Commercial Real Estate Finance

There was a recent article on Bloomberg.com entitled “Bond Dealers Say Futures Traders’ Rate Bets Wrong“

Well, if the broker/dealers say that the market is wrong, then the markets must be wrong!  Right?  WRONG!

Without getting into a debate on efficient market theory, I think we can point out how silly this argument is.  Let us start by considering the source.  These i-banks, along with ratings agencies, simply cannot be trusted to accurately predict moves in the market.  Even if they did not have constituencies to consider (large companies, local governments, foreign governments, the US federal government…etc.), why should we take their prognostications as being useful?  After all, their track record is less than stellar.  What were these institutions telling us (or worse, selling us) in 2006 and 2007?  “All is well!  Can I interest you in these AA rated synthetic CDO tranches?”  No, thanks. Now they are telling us the interest rate markets have this thing all wrong.  That the recent spike in short term rates (after a recent move up in 10 year rates) is not the harbinger of Fed hikes.  “It’s all technical,” they’ll tell you, “lots of people were long on 2 year bonds and got caught short with that better than expected non-farm payroll print.  Plus, look at where unemployment is!  How could the Fed possibly hike in the face of that?”  They’re saying that it’s esoteric near-term market dynamics that are causing short term rates to rise and therefore it should not be counted as a predictor of future economic events.  And, their point about unemployment is a good one.

Perhaps.  However, it is my experience that markets are a far better predictor of economic data, than the other way around.  Markets are real time information discounters.  Even if they are, to some degree, inefficient they are at least forward looking.  Data, like payrolls and unemployment, are LAGGING INDICATORS.  So, people who point to unemployment are sort of attempting to steer the car by looking in the rear-view mirror.  “But it’s only a month old,” you might say.  True, but have a look at a 12 month chart of the stock market to see what can happen in a month.

So, back before the blow-up and the yield curve was flat, what were they saying? “Don’t worry about an inverted yield curve.  While it has been an excellent predictor of recessions in the past, this time it’s different.  There is higher demand for long term treasuries, and that is why the curve is inverted.  Not because we are about to endure the most damaging financial/economic crisis since the Great Depression.”  Again, focus on track record; but, more than that, dismiss what markets are telling you at your own peril.