The Federal Reserve: Love it or Hate it

[Copernicus]

All that link 'establishes" is that someone else besides mises likes to theorize all kinds of things that are theoretially possible but which data from the real world shows doesn't happen.

[adios]

On that article posted I want a common misconcetion that the author states:

The basic idea behind EMH is that because there are so many investors out there hunting for good investment opportunities there can be neither undervalued stocks nor overvalued stocks because if there were, investors would instantly rush to buy the undervalued stocks and sell the overvalued stocks until no under- or overvaluation existed any more.

The "effecient market" theory doesn't state that stocks are never mispriced, it states that mispricings are random.

I fully admit I'm making a nitty point here though [img]/images/graemlins/smile.gif[/img].

Actually I think the article is good. Don't agree with everything in it but it does make many good points IMO FWIW. Doesn't the fact that knowledgable people including those that fully grasp how the Fed works can make above market returns, prove the notion that stocks can appreciate in value above the risk premium?

About the risk free rate FWIW:

The risk free rate IMO is an abstract concept. Repeating the obvious, U.S. treasury rates are used because default risk is perceived to be very low but not zero IMO. As a result of the last recession there was actual talk by some about downgrading the rating of U.S. treasuries due to the high budget deficit. Crazy talk I know but the perceived risk of default isn't that it could never ever happen. U.S. treasurys are just the best proxy we have for the risk free rate.

[DcifrThs]

[ QUOTE ]
On that article posted I want a common misconcetion that the author states:

The basic idea behind EMH is that because there are so many investors out there hunting for good investment opportunities there can be neither undervalued stocks nor overvalued stocks because if there were, investors would instantly rush to buy the undervalued stocks and sell the overvalued stocks until no under- or overvaluation existed any more.

The "effecient market" theory doesn't state that stocks are never mispriced, it states that mispricings are random.

I fully admit I'm making a nitty point here though [img]/images/graemlins/smile.gif[/img].

Actually I think the article is good. Don't agree with everything in it but it does make many good points IMO FWIW. Doesn't the fact that knowledgable people including those that fully grasp how the Fed works can make above market returns, prove the notion that stocks can appreciate in value above the risk premium?

About the risk free rate FWIW:

The risk free rate IMO is an abstract concept. Repeating the obvious, U.S. treasury rates are used because default risk is perceived to be very low but not zero IMO. As a result of the last recession there was actual talk by some about downgrading the rating of U.S. treasuries due to the high budget deficit. Crazy talk I know but the perceived risk of default isn't that it could never ever happen. U.S. treasurys are just the best proxy we have for the risk free rate.

[/ QUOTE ]

and thus how we structure investment portfolios.

Barron

[DcifrThs]

[ QUOTE ]
[ QUOTE ]


so lets say that everything i've said about absolutely everything is incorrect based on a proof you can provide...

...how much money are you making off your analysis of the markets?


[/ QUOTE ]

I dont discuss personal finances publicly, do you?


[/ QUOTE ]

no but my point is clear.
[ QUOTE ]
[ QUOTE ]

how much have i made?

[/ QUOTE ]

are you serious? do you really expect me to be able to answer this?

[/ QUOTE ]

have you ever heard of a rhetorical question?
[ QUOTE ]

[ QUOTE ]



regardless of your ability to provide a proof of the economic systems' flaws, does that allow you to make money off of the things you conclude?

[/ QUOTE ]

sure does.

thought this principle was established here:

http://forumserver.twoplustwo.com/sh...age=0&vc=1

[/ QUOTE ]

a) i don't believe in strong EMH

b) we've been over this a ton as to where i fall (which is to say that each market is unique in its level of efficiency which is unmeasurable in a precise sense but exists due to the players' in that market)

c) again, my point being that your theories should be able to net you money. but you can't construct a good ivnestment portfolio if you don't put any stock in the "risk free" rate. forget about BEATING the market. i'm talking about structuring a solid passive portfolio with a sharpe ratio of between .4-.65. you can't do that if you don't :

1) understand stock risk premium
2) understand risk premia in general
3) use intelligent leverage
4) diversify
5) base many things off of the difference between thema nd the "risk free" rate (and USE the risk free rate).

when i was responding to mises, you critiqued my implication that there is a gradient of risk where past a certain point, it becomes "risk free."

i meant clearly NOT that treasury bonds are as risk free as surely as the monitor in front of you will always in your life sit on the desk, but that we can live our lives with the trust in them that earns the moniker "risk free rate of return."

Barron

[Zygote]

[ QUOTE ]

no but my point is clear.

[/ QUOTE ]

not exactly.

[ QUOTE ]

have you ever heard of a rhetorical question?

[/ QUOTE ]

Sure have. Can't say i understand the context of yours.

[ QUOTE ]
a) i don't believe in strong EMH


[/ QUOTE ]

Okay so its possible to make long term profit investing.

[ QUOTE ]
\
c) again, my point being that your theories should be able to net you money. but you can't construct a good ivnestment portfolio if you don't put any stock in the "risk free" rate. forget about BEATING the market. i'm talking about structuring a solid passive portfolio with a sharpe ratio of between .4-.65. you can't do that if you don't

[/ QUOTE ]

They do net me money. I said that. I was basically saying that i wasnt going to bother revealing how much money i made off of this because no one would believe me without proof and see issue with posting my personal financial statements to prove the point.

[ QUOTE ]

1) understand stock risk premium
2) understand risk premia in general
3) use intelligent leverage
4) diversify
5) base many things off of the difference between thema nd the "risk free" rate (and USE the risk free rate).


[/ QUOTE ]

I dont use a non-existent risk free rate and have made money over an extended period. I mustve have defied gravity by your logic.

[ QUOTE ]
when i was responding to mises, you critiqued my implication that there is a gradient of risk where past a certain point, it becomes "risk free."

i meant clearly NOT that treasury bonds are as risk free as surely as the monitor in front of you will always in your life sit on the desk, but that we can live our lives with the trust in them that earns the moniker "risk free rate of return."

[/ QUOTE ]

You can put your trust them in them without an evaluation of the risks. I would not.

You were still being dishonest for equating the computer and and the treasury bond case. They are nothing alike and if you show the odds for both you'll see the extent of distortion a claim like that holds.


I'll challenge you, you let me choose a basket of 3 currencies and 3 commodities and i bet you they outperform the dow over the next 10 years.

Do you want to formulate a challenge?

[The once and future king]

(Cross post form EDGDF)

DcifrThs

It seems to me that the Austrains are asking you the wrong questions.

Assuming there is a "natural" fundamental market rate of fluctuation and the Central Banking system intervenes to smooth out those fluctuations by either encouraging the teleporting of wealth from the future to now (borrowing) or the teleporting of wealth to the future (saving).

Then let us assume the theory that you cant actually interfere with the fundamentals with out actually masking the problem in the present by creating a worse problem in the future (which I think is the Austrian arguement) then it dosnt follow that there will be more volatility in the cycle but instead one would have to conclude that the Central Bank would have to intervene more aggressively and more frequently to effect a smoothing out to the point where it was incapable of smoothing and there was a catastrophic shock.

So the metric that would seem to prove the Austrian hypothesis would not be more fluctuations in the business cycle but more frequent and more aggressive interventions by the central banking system.

This seems a pertinent point to raise in light of the Feds fairly aggressive actions of the last few days and the action today of cutting the discount rate to 5.75%.

[DcifrThs]

[ QUOTE ]
[ QUOTE ]
a) i don't believe in strong EMH


[/ QUOTE ]

Okay so its possible to make long term profit investing.

[/ QUOTE ]

it is possible to make a long term provit investing.

it is also possible to make a long term profit speculating. markets are most inefficient during tail events beyond random errors in mispricing espoused by EMH imo. i believe it is possible to beat currency, commdoity, FI, and equity markets if you are good enough.

investing, passive management, risk premia collection i term a Beta portfolio since you are simply exposing yourself long term to the excess return you get from holding risky assets. you also earn diversification benefits here as well as the benefits of leverage (to bring less risky asset classes like treasuries to the same risk and return level as equities) if you do both right. the trick here is constructing that portfolio optimally. this is NOT zero sum. everybody can win here.

speculating, trading, betting, active management etc. i term Alpha portfolio since you are trying to create alpha. this can involve shorting as well as going long, investing in options and other complex derivatives that deliver no risk premium by themselves. alpha generation is zero (and even negative) sum as the other side of your trade must lose for you to win.

some funds deliver both alpha and beta in a single shot, which is not optimal as the best constructed portfolio optimizes each allocation separately after deciding how much to put in each bucket (alpha and beta). (an example is a long short equity fund with a long bias. they are delivering the risk premium from holding stocks as well as their "management expertise" in picking over/undervalued securities).


[ QUOTE ]

[ QUOTE ]

c) again, my point being that your theories should be able to net you money. but you can't construct a good ivnestment portfolio if you don't put any stock in the "risk free" rate. forget about BEATING the market. i'm talking about structuring a solid passive portfolio with a sharpe ratio of between .4-.65. you can't do that if you don't

[/ QUOTE ]

They do net me money. I said that. I was basically saying that i wasnt going to bother revealing how much money i made off of this because no one would believe me without proof and see issue with posting my personal financial statements to prove the point.

[/ QUOTE ]

fine, you win. next point.

[ QUOTE ]


[ QUOTE ]

1) understand stock risk premium
2) understand risk premia in general
3) use intelligent leverage
4) diversify
5) base many things off of the difference between thema nd the "risk free" rate (and USE the risk free rate).


[/ QUOTE ]

I dont use a non-existent risk free rate and have made money over an extended period. I mustve have defied gravity by your logic.

[/ QUOTE ]

read above, i specifically said "forget about BEATING the market"

i mean here now i'm talking about passive investing where you are simply going long to expose yourself to risk premia generated from risky assets.

you can make money without investing a single dime in treasury securities. but you can't construct an optimal beta (see definition above) portfolio without use and belief in the "risk free" rate of return.

[ QUOTE ]


[ QUOTE ]
when i was responding to mises, you critiqued my implication that there is a gradient of risk where past a certain point, it becomes "risk free."

i meant clearly NOT that treasury bonds are as risk free as surely as the monitor in front of you will always in your life sit on the desk, but that we can live our lives with the trust in them that earns the moniker "risk free rate of return."

[/ QUOTE ]

You can put your trust them in them without an evaluation of the risks. I would not.

[/ QUOTE ]

excellent. do as you wish, it's your money.

[ QUOTE ]


You were still being dishonest for equating the computer and and the treasury bond case. They are nothing alike and if you show the odds for both you'll see the extent of distortion a claim like that holds.

[/ QUOTE ]

all i care about is that the odds are long enough so as to not happen in my lfietime or my children's lifetime so i can build a passive portfolio around it. in that sense, i'm happy witht he length of those odds and do not think i'm being dishonest in using a hyperbole.

[ QUOTE ]



I'll challenge you, you let me choose a basket of 3 currencies and 3 commodities and i bet you they outperform the dow over the next 10 years.

[/ QUOTE ]

so you want to bet your active management (alpha) decisions vs. a long only equity index (beta) and then judge them by absolute returns?? ummm no thanks buddy. what woudl that bet accomplish? you can outperform the dow by generating alpha in a number of ways and if you don't consider the RISK of what you're doing, then you're not being fair in the judgement of the bet.

how about you create a portfolio of 3 currencies and 3 commodities. i'll create a portfolio of assets JUST going long any number of asset classes (that i can construct how i wish). whoever generates the higher risk adjusted returns, wins.

i would bet any amount of money you wished on that bet (i.e. my porfolio would generate higher risk adjusted returns)

[ QUOTE ]


Do you want to formulate or challenge?

[/ QUOTE ]

i just did the latter.

Barron

[adios]

[ QUOTE ]
(Cross post form EDGDF)

DcifrThs

It seems to me that the Austrains are asking you the wrong questions.

Assuming there is a "natural" fundamental market rate of fluctuation and the Central Banking system intervenes to smooth out those fluctuations by either encouraging the teleporting of wealth from the future to now (borrowing) or the teleporting of wealth to the future (saving).

Then let us assume the theory that you cant actually interfere with the fundamentals with out actually masking the problem in the present by creating a worse problem in the future (which I think is the Austrian arguement) then it dosnt follow that there will be more volatility in the cycle but instead one would have to conclude that the Central Bank would have to intervene more aggressively and more frequently to effect a smoothing out to the point where it was incapable of smoothing and there was a catastrophic shock.

So the metric that would seem to prove the Austrian hypothesis would not be more fluctuations in the business cycle but more frequent and more aggressive interventions by the central banking system.

This seems a pertinent point to raise in light of the Feds fairly aggressive actions of the last few days and the action today of cutting the discount rate to 5.75%.

[/ QUOTE ]

Right, interest rates are volatile. Todays action by the Fed is more evidence that it has to fix problems it may and probably did create in the first place by it's intervention. So I was thinking somewhat along these lines as well.

But the Fed can and has caused big fluctuations in the business cycle too. If we go back to 1913 and look at the history of the Fed, we have plenty of evidence that the Fed can cause some wild fluctuations in the business cycle. Greenspan was the exception as Fed chaiman IMO and he has plenty of critics and detractors. We'll have to see about Bernanke.

Your call on the Yen in BFI was spot on.

[DcifrThs]

[ QUOTE ]
[ QUOTE ]
(Cross post form EDGDF)

DcifrThs

It seems to me that the Austrains are asking you the wrong questions.

Assuming there is a "natural" fundamental market rate of fluctuation and the Central Banking system intervenes to smooth out those fluctuations by either encouraging the teleporting of wealth from the future to now (borrowing) or the teleporting of wealth to the future (saving).

Then let us assume the theory that you cant actually interfere with the fundamentals with out actually masking the problem in the present by creating a worse problem in the future (which I think is the Austrian arguement) then it dosnt follow that there will be more volatility in the cycle but instead one would have to conclude that the Central Bank would have to intervene more aggressively and more frequently to effect a smoothing out to the point where it was incapable of smoothing and there was a catastrophic shock.

So the metric that would seem to prove the Austrian hypothesis would not be more fluctuations in the business cycle but more frequent and more aggressive interventions by the central banking system.

This seems a pertinent point to raise in light of the Feds fairly aggressive actions of the last few days and the action today of cutting the discount rate to 5.75%.

[/ QUOTE ]

Right, interest rates are volatile. Todays action by the Fed is more evidence that it has to fix problems it may and probably did create in the first place by it's intervention. So I was thinking somewhat along these lines as well.

But the Fed can and has caused big fluctuations in the business cycle too. If we go back to 1913 and look at the history of the Fed, we have plenty of evidence that the Fed can cause some wild fluctuations in the business cycle. Greenspan was the exception as Fed chaiman IMO and he has plenty of critics and detractors. We'll have to see about Bernanke.

Your call on the Yen in BFI was spot on.

[/ QUOTE ]

this is tough getting the same thread in both places.

i responded to OAFK in EDGF. the argument seems to be circular and unproveable from both sides. there needs to be data and studies that i'd like to read to sort all this out. how do you judge something that you are accusing of being its own cause? i can prove we've gotten better at reducing business cycle amplitude over time, but i can't prove that the fed didn't cause the initial problems of business cycles int he first place...only that the fed got better at whatever it was it was doing over time.

as to your last point about a call on the yen, what was the call? can you link it? (it wasn't obvious to me scanning BFI where it was, but maybe i'll come accross it)

if it was just long the yen, i called that many moons ago when i put an 80%+ long signal on the yen at 123.18 to the dollar (linkable from BFI "trade ideas" post if you like)!!

where's my parade [img]/images/graemlins/tongue.gif[/img]

Barron

[The once and future king]

Cross post from EDGDF (I think we should post exclusively here about this topic from now on for simplicities sake.)

Well if there is a definite trend towards more frequent and "aggressive" interventions from central banks (1980-81, 1994, 1998, 1999-2001, 2001-2003, 2003-2007), that must be symptomatic of something. BTW I am not sure this is the Austrian arguement, it just seems like the correct line of inquiry in response to your graphs.

If that trend is definite is it not unreasonable to hypothesis that there is an upper limit to the "aggressiveness" of the FED, and that if its interventions are trending upwards on the "aggression index?" then we must be approaching the upper limit where intervention becomes impotent and boooom or should I say bust.

Dont see how we can prove this before the fact, but can only lend credence to the hypothesis that fed interventions project and magnify problems forward in time requiring more and more frequent and aggressive interventions in the future. That there must be a sustainable limit to this process would seem a fair conjecture.