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Politics : Formerly About Advanced Micro Devices
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To: Rarebird who wrote (1057649)2/28/2018 12:34:31 PM
From: RetiredNow  Read Replies (1) of 1574004
 
Rarebird,
Have been thinking a bit more about this year's potential returns on stocks. We know at least 3, probably 4 rate hikes are coming. That's 0.75-1% of rate hikes. The 10-yr Treasury is already at close to 3%. So on rate hikes alone, we are likely to see the 10-yr at 4% by the last rate hike for the year.

In addition, QT is going to syphon $380B out of bonds. According to this economics paper, $1.35T of QE was worth 4% of Fed rate decreases. So using the reverse logic, then $380B of QT is worth about 1.12% of rate hike. My conclusion is that the Fed is tightening the equivalent of 1.87-2.12% (rate hikes + QT equivalent) the balance of 2018. Add that to 10-yr Treasuries of 3% today and you get 4.87-5.12% 10-yr Treasuries by end of the year.

Let's call it 5% to make it simple, which corresponds to the highs back in 2007-8. That yield will be one hell of a competition to the SP500, which only yields 1.75% right now. This is powerful evidence that stocks have not yet priced in a sharp spike in Treasuries. This recent rebound is likely a head fake. The total damage before it is all done could be a 40-50% drop from here, pushing the SP500 yields closer to 3%+.

BTW, if this scenario plays out, then gold would look like a good investment for a 10 month trade right now or if you are very brave, then a short sell on the SP500 and 10-yr Treasuries both. What do you think?
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