What’s the Impact of the Fed Bond Tapering?
Last week, the Federal Reserve announced that they may start to reduce their bond purchases by the end of the year. Naturally, two questions arise.
- What does that mean?
- How does that impact me?
In short, we’re expecting the tapering to lead to higher interest rates, which will result in higher borrowing costs for corporations and individuals. This CNBC article breaks down specifics of what happens when the tapering starts, and the possible impacts we can face.
What Happens if America Defaults?
Sticking with the political talk here, a topic that’s been highly covered in the news is regarding America’s federal debt ceiling. If Congress doesn’t raise the ceiling and allow the government to borrow what it needs, there’ll be hell to pay. It’s likely to be resolved before it wreaks havoc, but the path from here to there could be rocky and no one’s absolutely sure that disaster will be averted.
The core issue revolves around when and if Congress consents to raising the government’s debt ceiling to allow a higher level of borrowing to fund spending — spending that Congress has already approved. Without this change, the government will be in technical default on its various obligations including US Treasuries.
Here are a couple of things to know.
1. Why is this such a huge risk?
US Treasuries are the foundation for portfolio management and the global financial system, and they play a role in the world economy as the leading “safe” asset. Markets don’t like uncertainty, and the US defaulting would bring along that fear.
2. How did we get here?
There are different economic reasons that explain how we got to this point, but you can’t ignore the political dysfunction at the forefront. Waiting for two political sides to come to an agreement — on a deadline — is challenging.
The irony here is that the government has approved the spending, but the last piece of the budgetary puzzle is raising the debt ceiling. It definitely seems backwards to the way most corporations and families budget (or at least the way they should).
3. Is there any solution that doesn’t involve Congress?
Some analysts say that the Treasury could implement one of several measures to avoid default. Examples include halting contributions to government pension funds or prematurely redeeming government bonds. Another option is minting the $1 trillion coin. Yes, it’s actually a thought.
4. What’s the timeline for a default?
October 18 is the day when the Treasury exhausts its so-called extraordinary measures to fend off the blowback from a failure by Congress. If that day comes and nothing’s happened, expect a spike in interest rates.
Beware of Advice From “Experts”
There are many “experts” on social media providing advice on how to invest your money. Some have an agenda, such as swaying you to invest in something they have an interest in. Others just enjoy thinking they are smarter than everyone else.
Because there are so many people making predictions, you’ll hear completely contradictory advice all of the time. Someone may say, “Now is the best time to invest,” while others urge you to sell everything to avoid imminent doom.
Someone is going to be right, and someone is going to be wrong. The person whose advice is way off will likely hope you forget all about it, so you end up listening to their next predictions. With Twitter keeping track of historical tweets, it’s not that hard to go back and analyze an “expert”’s market calls.
Robert Kyisokaki, real estate investor and author of Rich Dad Poor Dad, has been vocal about predicting crashes in the stock market. Here’s a look at his tweets, mentioning a upcoming crash, from 2011 to present.
Mark Cuban, entrepreneur, television personality on Shark Tank and owner of the Dallas Mavericks has also made his opinions on how to invest in the stock market public. Following his advice wouldn’t have turned out great, either.
These are just two examples of well-known people making predictions that didn’t pan out. However, there are plenty more. This is just more evidence that proves timing the market is difficult, if not impossible.
Buying the Dip
In the old days, when the market dropped, I had to reach out to clients to reassure them that the drop wouldn’t be permanent and to stick to their investment strategy. Now, the overall sentiment has changed and anytime the market drops 2-3%, inventors want to take cash from the sideline and allocate it to the market.
I am all for buying stocks when they’re “on sale.” But you have to put short-term drops in a longer-term perspective.
The chart below shows the S&P 500 over the past year. While there are some drops, it is a pretty impressive ascent upwards almost in a perfect 45% angle. And while the drop last week was significant, the market is still at high levels in the grand scheme of things. Over the past five years, charts looks similar — excluding the mammoth drop in March of 2020.
Walter Deemer, who is known for his Technical Analysis of the market, is famous for saying that when the time comes to buy, you won’t want to.