Greed is good….at least the was the mantra in the 1987 film Wall Street, which won actor Michael Douglas an Academy Award for Best Actor. While the character was fictional,, the theme of the renowned “Greed is Good” speech given by Douglas’ character Gordon Gekko underscored the market psyche then, and today.
“The point is ladies and gentlemen that Greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through and captures the essence of the evolutionary spirit. Greed in all of its forms. Greed for life, money, love, knowledge, has marked the upward surge of mankind, and greed - you mark my words - will not only save Teldar Paper, but that other malfunctioning corporation called the U.S.A” (Gordon Gekko, Wall Street, 1987)
To capture the essence and meaning of these fictitious, yet very iconic words, look no further than the market today. The market is plummeting on the heels of Federal Reserve Chairman Ben Bernanke’s warning that the Fed will begin to pull back on its $85 billion per month bond and mortgage backed securities purchase. Today is what they call an inflection point day. Seldom do you have a market where everything is moving in the same direction. What is typical is when the equity markets correct people take flight in bonds. That in turn causes bond prices to rise and bond yields to decline. Here, there is a broad sell off in all aspects of the market. Equity prices are tanking and bond yields are spiking. In turn this means higher mortgage interest rates. Now, let’s be clear, all of this is happening on the mere possibly that the Fed will ultimately pull out of quantitative easing. The Fed made clear it all hinges on economic data and the economy continuing to recover. Can anyone say we are really close? Let’s consider a few things….
For months we have been in a market climate where good news has been seen as bad news and vice-versa. The market has lacked a solid footing on what it wants. If we get a solid employment number the reaction is tepid, with curiosity focused on whether that means the Fed is close to pulling out. So the question is, what does this market want?
Do we really want the Federal Reserve artificially printing and pumping money into the markets to artificially keep rates low? Is the fact that they are becoming more vocal in the fact that Quantitative Easing is going to come to and end sometime in the near future really bad? I venture to say it means the complete opposite of how the market is reacting to it. If the Fed is ready to cut the umbilical cord shouldn't we read that things are getting better? Apparently not, because the knee jerk reaction given the greed standard is the sell off at hand because outside of the Fed there apparently aren't enough believers in where we are and whether we can survive a higher interest rate environment. The non-believers will cite that employment remains sluggish, income growth is at an all time low, corporate earnings growth is below average, GDP remains well below healthy growth levels.
We have seen time and again that markets tend to overreact – and in my observations of markets, this is what we have here – an overreaction by Wall Street. In the dust things will eventually stabilize – with interest rates receding after a record 2 day spike.
If you are at least 15+ days from closing, I recommend you allow the dust to settle and float your lock decision – we are a midst a massive sell off in the bond market – eventually they will catch a bid - and yields will come back to reality. Rates simply cannot get too high, because this economy cannot handle it – and if you read between the lines and really parse the words of the Fed yesterday, that is what was said. Don't let the fear induced by greed mongers catch you at a top in rates. Wait for a pull back.
“The point is ladies and gentlemen that Greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through and captures the essence of the evolutionary spirit. Greed in all of its forms. Greed for life, money, love, knowledge, has marked the upward surge of mankind, and greed - you mark my words - will not only save Teldar Paper, but that other malfunctioning corporation called the U.S.A” (Gordon Gekko, Wall Street, 1987)
To capture the essence and meaning of these fictitious, yet very iconic words, look no further than the market today. The market is plummeting on the heels of Federal Reserve Chairman Ben Bernanke’s warning that the Fed will begin to pull back on its $85 billion per month bond and mortgage backed securities purchase. Today is what they call an inflection point day. Seldom do you have a market where everything is moving in the same direction. What is typical is when the equity markets correct people take flight in bonds. That in turn causes bond prices to rise and bond yields to decline. Here, there is a broad sell off in all aspects of the market. Equity prices are tanking and bond yields are spiking. In turn this means higher mortgage interest rates. Now, let’s be clear, all of this is happening on the mere possibly that the Fed will ultimately pull out of quantitative easing. The Fed made clear it all hinges on economic data and the economy continuing to recover. Can anyone say we are really close? Let’s consider a few things….
For months we have been in a market climate where good news has been seen as bad news and vice-versa. The market has lacked a solid footing on what it wants. If we get a solid employment number the reaction is tepid, with curiosity focused on whether that means the Fed is close to pulling out. So the question is, what does this market want?
Do we really want the Federal Reserve artificially printing and pumping money into the markets to artificially keep rates low? Is the fact that they are becoming more vocal in the fact that Quantitative Easing is going to come to and end sometime in the near future really bad? I venture to say it means the complete opposite of how the market is reacting to it. If the Fed is ready to cut the umbilical cord shouldn't we read that things are getting better? Apparently not, because the knee jerk reaction given the greed standard is the sell off at hand because outside of the Fed there apparently aren't enough believers in where we are and whether we can survive a higher interest rate environment. The non-believers will cite that employment remains sluggish, income growth is at an all time low, corporate earnings growth is below average, GDP remains well below healthy growth levels.
We have seen time and again that markets tend to overreact – and in my observations of markets, this is what we have here – an overreaction by Wall Street. In the dust things will eventually stabilize – with interest rates receding after a record 2 day spike.
If you are at least 15+ days from closing, I recommend you allow the dust to settle and float your lock decision – we are a midst a massive sell off in the bond market – eventually they will catch a bid - and yields will come back to reality. Rates simply cannot get too high, because this economy cannot handle it – and if you read between the lines and really parse the words of the Fed yesterday, that is what was said. Don't let the fear induced by greed mongers catch you at a top in rates. Wait for a pull back.
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