Fed Funds Rate and Equities: What's the Lag?

The Fed Funds Rate peaked at 7.03% in 2000.  The target rate was 6.5% in 2000, and was first dropped on January 3, 2001 to 6%.  It eventually bottomed at 1% on June 24, 2003.

This was the so-called tech bubble, so I'm tracking the NASDAQ.

The NASDAQ peaked at 5049 on March 10, 2000 and declined 78% to 1114 on October 9, 2002.

The Fed Funds Rate peaked at 5.41% in 2007.  The target rate was 5.25% until August 7, 2007.  The Fed dropped it to 4.75% on September 18, 2007.  It eventually bottomed at 0% on December 15, 2008.

This was the Great Financial Crisis, so I'm using the S & P 500 Index.

The S & P 500 peaked at 1565 on October 9, 2007 and declined 57% to 677 on March 9, 2009.

The takeaway message?  The Fed was late in dropping the targeted Fed Funds Rate, finally acting on January 3, 2001, a lag of 10 months after the NASDAQ peaked in March, 2000.  And the NASDAQ continued to plummet even as the FFR continued to decline.  In fact, the bottom in the NASDAQ tech bubble didn't occur until October, 2002, some 21 months after the Fed initially dropped the FFR.

With the Great Financial Crisis, the Fed acted more quickly, initially dropping the FFR in September, 2007. a month before the S & P 500 started cratering in October, 2007.  However, the Fed's aggressive easing did not prevent the S & P 500 from declining 57% to its March, 2009 bottom, thanks to the bank bailouts (TAFP, TALF, P-PIP, etc.).

In 2023, despite bank runs and another brewing financial crisis, the Fed continues to raise its targeted FFR.  When they finally do pivot and drop the FFR, it will probably be too little and too late.  Based on the two most recent cycles (and this one should be worse as debt loads and the insolvent Fed's balance sheet is more leveraged than ever), we can expect equities to face severe headwinds for the next 12 to 24 months, post-FFR finally declining (probably this summer).  The silver lining in all this is the S & P 500 peaked on December 29, 2021 at 4793, so we are off our all-time highs (currently 4109 at the time of this writing).  The key question then becomes is the bottom in?  Will bank runs be ring-fenced and contagion avoided?  And how much liquidity will be needed to prevent contagion of counterparty risks?  Monetary authorities have hinted at between $2 trillion and $18 trillion.

A side effect will be inflation as the Fed and US Treasury will provide trillions in liquidity and credit in an attempt to cushion collapsing financial markets if they do indeed collapse, with the latest vehicle dubbed the BTFP.  https://www.federalreserve.gov/monetarypolicy/bank-term-funding-program.htm

Foreign financial institutions will also be feeding at the trough in the form of currency swaps.

But don't worry, it's not "QE", so all is well.  /sarcasm

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Gold Performance During Inflation and Deflation

Many observers acknowledge that gold is a good hedge against inflation, as currencies are debased by central bankers. What they don't understand is that gold performs even better with deflation, which accompanies monetary disorder. They don't realize that gold is a safe haven asset when confidence in other asset classes dissipate, as they eventually do with government over-indebtedness and reckless currency and credit creation.

In other words, in a time of crisis, gold isn't just a commodity. It's a sound currency which will maintain its value, unlike fiat currency backed by nothing tangible.

Look at the chart of equities (S&P 500) vs. gold. Since 2001, the global economy has experienced two deflationary (or at least disinflationary) wipe outs. Inflation has been dormant--at least according to official CPI statistics (which is another boondoggle). Gold should have underperformed in that type of environment, according to conventional wisdom. Yet, during this time period of deflation, stocks have doubled, while gold has surged 3 1/2 fold. So the answer to the question: "when should one hold gold: to hedge against inflation or deflation?", is simple. It's both.

Letter About the Fed, Propped Up Equities, and Suppressed Gold

Extrapolating to its end, a case could be made for $136,000/oz. gold.  No, I am not kidding.  It's becoming well known that for every ounce of physical gold that exists, 100 oz. of paper gold is traded.  Hypothetically, if all 100 owners of paper claims wanted settlement in physical delivery, the price of said physical gold would soar 100 times in price.

Likewise, if central banks have goosed equities markets by injecting $29 trillion, the true value of stocks is about half of current levels (without artificial purchasing)

Dear CIGAs, 

The Financial Times did a story over the weekend entitled "Central banks shift into equities". Zero Hedge put this up Monday morning in response. The Official Monetary and Institutional Forum now says that central banks have invested $29.1 trillion into the global equity markets. Before going in to this, now we have a better understanding of how or "why" stock markets are "up". We wondered how the markets were going up because everyone, EVERYONE so far this year has been reported to be a seller.  We wondered where the money was coming from to propel prices higher is everyone was selling, now we know.

I will give you a little perspective on this $29 trillion dollar figure because big numbers are thrown around like penny candy these days and we have become numbed (dumbed) down by such huge numbers. My point is this, there is no longer any shock value to any number no matter how large it is. 

OK, in perspective, the value of all stock markets on the planet added together are about $62 trillion, now it is revealed that $29 trillion or so has come from the world’s central banks. How did this happen? Do central banks have an extra $29 trillion to throw around? The answer of course is no they do not… unless they just print it up and presto, there it is ready and able for whatever folly they choose.  For a little more perspective, the Federal Reserve supposedly has a total balance sheet of some $4.5 trillion or about 15% of this $29 trillion (I dropped the ".1" because it’s only $100 billion). But, this $4.5 trillion is all accounted for as being invested in Treasuries, agencies and some "junkier stuff." Please don’t tell me that the world’s central banks are doing something that the Fed is not… or worse, the Fed is doing something that they are not admitting or accounting for!

Do you understand what this really means? The Fed (central banks) own nearly 50% of all stocks. This means that yes, stocks are REALLY manipulated and the tin foil hat crew was right again. It means that central banks can keep on creating fake money and putting that money into stocks to create fake(r) values… or …they can tank all of the stock markets worldwide at will with the press of a single button that has the word "sell" on it.

Going even further down the rabbit hole, this means that central banks own nearly half of the equity in all publicly held businesses. It means that by simply printing money, they have "privatized" the world! Of course, there is no telling as to when exactly this scheme started but let’s assume that sometime late in 2008 or early ’09 would be a good guess. The markets needed support AND it was a good entry level. Maybe this was something that "just happened" and then morphed into its current size? Maybe it wasn’t on purpose? I doubt this is the case as everything is orchestrated today, as the CIA is well known for saying, "there are no coincidences." Who will the central banks sell to if the want out? Ahh, but why would they want out when they hold almost a majority position of the entire world.

So, we have wondered how the stock markets have done what they have done and we wondered how in the U.S. the markets have done well while the Fed has tapered their QE by $1/2 trillion annualized. Now we know, $500 billion is a puissant number that has been camouflaged by other, massive buying. Gold investors have also "wondered" how gold could go down in price while physical demand has far outstripped the actual supply.  "We" have told you how for a long time now, all the while being called tin foil hat wearing conspiracy freaks. We told you that at least 100 ounces of paper gold were being created to divert capital away from the real thing. We told you that these paper ounces were being used to dilute the real thing and hide what was actually happening. Do you believe us now?

Now that it turns out that an extra $29 trillion has been printed and put to work you must ask yourself several questions. First, if it was so easy to create all of this money (in the dark) and it is so plentiful, what is the money itself worth? What is it REALLY worth? Also, if the markets are where they are because of unnatural buying, where would they be trading on their own? How much lower? If gold is priced where it is today because there are 99 fakes out there for every real ounce then what is a real ounce worth if it is actually 99 times more rare? An even better question is this, if central banks were the sellers of real tangible gold for so many years and the conspiracy nuts are correct (as usual it seems lately) and the coffers are low, THEN what is an ounce worth?

Let me ask this question in a slightly different manner. If the West’s central banks have very little gold yet retain the ability to print money and suddenly decide that they would like to stack some of the "lost" gold, what would that do to the price? Or even differently, if money supply approaches infinity and gold reserves approach zero… then what price? Is the answer not infinity?
I hope that this revelation sinks in mentally for you. If not, please reread this because this is what it’s all about. You have been beaten over the head for at least 2 years to either sell your gold (and silver) or at least don’t buy it. It has been a psychological operation aimed directly at your finances through your emotions. Hopefully it hasn’t worked. If it has worked, then it is your job to un-work it. Stand strong, buy more or buy for the first time. We now know that we are (and were) 100% correct, nothing should get between you and your insurance policy!

Regards,
Bill Holter for Miles Franklyn

Central banks and public sector funds in diversification drive

This is tragically humorous on several levels, but the most egregious pronouncement is central banks, the bastion of conservative practices, have practically admitted they have goosed stock markets by buying up $29 trillion in assets, including equities.  They then, benignly paint these hedge fund-like risks as "diversification."  In reality, they are taking on humongous market risks.  I have posted many times that the Fed is the biggest hedge fund in the world, with perhaps the most over-leveraged balance sheet.

The public and Wall Street bankers can blame each other for manipulating markets, but at the end of the day, they are all merely agents of the ultimate manipulators--the central banks themselves.

You don't need a PhD in Economics from Princeton to know this will end badly.

http://omfif.createsend1.com/t/ViewEmail/j/AD679A12EEB1FB26

Nouriel Roubini Seriously Misguided on Gold, on Equities, on Economic Growth, on Money

http://globaleconomicanalysis.blogspot.com/2013/06/nouriel-roubini-seriously-misguided-on.html

Central Banks Load Up on Equities

Speaking of bubbles...

http://www.bloomberg.com/news/2013-04-24/central-banks-load-up-on-equities-as-low-rates-kill-bond-yields.html

Top UBS Analyst Predicts Carnage For The US Dollar & Equities

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/1/16_Top_UBS_Analyst_Predicts_Carnage_For_The_US_Dollar_%26_Equities.html

US Dollar Strong, What to Expect From Gold & Global Equities

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/5/30_US_Dollar_Strong%2C_What_to_Expect_From_Gold_%26_Global_Equities.html

Markets down, gold up

Last week's bad news on the economic indicators continue to weigh down markets.  Equities, commodities, the USDollar, and the Euro are all down.  10-year US Treasury bonds are up slightly in a "slow-growth economy" mini-rally, while gold is rallying higher.  Precious metals are commodities, but they are also monetary metals.  Take heed.

PIMCO is long gold

I previously blogged about how PIM(P)CO was ramping up their equities team.  I snooped around on their website for recent hires, and it looks like they have recently beefed up their equities team <click here>.

I sent this email to a group (the infamous BORG group of activist investors) last week (May 9):

When the biggest bond fund manager in the world is SHORT bonds (including Treasuries and mortgage-backed securities), he's expecting a bond collapse.  And because Bill Gross is building up his equities team (including emerging markets), he thinks the Asian growth story in stocks is alive and well.  One of their hires is a foreign exchange (forex) and derivatives trader, so he's also hedging.

It looks like PIMCO, the world's largest bond fund, is long gold after all, via their equities fund exposure:

http://money.cnn.com/2011/05/11/pf/anne_gudefin_pimco.fortune/

The largest position in the fund is gold, which we think is a very good form of protection against what can go wrong. We were encouraged by the fact that a lot of the central banks, especially in Asia, are big buyers. We think that's an underlying trend that's very favorable for gold.

I also follow Rob Arnott, who runs the PIMCO's All Asset Fund.  He's a proponent of sound money as well, and typically bullish on precious metals, the ultimate hedge against debased currencies.

Inflation and equities

http://www.financeandeconomics.org/Articles%20archive/2011.03.25%20Inflation_and_equities.htm

Gold bugs about to get squashed

http://www.marketwatch.com/story/gold-bugs-about-to-get-squashed-2011-02-16?reflink=MW_news_stmp

This is more anti-gold advice from mainstream media, the same ones who have been wrong for 10 years running.

Marc Faber on QE2, equities, commodities, and bonds

http://www.youtube.com/watch?v=KWiwWWAPBm8&feature=player_embedded

Stocks and gold stocks decoupling

http://www.caseyresearch.com/editorial/3505?ppref=CRX178ED0710B

We haven’t seen this level of separation between gold stocks and the general stock market since the first quarter of 2009. This demonstrates obvious strength in our sector, and is precisely the kind of action that can signal we’re getting closer to our precious metals investments starting a major leg up.

In the big picture, this data should be considered a short-term indicator. However, it’s a refreshing reminder that at some point, it won’t matter what the broader markets are doing. In the precious metals bull market of the 1970s, the Barron’s Gold Mining Index soared 652%, while the S&P gained only 22% for the entire decade. This means that if you’re bearish on the economy, you don’t have to be bearish on gold stocks.

At gold’s bottom in April 2001, the Dow/Gold ratio (DJIA divided by gold price) was 41.2. It now stands at 7.9 (as of July 2).

When gold peaked in January 1980, the Dow/Gold ratio reached “one,” meaning they were both selling for about the same price. To hit that same ratio today, gold will have to go higher and the Dow simultaneously lower. The fundamental reasons gold will rise are far from over, and a second leg down in the broader markets seems almost locked in at this point.

In this context, Doug Casey’s call for a $5,000 gold price doesn’t seem so farfetched. It also coincides with his call for a Greater Depression, an environment not exactly suited for higher stock prices. $5,000 gold = 5,000 Dow.

Where do you think they’ll meet – three? Eight?

David Rosenberg remains bearish on equities

http://pragcap.com/david-rosenberg-is-dow-5000-really-possible

* Secular bull and bear markets typically last 16 years

* During the secular bear market, most if not all of the prior gains made (again,in inflation-adjusted terms) in the prior secular bull condition, are wiped out. Look closely at the chart and there is a very subtle upward drift – the secular low points rise over time, albeit fractionally.

Assuming inflation averages 2% annually and that 2016 marks the end of this secular bear episode (seeing as it began in 2000) then the historical pattern would suggest a test of 5,000 on the Dow as the ultimate trough (at that point, gold will likely be 5,000 too). This does not preclude cyclical rallies along the way, but these will be “bear market rallies” such as we saw from March 2009 to April 2010 and investors should not be tempted into any other strategy than to rent these rallies and not own them.

Why most financial advisers misunderstand gold

http://seekingalpha.com/article/205108-precious-metals-the-safest-bet-during-uncertain-markets

Accumulation

The only sector in the equities market showing accumulation is the precious metals mining sector (the GDX ETF is a good proxy). Check the share volume numbers over the last five years.

Whether you believe we started a new bull market since March 2009, or we are in the midst of a rebound within a secular bear market, the volume has to mirror the price action to be confirmatory. Other sectors are showing declining volume, despite higher prices, which is non-confirming. Liquidity injections (like the most recent $1 trillion Euro bailout) may prop up equities, but the foundation could be built on tooth picks.

See disclaimers on side bar.

Disclosure: long precious metals mining shares, long some biotechs, and natural gas pipeline companies.

Louise Yamada on markets

Louise Yamada, a technical analyst extraordinaire, weighs in on equities, bonds, interest rates, and commodities, including gold and silver.



http://www.cnbc.com/id/15840232?play=1&video=1487900029

VIX soars in market rout

http://www.marketwatch.com/story/fear-index-jumps-over-60-in-market-din-2010-05-06

Anybody remember this blog on the VIX I wrote in late March?

http://gregnguyen.blogspot.com/2010/03/boring-markets.html

Or how about this one back in September, 2009?

http://gregnguyen.blogspot.com/2009/09/gold-chart.html

Rant

I've been immersed in these games the government and banks play, so I incorrectly assumed everyone believes what I believe about Wall Street, our government, central banks, fiscal and sovereign debt problems, Iceland, Dubai, Greece, etc.

The problem is this: most people don't have a clue about basic economics and financial models, even people much smarter than me, including the experts. Have they been that influenced by the media and teachings? Why do they cling to a Keynesian school of thought which clearly has failed? Why do they believe the only way to fix a huge debt problem is to add more debt, induced by a few privileged men? Why do they continue to believe the economic equivalent of a flat earth?

I've managed to piss off Ivy Leaguers, industry experts, financial insiders--you name it--for being the messenger. I've talked to economists, historians, and academicians from top schools and they believe the system is sound--that outlying events spoiled it for all of us, they reckon. They don't see the systemic breakdown in our fiat, fractional reserve financial systems--or how leverage has created huge pools of toxic derivatives, vulnerable to manipulation. Our financial system is a gigantic, rigged casino. Our profligacy has turned unfunded entitlements like pension funds, social security and healthcare programs into giant Ponzi schemes.

My friends in the real estate and equities markets have shunned me. What are they running away from--me? I'm one data point, unable to move my old dishwasher, much less markets. I haven't been a popular member of the cocktail circuit or at family dinners. And I thought to myself: why are these very bright people so unaware of what has been so coherent to me? I've ranted endlessly the basic economic laws of supply and demand for a certain asset class. Why are educated, bright, authoritative, and influential people missing out on something so luminous? I leave these questions to ponder, unsure of the correct answers. And I exit hoping I am completely wrong in my conclusions.