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195 comments on DrumBeat: July 17, 2007

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dVincent on July 17, 2007 - 1:56pm

Ron-

Although I thoroughly enjoy reading your contributions to the threads, I do not believe that your bond vs stock assessment is entirely correct.

There are times when stocks and bonds rally together, as in a time of 'soft landing scenario' expectations (Jun '06- Nov '06). There are times when bonds sell off and stocks rally ('99, '87- through Sept, '07). Here are two graphs, sorry i don't have better examples:

http://charts3.barchart.com/chart.asp?vol=Y&jav=adv&grid=Y&org=stk&sym=T...
http://charts3.barchart.com/chart.asp?vol=Y&jav=adv&grid=Y&org=stk&sym=S...

I also believe that the future of bonds is venturing more into uncharted water as it is in the best interests of our largest trading partners (China, Japan, etc) to recycle dollars back into the 'system' to enable their trade surpluses to continue. I believe that to be the lynchpin in the fragile balance as opposed to the theoretical 'investor' who switches between stocks and bonds.

Also, the market is ruled by funds who largely do not switch between stocks and bonds until the 'investor' redeems, and my experience has been that investors switch to bonds After stocks decline/begin declining.

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Darwinian on July 17, 2007 - 3:02pm

dVincent, what you say is often true but it is the exception rather than the rule. That is, the market will often move up despite rising interest rates. When this happens there is usually something else, something very bullish moving stocks.

Traders watch interest rates like rabbits watching a hawk. Witness the market everytime the Fed raises or lowers interest rates. When the announcement is made, sudden spikes usually mark his decision.

The stock market just loves low interest rates. This means credit is very easy to get meaning people will be buying houses, cars and all kinds of stuff. But if money gets tight, the housing market drops off, profits drop off and the market will plunge.

But of course all these things take time. In the short run, anything might happen. But in the long run, stocks and interest rates move in opposite directions.

Again, the market can move up in the face of rising interest rates but it does this despite the rising rates and not because of them. And if interest rates continue to rise this will eventually have a devestating effect on the market.

Ron Patteson

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jbunt on July 17, 2007 - 3:11pm

jbunt

Well, for every 100 people there are 100 theories. Mine is: If there is no cost for money, i.e., a zero interest rate, you will eventually get deflation. This is because it costs a business zero to borrow and expand. So, overcapacity of all material things occurs. See, e.g., Japan for the last 15 years.

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dVincent on July 17, 2007 - 4:11pm

Ron-
I agree, and am afraid rates will continue to rise despite all MSM market gurus that expect rates to fall. We are in the early innings of a structural shift away from high investment flows into financial assets and little into hard assets (rig construction, mine expansion, etc.) The cycle historically continues for over a decade and is accompanied with higher interest rates. This time it is likely to be the end game.

Regarding your comment on the next OPEC meeting (Sept) ... the call has gone out for more crude (IEA) and the backwardation of the oil curve expecting more crude from OPEC, what a meeting that will be!

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