18 March 2021
18 March 2021
The unwavering Fed. Which is also how central banks should act. A central bank that keeps changing its policy as and when, would only loose the trust of the people.
The Fed mentioned that they would not hike interest or taper its bond buying program even though current situation does not really resonate well with this. Unemployment declining, company's earnings improving, more people getting vaccinated and the opening up of country borders around the globe. All these does not really warrant a lower interest for longer or further bond buying environment.
However, during Powells speech he mentioned 2 things quite perculiar.
1. Expectation on core inflation to hit 2.2% this year (higher than his target of 2%)
2. GDP to rise to 6.5% in 2021. (Pre Covid growth in 2019 GDP was 2.2%) ~ okay significant reason was also because 2020 GDP growth is -3.5%
Applying Fisher's equation from my Economics teacher into use.
Nominal Interest = Real Interest + Expected Inflation
If expected inflation is 2.2%, in order for investors to see value in real Interest, nominal interest would have to rise above 2.2%.
This is also aligned with my previous post where i mentioned that interest rates would continue to rise even if the Fed does not hike their rates.
At the point of writing, 10 year treasury yield has risen 6% from 1.64 to 1.74.
To top it up the US 30 year treasury yield has increased to its August 2019 levels.
So what does this mean?
If fisher equations hold true, then i would expect the interest (10 year) to continue rising at least till around 1.9% near 2%.
Banks would be the biggest beneficial in my opinion. As a low Fed interest would mean low inter-bank borrowing rates. But a high interest in the market which are reflected off treasury yields, could provide the banks more room to increase lending cost to their customers resulting in higher interest margin (aka profits $$$) for banks.
With higher borrowing cost for firms, growth stocks would take a hit. However, firms could also look for liquidity via raising new shares instead of issuing debt. The recent 1.9 trillion fiscal aid from the Feds resulted to about 1.4k stimulus checks for each US citizen. This would in turn be used to support the stock market. (At least temporary until it it runs dry).
However, currently im keeping some cash as dry powder still. Because i feel many of the cyclical companies are over-valued. P/E and P/S ratios are screaming at me. Company's debts are rocket high.
As Warrant Buffet quotes it, "its only when the tode goes out that you learn who has been swimming naked"
Disclaimer: The above message is solely my opinion and does not constitute as any form of investment advice.
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