Based on my decades of observation, FOMC (Federal Open Market Committee 联储会)
(03-06-2015) 今天二月份工作报告强劲,市场预期联储会可能六月而不是就加利息. 所有债券都倒下..CA muni也不例外. The reason is bonds' interest rate must maintain a spread over the Discount Rate.
- 在联储会加息 (Discount Rate) 的几年周期里, 股市涨债券跌黄金跌..Economy keeps expanding.
- Mild inflation is good for GDP expansion.
- There's no reason for FOMC to kill a growing economy.
- As long as the Discount Rate <= 3.5%, buy dip in stock market.
- 联储会加息前就是meat grinder. Stock market hates uncertainty ( +0.25% or + 0.5%), therefore it jumps up & down. The measurement is unemployment report, core producer price index (PPI @ wholesale level), core consumer price index (CPI).
- Because inflation is climbing, debtors will lose purchase power because no one can predict how far inflation can go. So the best weapon to beat inflation is stock equity market.
- Holding bonds will cause capital loss.
- Evidence:
- FOMC pumped the Discount Rate all the way to 6.5% in early 2000. Then the economy ran out of steam. Nasdaq hit over 5,000 first time then fell under 1200 in Sep-2002
- In 2007, FOMC pumped the Rate until subprime issue rose. Then it rushed to slash rate.
- The Discount Rate history
- Comparison against 10-yr, 30-yr, mortgage rates. US Prime Rate=3% + Discount Rate.
- Long bonds vs. the gold
- Vice versa, when FOMC senses an imminent rececssion 3 months ahead, it will cut the rates to start the contraction cycle.股市跌涨债券涨黄金涨..Economy keeps shrinking.
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