De Do Do Do, De Da Da Da
From the álbum Zenyatta Mondatta, the British trio, The Police break into the Billboard Hot 100 with this song. Sting claims that it is their most misunderstood song. I must admit that I never really listened to the lyrics over the past 40 years until I searched for a title for this article and this song played on WNKO.
The song cautions us on how we use and interpret words. As Robert Plant shared with us, “Sometimes words have two meanings”. 2024 could be a very interesting year for the markets and leave a profound influence on 2025 and beyond.
Just think about the second verse about Poets and ‘our’ politicians. The policies at the Department of Treasury are likely to shape our market in ways that we haven’t seen in markets of old.
It is a Presidential Election year, and the gloves are off.
What does the Federal Reserve do?
The Fed role in society is to manage inflation and employment. One of the ways the Fed accomplishes its mandates is to set interest rates and maintain financial liquidity to the investment markets.
Let’s begin with a couple of basic points of investments. Investors should get compensated more for taking on more risks. For the US Treasury Bond Market, short term interest rates (90 days to 2 years) should yield Less Than longer term maturities such as 10 – 30 year bonds. When this scenario is reversed, the market is on the lookout for a recession, or the Federal Reserve is trying to tamp out inflation. For the past 26 months, we have seen shorter term bonds yielding more than long term bonds and the stock market has been like yo-yo.
Secondly, let’s tackle market liquidity. The Federal Reserve entity, the Federal Open Market Committee (FOMC), operates what is called the “Reverse Repurchase Agreement Operations” (RRP). This organization maintains liquidity of the investment markets through adding or removing money in the banking system.
