What is meant by “Peak Everything?” Have reached the peak of the economic cycle and things only get worse from here asks, Steve Reitmeister, editor of Reitmeister Total Return?
And that the Fed discussing that they will likely need to raise rates earlier than necessary is a sign that “peak everything” is soon upon us led to extended sell offs in all economically sensitive groups like mining, metals, industrials, autos etc.
Now time to wake up and smell the coffee!
Traders are often too quick on the draw. Kind of like missing the forest through the trees. So let me tell you the facts.
Normally, the economy and bull market keep rolling north for two-three years AFTER the Fed starts raising rates. So, if the Fed is talking about raising rates later in 2022 and then the two-three year clock begins, then we have PLENTY of time to keep riding the bull market from here.
That also means that the economically sensitive groups that recently sold off the most, in all actuality should NOT have been sold. That’s because their profits will expand the most as the economy continues to get back on track, which most certainly is beneficial to their share price.
Furthermore, the above two-three-year time horizon is based off rates starting at a higher level of say 3% and rising to 5-6%, which thwarts inflation while at the same time curbing economic activity. So when you start at the current 1.5% rates, then we may indeed have much more than two-three years before reaching peak economic activity.
Here is one more mind-bending part of the misplaced “peak everything” trade of the past week. Because the Fed said they are likely to raise rates sooner than expected then investors pushed up the rates on shorter duration maturities like one-month to three-year Treasuries.
However, the longer the maturity bonds, like the widely followed 10 year, actually dropped further and remains under 1.5% at this time.
The misguided theory behind this trade is that the Fed will hurt the economy by raising rates, which leads to recessions and deflationary pressures, which equates to lower long-term rates.
But wait…the long-term average rate for the 10-year Treasury is around 3.5% to 4%. And thus the types of rates that coincide with harming the economy are more like 5%-6%.
Now let’s remember that we currently stand under 1.5% because of HISTORIC Fed intervention. Thus, if they just ease off that QE gas pedal, then rates will naturally start to rise towards 3%-4% in the years ahead. And thus we are a long, Long, LONG way from any type of Fed action that really would lead to peak everything and lower rates to follow.
This is another way of saying that the bond traders are absolutely wrong and higher rates WILL be on the way for 10-year Treasuries. And that is why I continue to beat the drum for shorting the bond market with trades like 20+ Year Treasury ProShares (TBT).
So yes, that position has been battered and bruised of late. But given my contrarian value investing roots it is not shocking to see other investors make mistakes. And it is from these mistakes that we can take advantage to enjoy future outperformance. Indeed, that will be the case here.
Learn more about Steve Reitmeister at StockNews.com