What will happen to the stock market when the feds raise interest rates?
Are you betting that we are going to fall into another recession? I am.
I would agree that I think it would be a BIG mistake to begin raising interest rates before removing any stimulus.
The FED and Obama et al need to first reduce then eliminate ALL stimulus. Then let the so called "free market" rein, and wait 12-24 months to see how the economy is fairing on its own - without the government or FED artificially supporting the economy and housing market.
THEN, if price inflation is a clear problem, then raise rates. I think there is more down side risk in the short term than there is "overzealous consumer spending inflation risk."
The FED has been buying 80% of all the mortgages out there.
http://www.federalreserve.gov/newsevents…
What if the FED stops buying mortgages what would home prices do?
Answer: Go down...a lot.
So what if the FED raises rates?
What would happen to the FED's real estate loan balance sheet? Would it,
(a) Increase risk,
(b) Decrease risk or
(c) Stay the same?
I know, you didn't think there was going to be a built in quiz today. :P
A change in rates would definitely suggest the portfolio would NOT stay the same. So (c) is not the correct answer.
All the adjustable mortgages, the Obama 'fix me so I can still stay in my house that I still can't afford assuming I still have a job program' would thus, INCREASE loan default risk. That would then create LOSSES for the FED, FNM, FRE, GNMA (GNMA not public traded), increase losses for FHA, and help me out again, how is that good for the tax payers or the economy?
If the FED sustains a loss that goes right over on the U.S. Treasury balance sheet - the tax payers take the losses and that increased the national debt, and thus lowers the value of thee dollar.
Thus, higher interest rates would INCREASE risk to a real estate loan portfolio. Yes, (a) is the correct answer.
So why would the FED increase the risk on its own $1.25 trillion dollar real estate loan portfolio? Did I tell you its the same fed that said there was no recession in 2007?
03-28-2007
"(FED) Bernanke says no recession in sight"
http://seattletimes.nwsource.com/html/bu…
The FED, much of the media, Obama and company all think the economy is just great - or improving. Why? Because the stock market went up.
We'll what did you think would happen, when the gov et al floods the market with trillions of dollars, then guarantees everyone and their mother bank can't fail no matter how bad they managed it. Of course the economy moves up on that utopia trade.
The market is moving on technical factors and has been since March. The acceleration lately in the move is due in large part due to fund managers chasing returns.
Money Managers Rush in the Market Chasing Performance
http://profiles.yahoo.com/blog/CUXTCCBSB…
Then, factor that in Q3 2008, expectations for earnings through Q3 2009 was that no one would make any money. Back in Q3 2008, everyone seemed to think that the stock market was about to collapse and nearly did.
So exceptions on Q3 2009 earnings were driven down so low, that you could walk over that hurdle. Now that Q3 2009 earnings are is here, everyone is excited on how companies are beating earning expectations! Amazing how that all works huh?
The market may move higher but a second day of reckoning will come again. Whether it be 2010-2012 when $1.5- 3 trillion of commercial real estate comes up for refi. And try to refi that property when it no longer appraises at its 2004-2008 purchase price. Now account for fewer tenants due to increase unemployment and increase in businesses failing. Then factor that cost of trying to refi that loan (if you can get a loan) will cost plenty more with higher rates. Yea, not exactly bullish on that commercial market.
Here is a sample problem:
10-26-2009
"Capmark Files for Bankruptcy With $21 Billion in Debt"
http://www.bloomberg.com/apps/news?pid=2…
This one is on my watch list: Poss negative impact over the next 1-3 years: Let's see what happens. Stock curr $23.78
Realty Income Corp. (O)
http://finance.yahoo.com/q?s=o
Eventually, we will also have to deal with the massive deficits that will put the USD in a long term risk. If the deficit doubles in 10 years which Obama's own numbers suggest [based on government over spending, and not including any new health care "reform" (control)], the value of the USD will decrease, making things at the consumer level more expensive since most things we buy are important from China and other foreign countries. The result would drive inflation higher.
The FED will then raise rates to "fight inflation" just like they did in 1998-2000, and 2004-2006 and what followed after that?
I am not saying the market will go down to 2008 or March 2009 levels. I am saying that there are tons of economic issues that are not resolved, are not being addressed, and will weigh in on the economy, the market and on jobs, now or in the future, and higher rates won't help solve that problem.
Covered this in further detail back in August 2008 here:
Why Higher Interest Rates is a Bad Move for the FED and the Economy Right Now
http://profiles.yahoo.com/blog/CUXTCCBSB…
Related stories:
You're Sure There’s a Recovery in 2010, Right?
http://profiles.yahoo.com/blog/CUXTCCBSB…
Now What? - Another $1 Trillion Bailout?
http://profiles.yahoo.com/blog/CUXTCCBSB…
I go with the trend until the trend breaks.
Since someone deleted their answer to a prev question, I've added this as my new 5,000th answer.
10.26.2009
Their are a lot of people who think that if the Feds raise interest rates it will probably trigger another recession. One of them is the chairman of the Federal Reserve, Bernanke. That's why he's says he has no plans to raise interest rates anytime in the near future.
What is the main reason the Fed might raise interest rates? It would be to fight inflation. But currently the inflation rate is negative. It's been running in the red at negative 1-2 percent recently. (See link 1.)
There is no inflation to fight. The recession is causing deflation, the opposite of inflation.
Depending on when they start, it will have a significant impact on the market. Unless the economy has recovered significantly by then, it will push us into a double dip recession.
I don't think we will hit a depression though it will be a long hard slog through until the other side. I wrote a couple of long posts that detail a lot of my thinking. They are below. They are 6 and 8 weeks old but I still think they cover what is going t happen.
The last 2 times the fed aggressively raised rates, 1999, 2005 the market reacted by growing very fast. The fed raising rates causes irrational exuberance. When the fed raises rates it sends a signal to the market that everything is ok, that the fed is very confident about the economy.
when it is being done is definitely impt.
too fast, panic develops.
at the right time, positive sentiments that it is finally over.