The bond market fell last week, wiping out gains for the year. Some blame it on Mario Draghi’s comments after an ECB meeting in which he expressed indifference to volatility in bond markets. If it is true that Draghi’s statements motivated the selloff, it shows how fragile is an investing philosophy that is based solely on what central banks do. Such investors are terrified of rising interest rates but want to remain fully invested until the last bell. Of course, anyone investing in bonds or stocks at these altitudes should be as nervous as a long-tailed cat in a room full of rocking chairs.
I think the bond market is giving us a head fake, like what running backs in the NFL (American football) do to defensive backs to confuse them so they can’t tackle the runner. It’s important to pay attention to central banks because a large part of asset price inflation comes from them expanding credit with artificially low interest rates. But investors should ignore the nagging fear of rising interest rates because that will not happen until the distant future. I have argued for a few months along with others that the Fed would not raise interest rates this year and recently the International Monetary Fund joined us by warning the Fed to delay a rate hike until the first half of 2016.
Investors should worry more about the danger of another recession at a time when total debt is much higher than in 2007. The omens pointing to a recession keep piling up. Nonfarm productivity fell at a 3.1 percent annual rate instead of the previously reported 1.9 percent pace. Productivity falls, for the most part, because of declining investment in new equipment, and that investment falls when the Ricardo Effect kicks in.
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