will raise interest rates on December 16.
It’ll be the first hike in almost 10 years (the last raise was in June 2006). The Fed has kept rates near 0% since the depths of the financial crisis in 2008.
Teeka warns this event will set off a chain reaction he calls “income extermination.” As rates rise, interest rate-sensitive securities will see their asset prices collapse. These include real estate investment trusts (REITs), utility companies, telecoms, preferred shares, bonds, and bond funds.
[Bonds and bond-like assets hold an inverse relationship between their prices and their yields. The higher their prices, the lower their yields (and vice versa).]
It gets worse…
The U.S. bond market used to be the most liquid market in existence. But that changed after the financial crisis. The Dodd-Frank Act slashed much of Wall Street’s big banks’ exposure to bonds. These institutions were the No. 1 source of liquidity for the market.
At the same time, retail investors have put over $1.5 trillion into the bond market through exchange-traded funds (ETFs).
Here’s why Teeka says that’s a problem…
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Remember, we had a period of time last October when there were no bids in the Treasury bond market. This is the U.S. Treasury bond market: the biggest, “most liquid” bond market in the world. Think about that. There was a period of time when you could not sell your bonds in the open market… Now imagine $1.5 trillion in retail bond ETF money panics and decides to “hit the bid”… No one’s going to pick up the proverbial phone. The bids will just melt. There’ll be nobody buying. You’re going to see volatility in the bond market nobody alive today has ever seen before. And you’re going to see catastrophic losses take place in bonds. |
Now, most major financial displacements don’t take place in a vacuum…
I asked Teeka if the bond market carnage could lead to “contagion” with other markets. Here’s what he said:
A crisis in bonds could force investors to dump stocks to raise liquidity. This could lead to a 1987-style crash in equities [the largest single-day crash in market history]. Think of the “flash crash” of August 2015 or 2010. This would be worse. The money fleeing stocks would be used to staunch the bleeding from losses in the bond market. It could get ugly, fast. |
Bottom line: Teeka remains bullish on the U.S. stock market over the long term. But that doesn’t mean the Fed’s interest rate hike couldn’t unleash a cascade of volatility across the bond and equity markets over the short run. Prepare your portfolios now.
There’s a way to insulate yourself from these market upheavals. You can earn safe, strong yields—100% outside the stock and bond markets—while harnessing market volatility to capture fast, outsized gains.
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It’s no secret the Fed’s interest rate manipulation disturbs us. Distortions of the free market never end well.
Do you share our concern over December’s Fed meeting? Please consider taking this brief survey. Your responses will help us know the best way to serve you in any turbulence ahead… |