These aren't the droids you are looking for...
Many exciting things happened this last week but at the top of the list has to be the Federal Reserve finally raising the Fed Funds Rate and the opening of the new Star Wars movie. Which one is more exciting? Well, that may be ultimately a personal decision, but I will admit that even as much as I love the financial markets, I will always have a soft spot for anything to do with my favorite childhood movie series.
In preparation for the new movie, I have been re-watching the original trilogy (if you are like me, you might pretend the next trilogy didn’t happen). One of the iconic lines in Episode IV is when Obi-Wan waves his hand and tells the Stormtroopers that “these aren’t the droids you are looking for,” and the Stormtrooper repeats what he says and waves them through the checkpoint despite the fact that these were obviously the droids they were looking for. As the young Luke Skywalker looks on amazed, Obi-Wan quips that “the Force can have a strong influence on the weak-minded.”
The good news for us is that as far as I am aware, there are no ancient orders with the ability to control our thoughts and be able to convince us to ignore something we are looking for with the wave of a hand. However, if you listen to the media, sometimes you might think that is possible. For years now we have heard that once the Federal Reserve raised rates, it would cause a massive selloff in bonds. Many individuals have repeated this over and over much like how Obi-Wan convinced the Stormtroopers to repeat his nonsense as well.
The markets are forever forward-looking and many factors are built into prices. Always be careful of listening to a voice that oversimplifies a relationship that has many variables. Even raising short-term rates does not guarantee the same will be true of long-term rates. In fact, since Wednesday’s announcement from the Federal Reserve, long-term rates have fallen and bond prices have increased.
What lessons can we gain from Obi-Wan? While all of us seek simple answers to help us navigate a complex world, be cautious to believe something we are told even if it sounds straightforward, especially in the financial markets. We should do our best to avoid becoming the weak-minded people that these Jedi tricks work on.
May the Force be with you.