The Ides of March
“Beware the Ides of March,” cautioned a soothsayer on March 15, 44 B.C. In response, Julius Caesar quipped, “Well, the Ides of March have come.” The soothsayer replied, “Ay, they have come, but they are not gone.”
By the end of that fateful day, Julius Caesar met his demise via a dagger in the Roman Senate, heralding a significant turning point in Roman history. Cicero remarked, “The Ides changed everything.”
This year has been rife with dramatic inflection points—natural disasters, nuclear crises, conflicts, uprisings, and even celebrity scandals. As we navigate these tumultuous times, one must wonder: what else lies ahead?
Could it be a collapse in the bond market? Or perhaps a downturn in the stock market? Let’s delve into some worrying signs that are shaking bond investors to their core.
An Unappetizing Mess
Inflation poses a significant threat to bond investors. When inflation surpasses the yield set by these investors, their returns turn negative. In simpler terms, the income generated fails to keep pace with rising prices.
Globally, central bankers are engaged in a risky game with inflation. To stimulate economic growth, they have kept interest rates artificially low, effectively reducing the cost of borrowing. This strategy encourages spending but also expands the money supply.
As explained by BusinessWeek last Saturday, “Among central bankers, there’s a consensus on how to restore stable global growth.”
“Step 1: Emerging-market central banks raise interest rates sufficiently to control inflation. This aims to prevent price pressures from affecting the U.S., allowing the American economy more time to recover. Following that, Step 2 sees the U.S. Federal Reserve tighten rates. Timing is crucial—too much deviation, and the entire system can collapse into chaos.”
Here’s why this matters:
When interest rates rise, bond prices fall. If the increments are moderate and effectively counteract inflation, bond investors generally maintain their income. A slight dip in bond prices becomes a non-issue.
However, if rates increase too rapidly or sharply, prices can plummet, causing panic among bond investors. When they begin to sell, it exacerbates the situation, leading to soaring interest rates and a market collapse.
Currently, inflation in emerging markets is accelerating and will inevitably reach the U.S. economy. The speed at which central bankers adjust interest rates and how investors respond could create ripples in the debt market, ultimately affecting broader economic stability.
Yet, as if that volatility weren’t enough, the stock market may also be on the brink of a crash…
Advice Worth Considering
Charles Nenner, a former market forecaster for Goldman Sachs, warned last Thursday on FOX Business that he’s advising clients to exit the market, predicting the DOW could plunge to 5000.
“We went long in 2009 during the first quarter, targeting a price of 1356 for the S&P 500, which is nearly within reach,” Nenner stated. “I advised my major clients—hedge funds, pension funds, and large firms—to move almost entirely out of the market.”
So, what could possibly trigger a DOW drop to 5000 according to Nenner?
“I don’t mean to alarm you,” he cautioned, “but my analysis of war and peace cycles indicates we may face a significant conflict by late 2012 or early 2013. I believe this could be the catalyst.”
A substantial war could indeed wreak havoc on stock markets, should it occur. But what are the chances of this happening, and why consider Nenner’s insights?
At the end of the day, he might just be another modern-day soothsayer. While his credibility is questionable, there remains an undeniable truth: even the words of a dubious figure like Nenner can bear weight. In light of current uncertainties, it may be prudent to heed his advice and consider exiting the market.
Sincerely,
MN Gordon
for Economic Prism