Crypto thread

What I have learned through experience and loss is nobody including experts or authors can predict what drives the market or why it goes up and down. Chartist are not accurate because a chart is only good if it is, but if it is not there are a thousand excuses why it didnt predict..I do not follow chart style investing unless a market is in a long term trendless environment and for the last twenty years that is not the case. FA means little to nothing because momentum has dictated market moves...stocks can trade at less than book and at low multiples until they dont and buying based on backward looking FA has not worked across the board so you have to do more work than looking at PE ratios or price to book or the like.

What I do know is the market is right until it is wrong...that is all really there is because as mentioned the market is not functioning properly and has not/cannot due to the way we have allowed it to morph. The market is now driven by hedge funds and CTA programs...computer based programs that will shift in the drop of a hat in any direction based only on formulas and current market conditions meaning to that MINUTE. There are silly indicators of TA base that CTA funds will allegedly flip long or short so in a goofy way they do implement resistance and support levels...why I dont know because those are chartist and have little relevance to the current market but it shows the human element even in a CTA program based strategy.

And lastly what I seriously know is the FED runs this market...forget government, forget buybacks the FED runs this show. If the FED wanted to stop the market dead in its tracks it could in the matter of minutes and a few words. The market is controlled by cheap capital and liquidity. Not much else matters...as we see in the face of a global epidemic and slowdown, in the face of enormous debt levels from government and corporate and individual it matters little. There really are zero reasons why the NAZ is over 8k, why the SPX is itching for 3k and why the DOW is up here...none but the facts which are the FED runs this market.

Its sickening to me...as a market participant and a prior licensed rep this is disgusting and pathetic..we have turned the markets into micro penny drug users and liquidity squids...most ever day I am baffled with the idiocy and greed in these markets but I am not stupid enough to be a victim to the buzz saw either.

The test results from Gilead are ONLY a big deal if it actually works .. I tend to agree with you Wall, the market is getting wayyyyyy ahead of itself on such a narrow sample size.  The markets are really hanging on to every bit of good news, and discounting the bad news, as you say.  What about the small business loan debacle ?  That money is already exhausted , yet nobody cares because of the Fed Put.    And what about testing when cities open ?  I've still heard very little about this, and it's not in the plan when we start to open up society again.  How does this make any sense ? We are pushing ourselves into another repeat of the current lockdown when we have a second wave of flare ups.  Count me as skeptical of the WH plan..   Wall street doesn't care .... I guess it will only care when the Fed "steps back" from the next predicament..  

And the disconnect between Wall Street and Main Street is appalling.  People that can't figure out how to pay their bills or put food on the table as they look at the Wall Street euphoria.  I'm sure if people were getting money in their hands to deal with this crisis, they wouldn't be so frustrated..  

Our society is setting itself up for another Occupy Wall Street part II. 

I know a couple of guys that really push the old Fed Model PE theory.   Where they tie it to the 10 year bond and say the reciprocal would give an estimate of what investors are willing to pay relative to the market.  It has been around 40ish I think.  The 10 year yield and S&P track that way.

Assuming rates go up the 4% would make the ratio around 25.  Which is about where the TTM PE is now.  So, the PE today would seem off historically but would be realistic with low interest rates that we have had for so long.  So their theory is in the current market and number of 15-17 is not the correct number.

At least that is the gist of how the theory goes.

But timing markets short term or justifying them by using metrics/charts/fundamentals that are not holding up longterm may imply that things certainly have to be looked at differently.  I think the best plan is to have a longterm outlook — and to me that looks the same as it has for the last several years. Especially, once/and if we get over this virus soon enough.

To me if you use old ‘theory’ or something that might not apply currently — you will be sitting in the sidelines for too long, or have been on the sidelines for too long.  

There are reason(s) the market has done so well for so long.  Even if you don’t fully understand why —or even like/ agree with why — you cannot ignore for so long and miss out on making money! 

The dynamics are not the same — algorithms and computers and volume, etc., etc.  You have to adapt.  The odds are tremendously in your favor to not fight the market — even if it doesn’t make sense or you cannot fully understand it. 

The Nikkei in Japan is down 50% since its high in 1989.

Your reply makes the point strongly I keep saying. So yeah that ratio works and rationalizes things, but WHY does it work? Why are rates at zero and thus some ratio rationalizes stock prices being high because there is no equiv return elsewhere for investors? The FED is why rates are low and even 4% is too low, market forces are not dictating rates it is the FED and their backstopping of the market and interest rates. That is not how free markets are meant to function, so while those paragraphs rationalize things the entire reason it works is because of the FED.

So nothing else, not some forward ratio based on 10 yr GDP to bond rates to growth rates divided by IRR multiplied by the ten year treasury yield blah blah blah matter...when the FED distorts ALL markets then NO markets are worth a crap.

Thats why I said nothing matters...ratios, charts, FA etc, the FED has distorted and ruined our markets for the benefit of profits to the elite and debt accumulation for governments and corporations.

Very well said. It's just logical to be in the markets, especially when you have been in the markets. In my 30 plus years of investing I have always been 100% invested. The cash I recently raised will eventually be put to work and I will creep up to 100% invested once again over the next couple of years.

I guess what Wall is saying is that one day the house of cards will fall inside of itself and the game will be over. So it comes down to the belief that our markets are always priced for fair value vs. the markets being one big Ponzi scheme. I choose to believe the former. If I believed the latter, I wouldn't be invested in the markets. 

Okay?

I understand you guys are ‘frustrated’ by the way it looks and, naturally, want to lay the blame somewhere.  That is fine with me.  I understand that.  But you really give the FED too much ‘credit/blame’ I think.

I could recommend a couple of books or in-depth articles.  But I know if it is not your background or something you want to learn about it is too tedious and complex to deal with.  So, I will copy in a very simple article that makes it easy for anyone to read and understand.  Basically, the guy is pointing out the FED may not have the control over interest rates people think.

It does not go into nearly as much detail on the workings of the FED and interest rates and markets as the others.  But I think it captures some of the main points.

Read it if you like; dismiss it altogether if you like. Just food for thought.

Last week, the Federal Reserve did what was expected by leaving their targetfor the fed funds rate unchanged. To the point that a misplaced adverb can cause a mini market selloff, investors meticulously dissect Federal Open Market Committee minutes and hang on Fed Chair Jerome Powell’s every word for language that provides insight into where the Fed may take interest rates. It’s a near universal axiom that the Fed sets interest rates, and we’re all just along for the ride.

How much control does it really have, though?

The bond markets are consistently accurate at pricing in what the Fed will do throughout the year. While the Fed does a good job being forthright about the state of the economy and its actions, this isn’t really a result of Jerome Powell saying all the right things in his speeches. 

We have a quasi “chicken and the egg” scenario: does the Fed guide the bond market, or does the bond market lead the Fed?

Firstly, it’s not pedantic to point out the Fed doesn’t actually directly control the federal fund’s rate; they only set a target range for it, implemented typically very well, via open market operations(though sometimes this rate does get away from them). The only interest rate the Fed has 100% under its own control is the discount rate: the cost to borrow directly from the Fed itself. Neither of these are rates a normal person, or even a company, directly encounter. Both of these are overnight interbank lending rates banks incur to meet Fed-mandated reserve requirements.

Why does the Fed merely setting a range for a rate that’s only meant for banks borrowing from each other matter so much? There are ripple effects for the rates that end up manifesting in real life for companies and people. But a look at some of the data makes it less clear exactly who is influencing who. For this analysis, I’ll be using the research of renowned NYU professor of finance Aswath Damodaran, commonly known as the “Dean of Valuation” in the financial world.

The table below shows the most-recent bout of Fed tightening from 11/16 - 2/18 and the subsequent behavior of 3-month Tbills and 10-year Tbonds. 

The Fed looks like it exerts effective control over short-term rates when it moves its target, as you see increases in Tbill rates consistent with the fed funds rate. However its control on long-term rates is not nearly as impactful. The overall movement is upwards, but you’ll note Tbond rates were sideways and even down slightly over the first 13 months of Fed tightening, only in the last two months do they become clearly higher than what they were over a year ago.

At first glance, it’s intuitive to conclude the Fed essentially controls very short-term rates, and struggles to manage long-term ones, but they eventually follow suit. However when we broaden the date range the Fed’s power is placed in better context.

Monthly data from 1962 - 2018(see slide #5 in the linked research) demonstrates how interdependent the fed funds rate, Tbill, and Tbond rates are. When we assess how these rates behave within the same period, the Tbill and fed funds rate are related, moving together with an r-squaredof 56.5% (meaning 56.5% of the change in one can explain the change in the other). However the relationship with Tbond’s is dramatically weaker, with an r-squared of only 6.7%.

So there's shared movement within the same period, however regarding the causality question: if the Fed is leading interest rates, a move in the fed funds rate ought to produce the same in Tbill and Tbond rates in the subsequent period. However you see the r-squared actually decrease when you compare the movement in interest rates the month after the fed funds rate is modified.

Further, when you invert the test to see if shifts in Tbill rates are what precipitate a move for the Fed, it’s actually more likely the fed funds rate will change based on what the Tbill rate did in the former period. It’s not incontrovertible evidence, but over the span of nearly 60 years, this does not suggest the Fed is the dictator of rates it’s believed to be.

So if bonds are largely deriving their prices independent of central body control, what’s driving them? Basic macroeconomics.

Expected inflation and GDP growth are what ultimately create interest rates. If you add up the expected inflation and growth rate, you get an intrinsic risk-free rate (in theory, what the 10-year Tbond rate would be without any Fed influence). Broken down by subperiod above, you can see over the last 60 years the intrinsic risk-free rate has been inextricably tied to the real risk-free rate (10-year Tbond).

Giving the Fed its due, this isn’t to say it has no effect. And that difference can be encapsulated by taking the difference between the 10-year Tbond rate and the intrinsic risk-free rate (The Fed Effect on the chart). Suffice to say this is a much more subdued impact than it’s routinely given credit for.

The bond market is a sage leading indicator because its market prices reliably reflect future economic growth expectations. The reason no one can consistently predict interest rates isn’t because no one can foretell what 12 economists in a room decide to do with them, it’s because the real driver of interest rates is a multivariate macroeconomic equation that no central body has real control over. 

Rather than obsess over Fed decision making, the data suggests that you’re best suited to simply pay attention to inflation and growth to get an idea of where rates will head. It's high growth and expected inflation that give way to elevated interest rates, and vice versa.

There are articles of course on the other side of this issue.  

I am not a fan or defender of the FED.  There is even good reason to say get rid of it because it has gotten away from the original intent.  

I just think you have to see both sides and look at the picture as a whole when deciding to invest or not.   

I know people that were frustrated the last time the market crashed and they never got back in.  They missed out on huge gains.  

For sure, you have to invest your money.  Great real estate is an alternative.  But not much else competes with the stock market in the long haul.  There is no good reason to sit out for 15 years because ‘the market is overvalued’ or ‘not acting right’ or ‘the FED is propping it up’.  All of these I have heard for years.  

I know some people have their mind made up and will NOT get back in the market.  But for those on the fence — yes, be cautious.  But the short term (since last crash) is there; and, for sure, the long term is there.  

But

Good for you.  

Always have plenty to get by for a few months in case of another quarantine or anything else.  You don’t want ALL in the stock market.  But besides an emergency fund — cash only loses value.  But if you have 80 in stocks — I don’t think the other 20 HAS to be back in stocks. But I do think it should be doing something for you.  

Sure, absolutely, the house of cards comes down — from time to time.  Always has and always will.  BUT the game will NOT be over.  Unless it crashes at a time you just absolutely need the money — no big deal.  It will start back up again.  It is never a loss until you sell.  

If we go into an end-of-world apocalypse— sure all bets are off.  

By strict definition stock markets are not Ponzi scheme. Now by strict definition bitcoin could be.  But still I like to gamble and it is your money.  So nothing wrong with a small percentage to take a chance. 

The short vs long argument does not hold because it does not factor in the time value of money...so yes the FED uses short term rates with their policy and actions because that is what is most liquid and active and has the greatest impact but there cannot be a large spread between short and long because there are no high rated alternatives long term available..note that I said high rated. If there were a high credit rated alternative then investors would try and ARB it, like we see every single day. If there is an ARB opportunity it is taken and utilized. All high rated central banks are on the same page as the FED, they are all in the same boat so there is no stronger alternative for higher rates. 

And the FED can go out in duration, they have and do..so it isnt just the ultra short duration they are impacting but something of great note recently..in the past the short term rates spread vs long term was higher and with this recent violent drop the spread reduced and that is largely due to the expectation that rates are NOT going up...the FED has stepped into a situation they will not and cannot reverse and thus there are less and less expectations that rates will go up so the differential between short and long is less. In the past this was not the case and when the FED raised last year a few times long term rates reflected that and the 30 year. In late 2018 the 30 year was near 3.5 and this year on the low I think it went near .75 but is at 1.2 now.

The FED controls the entire curve because all the central banks are the same and have the same agenda, so unless there is a shock or an alternative net of any currency costs, rates are and will continue to be controlled.

The error in the end is that the FED thinks economic growth is conditioned upon interest rates and that they can stimulate to an inflation target by changing rates, that is false. Rates impact large institutions and the elite..there is no trickle down to the consumer who drives inflation so this policy serves the elite and governments but demand is not materially impacted without flow through. The elite hoard this advantage to make more profits, that is why the chasm between the elite and the rest of us expand and there is no inflation. If the FED wanted to get to the inflation target they are lying about then they would not target government and corporate rates...they would go to the source or force corps to not hoard.

Rates Impact everyone, of course.  It certainly trickles down through any credit or borrowing that anyone does.  It can be more advantageous to richer folks — simply because they have more money and it is amplified.  Absolutely it impacts individual spending and production and investment and inflation.  This is easily tracked.  Yes, they may impact people with more money and businesses more than the average person by total dollars.  But I don’t think I have seen a study where it shows an effect out of proportion to a person’s  wealth on their spending or investing power.

In theory, it is also good for the folks that are in debt.  So many In the US are so far in debt. Hopefully, some take advantage with the rates lowered to pay down quicker on their debt.

Yes — it is a fine line to make sure you don’t get the bad inflation.

And — if you are someone who does not take advantage of the markets and investing — it can be bad for savings accounts and CDs.

I am not clear what you mean by: ‘If the FED wanted to get to the inflation target they are lying about then they would not target government and corporate rates...they would go to the source or force corps to not hoard.’

They are in a situation where economists have been looking more and more for a recession in the last year or so.  Now, couple that with the expected slowdown from the coronavirus, they are trying to get out in front of this and keep money flowing through the economy.  If not, the worry is it could slip into a free-fall of sorts for a time. I mean look at the unemployment situation right now. It is their obligation and duty to try to manage the monetary policy this way.

I am not sure what you expect them to do?  Nothing?  Raise the fed rate?

Because of the way the FOMC is set up they all have a say.  This is to keep, for example, the NY region from being a lone voice — so, it is not as much with the stock market in mind as people think.  The regional guys have to look at their region as well as the overall economy.

I am not a FED guy and for sure not a Wilson guy.  But this is the system we have come up with.

There are indications that the Phillips Curve is no longer working as they think — if it ever did.  Even though there is some slight evidence of income inequality, this is not really in the FED’s purview.  High-school dropouts and lack of skills, etc. are some of the things that need to be addressed.  And even Powell has stressed that wage inflation is not a FED mandate. But people will lay the blame at the FED’s feet because they have become the scapegoat for everything.

I realize that a lot of folks hate the FED, hate corporations, and think the stock market is overvalued.  I think these folks should study up on the issue and it might give them a more complete understanding of the FED and the stock market and the economy.  There are a lot of misconceptions that are out there.  I mean there are folks that even feel there is not regulation or oversight of the FED.  They think all they care about is the stock market and they think every time something goes wrong in the economy it is the FED’s fault.  The FED is very complex and is not easily understood by a casual day-to-day news article here and there.  Same with the stock market.  Same with the economy.  

These things are very dynamic.  Sometimes there is direct causality — absolutely.  Sometimes, you have to really reach to make a connection.  

But the FED and the overvalue cannot justify not having your money at work for you.  That is my main issue with the rail riders for the last 15 years.  

Of course, one day they will be right.  The economy will tank.  But will they get in then?  No of course not.  It is a mindset at that point.  I have seen it over and over.  The money for them has to be made somewhere else — it will never be in the markets. 

I fully understand the FED, the market and interest rates...I have a feeling whatever you suggest I read is quite a bit below my level of understanding. I disagree with your summary of ratios and that you negate the reality that the FED in dropping rates has forced people who do not want to be in the market to get into the market...people who are not served to be in at all. The ratios you suggest work because rates are low, rates are low because the market is distorted because the FED has erroneously forced low rates to stimulate inflation and I am saying it is a flawed theory.

If the FED wanted to boost inflation it would not cut corporate and government interest rates...the fuel for inflation comes from the consumer and you are dead wrong about the little player benefiting. CC rates are higher than when the FED started cutting in 2009, student loan rates relative to FED funds is awful, even mortgage rates have not dropped relative to FED funds. I got a 15 year loan about 5 years ago and rates are higher now than when I closed my loan...and government/FED funds are MUCH MUCH lower. I am not sure what you are even suggesting about who has reaped the benefit. So the hedge fund or private equity or bank who takes this ZERO money, leverage it 50X plus and game the market are not gaining a larger benefit than a guy who has a 300k mortgage and saw a drop of half a point? Who exactly is the winner and loser with the FED lowering rates like they have?

 ‘I disagree with your summary of ratios and that you negate the reality that the FED in dropping rates has forced people who do not want to be in the market to get into the market...people who are not served to be in at all.’

The numbers are what the numbers are.  

Who has been forced to be in the market?  Why are they not served to be in at all?  What are your examples of this?  I miss your point.

Certainly not saying it is below your understanding.  I am saying it seems as if you are looking at it with blinders.  You see what you see and only what you see. So, I do not think you have the full understanding.  

I am suggesting it is in no way at all that simple is all. 

Yes. The theory can be flawed.  As I say it is a working theory.  But for it to be flawed you have to be empirical about it.  And even offer up a better one that is supported.  That is exactly how we do it in practice and in actuality.  

Of course there is an inverse relationship with interest rates and inflation?!

Absolutely, it can benefit everyone.  Unless, you have fixed rates. The data is there.  I don’t see what you are not seeing here?  I thought your point was it does not help as much as the big business or something along those lines.  You actually do not think it helps at all?!

Yes, I said it may be disproportionate—but I don’t recall seeing a study on that.  I will look later for one.  

But if you could provide one it would help.  Otherwise, it is perception. Right?

Even if you feel the way you do and think it is ‘rigged’. Why not at least jump in and take some advantage?  That is always my question to the naysayers — and I know a lot of them in my business.  Then when it turns — if it does — have a solid bailout-Type plan.  

I never get good answers to these questions. 

Top part posted out funny.  It is not just you on here that feels that way.  What I’m saying is that it is tedious stuff and very involved.  If it is not someone’s background and something they have studied then they have a different perspective is all.  I just don’t like to see Folks have opinion that affects their money based on partial-understanding or perceptions that may be wrong.  

But even if they were right — you have to have your money working for you.  Maybe, could be more cautious.  

For example, you always say folks are forced into the market because there is no other options.  There are other options. But it is hard to turn this one down.  It is almost hands-off.  Not like real estate or starting your own business.  This one really does do most of the work for you.  

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