The upward move since early 2002 has been broken and prices are in a well defined downward channel. Out of curiosity you might like to look at a daily chart for yourself. But you will see that it really tells you little about where bonds and therefore interest rates might be going – it is almost useless. That is why it is important to make sure you are looking at the right chart.
Whilst the steep decline in bonds over the last few months looks ominous the reality is that they are more likely to retrace upwards before they head further south and this is likely to happen following an increase in interest rates over the next months or so. That will satisfy the bond players for the moment.
Interest rate policy management is not as raw as it was in earlier decades and “cool handed Luke” Greenspan has shown great dexterity over recent years in taking the peaks and roughs out of the cycles.
As any increase will more likely be 25 basis points initially it is unlikely to spook the equity markets. A key factor behind an increase will be to take the heat out of the overboiling property markets and this is more likely to plateau the markets rather than cause them to fall asunder.
Further increases will continue in to 2004 and as rates escalate it will affect different market sectors in different ways. Sectors most likely to be affected are building materials, consumer discretionary and banks. I propose to cover the impact on each of these sectors at the forthcoming SITM November Conference.
So the Caviar Index looks appetising for the medium term – but if interest rates rise by greater than 1% over the coming year then we could see a nose dive in the Index. Remember from previous articles I have spoken about consumer indebtedness. Where borrowings are for today’s consumption – indulgent borrowings – as opposed to debt for capital creation – then sharp increases in interest rates can cause some degree of panic for those over extended.
Always keep an eye on the Caviar Index!
Enjoy the ride.