It was mentioned that in order to save the banking system, it is necessary to raise interest rates.
“Either they raise rates rapidly to save the bond market — or they lose the whole banking system. This will become obvious and existential (soon)”
As we’ve noted in the past, the history of rising rates has been very good for markets under the right conditions. However, the real question is, how is it beneficial to have Quantitative tightening (QT) or a balance sheet unwind?
One of our favorite examples is found in the unwind of the Reconstruction Finance Corporation.
When the government gets out of the business of bailing out, the reverse of the “crowding out effect” takes place. As noted by us:
This is consistent with Dow Theory which says, when the government gets involved, they take away the risk portion of the market. This could mean that the market crashes due to government meddling. However, according to Dow Theory, it typically means that whatever the government got involved in will trade more like a government bond, flat to middling at best.
This concept of trading like a bond can best be seen in nationalization of railroads during the period 1918-1921. This is also seen in the performance of Fannie Mae.
In this case, the wild upside potential before government control in 2008 cannot and will not be seen after government control. This in spite of the fact that from the 2009 lows, Fannie Mae has jumped +600%. Again, contrast that with +6,000% move before 2005.
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