Presented with no comment….
A better metric is where the SnP was in 2014 when they stopped QE and 2015 when they started hiking. Forget what they say, it’s what they do and what they do has very little market impact long term because they simply follow the market and don’t lead.
Ray. I’m sorry but I cannot agree with your statement. What central bankers say is every bit as important as what they do. This is quantifiable from the Greedometers over the past 18 years. The best example: the ECB threat to do whatever it takes in July 2012. The ECB did nothing but its threat caused $Ts in global asset price movement.
So the fact that the market rallies as the Fed raises rates (98-2000, 2003-2007, 2015-2017) and collapses when they cut (2000-2002, 2007-2009, etal) has no bearing?
Ray. In general, when a central bank perceives a significant threat to the stock market (I’m doing away with any pretense that the Fed-for example- acts based on concerns about inflation and employment –> its mandate) and therefore that it will be forced to spike the punch bowl with something significant it will usually reduce the risk that its punch bowl spike will be insufficient by signaling in advance that it will spike. Central bank threats as well as actions are important. I defy you/anyone to study the Greedometer and mini Greedometer sequences over the past 18 years and conclude that central bank statements are not relevant.
There’s no hard distinction between the “walk” (action) and the “talk” (words). That applies not only to the Fed but to the business media, in general. Whether intentional or not, the shoeshine boy’s stock tip of the late 20′s has its parallel in ubiquitous online forums where anyone and everyone can moot stock ideas. And that talk, whether informed or ill-informed, has had the effect of supporting the current cyclical bull: it is mostly positive talk. The Fed’s talk is also “positive”talk, but the purpose–to support the market–is transparent, at least to me.
One unrecognized assumption in the “talk” is the idea that secular (long term) business cycles don’t exist, or that if they do, the worst is over, and it’s up, up, up from now on. The Fed is only too content to participate in this kind of uncritical acceptance of assumptions such as these. Very dishonest, and very harmful in the long run.
I don’t know enough about the Greedometer to make a statement, but I can state unequivocally that the Fed cut rates from 6.5% to 1% in 2000-2002 while the market collapsed almost 50% and then raised rates to 5.25% and the market more than doubled. They then cut rates to 0% and started QE only to watch the market drop almost 60%. Not sure how all this fits in the Greedometer system, but the fact remains they cut while the market collapses and tighten while the markets rally.
Hi Ray. Yes. There is a lot more to know though. The Greedometer sequence gets out in front of a market collapse initiation with months of build-up / warning. You must look for more than the obvious. There is more to solving this riddle than just the Fed and more than just actions. Other central banks matter, and threats of actions matter as much as the actions themselves. I remind you of how QE3 went. First it was threatened (risk on). The it was delivered (risk off). Then it was hinted to be expanded (risk on). Then the expansion was delivered (risk on). See also the video on the website about Bernanke threatening to begin tapering QE3, then reversing course later –> notice the impact on the mini Greedometer sequence –>> yet no actual change in monetary policy expansion/contraction happened….
Ray makes an important point: there’s no tight or direct causal link between low rates and low market risk. Market history shows that beyond any reasonable doubt.
What does exist, however, is the erroneous perception of a direct causal link. That’s the Fed’s game: drive money out of low yield securities and into expensive and very risky high yield securities by fueling the completely unwarranted assumption that purchasing high yield, high risk securities is somehow “safe” in a low rate environment.
Alas, even false perceptions can have a powerful impact on the market (as the last 10 years have demonstrated). Market enthusiasm at market tops, backed by good robust market internals and generally positive economic data, is not a bad thing. But market enthusiasm at market tops, accompanied by sketchy market internals, by record levels of margin buying, by records levels of personal and corporate debt, and by mediocre-at-best economic data, is a very, very bad thing.
So periodic jawing by Fed officials who should know better, and who are actively promoting the assumption of risk in what is already very risky market, is not helpful. Still….. it does the trick if your game is selling securities to mom and pop.
John: nice one.
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