This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Danger Ahead: Easy Money Is No More

NEW YORK ( TheStreet) -- Even after "tapering" has begun, Fed officials have made it clear that monetary policy will remain extraordinarily accommodative for a long period of time. In this sense, "easy money" is going to remain with us for quite a while.

However, the agonizing by financial market participants over the timing and rate of monetary tightening has begun. The "tapering" genie is out of the bottle and it is pretty clear that it will not go back into it without a major accident to the U.S. economy.

So, any way one looks at it, when it comes to speculative profits in financial markets, the "easy money" is no more. Financial markets investors are in for a very volatile ride in the next few months: Either the economy tanks and rates fall/stabilize at a low level, or the recovery proceeds and rates normalize.

The problem with the latter more optimistic scenario is that given the current rate of inflation as well as the stage of the recovery that the U.S. economy is in, a "normal" yield on the 10Y Treasury note should be in the neighborhood of 5.00% vs. the roughly 2.16% rate that prevails currently. Thus, ironically, "normalization" of interest rates led by the Fed implies a severe shock to financial markets as fixed income instruments such as iShares Barclays 20+ Year Treasury Bond (TLT) , and SPDR Barclays High Yield Bond (JNK) decline sharply in price as yields rise.

Markets are not going to wait for tapering to occur; markets will become highly volatile as investors anticipate this prospective interest rate shock and its perceived consequences for the economy and financial markets.

It is far from clear how this massive anticipatory adjustment that will be played out in financial markets is going to turn out. The path ahead is highly unpredictable, and potentially treacherous.

On the one hand, the financial markets adjustment could go badly. Credit market dislocations caused by rising interest rate expectations could become so severe that the economic recovery in the US becomes derailed. In this scenario, broad stock indices represented by ETFs such as SPDR S&P 500 (SPY) will decline severely.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
JNK $34.88 -0.77%
SPY $206.16 -0.87%
TLT $129.43 1.26%
AAPL $95.18 1.64%
FB $117.43 -0.96%


Chart of I:DJI
DOW 17,750.91 -140.25 -0.78%
S&P 500 2,063.37 -18.06 -0.87%
NASDAQ 4,763.2240 -54.37 -1.13%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs