The differences between 1929 and Today

[DcifrThs]

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No one with even the slightest of intellectual honesty can deny that the primary engine of price movement in the DJI has been perception about the possibility that the Fed will cut/not cut interest rates for some time now.

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No one with even the slightest of intellectual honesty can deny that a primary engine of equity valuations are interest rate levels.

therefore you'd expect that during part of the late 3rd quarter of the business cycle, interest rate expectations are primary drivers of equity prices.

Barron

[The once and future king]

DcifrThs

Consider this exercise.

The Fed never announces a cut in a vacuum. It is normally in the context of some negative news for the economy.

Now given all the reasons you have given for why interest rate cuts lead to a positive price action in equities could you postulate how bad the negative news would have to be to counter the upside from an interest rate cut.

I ask because if one looks at the recent history the news has been fairly negative but has never got close to actually leading to a fall (by news I mean assessments from the fed) . In fact the worse the news the bigger the positive price action because the likely hood of bigger and more sustained cuts becomes a greater possibility.

The greatest absurdity is that the only announcements from the fed the markets hates to hear is that there is an inflation danger (hence inhibiting interest rate cuts).
"There is a danger of inflation this month so this month we wont be inflating."

Contradictions and absurdities infest the system of money at the moment imo.

[DcifrThs]

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DcifrThs

Consider this exercise.

The Fed never announces a cut in a vacuum. It is normally in the context of some negative news for the economy.

Now given all the reasons you have given for why interest rate cuts lead to a positive price action in equities could you postulate how bad the negative news would have to be to counter the upside from an interest rate cut.

I ask because if one looks at the recent history the news has been fairly negative but has never got close to actually leading to a fall (by news I mean assessments from the fed) . In fact the worse the news the bigger the positive price action because the likely hood of bigger and more sustained cuts becomes a greater possibility.

The greatest absurdity is that the only announcements from the fed the markets hates to hear is that there is an inflation danger (hence inhibiting interest rate cuts).
"There is a danger of inflation this month so this month we wont be inflating."

Contradictions and absurdities infest the system of money at the moment imo.

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there are two things you need to understand that you don't EDIT: seem to (from your above post).

1)a reduction in the likelihood of rate cuts are not only caused by increased inflationary pressures but also as a result of decreased downward economic pressures. so if the fed announces that the rate cut won't happen, it maynot be just because inflationary pressures are too high. it may also be because growth expectations were too low.

2) mathematically, a rate cut means more in terms of % gain than a rate hike means in terms of % loss.

to test this, take a 30 year coupon bond and ignore principle. look at the coupon payments annually (for simplicity). imagine $100 payments for 30 years at 5% interest. at par, these payments are worth $1537.245.

with a 10% rate cut, the value of these payments goes to $1628.889, or a 5.9616% gain.

with a 10% rate hike, the value of these payments goes to $1453.37 or a 5.4559% loss.

so a rate cut SHOULD be more meaningful than a rate hike.

also, you should consider that a rate hike to the Dow means less than to the S&P500 since the S&P500 is more broad based. the Dow includes only those companies that have better access to lower ovreall costs of capital. in other words, a rate hike would have less effect proportionally speaking on the dow's cost of capital than it does the S&P due to both industry considerations and individual company considerations.

this last part is based on my own extension of my understanding of the markets though (the dow vs. s&p cost of capital) so let me know if i've mispoken here or made a logical mistake.

the first two issues though i'm fairly certain of (especially the 2nd since that is simply bond convexity extended to equities)

thanks,
Barron

EDIT: it would be an interesting study to see mathematically, what difference rate change probabilities *should* have on various selections of stocks and what those probabilities actually result in in terms of price changes of these indices.

it may certainly be the case that the market overreacts/underreacts in certain cases (you'd have to control for the reason behind rate change expectations in the fed fund futures/options markets which wouldn't be hard imo)

it seems to me though that your bias (like mine - though i've been trying to decrease it - and everybody's) really shines through in your posts.

[The once and future king]

Hmm

One thing I need to understand that I dont is how the above post answers my question in any way.

The question is quite clear.

How negative must be the contextual reason given for a rate cut be to overcome the upside derived from a rate cut?

Looking at recent price action in relation to announcements from the fed, the negative context would have to be total catastrophe to overcome the upside.

Bottom line is that I think the disconnect between the negative context and the consequent (often extreme) upward price action e.g bad=good demonstrates that the markets are irrational.

As for Bias, well I have no investment intellectually and emotionally either way. I dont care what is right, I do care at reaching conclusions that are right whatever they may be.

[DcifrThs]

[ QUOTE ]
Hmm

One thing I need to understand that I dont is how the above post answers my question in any way.

The question is quite clear.

How negative must be the contextual reason given for a rate cut be to overcome the upside derived from a rate cut?

Looking at recent price action in relation to announcements from the fed, the negative context would have to be total catastrophe to overcome the upside.

Bottom line is that I think the disconnect between the negative context and the consequent (often extreme) upward price action e.g bad=good demonstrates that the markets are irrational.

As for Bias, well I have no investment intellectually and emotionally either way. I dont care what is right, I do care at reaching conclusions that are right whatever they may be.



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if you're saying mkts are irrational, i think you know i agree.

the bad news would indeed have to be catastrophic. mainly b/c corporate profits are still at near all time highs and so far have weathered the tighter money conditions.

given that the dislocations in the economy now will take maybe a two quarters to a year or so to work through to consumer spending and thus to growth, the current news would have to be very very bad to move markets down substantially.

markets are definitely irrational, but still not easy to beat.

in terms of betting, i'd rather take recessionary bets against specific aspects. i.e. for a $100 fall in financial wealth, consumer spending falls between $3-5. these losses are quick and work through relatively fast.

for a $100 fall in housing wealth, consumer spending fals between $4-$9. this reaction is slow and would likely prove a longer term damper on grwoth rates.

what i'd want to do is take credit spread bets on the places from which i think this spending would recede.

fundamentals really only make up (or should imo and in the opinion of my last employer) 1/3 of a trading signal. the remainder goes to 1/3 flows and 1/3 momentum. so outright shorting the S&P500, while easy, may not be the best way to execute yoru view in the markets.

so i agree markets are irrational for sure, but still not easy to beat and you can lose a ton trying to predict the equity market top rather than taking specialized bets.

but back to the conversation we're having, the positive price action makes sense given corporate profits, consumer demand, interest rates etc. for the most part. the large ratio of "up moves" to "down moves" in terms of size also makes sense to me but not in the degree shown by the market. in that sense, i do agree that the market seems to be heeding good news more than bad.

i also think it is looking far more short term since long term equities will ikely fall .

Barron