Stocks flipped over late last week, as hints of a strengthening U.S. economy have induced a bout of “Rate Liftoff Anticipation Syndrome.”
This is an ailment that apparently can only be relieved by smacking your palm to your head like Homer Simpson and yelling, “D’oh!” — and then immediately selling every bond and share of stock in your portfolio.
Why would normally rational people do this? It’s a concern that the end of the Federal Reserve’s zero interest rate policy (ZIRP) will both undercut corporate profitability and lead to wage inflation.
As you probably know, inflation is the mortal enemy of bonds, because it makes money paid in coupon payments later worth less than it is now. And higher rates are, theoretically, the enemy of corporate profitability, because it will cost more to borrow for expansion.
The only problem with these theories — the fear of the great unZIRPing of America — is that there is really very little evidence of actual inflation. Investors are just programmed to think it might emerge on the proverbial horizon once job gains pick up.
To be sure, inflation might emerge down the road. But there continue to be much stronger forces at work that are deflationary, like lower energy costs as the price of crude oil falls, productivity increases from the substitution of software for expensive, well-educated humans, and the march of globalization that makes low-cost labor overseas ever more fungible with U.S. labor.
A great example of deflation showed up in my smartphone last week. I use Uber a lot in Seattle instead of a car, because it’s actually an efficient, economical way to get around, in many cases. A note popped up stating that they were dropping prices by another 15%. So, a month ago, a taxi ride from downtown to my house was $12 plus tip. An Uber ride was $9.50 (and there’s a culture of no tipping with Uber). And now Uber is usually $8.15 with no tip. That’s deflation at work.
So, anyway, this misplaced fear of inflation has driven stocks and bonds down and pushed volatility up. These conditions probably will not last…which is, in part, why the CounterPoint Options system recommends that you play for a reversal via a bullish trade on the iShares Barclays 7-10 Year Treasury Bond Fund (NYSEARCA:IEF).
Buy the IEF Apr. 17th $108 calls at $0.25 limit, good till canceled, for target $0.50. The ticker symbol is IEF 150417C00108000, and the call options expire on April 17, 2015.
Jon Markman operates the investment firm Markman Capital Insights. He also offers a daily trading advisory service, Trader’s Advantage, and CounterPoint Options, a service that helps individual traders make steady, consistent profits with volatility-related instruments.
