The Fed & Treasury interventions, and US stock markets

[bart]

For sure, if the action of the past couple days is any indication, we may be into it already. Even to a non-CB guru like finster, it's still surprising that it is contemporaneous with that high-powered liquidity injection.

Even more striking is that that liquidity surge comes at a time when liquidity has become a buzzword in the financial media and the Fed so openly frets about inflation. What are they thinking? Widespread media coverage of something it supposed to mark a peak, right? And yet the Fed is stomping on the accelerator even harder?

Is it well into squandering-its-precious-credibility mode here or what?

It sure could be a desperation or similar mode issue with Fed credibility, but until it really breaks it seems more along the lines of that Alan Blinder* quote from a while back. The Fed virtually always speaks with a forked tongue, and sometimes the fork is sharper and broader than other times.

http://www.nowandfutures.com/grins/forked_tongue1.jpg

* "The last duty of a central banker is to tell the public the truth."
-- Alan Blinder, Vice Chairman of the Federal Reserve, on PBS’s Nightly Business Report in 1994.



Here's the current picture on the S&P from a trend line view - a series of bear fake outs and bounces from the trend line since August or so.

http://www.nowandfutures.com/download/tspx20061222.png



One of my favorite views is based on a definition of money as "an idea backed by confidence". Add that in to the high correlation between the US stock markets and consumer confidence, and there's some possible "logic" for you behind the continual liquidity injections represented by the TIO & repo chart I posted on the other thread.

http://www.nowandfutures.com/daily/tio_repo_sp500_daily_short_term.png

[Finster]

It sure could be a desperation or similar mode issue with Fed credibility, but until it really breaks it seems more along the lines of that Alan Blinder* quote from a while back. The Fed virtually always speaks with a forked tongue, and sometimes the fork is sharper and broader than other times.

...

* "The last duty of a central banker is to tell the public the truth."
-- Alan Blinder, Vice Chairman of the Federal Reserve, on PBS’s Nightly Business Report in 1994....

The Fed may speak with forked tongue, but at the same time it does rely heavily on its credibility.

It can't have it both ways!

Here's the current picture on the S&P from a trend line view - a series of bear fake outs and bounces from the trend line since August or so.

...

One of my favorite views is based on a definition of money as "an idea backed by confidence". Add that in to the high correlation between the US stock markets and consumer confidence, and there's some possible "logic" for you behind the continual liquidity injections represented by the TIO & repo chart I posted on the other thread.

...

Consumer confidence? Bah humbug! Just another one of those indicators destined for the trash heap of history, along with divining rods and eye of newt.

As I stated in the parent thread, stock prices rise not because of prosperity, but because of inflation. You implicitly recognize this yourself by adopting monetary measures as your principal stock price forecasting tool.

Up Good Bad Down (http://www.itulip.com/forums/showthread.php?p=5460#post5460)

Unless of course you are suggesting that Fed monetary profligacy actually causes real prosperity, in which case we have ourselves a bona fide issue ... :eek:

:D

[bart]

The Fed may speak with forked tongue, but at the same time it does rely heavily on its credibility.

It can't have it both ways!


Au contraire, Manor Maven. They've been getting away with it for decades. Much of the proof is simply just the actual record of inflation, plus the better "quality of PR" (aka spin & BS) that keeps folk in the relative dark.



Consumer confidence? Bah humbug! Just another one of those indicators destined for the trash heap of history, along with divining rods and eye of newt.

As I stated in the parent thread, stock prices rise not because of prosperity, but because of inflation. You implicitly recognize this yourself by adopting monetary measures as your principal stock price forecasting tool.

Up Good Bad Down (http://www.itulip.com/forums/showthread.php?p=5460#post5460)

Such words, and on Christmas Eve too! ;)

Seriously, I didn't say I believed wholeheartedly in consumer confidence, etc. - just that the concept I presented is one possible explanation on the connection between the actual intervention actions and all the talk about the Fed being concerned about inflation.

There has to be something they have to allow them to CYA.


Unless of course you are suggesting that Fed monetary profligacy actually causes real prosperity, in which case we have ourselves a bona fide issue ... :eek:

:D

Well of course it does... look at all the charts on my site... ;)

[akrowne]

Consumer confidence? Bah humbug! Just another one of those indicators destined for the trash heap of history, along with divining rods and eye of newt.

I actually disagree. Consumer confidence, when measured consistently over long periods of time, seems to have <a href="http://br.endernet.org/~akrowne/econ/charts/sentiment_oct_06.gif">an excellent track record</a> for revealing recessions and other hardship (and the inverse).

Looking at that chart, now we seem to be in roughly the same economic funk we've been in since the heady bubble days ended in 2000. But it still isn't as bad is it could be, a-la the "real" recessions of the 80s and early 90s.

But this pretty much corroborates the accusations of a "non-recovery recovery" since 2000; we certainly haven't returned to those times of "prosperity" (which is probably because they were a one-time gimmick).

So I think a close eye should be kept on this indicator (though I think I already know the answer as to where it is going, given the weakening median consumer spending picture today). As long as the survey methodology stays the same, it is hard to see how overall consumer perceptions of their own financial well-being could <i>fail</i> to be a very useful macroeconomic metric.

[Finster]

Such words, and on Christmas Eve too! ;)

Seriously, I didn't say I believed wholeheartedly in consumer confidence, etc. - just that the concept I presented is one possible explanation on the connection between the actual intervention actions and all the talk about the Fed being concerned about inflation.

There has to be something they have to allow them to CYA.

Argggh ... you know a finster like me can never resist a pointed tweak ... and what better way to celebrate a holiday!

[Finster]

I actually disagree. Consumer confidence, when measured consistently over long periods of time, seems to have <a href="http://br.endernet.org/~akrowne/econ/charts/sentiment_oct_06.gif">an excellent track record</a> for revealing recessions and other hardship (and the inverse).

Circular. The arugment uses conventional economic assumptions to support a conventional economic assumption. For it to be supported, it first needs to be shown that recessions and their inverse have been defined in a meaningful way. It is very much in question whether any commonly cited economic statistic measures economic well being, much less the simplistic binary absence/presence of an ill defined thing like 'recession'.

Mere fact that mainstream economists uncritically accept something is does not mean it is going to be uncritically accepted here, especially considering the track record of mainstream economics. After all, this is a contrarian web site.

[bart]

Argggh ... you know a finster like me can never resist a pointed tweak ... and what better way to celebrate a holiday!


Gotcha... ;)

[Finster]

Gotcha... ;)

Well the schlock market seems to be continuing to power ahead. But far as my forecasting goes, the time frame for this rally so far is much too short to claim any kind of vindication. Possible that we're just seeing a bit of a delayed reaction to that high-powered money you cited? That would seem to be a better rationale than any other I can think of ...

[bart]

Well the schlock market seems to be continuing to power ahead. But far as my forecasting goes, the time frame for this rally so far is much too short to claim any kind of vindication. Possible that we're just seeing a bit of a delayed reaction to that high-powered money you cited? That would seem to be a better rationale than any other I can think of ...


There is at least one other, besides a possible lag and of course the "Goldilocks" silliness. The Fed has been at it again this week.

There was an $8.25 billion one day TOMO on Tuesday and a $10 billion one today. I stopped being concerned Tuesday morning since the average TOMO since 2000 has been under $6 billion.
(TOMO = Temporary Open Market Operation = temporary repurchase agreement, which is simply a short term loan interest loan made to the "banking system")

[Finster]

There is at least one other, besides a possible lag and of course the "Goldilocks" silliness. The Fed has been at it again this week.

There was an $8.25 billion one day TOMO on Tuesday and a $10 billion one today. I stopped being concerned Tuesday morning since the average TOMO since 2000 has been under $6 billion.
(TOMO = Temporary Open Market Operation = temporary repurchase agreement, which is simply a short term loan interest loan made to the "banking system")

Aha!

On Bloomberg today one of the trader-types they interviewed mentioned the market being driven up by a series of block trades ... sounds consistent with someone in the "banking system" having come into a big slug of cash.

Would this be something the Fed might use to actually target the stock market? Expanding money would of course be generally inflationary over time, but perhaps putting the stock market early in line might at least provide a temporary targeting effect.

Yet the bond market was down today ... pretty heftily ... hard to imagine that would have been the Fed's desired result. Perhaps due to fretting over foreign central banks (notably the UAE's has been in the news) "diversifying" their reserves away from dollars? ...

[bart]

Aha!

On Bloomberg today one of the trader-types they interviewed mentioned the market being driven up by a series of block trades ... sounds consistent with someone in the "banking system" having come into a big slug of cash.

Would this be something the Fed might use to actually target the stock market? Expanding money would of course be generally inflationary over time, but perhaps putting the stock market early in line might at least provide a temporary targeting effect.

Yet the bond market was down today ... pretty heftily ... hard to imagine that would have been the Fed's desired result. Perhaps due to fretting over foreign central banks (notably the UAE's has been in the news) "diversifying" their reserves away from dollars? ...

While I sure can't prove it, and correlation does not always mean causation, it sure is my working theory that the Fed and Treasury do control/manipulate the stock markets with instruments like TOMOs and TIOs.

The correlation is pretty damning too - here's commercial bank repos plus permanent OMOs for the last few years...

http://www.nowandfutures.com/images/fed_repos_dow.png



A similar and even higher correlation exists for TOMOs + TIOs.

http://www.nowandfutures.com/daily/tio_repo_sp500_daily.png





As far as bonds and it being hard to imagine the Fed wanting rates to go up, if you were on the FOMC and you had an inverted yield curve, wouldn't you want it to go back to normal (without even taking any dollar protection issues into account)?

Here's my unusual yield curve chart and my SecLend chart:

http://www.nowandfutures.com/images/yield_curves_short_term.png

http://www.nowandfutures.com/images/fed_seclend_bond.png


Do you see the rather interesting correlation between when the yield curve changed trend and when the 13 week light green SecLend trend changed?
My main point here is both the correlation, and that the Fed has many tools with which to affect markets if they so desire.

[bart]

Yet the bond market was down today ... pretty heftily ... hard to imagine that would have been the Fed's desired result.

Down again today... makes me want to go hmmm...

http://www.nowandfutures.com/download/t_tnx20061228.png

[Finster]

Down again today... makes me want to go hmmm...

Ditto, dude! As I've remarked before, the path of least resistance for rates and yields should be up (meaning down for prices), as interest rates are too low given the overall financial environment.

Trouble is, markets don't always follow the path of least resistance, at least as we deem it. In this case, there is still a massive reflux of expatriated dollars from our trade gap coming back into the US via the Treasury market, which is supporting prices (depressing rates). The Fed has in a sense ceded much of its monetary policy power to foreign central banks through years of excessive ease.

Will this trend have legs? The unknowns swamp the knowns, but my guess is we won't really see a major upward adjustment in rates until the bonar sinks in forex markets enough for the Fed to get religion.

[bart]

Ditto, dude! As I've remarked before, the path of least resistance for rates and yields should be up (meaning down for prices), as interest rates are too low given the overall financial environment.

Trouble is, markets don't always follow the path of least resistance, at least as we deem it. In this case, there is still a massive reflux of expatriated dollars from our trade gap coming back into the US via the Treasury market, which is supporting prices (depressing rates). The Fed has in a sense ceded much of its monetary policy power to foreign central banks through years of excessive ease.

Will this trend have legs? The unknowns swamp the knowns, but my guess is we won't really see a major upward adjustment in rates until the bonar sinks in forex markets enough for the Fed to get religion.


True enough, but as you likely know I'm more making a point about a short term trend. I think we're near the beginning of a run towards 5%+ on the 10 year. The Fed is definitely on the loud pedal pretty strong with their SecLend operation. Yesterday for example, there was a $7.2 billion operation and the daily average since 2002 has been under $2 billion.
As far as foreign central banks, its more than a tiny bit of a null point. They're not likely to fight rates going up.

[Finster]

True enough, but as you likely know I'm more making a point about a short term trend. I think we're near the beginning of a run towards 5%+ on the 10 year. The Fed is definitely on the loud pedal pretty strong with their SecLend operation. Yesterday for example, there was a $7.2 billion operation and the daily average since 2002 has been under $2 billion.
As far as foreign central banks, its more than a tiny bit of a null point. They're not likely to fight rates going up.

I hope you're right about that 5%. The last time I bought TBonds was last summer when they were yielding around 5.25%, and I had to hold my nose at that.

Also I don't mean to imply that foreign central banks would have any direct motivation to keep rates down. Rather, they have to do something with all the dollars piling up in their reserves, and buying US Treasuries is a logical option. All the more so being that the US Treasury market is so large and liquid and they have such volumes of US dough to disgorge.

In other words, the tide of global liquidity from the legacy of Greenspan era profligacy was so large as to still be inflating Treasury prices.

[bart]

I hope you're right about that 5%. The last time I bought TBonds was last summer when they were yielding around 5.25%, and I had to hold my nose at that.

Also I don't mean to imply that foreign central banks would have any direct motivation to keep rates down. Rather, they have to do something with all the dollars piling up in their reserves, and buying US Treasuries is a logical option. All the more so being that the US Treasury market is so large and liquid and they have such volumes of US dough to disgorge.

In other words, the tide of global liquidity from the legacy of Greenspan era profligacy was so large as to still be inflating Treasury prices.

That 5% is just a best guess, given various TA factors and the fundamentals including the SecLend stat itself. Check out how the 13 week rate of change is almost vertical lately and the annual change rate is just turning:

http://www.nowandfutures.com/images/fed_seclend_bond.png


Cool on the FCBs... you've been know to not only tweak or *fin* me but also to know a lot more than I in many areas. I just wasn't sure where you were going.

And isn't that the truth on Greenspan (and the BoJ) and liquidity... *sigh*



An almost brand new chart here and change of subject - my first shot at a picture of most of the world from a GDP, money and credit view:

http://www.nowandfutures.com/images/world_gdp_money1.png

[Finster]

That 5% is just a best guess, given various TA factors and the fundamentals including the SecLend stat itself. Check out how the 13 week rate of change is almost vertical lately and the annual change rate is just turning:

...



Unfortunately, the graphic is hanging again, so your chartful handiwork isn't coming through ... :mad: ... but as you know, SecLend and other CB esoterica is a little over my head anyhow... :confused: ... at least without some expert handholding. :o You're saying the Fed is ramping up short-term liquidity? And this is likely to lead to some bond market selling?

An almost brand new chart here and change of subject - my first shot at a picture of most of the world from a GDP, money and credit view:

http://www.nowandfutures.com/images/world_gdp_money1.png

Just came in. What are you seeing here? At first glance, it appears one could draw the conclusion that recession causes a massive liquidity surge. ;) Something tells me your practiced eye sees something more significant... implications for the next few weeks/months?

Cool on the FCBs... you've been know to not only tweak or *fin* me...

HUI ... MOI? :eek:

[bart]

Unfortunately, the graphic is hanging again, so your chartful handiwork isn't coming through ... :mad: ... but as you know, SecLend and other CB esoterica is a little over my head anyhow... :confused: ... at least without some expert handholding. :o You're saying the Fed is ramping up short-term liquidity? And this is likely to lead to some bond market selling?

I sure wish I knew what was up with my charts hanging now & then, but you can see the SecLend chart on my Fed watch (http://www.NowAndFutures.com/fed_watch.html) page. Its in the section entitled "What does the Fed want to happen to interest rates?".

The theory behind what I'm looking at on it is pretty simple - when the Fed has much larger daily operation totals than average and they go on for a few weeks, interest rates tend to go up. The longer they stay on the loud pedal, the more they go up. I don't know what they actually do on the NY bond trading desk under FOMC direction, but the correlation is definitely not insignificant.
Its also quite similar in theory to the various repo (repurchase agreement, not repossession) stuff I've been tracking and posting for years - when they go up, the Dow and US stock markets tend to follow... and vice versa. It literally isn't any more complex than "Fed acts and market responds".


And yes, that liquidity add is roughly on target although in the case of SecLend operations they only last one day (temp repo operations are 1-14 days on average, for example and as a comparison). Just look at that SecLend chart on my page and you'll see the correlations... as long as you don't have some SYT (of all ages) "interfering"... ;)



Just came in. What are you seeing here? At first glance, it appears one could draw the conclusion that recession causes a massive liquidity surge. ;) Something tells me your practiced eye sees something more significant... implications for the next few weeks/months?


Recessions causing CBs to open the liquidity spigot?!? *gasp*... say it isn't so... ;)

Here's a longer term picture with the same data:

http://www.nowandfutures.com/images/world_gdp_money_long_term1.png


And to answer your question about what I see, barring some large sudden drop in the rate of credit creation or short term Fed fiddling, we're looking ok for the next 1-5 months albeit with continuing & growing inflation.

As I continue to learn more and also slice & dice more & broader data, I'm not nearly as certain as I was a few months ago about an upcoming recession. I still view the chances as over 50% for one in the US, but the NBER definition of one is so general that they may not call it.

[Finster]

I sure wish I knew what was up with my charts hanging now & then, but you can see the SecLend chart on my Fed watch (http://www.NowAndFutures.com/fed_watch.html) page. Its in the section entitled "What does the Fed want to happen to interest rates?".

You might check and see if anybody else is having the same problem. The first couple of times it happened, I just took it for a fluke, but it’s pretty regular now. Just now it happened again. If a post page has an image from your site in it, it hangs. The same thing happens whether it’s an image in a post or whether I click on the link above. It also happens when I click the link from my site to yours, and when I just enter the URL for your site in my browser. You’re much more savvy in this stuff, but my guess is either your web site is generating so much traffic it’s overwhelming your hosting service or your hosting service is having problems.

Hopefully it’s the former... ;)

The theory behind what I'm looking at on it is pretty simple - when the Fed has much larger daily operation totals than average and they go on for a few weeks, interest rates tend to go up. The longer they stay on the loud pedal, the more they go up. I don't know what they actually do on the NY bond trading desk under FOMC direction, but the correlation is definitely not insignificant.

So you’re suggesting here that the Fed is actually trying to pressure long rates northward? Not that it would be beyond the pale of imagination, at least in light of Greenspan’s famous fretting about conundrum. All the more so in light of the Fed’s recently vocal concern about inflation.

Its also quite similar in theory to the various repo (repurchase agreement, not repossession) stuff I've been tracking and posting for years - when they go up, the Dow and US stock markets tend to follow... and vice versa. It literally isn't any more complex than "Fed acts and market responds".

Do you mean the same direction as above? There it sounded like you are saying the Fed is trying to nudge bond prices down (yields up), but here, that the Fed is trying to push equity prices upward. I guess those are not mutually exclusive objectives, but can’t think of any reason the Fed would want to push bond prices down and equity prices up.

BTW - I am really not trying to entrap or ‘fin’ you here ;) … I am genuinely feeling rather clueless. :confused:

And to answer your question about what I see, barring some large sudden drop in the rate of credit creation or short term Fed fiddling, we're looking ok for the next 1-5 months albeit with continuing & growing inflation.

As I continue to learn more and also slice & dice more & broader data, I'm not nearly as certain as I was a few months ago about an upcoming recession. I still view the chances as over 50% for one in the US, but the NBER definition of one is so general that they may not call it.

Now, where’s that little smilie that signifies a light bulb going off … :cool:

I’m going to avoid the question of "recession", since for reasons of record I don’t think it’s very meaningful. (NBER comment noted. ;)) But "continuing and growing inflation" is pretty unambiguous. It certainly sounds consistent with your near term outlook for rising rates. It also suggests generally rising stock and commodity prices, no?

FWIW, that is also the general bias suggested by my work. Setting aside any potential issues of "absolute" over-or-under-valuation, bonds come out pricey compared to stocks, and commodities cheap compared to stocks.

[bart]

You might check and see if anybody else is having the same problem. The first couple of times it happened, I just took it for a fluke, but it’s pretty regular now. Just now it happened again. If a post page has an image from your site in it, it hangs. The same thing happens whether it’s an image in a post or whether I click on the link above. It also happens when I click the link from my site to yours, and when I just enter the URL for your site in my browser. You’re much more savvy in this stuff, but my guess is either your web site is generating so much traffic it’s overwhelming your hosting service or your hosting service is having problems.

Hopefully it’s the former... ;)


Hopefully others will chime in here on a "hang". I too have stuff hang sometimes on various pages here, and it can take upwards of 15-30 seconds for the longer pages to load. My own charts come up pretty quick since my computer already caches much of my site and its address. Do you always have slow performance when you go directly to one of my pages?
There's no question that my site traffic is hugely up with all the M3 coverage, but there have only been 3 folk that have mentioned speed issues. I probably should call the hosting folk, but I'll wait to see if anyone else mentions any issues.




So you’re suggesting here that the Fed is actually trying to pressure long rates northward? Not that it would be beyond the pale of imagination, at least in light of Greenspan’s famous fretting about conundrum. All the more so in light of the Fed’s recently vocal concern about inflation.

Yes, and I have all sorts of theories and guesses on why they are trying it, my favorite being that they're trying to eliminate the inverted yield curve.


Do you mean the same direction as above? There it sounded like you are saying the Fed is trying to nudge bond prices down (yields up), but here, that the Fed is trying to push equity prices upward. I guess those are not mutually exclusive objectives, but can’t think of any reason the Fed would want to push bond prices down and equity prices up.

BTW - I am really not trying to entrap or ‘fin’ you here ;) … I am genuinely feeling rather clueless. :confused:

All I'm really doing is conjecturing here too. As usual, my crystal ball has more than a few clouds in it... but basically, you're tracking with me. If you put yourself in the position of an FOMC member (yep - I know - *shudder* ;)), and you had an inverted yield curve and an under performing stock market (when compared to many other countries), what would you do?
Its not that simple, but you should get my drift a bit better now... especially when you take into account that expectation management is a large part of what the Fed does and tries to do.



Now, where’s that little smilie that signifies a light bulb going off … :cool:

I’m going to avoid the question of "recession", since for reasons of record I don’t think it’s very meaningful. (NBER comment noted. ;)) But "continuing and growing inflation" is pretty unambiguous. It certainly sounds consistent with your near term outlook for rising rates. It also suggests generally rising stock and commodity prices, no?

FWIW, that is also the general bias suggested by my work. Setting aside any potential issues of "absolute" over-or-under-valuation, bonds come out pricey compared to stocks, and commodities cheap compared to stocks.

Yoiks... you seldom ask any easy questions... ;)
There's little question that commodities are undervalued in my opinion, but stocks are much dicier. My repo and TIO related work *very* roughly shows us near a peak and headed down into around May/June with some significant volatility, and its also *very* subject to short term actions of the Fed & Treasury. In other words, the down move on the work that involves lags can be trumped by large repos and TIOs.

The down move probabilities are also enhanced by the unemployment and other issues in housing, a lighter than expected set of Christmas retail stats, continuing drops in consumer credit rates of change, a slight drop and possible peak indication in overall credit creation, relatively high energy prices, etc. In other words, that continuing and growing inflation could easily translate to one of your other favorite terms - stagflation - a stagnant economy and relatively high inflation.

I hope all that makes sense.

[jk]

re: recession risk

fwiw, ecri 12/29/06 "WLI [weekly leading indicator] growth has now climbed to a 44-week high. Given the steady improvement in the WLI, recession is no longer a serious concern."

jim paulson, chief economist at wells capital mgmt did a recent piece which was relatively optimistic on the economy and equities going into 2007.

2 points of interest:
1- he discussed what he called 3 little merger and acquisition waves. 1980s' was debt financed and led to debt destruction in the s&l/banking crisis. 1990s' was equity financed, and led to the internet/tech bubble breakdown of 2001-2002. the 2000s' is cash financed, and he asks: "what does a breakdown/liquidation in cash look like?" answer- inflation and a lower dollar [relative to other currencies].
2. he compared our current scenario to that entering 1987- not a prediction but food for thought. in late '86 we had dollar weakening, sluggish economy, bond yields at multi-year lows. this led to a surprising improvement in the trade deficit in 1987, which contributed to surprisingly strong real gdp growth, accompanied by a 40% move in equities by august, strongly rising commodity prices and a big sell of in long term treasuries. we all know what happened that fall to the stock market. but there was no recession.

[Finster]

Hopefully others will chime in here on a "hang". I too have stuff hang sometimes on various pages here, and it can take upwards of 15-30 seconds for the longer pages to load. My own charts come up pretty quick since my computer already caches much of my site and its address. Do you always have slow performance when you go directly to one of my pages?
There's no question that my site traffic is hugely up with all the M3 coverage, but there have only been 3 folk that have mentioned speed issues. I probably should call the hosting folk, but I'll wait to see if anyone else mentions any issues.

I am still unable to use the standard "Quote" mode without incurring several minutes of stultifying daze (not that that’s unheard of for me anyway …;-), but was able to reply by copying the text from your post and composing the reply in word with manual tags.

So you’re suggesting here that the Fed is actually trying to pressure long rates northward? Not that it would be beyond the pale of imagination, at least in light of Greenspan’s famous fretting about conundrum. All the more so in light of the Fed’s recently vocal concern about inflation.
Yes, and I have all sorts of theories and guesses on why they are trying it, my favorite being that they're trying to eliminate the inverted yield curve.

That sounds eminently plausible, especially given the Fed’s preoccupation with perception. I suspect that (even though they’re weak-kneed when it comes to acting on it) they truly do believe inflation is the principal risk. With the bond market being flat to inverted for about a year now, many consider it to be telegraphing the opposite. They probably want the bond market to see it their way. Unfortunately, as alluded to before, they are fighting the hangover effects of prior Fed profligacy.

Do you mean the same direction as above? There it sounded like you are saying the Fed is trying to nudge bond prices down (yields up), but here, that the Fed is trying to push equity prices upward. I guess those are not mutually exclusive objectives, but can’t think of any reason the Fed would want to push bond prices down and equity prices up.

BTW - I am really not trying to entrap or ‘fin’ you here … I am genuinely feeling rather clueless.

All I'm really doing is conjecturing here too. As usual, my crystal ball has more than a few clouds in it... but basically, you're tracking with me. If you put yourself in the position of an FOMC member (yep - I know - *shudder* ), and you had an inverted yield curve and an under performing stock market (when compared to many other countries), what would you do?
Its not that simple, but you should get my drift a bit better now... especially when you take into account that expectation management is a large part of what the Fed does and tries to do.

Sheesh. I manage to keep fin in his cage for one post, and you turn around and answer a different question than the one I asked. My thrust here was not in trying to get at the market itself, but at something entirely subjective, at what message you’re trying to convey with the chart. You may have to indulge in conjecture about the former, but the latter relates purely to information residing in your own brain, which presumably is a definite quantity known to you with certainty. Please tell us you do not need to speculate and guess about what is going on in your own head. Something prompted you to isolate these data and plot them in this selected juxtaposition, and that something is known only to you until you share it with us.

Now that you have been roundly finned … ;), I stand ready to accept whatever punishment you deem necessary.

Yoiks... you seldom ask any easy questions...


I just had to volunteer … :rolleyes:

Now since once already in this post you have been finned and I have been counterfinned, the following is just for kicks and potential thought-provoking value …

There's little question that commodities are undervalued in my opinion, but stocks are much dicier. My repo and TIO related work *very* roughly shows us near a peak and headed down into around May/June with some significant volatility, and its also *very* subject to short term actions of the Fed & Treasury. In other words, the down move on the work that involves lags can be trumped by large repos and TIOs.

I assume you mean stocks as denominated in US dollars? If so, then you are by definition saying that the US dollar will rise relative to the stock market. On what do you base this bullish view of the bonar?

The problem with valuations is relativity (see avatar). Since bonds are overvalued compared to stocks, stocks conversely must be undervalued relative to bonds. The latter statement is a necessary logical consequence of the first. Now if commodities are undervalued relative to stocks, then by the same token stocks are overvalued relative to commodities. This puts stocks - in relation to two major asset classes - squarely in the middle.

So what else do we have? Real estate? Do we think real estate as a class is cheap? How about cash? Of course since there are all kinds of cash, we have to specify which cash. How about the world’s most abundant and widely used? The USD. Do we think the USD is cheap?

Suppose we assume that the answers to the last two questions go something like "I wouldn’t touch that with a ten-foot portfolio". Then we have commodities being more undervalued than stocks, and stocks more undervalued than bonds, cash, and real estate.

Finally let’s assume an investor interested in at least a modicum of diversification and who does not want to stake his entire nest egg on one sole asset class. He has to own commodities, since they are the most undervalued of asset classes, but since we assume he has at least some exposure to something else, then he must also own at least some stocks. Consequently, the valuation question for stocks comes down in favor of owning them.

[jk]

finster, a question about your notion of asset allocation. in your most recent post, above, you exhaust the universe of choices with real estate, bonds, equities, commodities and cash. where do you place, for example, a balanced long-short fund? it has no net equity exposure. where is it? or are there investment choices which do not fit neatly into that list, and a longer and more complicated list is required?

[Finster]

finster, a question about your notion of asset allocation. in your most recent post, above, you exhaust the universe of choices with real estate, bonds, equities, commodities and cash. where do you place, for example, a balanced long-short fund? it has no net equity exposure. where is it? or are there investment choices which do not fit neatly into that list, and a longer and more complicated list is required?

Two points.

First, those classes are collectively exhaustive of the major areas generally available to the investor. As with most rules, they are either proven by their exceptions or require liberal interpretation. Private equity, for example, would either be considered an exception or not widely and readily accessible, or be considered merely as an alternative form of equity (most people think of the public markets). Rare works of art or gemstones would similarly fall into the category of exception or not widely and readily accessible, or be considered (stretching) a form of commodity investment. An investor whose portfolio is large and sophisticated might easily consider adapting the list to his special circumstances.

Second, asset class, while of prime importance as a portfolio property, is not everything. Return and risk come not merely from asset class exposure, but also to the specific selection of assets; and the latter come to the fore in this case. For asset class allocation purposes, if I owned a long-short fund, I'd treat it as belonging to whatever asset class it was long to the extent it was long and subtract the short portion. For example, suppose you toted up all your exposure and it turned out you had $20,000 in bonds, $20,000 in real estate, $20,000 in commodities, $20,000 in cash, $20,000 long stocks, and $20,000 short stocks. Remember that last fact means not that you own $20,000 of stock, but that you owe $20,000 stock. So for asset class allocation purposes, your net portfolio is $80,000, 25% of which is bonds, 25% real estate, 25% commodities, and 25% cash.

[bart]

I am still unable to use the standard "Quote" mode without incurring several minutes of stultifying daze (not that that’s unheard of for me anyway …;-), but was able to reply by copying the text from your post and composing the reply in word with manual tags.


I sure hope someone else will comment on this or give their experiences. I'm very much at a loss in understanding what's going on with my site and images, and your experiences.




That sounds eminently plausible, especially given the Fed’s preoccupation with perception. I suspect that (even though they’re weak-kneed when it comes to acting on it) they truly do believe inflation is the principal risk. With the bond market being flat to inverted for about a year now, many consider it to be telegraphing the opposite. They probably want the bond market to see it their way. Unfortunately, as alluded to before, they are fighting the hangover effects of prior Fed profligacy.

We're very much tracking here.



Sheesh. I manage to keep fin in his cage for one post, and you turn around and answer a different question than the one I asked. My thrust here was not in trying to get at the market itself, but at something entirely subjective, at what message you’re trying to convey with the chart. You may have to indulge in conjecture about the former, but the latter relates purely to information residing in your own brain, which presumably is a definite quantity known to you with certainty. Please tell us you do not need to speculate and guess about what is going on in your own head. Something prompted you to isolate these data and plot them in this selected juxtaposition, and that something is known only to you until you share it with us.

Sorry, I didn't get what you were asking.

I posted it for two primary reasons. The first and most important one is that it shows that the various central banks are very much still inflating with vim & vigor. The second is that it marked the end of a major task of mine, which was to get all the major central bank data together for at least the last 25 years and then do a roll up. The global LEI was a bonus.


Now that you have been roundly finned … ;), I stand ready to accept whatever punishment you deem necessary.

I do have the perfect image, but can't use it due to the trouble you're having with links to my site... but did find a smaller version elsewhere:

http://packy.dardan.com/walky/albums/album11/agm.thumb.jpg

The caption is "Sir, I'm going to have to ask you to leave the internet" ;)



I just had to volunteer … :rolleyes:

Now since once already in this post you have been finned and I have been counterfinned, the following is just for kicks and potential thought-provoking value …



I assume you mean stocks as denominated in US dollars? If so, then you are by definition saying that the US dollar will rise relative to the stock market. On what do you base this bullish view of the bonar?

The problem with valuations is relativity (see avatar). Since bonds are overvalued compared to stocks, stocks conversely must be undervalued relative to bonds. The latter statement is a necessary logical consequence of the first. Now if commodities are undervalued relative to stocks, then by the same token stocks are overvalued relative to commodities. This puts stocks - in relation to two major asset classes - squarely in the middle.

So what else do we have? Real estate? Do we think real estate as a class is cheap? How about cash? Of course since there are all kinds of cash, we have to specify which cash. How about the world’s most abundant and widely used? The USD. Do we think the USD is cheap?

Suppose we assume that the answers to the last two questions go something like "I wouldn’t touch that with a ten-foot portfolio". Then we have commodities being more undervalued than stocks, and stocks more undervalued than bonds, cash, and real estate.

Finally let’s assume an investor interested in at least a modicum of diversification and who does not want to stake his entire nest egg on one sole asset class. He has to own commodities, since they are the most undervalued of asset classes, but since we assume he has at least some exposure to something else, then he must also own at least some stocks. Consequently, the valuation question for stocks comes down in favor of owning them.

The correlation between US stocks and the dollar is tenuous at best. They can move in opposite directions.

I've also never seen a decent study or set of charts showing bond vs. stock valuations and other related areas, so I'll just leave the whole area in your ever so capable hands... and not only be sure to note my avatar but also note that my minimum length on stocks and bonds is a 100' portfolio...

[Finster]

Sorry, I didn't get what you were asking.

I took me a while to figure it out too … ;)

I posted it for two primary reasons. The first and most important one is that it shows that the various central banks are very much still inflating with vim & vigor. The second is that it marked the end of a major task of mine, which was to get all the major central bank data together for at least the last 25 years and then do a roll up. The global LEI was a bonus.

Two "light bulbs going off" in one thread. This must be a finster first …;)

The correlation between US stocks and the dollar is tenuous at best. They can move in opposite directions.

If one measures each against the other, they must move in opposite directions. Stocks down = Dollar up.

Perfect anticorrelation!

I've also never seen a decent study or set of charts showing bond vs. stock valuations and other related areas, so I'll just leave the whole area in your ever so capable hands... and not only be sure to note my avatar but also note that my minimum length on stocks and bonds is a 100' portfolio...

In the below chart, higher means more attractively valued, lower the opposite. Neutral is 0.25 for bonds and commodities, 0.50 for stocks.

http://users.zoominternet.net/~fwuthering/Posts/StockComBond.png

I do have the perfect image, but can't use it due to the trouble you're having with links to my site... but did find a smaller version elsewhere:

http://packy.dardan.com/walky/albums/album11/agm.thumb.jpg

The caption is "Sir, I'm going to have to ask you to leave the internet" ;)

I’m afraid I’m going to have to go anyway. You have me totally busting a gut. You are in top form today, you bartaceous ball of blankety-blank. I can hardly freaking breathe …

LOL!!!

:D

[bart]

Two "light bulbs going off" in one thread. This must be a finster first …;)

Thank goodness you didn't hurt yourself... ;)



If one measures each against the other, they must move in opposite directions. Stocks down = Dollar up.

Perfect anticorrelation!

Sort of, in the sense of what we use to and how we do the measuring.

What I was looking at though is that the USDX was generally rising both during the dot com boom and also most of the dot com crash. There was a real and large gain in world purchasing power in the mid to late '90s if one was in many US stocks and/or dollars.




In the below chart, higher means more attractively valued, lower the opposite. Neutral is 0.25 for bonds and commodities, 0.50 for stocks.

http://users.zoominternet.net/~fwuthering/Posts/StockComBond.png


hmmm... fascinating... but I would have thought that stock valuation should have varied a whole lot more over the years. It shows as mostly being neutral or even overvalued from 1982-2000... unless I'm misinterpreting it somehow. Same thing with commodities being undervalued since about 1997. Bonds seem close, from the little I know and am certain of - its by far my weakest area.

Do you have that chart with the respective lines compared to some stock index, the CRB/CCI and the 10 yr or other bond?

By the way, the chart seems to be missing the last portion of 2006.



I’m afraid I’m going to have to go anyway. You have me totally busting a gut. You are in top form today, you bartaceous ball of blankety-blank. I can hardly freaking breathe …

LOL!!!

:D


Mongo very happy now... :)

[Finster]

hmmm... fascinating... but I would have thought that stock valuation should have varied a whole lot more over the years. It shows as mostly being neutral or even overvalued from 1982-2000... unless I'm misinterpreting it somehow. Same thing with commodities being undervalued since about 1997. Bonds seem close, from the little I know and am certain of - its by far my weakest area.

The main reason it's not showing stock valuation to have varied a lot more over the years is that valuation is always relative to something else. And of the two major classes stocks are being compared to is bonds. Bonds themselves traced out a move during this secular mega-run of going from very undervalued to very overvalued, as interest rates collapsed from way into double digits early in Volcker's tenure to practically nothing by late in Greenspan's. So this diminishes the variation being seen in stocks.

This is most evident taking them together, weighed against the third class shown, commodities. By comparison, they went from way overvalued to way undervalued, for example with gold and silver starting out the secular cycle at respectively around $850 and $50 an ounce, and concluding it around $250 and $5, even though inflation had reduced the value of the dollar itself a lot over the secular supercycle. So if you were to, say, look only at the relative valuation of stocks and commodities in isolation, you would see something much closer to your expectations.

[bart]

...
So if you were to, say, look only at the relative valuation of stocks and commodities in isolation, you would see something much closer to your expectations.

Cool and thanks - it was indeed an interpretation nuance. Nothing like getting it direct from a chart creator.

[jk]

"over- or under-valued" is usually measured relative to cash. of course we know the value of the dollar is not a fixed thing, but looking at cash flows [in dollars], profits [in dollars], revenues [in dollars], book value [in dollars], dividends [in dollars],etc, surely we can talk about the value of stocks relative to [current] dollars.

so why not make the graphs show value relative to cash? especially since cash will always represent the medium through which other asset choices and changes flow? [e.g. you sell your bonds for cash with which to buy stocks or commodities]. i think then, too, the charts of "value" will make a lot more sense to most viewers.

[Finster]

"over- or under-valued" is usually measured relative to cash.

... and usually people get the markets wrong, too ...

:D

... of course we know the value of the dollar is not a fixed thing, but looking at cash flows [in dollars], profits [in dollars], revenues [in dollars], book value [in dollars], dividends [in dollars],etc, surely we can talk about the value of stocks relative to [current] dollars.

This is exactly the problem. Looking at corporate cash flows, book value, dividends, etceteras is a great way to compare stocks with each other, and even with bonds. But how can you fit a barrel of oil or ounce of gold into that metric? Or, for that matter, a currency unit?

...so why not make the graphs show value relative to cash? especially since cash will always represent the medium through which other asset choices and changes flow? [e.g. you sell your bonds for cash with which to buy stocks or commodities]. i think then, too, the charts of "value" will make a lot more sense to most viewers.

Because there is nothing special about cash. That is a crucial premise here. As you know from my previous comments, I view cash as just another security. Sure, we happen to be in the habit of using it as a reference unit against which everything else is measured (simply because as you point out it serves as our medium`of exchange and unit of account), but that very habit distorts, not clarifies, our understanding. And because it is so universal and ingrained, it requires a concentrated effort to continually remind ourselves that it is not fixed, that it fluctuates just like every other security. My relative valuation model, like my other financial work, is consistent with this premise. All assets vary in value and none occupy or define a special privileged reference frame.

Many people think they are invested in something if they own stocks, bonds, or what-have-you, but think of their cash holdings as being uninvested. But if cash does indeed vary in value, this is extremely misleading indeed. In my view, apart from taking a vow of poverty and joining the brotherhood, there is no such thing as having your assets in nothing. There is no such thing as being invested in nothing. And the investment implications are distinctly non-trivial, as it means there is nothing to which you can retreat if you don't like what's on the investment asset menu.

As it turns out, in this simple valuation model cash is tangentially covered as a limiting case of bonds. The "Bond" class on the above diagram is generic to every maturity from the long TBond down to zero (cash). For relative valuation/allocation between subdivisions of the above broad categories (e.g. cash versus longer maturity debt securities, gold versus other commodities, large cap versus small cap stock, domestic versus foreign), one needs to supplement it with more detailed analytics.

[WDCRob]

As it turns out, in this simple valuation model cash is tangentially covered as a limiting case of bonds. The "Bond" class on the above diagram is generic to every maturity from the long TBond down to zero (cash).

Finster (et al), could you explain this idea a bit further?

I think I get the gist of what you're saying (that cash is issued by the government and can be thought of as bonds with no time to maturity and no interest rate??), but I can't make the intuitive leap of why something with no payments and no maturity is equivalent to a bond.

Why should they be treated the same way?

I suspect it has something to do with the possibility that dollars can be devalued through inflation (just like bonds), but think I'm missing some central piece of the explanation.

[Finster]

Finster (et al), could you explain this idea a bit further?

I think I get the gist of what you're saying (that cash is issued by the government and can be thought of as bonds with no time to maturity and no interest rate??), but I can't make the intuitive leap of why something with no payments and no maturity is equivalent to a bond.

Why should they be treated the same way?

I suspect it has something to do with the possibility that dollars can be devalued through inflation (just like bonds), but think I'm missing some central piece of the explanation.

Good question ... guess I kind of just glossed over that. I probably should should have said "cash/cash equivalents" ... e.g. a bank savings account, Treasury-only money market, TBills, etceteras, are conventionally considered "cash equivalents" in that they are of a short enough term as to have zero or neglible principal risk due to changing interest rates, as well as having zero or neglible risk of default.

[WDCRob]

Many thanks. We're halfway home, I think.

Why are those "cash equivalents" lumped in with longer-duration bonds on your chart above? Is it that they appreciate and depreciate under the same policy/economic circumstances?

[Finster]

Many thanks. We're halfway home, I think.

Why are those "cash equivalents" lumped in with longer-duration bonds on your chart above? Is it that they appreciate and depreciate under the same policy/economic circumstances?

The above chart is intended to be basically exhaustive of the major investment assets. Since there are only three broad categories, it necessarily makes what some might consider strange bedfellows here and there. Stocks, for example, include Google as well as Newmont Mining. Commodities would include cocoa as well as gold. Bonds, well ...

Yet they share certain fundamental, defining elements. TBonds and Federal Reserve Notes are both paper issued by the same sovereign entity. Stock is ownership of corporate capital. Commodity is some physical matter.

Note in the case of TBonds and FRNs that there is an additional fundamental link - the former is a derivative of the latter. The former partakes of all the value change of the latter, plus that due to changes in the rate of interest.

[WDCRob]

Thank Finster.

So is this the output you use to calculate the reweighting of your portfolio? Am I reading the chart right that (adjusted for FDI) stocks haven't been cheap in 30 years?

[Finster]

Thank Finster.

So is this the output you use to calculate the reweighting of your portfolio? Am I reading the chart right that (adjusted for FDI) stocks haven't been cheap in 30 years?

Right, WDCRob. The vertical scale is the actual percentage allocated to each of the three broad categories. Worth noting is that it works on two levels. First the overall static exposure, and second the dynamic adjustment. That is, once the portfolio is adjusted to the target weighting, then a rising line indicates buying and a falling line selling. So not only is the overall level relevant, but also the slope. So, for example, while the stock and commodity lines show them to be more attractive and highly weighted than bonds, they are also becoming less so, and the downward slope of the lines indicates gradual selling. Conversely, while bonds are relatively unattractive, they have been becoming less unattractive; while my bond weighting is still low, I have been taking advantage of selloffs to increase my exposure.

Keep in mind that the level doesn't reflect how expensive (relatively) the asset class is, but how cheap. A lower value indicates less attractive/more expensive and a higher value indicates more attractive/less expensive. Also, the FDI is not an essential element here. That is because the chart weighs the asset classes against each other, not the value of the dollar.

[bart]

Just on a for what its worth basis, I note that both the submit/accept ratios on TIOs and TOMOs (both are "hot money injections" bu the Treasury & Fed, respectively) and the effectiveness of them have been dropping of late.

Although I haven't yet entered it, I'm quite close to taking a short position.

[jk]

Just on a for what its worth basis, I note that both the submit/accept ratios on TIOs and TOMOs (both are "hot money injections" bu the Treasury & Fed, respectively) and the effectiveness of them have been dropping of late.

Although I haven't yet entered it, I'm quite close to taking a short position.

do you have specific criteria you are waiting to emerge to trigger your short position?

[bart]

do you have specific criteria you are waiting to emerge to trigger your short position?

Yes, TA and momentum based stuff - very roughly, I need a large change in momentum intra day which is not followed by a blitz of buying in e-minis. That could take hours, days or even up to two weeks.
Another basic observation is that there aren't many short sellers for "the boyz" to take advantage of and they're not happy campers, as shown by the accept/submit ratio.

[Pervilis Spurius]

I entered mine last Friday, based on my (always limited) read of the fundamentals and TA. Those futures are always a concern of mine though, thus my hair trigger.

[Finster]

Yes, TA and momentum based stuff - very roughly, I need a large change in momentum intra day which is not followed by a blitz of buying in e-minis. That could take hours, days or even up to two weeks.
Another basic observation is that there aren't many short sellers for "the boyz" to take advantage of and they're not happy campers, as shown by the accept/submit ratio.

What's your near-term take on energy? E.g. does WITC continue below $50/BBL or begin to back up?

[bart]

What's your near-term take on energy? E.g. does WITC continue below $50/BBL or begin to back up?

Mostly I do a lot of mumbling about WTIC, and stay out of the market. The amount of spin and bad data and manipulation on the short term takes the cake - I've never had the same feel about it as I have on metals for example.

That said though, I think there's still room to drop more - at least until weather events occur and a "real" winter actually arrives in the minds of traders & manipulators.

[Finster]

Mostly I do a lot of mumbling about WTIC, and stay out of the market. The amount of spin and bad data and manipulation on the short term takes the cake - I've never had the same feel about it as I have on metals for example.

That said though, I think there's still room to drop more - at least until weather events occur and a "real" winter actually arrives in the minds of traders & manipulators.

Thanks! Just happens that in these here parts we are getting something that could be described as a "real" winter for the first time this season. Tough, though, to tell just how much of the trading swings can be accounted for by actual weather and how much by forecasted weather. And given the sizable impact of both on energy prices, you can be forgiven a few fuzzy clouds on your crystal ball in this department ... ;)

[akrowne]

Circular. The arugment uses conventional economic assumptions to support a conventional economic assumption. For it to be supported, it first needs to be shown that recessions and their inverse have been defined in a meaningful way. It is very much in question whether any commonly cited economic statistic measures economic well being, much less the simplistic binary absence/presence of an ill defined thing like 'recession'.


I don't see what's conventional about it. The conventionalists seem to discard poor confidence if it doesn't fit their a priori notion of the economic condition.

Look at the chart again. It has NBER recession periods, but I'd argue that, based on confidence (as well as other factors), it is highly likely the recession periods are actually much more extensive. I didn't get around to marking it up according to this viewpoint.

I would be surprised if the economic condition of regular folks as measured by their confidence was less meaningful than the garbage coming out of the big statistical bureaus.


Mere fact that mainstream economists uncritically accept something is does not mean it is going to be uncritically accepted here, especially considering the track record of mainstream economics. After all, this is a contrarian web site.

I'm not a contrarian, I'm a realist. Contrarianism for its own sake just strikes me as silly.

I hope I don't get kicked off the site now =)

[Finster]

I don't see what's conventional about it. The conventionalists seem to discard poor confidence ...

What the heck is "confidence"? Gimme hard numbers. Prices. Volumes. People can say anything on a survey. To the extent it differs from what they actually pay for gasoline, electricity, college tuition, houses, stocks, bonds, borrowed money, it's unreliable.

Look at the chart again. It has NBER recession periods, but I'd argue that, based on confidence (as well as other factors), it is highly likely the recession periods are actually much more extensive. I didn't get around to marking it up according to this viewpoint.

But the simplistic bifurcation of the economic timeline into "recession" or "no recession" is misleading and I categorically reject it. Even assuming arguendo the notion of GDP represented overall economic well-being (and I don't accept that, either) the gross binary reduction of the entire spectrum of GDP growth into "on" and "off" makes strange bedfellows of very different realities while casting as polar opposites of very similar circumstances. Annualized growth of 12% and 1.2% are the same in this contorted reality. Meanwhile, growth of +0.6% and -0.6 percent - while much more similar - are diametrically opposite.

Wall Street and Washington economists and their willing accomplices in the media and academia have been selling you a bill of goods, AK. Don't check your healthy skeptisicm at the door ...

I would be surprised if the economic condition of regular folks as measured by their confidence was less meaningful than the garbage coming out of the big statistical bureaus.

I'll go along with that. But it's setting a darn low bar! If you instead compare what they say to what they do, the latter win hands down.

I'm not a contrarian, I'm a realist. Contrarianism for its own sake just strikes me as silly.

I hope I don't get kicked off the site now =)

:D

I hope you don't, too, AK.;)

[bart]

Originally Posted by akrowne

I hope I don't get kicked off the site now =)



I hope you don't, too, AK.;)


I worry more about a visit like this ;)

http://www.nowandfutures.com/grins/getout_leave_internet.jpg