no problem. Let me expand. There's a shit load of things that move markets but if you had to focus on just one thing, the 800 pound gorilla is 10 year treasuries because it will tell you what the price of debt is going to be and that is the only thing that matters in this economy that is fueled totally by debt.
There will be no refinancing of homes, no records in housing starts, no record sales of cars etc if the price of debt shoots up. Corporations will not refinance as much debt, corporations will not buy back their own stock with borrowed money, corporate stocks will be valued with a higher cost of capital which by definition will reduce stock prices.
This is why it is absolutely crucial for the FED to slam down the yield on the 10 year bond as it approaches the "danger zone" or the game is over.
To understand how yield works think of the analogy of being a landlord in an area where the most you can charge is 1000 dollars a month for rent. If you could only charge 1,000 a month for rent then all else being equal, you would like to buy the cheapest property you can find so that you would have a better return on your investment.
If you had a rough neighborhood but thought that it was improving, you would be ok with buying that property if you could get it at the right price.
But lets say you have a rough neighborhood but the city keeps coming in and using taxpayer money to give aid to troubled home owners and also to buy up shitty properties so the price never crashes.
That is what the FED is trying to do by supporting the 10 year bond at current levels. The market is saying that the government is borrowing too much and looking like a shitty neighborhood and will not buy at these levels. But the FED just won't let prices drop low enough to clear out the weak hands.
Eventually though the market always wins as it is doing right now. The FED is doing all this intervention with fake money and yet prices keep falling. This fake money is diluting the unit of account, the dollar, and also circulating more money which bids up the prices of commodities. That is why all the commodity prices are up double digits (gas, oil, lumber, copper, soy etc) not because of "faith in a recovering economy".
Thank you for going to the trouble to make this understandable. Greatly appreciated. Part of me say let it all burn to the ground.
no problem. Let me expand. There's a shit load of things that move markets but if you had to focus on just one thing, the 800 pound gorilla is 10 year treasuries because it will tell you what the price of debt is going to be and that is the only thing that matters in this economy that is fueled totally by debt.
There will be no refinancing of homes, no records in housing starts, no record sales of cars etc if the price of debt shoots up. Corporations will not refinance as much debt, corporations will not buy back their own stock with borrowed money, corporate stocks will be valued with a higher cost of capital which by definition will reduce stock prices.
This is why it is absolutely crucial for the FED to slam down the yield on the 10 year bond as it approaches the "danger zone" or the game is over.
To understand how yield works think of the analogy of being a landlord in an area where the most you can charge is 1000 dollars a month for rent. If you could only charge 1,000 a month for rent then all else being equal, you would like to buy the cheapest property you can find so that you would have a better return on your investment.
If you had a rough neighborhood but thought that it was improving, you would be ok with buying that property if you could get it at the right price.
But lets say you have a rough neighborhood but the city keeps coming in and using taxpayer money to give aid to troubled home owners and also to buy up shitty properties so the price never crashes.
That is what the FED is trying to do by supporting the 10 year bond at current levels. The market is saying that the government is borrowing too much and looking like a shitty neighborhood and will not buy at these levels. But the FED just won't let prices drop low enough to clear out the weak hands.
Eventually though the market always wins as it is doing right now. The FED is doing all this intervention with fake money and yet prices keep falling. This fake money is diluting the unit of account, the dollar, and also circulating more money which bids up the prices of commodities. That is why all the commodity prices are up double digits (gas, oil, lumber, copper, soy etc) not because of "faith in a recovering economy".
Agreed thanks for laying this out. Been watching the 10yr. since you mentioned it, and thinking of ways to protect my investments.