This is so clear to see, but I will briefly cover the bullet points. Short rates were pushed to zero from 4-5% from QE. Long Rates were pushed down to 3% from 4-5% from QE . Long rates are near 3.5-3.7% now and will slowly rise to 4.5% over next two years, very easy to forecast this and not much demand from 90 million baby boomers retiring over the next 10 years, hence these should stay low. The short term rates will rise, this is the most risky, since FED intervention is leaving. Market makers and demand will become KING. You need money quickly for short period of time you are going to pay the market rate. Look at payday loans and income tax refund loans. I see short rates really soaring, back to what they should be. This will bring the economy back to a free market. THE M-REIT and carry trade industries will be wiped out, from a kryptonite disease called FREE MARKETS and risk based compensation. This will be good for the economy expecially at a time when one generation, the Baby Boomers are transferring to the younger folk. Look for sudden and enormous drops in asset prices, when the FED is confident the stock markets can take a 50-80% plunge, they stock fund managers will take their cue and start selling. I would be getting out of stocks and book profits., I would be 40% in cash (money market or 1-2 yr treasuries held to mat.), 40% in US dollar etf fund, like UUP, and 20% in an etf short fund 1x, something like Short S&P (SH). I WOULD BE TOTALLY OUT OF STOCKS AND BONDS AND REAL ESTATE AND BUSINESS OWNERSHIP. The prices now are extremely elevated, and the future growth over 10-15 years is zero or negative.
When I look at real estate. Prices have only doubled in last 20 years in most parts of CA, even after the current bounce. Of course there are lot more desirable zip code areas which will continue to have higher appreciation.
We don't need homes that go up in value so people can take out loans and spend their equity. What we need are affordable homes so that young people can afford to buy one which they currently cannot because of the flood of money coming out of the Fed.
Proping up the economy with printed money does not bring jobs back from China so that our current bar bell economy is leveled out. Democrats talk about the uneveness of wages but they don't do what is needed to fix it which is to bring back middle class jobs from China. You don't do that by printing money. You do that by forcing China to quit pegging it's Yuan so that the trade imbalance no longer exist.
If currencies are allowed to float then it is impossible to have a trade imbalance. Floated currencies adjust in value until the trade imbalances disapear. Which means that anyone who we have trade deficit with has been stashing our currency so as to keep their products cheaper than ours which causes our jobs to go over there.
It seems that the US is the only moron that is not doing this. We need to wise up and get our jobs to return back home. The rest of the world must think we are easy marks.
This is bogus. If markets crash 50%. We will have infinite QE and printing of money. We couldn't handle previous crash and got us into great recession. Fed would be stupid to raise rates quickly. It is like taking the oxygen away. There are lot of other frothy parts of market you need to worry about. This is the new normal as Pimco big guy is saying. Fed will keep holding the bag for a long long time, like Japan.
QE was instituted to save the banks and to reduce unemployment from the recession, not to prop up the stock market, which was an ancillary effect of QE. Now, the FED has telegraphed that stock prices are bubbled, make no mistake, when FED says something they are telegraphing changes are coming. THIS TIME, THE STOCK MARKETS WILL PLUNGE FROM OVERVALUATION, LIKE 1987, not from slowing economy, not from rising unemployment, not from failing banks. I looked at stress test data, and the FED is fairly confident we can have a 50-80% correction across all averages without any disruption to the job engine, or business solvency or bank solvency. Mainly the only ones that will get hurt is the average Joe who is in funds or doesn't know how to hedge correctly, The professionals, pension funds, banks, gov. pension funds will use the correction to bone up their long term investments to pay for baby boomer retirements. THE BIGGEST RISK TO THE FED now is the retirement system and job creation for the children of the baby boomers. Big corps., medium corps, are sitting on TRILLIONS of investment dollars waiting to invest when interest rates are normalized. THE FED IS LISTENING TO THEM. The next phase will save the pension system and create jobs for the children of the baby boomers, this is the transition phase from one generation to the next, we went through this in the late 70's and early 80's from the last baby boom, "Bob Hope" generation, all perfectly normal. The best time to load up the truck then was 1979-1982, which was the market asset valuation bottom. Right now we are at the TOP of the asset valuation or the YELLEN BUBBLE POINT.
Won't some MREITS ( and I do not know which ones) have enough hedges in place and will buy new MBS with higher underlying mortgage rates, and reduce leverage as rates rise? Don't get me wrong, I am sure yields will drop tremendously on Mreits. I am sure those heavily invested will be smashed over the head.
But at the point when Rates are high and mreit yields are low and the (Smarter) Mreits are adding in deeply discounted low coupon (High convexity) MBS and shortening up the duration of their liabilities...Won't that be the time to buy Mreits?...for example in 6/30/ 2006 NLY was yielding 3.75 an the price was ~12.80
Had you bought then and DRIPed and closed your eyes- you would have over 11% annually till 6/30/14.
OK not killer but I would take 11% per year over 8yrs.
AGAIN: I do not think it is time to buy MREITS ...but...when rates a higher I will be buying the survivors.
At these inflection points of the HIGHEST VALUATIONS IN ASSET PRICES, one can have a buy and hold strategy. My strategy is to trade news and valuations, of very limited durations. You can not buy 50 year duration stocks with 1-2% yields, you have got to hedge if you do this and set very narrow trade timelines. If you have to buy and hold, look to preferred stocks but have a strategy to limit losses if their is a decline. The next BIGGEST time to get into REIT's is after the shakeout that is coming when rates do start to normalize and increase. There will be m-reits that get downed, like a 777, quickly, because they took extreme risk like flying over a war zone to boost profit from fuel savings. There will be more conservative M-REIT's, like NLY, that will just drop 50-60% and possibly be in a vegetative survival mode for 5-15 years. Then there will be the ZOMBIE'd M-REIT's, who leveraged extremely, and pushed the pedal to the floor to max yields, who will get wallopped and liquidate or get Zombied awaiting to be resued by another Capital infusion, like Bimini Capital Management (BMNM) the best performing REIT in 2013-2014. Zombie REIT's have the highest rewards and lowest risks, they ussually have deleveraged and converted to a very riskless low yield strategy to survive, I love these situations, they ussually result in 10 - 50 fold increase in your investment in a relatively short period of time. I can afford to wait in 1-2% treasuries, sitting in my back yard by the pool with a Corona, wasting my time away, in Mortgage REITAVILLE.
If you are so sure rates are going up why don't you short the 10 year futures contracts? Or short some treasury bonds? Or buy some swaps? You can add hedges to your own merit positions. Like I am long 21,500 mtge shares and short 4 10 yr treasury futures. It will protect you from nav declines but not stock discount/premium #$%$.