We have discussed ad nauseum what has happened after the Fed finished their tightening cycle. It turns out to be a bit more complicated than either the Bulls or the Bears expect.
1980 seems to be a dividing line when it comes to Fed cycles. In the majority of cases from 1980 forward, markets did rather well after the Fed finished. Prior to that year, markets were generally lower six and 12 months after a tightening cycle ended.
There may be two reasons for this:
• In October 1982, the Fed shifted its emphasis from money-supply measures and "nonborrowed reserves" to an explicit funds rate-targeting procedure. That is one possible explanation for the change in results after Fed tightening ends. (See: When Did the FOMC Begin Targeting the Federal Funds Rate?)
• 1982 to 2000 was the biggest Bull Market in history. Results from that specific period may be aberrational, due to the strong Bull rally. Or, those results may be applicable only to other secular Bull markets (which we are decidely not in at present).
I’ll have a column out on this at TheStreet.com later today; I’m travelling, but I will try to get a post up with an excerpt and the link.
In the meantime, here’s a quick overview of what we have discussed in the past:
Ned Davis Research compiled all of the Fed hiking cycles going back 75 years: Once Fed Hikes Stop, Markets Fall.
Investech Research looked at market performance over the following 3, 6 and 12 months: After Final Discount Rate Hike
Birinyi Associates’ Ticker Sense put together a composite chart of the post Fed tightening cycles since 1962: More evidence: Fed Pause Not Good For Stocks.
Comstock Partners looked at when Markets bottomed after the Fed has engaged in a series of rate hikes. In 10 of 12 instances over the last 53 years, the S&P 500 subsequently declined an average of 22% ten months after the end of tightening: When the Fed Stops Tightening.
Merrill Lynch‘s chief North American economist, David Rosenberg points to periods of "Financial Crisis" shortly after the Fed goes on hold: Beware Periods of Crisis Post Fed.
More on this later . . .
I guess “don’t fight the Fed” has it exactly backwards.
For all the talk about the double top in the trannies, anyone else notice the double top on the thirty year yield? Throw in the double bottom on PTTAX, and it looks like the Fed is not only done, but so are the markets.
Futures back to near flat. If they had actually brought down a couple of planes, we could have opened up a hundred.
Ad nauseum, for sure.
When you peel the onion back a bit you’ll notice the numbers are dramativally different if we look at the markets performance after the Fed is done, and we HAD NO RECESSION. The one outlier was 1987 (had it’s own special issues). I’d suggest that’s why the numbers are better after the 80’s….Paul Volker took inflation head on, and “taught” future Fed members how to control inflation….and the number of recessions became fewer, after they fininshed.
So for me this data clearly makes the case that the market direction is purely a function of whether we will enter into a recession or not…it’s that “simple” imho.
so the trannys drop 125 points and the next day a terror plot against airliners is foiled. makes you go huumhh.
SS, that’s exactly why many on this site are bearish, because the US is headed for a recession. But don’t take my word for it…
http://www.rgemonitor.com/blog/roubini/139867
Your conviction of a recession is impressive. I assume you’re short gold and equities, and long bonds?
1980 is the turning point because that’s when the world’s central banks embraced Friedman and largely rejected Keynes.
so we stop raisiing rates while the rest-o-world is still jacking and the next day a terror plot against airliners makes everybody run for the good old greenback. makes you go huumhh… to paraphrase a wise man.
why would you be short gold? it is a hedge against inflation, deflation, recession, stagflation, depression, currency crisis, budget crisis, savings crisis, housing crisis, banking crisis, credit swap derivatives crisis, oil crisis, middle east crisis, north korea crisis, liquidity crisis, debt crisis and any other crisis you can dream up. now, personally i’m not convinced we are going to higher highs on gold but it will likely hold up better than any other declining asset class because it is almost a cash equivalent and right now cash is king.
i like the fact that you present an alternative point point of view to many of the perma psychos on this board but give us some facts other than the ignoramous comments of don hays. i see on his web site he’s now pulled 1966 out of his ass. first it was 1994-95. now, i like don alot but his thesis this cycle shows how little he truly understands about markets, economics and cycles. his investment in tech and shunning of energy and commodities makes him the major dummkoff of this cycle. confucius say rule #1 is follow the hot money in a bull market. he swam against the tide for three years with marginal returns. so far, the only thing you seem to be able to quote is the ecri fig data and don hays. might you please enlighten us with something else? many of the regular posters on this board are pretty savvy. you get brushed off because your arguments are, well, frankly, without alot of substance.
for the first time since october of 2002, my long term model is on sell. now, it may regenerate a buy within three to six months for all i know, well, actually, i know it likely won’t but through all of the negative squawking from 2003 on it remained bullish. not any more. give us something intelligent to chew on.
“i like the fact that you present an alternative point point of view to many of the perma psychos on this board but give us some facts other than the ignoramous comments of don hays. ”
Name ONE fact from your rant above (other than the fact that you constantly resort to name calling).
Your Goldbug “facts”? Perhaps you’ll quote Arch Crawford astrology facts next.
Good luck.
Hey, Arch Crawford does pretty well considering all the sleep he loses staying up late reading the stars.
One fact? You can’t seem to come up with any thing to say except don hays says 1994 and the FIG data is tame. YOU STILL DID IT IN YOUR RESPONSE!
Is that fact enough? You post the same goddam thing over and over again in the hope that it will change reality or alter the course of the future or some reason my feeble mind cannot comprehend. Were you the annoying little kid everyone beat on and now this is your attempt at payback? Now, in real life, I’m generally a patient person. But, you remind of of this gnatty little kid I used to go to school with who just wouldn’t shut up. The same incessant ramblings over and over again. Eventually I just had to “off” him. lol.
Btw, the stars have done a better job of telling reality than you have to date.
http://www.amanita.at/e/faq/e-bradley.htm
For the record, Arch Crawford has been saying for some time that the last week in July 2006 would mark a turning point for equities, and that “terrible, terrible” conditions would prevail going into the fall. He also mentioned a strong possibility of heightening geopolitical pressures, which appears to be the case (Iran, Israel/Lebanon, and now the terrorist plot).
ss, here are some facts for you:
The long term average of consumption as % of GDP is about 66% in the US. Currently it is 70%. In a ~ 12T economy, that works out to about 500B in “excess” consumption. Now, go back and check the stats on mortgage equity withdrawal, the prime source of funds for this excess consumption. As MEW disappears as a funding source, where is money coming from to support consumption?
Home sales have collapsed and pricing is beginning to follow. Housing has probably been responsible for 50% or so of new jobs growth.
Business investment fell in the lastest Q2 GDP report. Companies are choosing to hold cash or buy back stock because there’s a dearth of investment opportunities meeting return on capital hurdles. The bulls think business spending will take the baton from consumers, I think otherwise.
Rates are rising in nearly every major economy in the world. Korea jumped onboard the train last night.
Personal savings are at record low levels, regardless of how you calculate them. People have very little disposable income, and that’s at the end of a 3 year economic boom. Doesn’t bode well even if we are in for just a “slowdown”.
I mean, honestly, the list goes on and on. Like B said, give us some facts that would convince us of a soft landing. I want to be convinced that I’m wrong. Tell me something I don’t know, introduce a new way of thinking about the data that we’ve all been poring over, find a new data point that’s worth mentioning. But don’t just post the same tired crap that we’re perma bear, gold bugs, guilty of consensus thought. And seriously, if you think this site is indicative of consensus, I have some beautiful waterfront property in Pyongyang I’d love to talk to you about.
ss said:
“BYNO:
K.M.A.
I’m not a day trader, sitting in my condo in my PJ’s looking to scalp $50 on a trade. I manage portfolios.
You pitiful attack on my purchase of AAPL shows how strong your strong self worth is.
Posted by: ss | Aug 10, 2006 9:38:20 AM”
Frankly, I’ve had enough of “ss” for awhile. You guys can try to engage him if you want but as his posts have shown, there is little substantive thinking behind them.
I like the free exchange of ideas here but I don’t find this worth my time. Bynocerus puts up some GREAT posts, with details and explanation of his thinking, and all this guy puts up is drivel: “torrets markets”, third waves you trust”, “no recession is coming”, “short gold in recessions”, ‘buy AAPL now”, along with sell-side cheerleading. And now he tells Byno to kiss his a**.
I say meet his posts with silence. That has always been the way to get rid of trolls.
Amen brother. Now about that land in Pyongyang………..I’m extremely interested. That is likely the only spot in Asia not to see increased land prices in the last ten years. I’l take it all. And, like all other Americans, just put it on my Mastercard.
and the Bloviation Award goes to…
Ed Hyman, ISI Group, was on Bloomberg this morning.
http://www.bloomberg.com/index.html?Intro=intro3
Economy is slowing, unlikely to be recession, will be good for the markets. economy slows, inflations slows, the fed stops raising. The slowdown will last one year, maybe two years, He thinks ifnlations will come down and fed will ease early 07.
Has 2 1/2 years great economy and market has done nothing. He syas history says a big market rally.
What history does he have that is different than above? This guy does have some credibility.
Ed Hyman, ISI Group, was on Bloomberg this morning.
http://www.bloomberg.com/index.html?Intro=intro3
Economy is slowing, unlikely to be recession, will be good for the markets. economy slows, inflations slows, the fed stops raising. The slowdown will last one year, maybe two years, He thinks ifnlations will come down and fed will ease early 07.
Has 2 1/2 years great economy and market has done nothing. He syas history says a big market rally.
What history does he have that is different than above? This guy does have some credibility.
Ed Hyman, ISI Group, was on Bloomberg this morning.
http://www.bloomberg.com/index.html?Intro=intro3
Economy is slowing, unlikely to be recession, will be good for the markets. economy slows, inflations slows, the fed stops raising. The slowdown will last one year, maybe two years, He thinks ifnlations will come down and fed will ease early 07.
Has 2 1/2 years great economy and market has done nothing. He syas history says a big market rally.
What history does he have that is different than above? This guy does have some credibility.
Facts:
-Spreads on corp paper are near record lows = low probability of a recession. http://tinyurl.com/hmjhz
-Longer term bond yields project a moderate slowdown…not a crash. (Watch the 2/10 curve slope)
-CASH on the balance sheets (Corp) at RECORD levels.
http://tinyurl.com/gvt6b
-stock valuations at extreme lows vs. bonds (Fed model)
-earnings and guidance continue double digit advance, and have ~doubled since 1998, yet indicies have barely moved
-cash and short term CD’s are near record levels
Cult of the Perma Bear myths:
-the death of the consumer has been called for since ’00….as has the greenback. Interest rates were a “shoe in” to get to 6% last year…deficits would continue to rise (wrong)
Flame away…and keep those Short positions growing!
Hey Mark…I look forward to and dare you to keep silent.
Notice (again) the name calling. Very enlightening.
SS, all of the facts you’ve listed are the simply result of massive credit expansion (debt), rapid growth in consumer and corporate debt, swaps and derivatives. At what point do the chickens come home to roost, i.e. when the requestors of debt can service their debts no longer? Answer, when interest rates rise.
It seems that corporations have been busy loading up on more debt and refinancing their long term fixed rate debt to short-term variable rate debt. Are corporations doing the same thing US homeowners have been doing, with ARM refinancings and equity withdrawals (MEW’s) to fund stock buybacks, pay dividends and shore-up balance sheets?
Although this was written in 2004, I’m guessing it’s even more applicable today:
http://tinyurl.com/bfwew
“CFO’s across the land have taken meaningful advantage of the ability to “swap” longer term and higher cost fixed liabilities into lower cost, shorter maturity floating interest rate exposure. The ability of corporations to use derivative products to lower their total cost of capital has been a fantastic gift to corporate sector profitability and cash flow”
Well Fred, certainly lower interest rates have fueled debt expansion and consumption. It has also enabled consumers and corporations to lower their debt service. That’s a good thing….thus lower credit spreads.
You should know, however, that Federal debt, as a percentage of GDP is lower today than the ’90’s. This really upsets the typical reader of this site.
I would also say that the current massive cash in corporate America was fueled by the Repatriation Act last year. That, together with MUCH HIGHER TAX RECIEPTS, thanks to the tax cuts (uh oh), accounts for the wrong predictions of run away deficits (another PBear myth).
Thanks for the civil discussion Fred.
-Spreads on corp paper are near record lows = low probability of a recession. http://tinyurl.com/hmjhz
“History has not dealt kindly with the aftermath of protracted periods of low risk premiums,” Greenspan said in the text of his speech to the Kansas City Fed conference. “Such an increase in market value is too often viewed by market participants as structural and permanent.”
And the fact that spreads are at record lows tells me that they only way they have to go is up. Mean reversion is a powerful force
-CASH on the balance sheets (Corp) at RECORD levels.
I believe I addressed this in my comment re: buybacks. Companies aren’t holding cash because they’re super psyched about 5% returns. They’re holding cash because they don’t have investment opportunities that earn a required return on capital. How you would find this bullish I don’t understand.
-stock valuations at extreme lows vs. bonds (Fed model)
If you invest your clients money based on the Fed model, I really fear for them. Look, unlike most on this site (I think), I’m not a short term trader nor am I a macro trader. In fact I’m a bottoms up long term stock picker, so I pay very close attention to stock valuations (not to imply that others don’t). To say that they are at “extreme lows” defies logic. Market multiples are about average looking back over the past 50 years. Average multiples on record high profit margins does not really represent a great buying opportunity. Wouldn’t you rather buy depressed multiples of depressed profits, a la 1982? When people pitch me this “relative multiple” story, I point them to 1988. Warren Buffett was ridiculed because he purchased a huge slug of KO at an above market multiple. That multiple however was 12. When I start seeing companies like WMT and other high quality franchises trade at 10-12x and not 15-17x, then I’ll be interested. For the long term investor, I will concede that you can buy high quality businesses at fair prices today and expect to earn a decent return (prob mid to high single digits) over the next 5 years. If that’s your style, I have no quibbles.
-earnings and guidance continue double digit advance, and have ~doubled since 1998, yet indicies have barely moved
while earnings have continued to advance at dd rates, I would caution that that was in the past, what matters is the future. Additionally, if you strip out energy co’s, the recent growth rates don’t look as good. The reason that earnings have doubled and indices have barely moved since ’98 is because stocks were ridiculously overvalued then and have spent the past 8 years growing into their multiples. That doesn’t mean they are cheap today, it just means they are cheaper than they were 8 years ago.
-the death of the consumer has been called for since ’00….as has the greenback. Interest rates were a “shoe in” to get to 6% last year…deficits would continue to rise (wrong)
I haven’t been calling for the death of consumer, nor am I today. I’m calling for a reversion back to historic trendline levels of consumption. If this is interpreted as “death” so be it, but trees don’t grow to the sky and consumption can’t keep increasing as a % of GDP unless we want an economy entirely based on consumption and government spending. We haven’t had a consumer recession in 15 years in this country. The Fed and the gov’t have done everything in their power to make sure that consumers keep spending. The ’00-’01 recession was in business spending only. Consumers didn’t bat an eye. Again, I’m not calling for death, I’m just calling for a break from the consumption binge of the past decade and a half.
Recessions are a useful part of the business cycle. They clear away malinvestment. They do away with unsustainable imbalances. I liken them to forest fires that clear out the rubbish so the next generation of vegetation can grow. I don’t wish a recession upon the country, in fact I’m fearful that we have lost the stomach and the political will to endure the recession. But I am convinced that we are headed into one, and for better or worse, you’re facts did nothing to persuade me.
It would be pretty easy to knock down SS’s “facts” but somebody has to be on the other side of my trades. So let him/her continue buying (pun intended) into the sell side talking points. Works for me.
When people are not old enough (or smart enough to listen to the oldsters) they don’t have the perspective of multiple secular cycles. And given the length and duration of the last secular bull, most people under 35ish just never experienced anything else.
I try to save my name calling and berating for TV personalities, pundits, and politicians. But watching ya’ll do it is somewhat entertaining, so please…carry on.
Thanks for the reply. I obviously have a different take on each of your points, but I respect your “read” of them. A few of your facts aren’t correct from my perch however.
“Market multiples are about average looking back over the past 50 years. Average multiples on record high profit margins does not really represent a great buying opportunity”
Actually they’re below the averages since 1960. In order for margins to get materially squeezed you’ll need a large labor cost increase. Last I looked labor unions are giving concessions, not getting gains. Throw in outsourcing, and productivity (tech) and margins appear safe.
Fed Model….it got my clients out of equities and into bonds in ’99-’00.
“Recessions are a useful part of the business cycle. They clear away malinvestment. They do away with unsustainable imbalances.”
On this we agree….and those unfortunate souls who bought speculative real estate at the top (on leverage) will be taken to the woodshed. This is a healthy (long term) reality.
I forgot to even mention all the Trillion$ in LBO/private equity funds, waiting in the wings to by these businesses. Talk about a floor for equities. Have you noticed the insider buying picking up as well?
Good luck.
its a hostile yak-over!
More facts..
From the “it’s not as bad as concensus thinks” dept:
July Monthly Budget Statement…narrows to
(-$33.2B)…vs. street at (-$40.0B)
Keep up the good work SS, while most on the board will be shocked, I am in agreement with what you are saying. Look, even from a geopolitical point of view, how much worse can things get? War in the middle east, Iraq in a mess, Iran, N. Korea, Venezuela all making a lot of noise, now a terror plot (big one) scaring the bejesus out of everyone. If we can just get some of these issues to “go away” for a while, that will release a ton of pressure on the market. Do people on this board really think things can get much worse?
I still believe the housing slowdown/crash is not going to effect as many people as most on this site think. People will just live in their houses or sell them for less than they could 6 – 12 months ago if they need to become more liquid. Big deal. Once the consumer gets used to spending, they typically will not stop whether or not their home is worth $100 – $200K less.
Look, if Iran ever, I mean ever, sets off a nuclear device, they will become the largest piece of “stained glass” on the planet. Nothing and no one will save them – not even their buddies China and Russia. Now, short-term, the market would have some real problems. However, if the device is set off in Israel, Israel goes in and nukes them with our backing. No one is going to be this stupid.
Housing slowdown isn’t going “to effect as much as thought”? Yes it is. Literally, once the lags catch up in Sep/Oct, the market will shave 2000-3000 points off.
Once the sign comes the slowdown will be BIGGER than they thought, the panic will begin.
Yes, nuke Iran and effectively take the second largest oil and gas reserves on the planet out of the supply chain. Not many oil field workers can operate in a Cherynobl(sp?) style radioactive wasteland.
So please, go ahead and stir the warmongering pot so we can crash the world economy. I can live off the land up here no problem, as long as the salmon swim and the moose graze, I’m all set. You folks down there on the other hand…well you might have a wee little problem.[
Great idea, fellas, bravo. NUKE EM! Let me lend you a crowbar to pry your collective heads out of your asses.
Speculators will get hit…not homeowners who pay their mortgage. If the unemployment rate was >7% it would be a different matter. We all agree on a slowdown…which guys like Ed Hyman see as a good thing, as it will take the froth out of the economy that the Fed was not comfortable with. (I like Joe’s “forest fire clearing the rubbish” analogy).
Being bullish in the face of all these “risks” is the tough trade. Selling into bearish sentimet is easy to do (just read most of the posts here) but has historically been the sure way to lose money.
I’d frame it up (again) this simply — IF we have a recession, stocks will underperform. THAT’s the debate and the trade. **** Post Fed hike eras that AVOIDED a recession have enjoyed a surging stock market….another FACT.
JDamon:
Listen to the TOL call from yesterday.
Market Behavior after the Fed Finishes
Now that we have had a Fed meeting without a rate hike, what’s next for the market? Barry Ritholtz summarizes research from several sources. Check out his helpful guide, and then see why you should ignore all of these studies.
per Alaskan Pete:
“I can live off the land up here no problem, as long as the salmon swim and the moose graze, I’m all set. You folks down there on the other hand…well you might have a wee little problem.”
bah, you’ve forgotten that Georgia boys can live off of pork rinds and beer as long as it takes Pete. Plus, you are at least as dependent on the lower 48 for porn as we are on you for oil!
As you pointed out, the Nuke Iran! lobby is composed of people who apparently have no understanding of economic (or political) consequences. Then again, most of them are the equivalent of suicide bombers who want the world to die so that they can get dugout seats in heaven because they helped to end all evil (kind of like the prison warden who rationalizes executing people as helping them).
Eventually, the religious insanity on both sides will become more than anyone can stand which is essentially how the Hundred Years War ended. Until then, you can expect people to see evil as good and talk about turning countries into glass.
wow pete, you’re an “oldster” and you still haven’t learned that appeasement no workie? see there was this guy in England some time back by the name of Chamberlain……..
I agree tho, we missed our opportunity in Indonesia last week to take out Iran’s prez rakhmood ahmenolikiejewie and a bunch of the rest of the evilest slime this world’s ever seen, so enough talkin, let’s get to the nukin’-
JDamon,
I would propose that you are quite naive. Things could get much worse, very quickly.
A subscription to Stratfor.com might prove illuminating as you seem to have a healthy interest in geopolitics. Even if you do not agree with the assessments you will at least come away with the understanding that the global situation is dire. These topics require a healthy respect and you can grow to realize this.
Having the luxury to invest and trade stocks requires a relatively stable backdrop … which we are very, very, very fortunate to enjoy. When large conflicts occur there are epic changes in currencies and markets which take a very sad and tragic toll on everyone.
Our own personal monetary damage following something as horrific as WWIII would be a trivial sliver of a much greater reality of sadness, loss and unthinkable destruction.
Remember the words “Peace and Prosperity”? They are best spoken and experienced in unison.
All those article point out the negative market behaviors post-fed. Any positives? How about some impartiality Mr. Bear.
Speculators will get hit…not homeowners who pay their mortgage.
Actually, anyone who pays their mortgage will be fine, whether they are a speculator or not. The people who can’t afford their mortgage will be forced to default. Lots of people have bought houses recently based on the idea that they could just pay the interest at a low teaser rate. The problem is, when the introductory period ends, the payment will double or triple. If they can sell the house for more than the mortgage or refinance to a new teaser rate, they will be fine. Otherwise, they will probably be defaulting. Read the news. Most people don’t understand what an ARM is or what an interest only mortgage is. Most of them don’t know what they agreed to. Most of them barely qualified for the introductory level payments, so they will have no chance when the payments increase.
Foreclosures are on the rise in most of the country. That will have a trickle-up effect. The unqualified buyers will be unable to pay off their mortgage, so they will either default or try for a short sale. The banks will be forced to sell the houses for whatever they can get, which will drive down prices. Then people who qualified for a reasonable mortgage will become upside down as their house price falls below their mortgage balance. Which means they can’t sell, so they can’t move. If jobs in their area go away, they will be forced to default or sell short, so more properties end up in the “must sell at any price” category. And the cascade continues.
Even the people who can afford an increase of $1k/month in their mortgage payments will have problems. They will have to cut back on consumption to pay the mortgage.
In a real-estate crash, you get people unable to move with no freedom to control their finances while banks are losing money and tightening their loan standards to the point where nobody can afford to buy houses anymore. Bank failures cause panic (even with FDIC insurance, people will get scared). People who thought they were well-off will start questioning that assumption. Everyone will cut back on spending. It’s pretty much a worst-case scenario economically.
If the unemployment rate was >7% it would be a different matter.
What will the unemployment rate be once the mortgage/real estate/construction industries dry up? Who is going to hire anyone when consumer spending is slowing down? The unemployment rate might be low now, but it can’t stay there without real estate continuing to surge.
It is too late to stop real estate from causing a recession. The only questions now are how severe it will be and how long it will last. Do we get a repeat of the great depression? Will the government decide to bail out mortgage-debtors with inflation and repeat the stagflation of the 70’s? Either way I think the Dow is likely to hit 7,000 before it hits 15,000.
“Actually, anyone who pays their mortgage will be fine, whether they are a speculator or not. The people who can’t afford their mortgage will be forced to default.”
This is the only statement I agree with in your post.
That’s what makes a market.
Market Behavior after the Fed Finishes
Now that we have had a Fed meeting without a rate hike, what’s next for the market? Barry Ritholtz summarizes research from several sources. Check out his helpful guide, and then see why you should ignore all of these studies.