Markets Normalizing After 5+ Years of Fed Rigging? Where is the money going??

Posted by urbandigs

Thu Jun 20th, 2013 01:39 PM

A: Crazy stuff is going on in Equity markets and the US Treasury market right now as bonds are selling off in a fierce way. Sure, one can look at where we are and the bigger picture and say the infamous line, "but rates are still at historic lows.". But you can't just ignore the shock that comes with surging lending rates combined with equity selloffs. This is what happens when market's start to normalize after years of central bank engineering. While the 'end game' of all this is yet to reveal itself, this brief preview is quite sobering. It leaves me wondering, "where is the money going??"

While Manhattan continues to churn out deals at a high level, US Treasuries are starting to normalize and price in a world with out Fed manipulation -- and yes, the Fed is still buying $85Bln in Treasuries a month. Talk about unintended consequences finally kicking in!

Take a look at this 10YR chart comparing the S&P 500 (red) versus 10YR US Treasury yields (blue):spvstreasury.jpg
Typically, treasury yields rise as equity markets rise and confidence rises for broader economy growth/corporate earnings/higher inflation, etc.. Conversely, when equity market's selloff usually that money runs and hides into two main areas of safety: US Dollars & US Treasuries (sending yields lower). The chart above shows how since 2010 the gap between equity trends & treasury yields have been widening as a result of Fed's efforts to keep rates artificially low as banks continue to recapitalize and businesses/consumers refinance. This chart really puts the wizadry of the fed into context and is worrying when thinking about where rates might be today without all the intervention; and if the market is in the process of normalizing itself right now.

This is one of those situations where the trifecta of treasury bonds & equities & commodities are all selling off at the same time -- putting an added crunch on general investor sentiment that can feed upon itself if it continues.

It's hard to pin this selloff on anything other than the selloff in the treasury market and perhaps, the disruption of the yen carry trade & China's recent clampdown on their shadow banking system; both intervention led shocks as well. There are no free lunches and the party never goes on forever. It seems the US dollar is the only hiding place right now.

As for Manhattan, expect a minor hit to buy side confidence from recent events, but nothing near the level of shock that we saw back in 2008/2009. We are far far from those 'fear' times and the only real question is whether today's market forces ultimately define the top of this 4+ year reflation we have enjoyed since early 2009. I have said repeatedly in the past 2-4 months that "I can't think of a better time for sellers to list" -- as the UrbanDigs realtime system shows production at the highest levels since 2008.

We still continue to see bidding wars for desired property, especially below 14th street, and we continue to see the leverage pendulum swung to the sell side. But Manhattan is a very fast paced market and I'll be watching the UD daily production ticker to see if deal volume starts to slow. Should the trend of equity selloffs and surging rates continue, say to the tune of another 7% to 10% or so, expect a 'media effect' to kick in and buyers to add pause to their recent aggressive bidding strategies. Something Manhattan has not been used to recently. Stay tuned!