Update – Fed losing control of bond market?… www.youtube.com Conventional wisdom which suggests that rising interest rates crush stock prices and that falling rates stimulate the market. I first published a version of this chart on a message board in 2007, when the Fed cut rates after a market selloff. I’m not unique in charting this relationship, nor in using it to challenge conventional thinking, but I do think that I have something to contribute to the discussion. At that time, in 2007, the market was struggling and the consensus was that cutting rates would ‘save the day’. This chart suggested otherwise and was subsequently proved correct. Rates were slashed but the market continued to fall – just as it had done from the peak in 2000. I’m afraid it is now time to look at this chart from the other perspective. Stocks have made a major move up, rates have bottomed but rumblings are being made that they will rise over coming months. Clearly, interest rates and stocks have, during the period in question generally enjoyed a surprising relationship. There was a period from 1995 to 1998 where rates were falling while the market rose but taking simple tops and bottoms in 2000, 2003, and again in 2007 it certainly looks as though stocks and rates have a correlation – and that stocks lead the relationship, not the other way around as is generally touted. Why would this be – surely rising rates should kill the market, and easing of rates simulate. Isn’t that what we’ve just …
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@swordfish845
Yes, I agree, as suggested in the video.
The Fed can tamper with very short term rates, but the market has control of longer term. If/as the longer rates climb, due to investor fear of inflation, so the difference between long and short rates grows. This steepens the “yield curve” and puts extreme pressure on the Fed to raise their short term rate target, or face massive, rising, inflation expectations (bond investors demand higher yield as the ‘yield curve’ steepens).
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Robert Prechter says the market sets interest rates as demand for money changes and the Fed changes official interest rates later. Alan Greenspan also said the market sets interest rates. The Fed might influence expectations (if the market believes then) but it seems can’t ‘set’ interest rates.
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March 8th 2010. Quote from yahoo article (seems to support the chart):
“…investors anticipate that U.S. interest rates could soon rise above their historic lows.
But instead of falling in response, stocks are rising too…”
Link in the box.
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Sess, please – you are stating what SHOULD happen, but my video discusses what DID happen during the past 20 years or so.
Let me quote your comment – “when the fed cut rates it raise stock prices”.
Is that what actually happened in 2000 and 2007/08? No, it is not.
I understand your thinking on the theory, and in previous decades that relationship has been true, but during the recent bubble decades it has NOT.
That is what makes a myth – a general belief that is not backed up by the facts.
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boy wow this guy is losing it.listen man when the fed cut rates it raise stock prices,when stock price or the economy is growing THE FED RAISE rates to put a cap on inflation.when interest rates are high,price gets low,since the fed tighten money supply to cause deflation.when u see the fed rate rising it’s to stop inflation.Therefore,when rates get high enough IT LOWER PRICE.
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Thanks, I think it would be interesting to add the spot price of silver to that chart.
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Hi Sesshoumaru3st.
Sorry, but you’re statement is completely negated by the ACTUAL market action.
You are simply restating the MYTH that interest rates and the market always move in opposite directions – dispelling this myth is the point of the video!
In 2008 the market CRASHED in anticipation of rate cuts (A recession was looming and Fed tried to stimulate economy before a crash) – smart money got out and market moved WITH rates, as I said.
Makes sense if you think about it.
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WHAHAHAH rates follow stocks what nonsense.Listen you forgot one important detail.THE MARKET is manipulated by very smart investor who anticipate that the fed will lower rates sooner or later when things get bad.Therefore,investors move up stock price IN ANTICIPATION of lower rates.Stop telling people crap.
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Hi silverRose.
Not sure, but the reasons for rates to rise (bond market pressure) are exactly the reasons that can underpin a flight to hedge against inflation caused by that cash being redeployed into inflation assets.
Quote from an article…
“…gold’s bull run from $35 to $850 per ounce during the 1970s came during a time of rising interest rates. Historically, one of the best performing periods for precious metals has been when the Fed starts to raise artificially low rates.”
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What will happen when the interest rates go higher? Will gold go higher or lower?
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Hi haoqfu.
Ultimately, the market sets all the rates as the Fed has to manipulate (in a good way) to achieve even its target rate. Any pressure on treasuries will place pressure on the Fed.
A quote from the New York Fed website…
” It is important to note that the fed funds rate is determined by market participants, and is not actually “set” by the Fed.”
Search that quote and you should find some relevant pages.
But might have been better to put “interest rates” instead of Fed Funds Rate
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anyone can enlighten me why fed rate has to keep up with treasury yield?
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If you are a saver and you put money in a bank with near-zero interest rate, and the currency is debased (inflation), you lose buying power. The real interest rate is therefore below zero. You lose buying power over each unit of time.
If you are a borrower, and you borrow at a near-zero interest rate, then the currency is inflated, you will pay the loan back with currency of a lower real value than what you borrowed, even if the nominal figure is higher; making real interest again below zero.
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Interest rates can’t go below zero. Below zero would mean they are paying you to take their money. The Fed does control the Funds rate but has no direct control over mortgage bonds or mortgage rates. They can manipulate it by buying mtg backed securities to create demand and help drive bonds higher and rates lower as they have been doing but they can’t simply dictate what rates will be.
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The fed can keep rates down to whatever level they want by monetising debt.
By monetising debt and through quantitative easing, they can lower the *real* interest rate to as far below zero as they like, because it inflates the currency.
Your real interest rates are a function of nominal interest rates minus the inflation you personally see.
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Any news on “Fake Gold Update #2′ ?
Always look forward to your videos. Thanks
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This may really make sense, look at JAPAN’s market top of 39k now around 10k, and japan has had interest rates extremely low for the last 20 years
what do u reckon?
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Outstanding!
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Your video and chart confirm to me again that investing on margin is more hazardous than playing with fire. Mr. Market often does not demonstrate respect for dogma.
Quite hazardous.
Merry Christmas and Happy New Year to you, kind sir.
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Very enlightening vid. Not so long between vids next time.
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I’m afraid Jim and Ben are giving bald guys a bad name. Dont get the wrong idea. J&B are only a fringe element. Dont let a couple of bad eggs take the shine away from us baldies. Despite the handycap, I’ve never lacked a heady rate of interest.
Bald power 2010, I say!!! And you can take that to the bank.
Merry Xmas flask and folks! Bottoms up (oh – they already were!
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Interesting.. Thanks!
Merry Xmas
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Great work , thanks.
And a Merry Christmas to you as well.
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@flaskofcoffee
Ah so, shiawase na marui me shin’nen wo, sort of thing.
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Hi Nick.
By coincidence I just sent you the video by message – you must have been commenting at the same time.
“Merry Xmas” (Half-hearted… humbug)
“Happy New year” – delivered with full gusto. I love New Year, and I hope its a good one for everyone.