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Have no fear, the fed put is here!
Old 11-30-2007, 10:51 PM   #1
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Have no fear, the fed put is here!

I loved this fake interview of William Poole on the fed put:

Economist's View: Market Bailouts and the "Fed Put"



How has this affected investor behavior?
Consider the second of Graham and Dodd’s “Four Principles for the Selection of Issues of the Fixed-Income Type.”
The rule that a sound investment must be able to withstand adversity seems self-evident enough to be termed a truism. Any bond or preferred stock can do well when conditions are favorable; it is only under the acid test of depression that the advantages of strong over weak issues become manifest and vitally important. For this reason prudent investors have always favored the obligations of old-established enterprises which have demonstrated their ability to come through bad times as well as good. (Graham and Dodd, 1951, p.289)

...How many investors today measure the value of a bond by the likelihood that it will continue to pay interest “under the acid test of depression”? How many investors today maintain portfolios robust against the possibility of inflation of the magnitude experienced in the 1970s or deflation of the magnitude experienced in the early 1930s? The answer, I believe, is “not many.”
I'm guessing this is where the point you made above that it is not moral hazard if behavior changes in a desirable way comes into play?
The fact that few investors worry about extreme economic instability is a benefit of sound monetary policy and not a cost; changes in investor practice are conducive to higher productivity growth. The same is true for changes in household and firm behavior reflecting the greatly reduced risk of economic depression or even severe recession of the magnitude of 1981-82. If we did not believe that economic stability is good for the economy and for society, why would a stable price level and high employment be monetary policy goals? Just as a deductible changes behavior of insurance policyholders, so also does economic stability change investor behavior.


Basically, the fed is telling us that we no longer have to worry about inflation, deflation, depression, deep recession, or stock market crashes!
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Old 12-01-2007, 12:45 AM   #2
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This is interesting. It isn't exactly a fake interview; more a synthetic interview created by using his recorded statements in speeches as answers, and "asking" questions to focus us on just what is really being said here.

One thing for sure, the Fed and likely the administration believe this fully. It may even be true. I say "may", not about the existence of the Fed Put witch obviously does exist; but it may even be true that it will continue to work in spite of the moral hazard that this creates. If so, we should eventually get PEs of 100+, just like that idiot back in 1999 predicted. Also long term interest rates of 1% or less, like our eastern brothers in Japan.

We can sell the books of Ludwig von Mises and Frederich Hayek as mere historical curiosities. Same with the much more recent work of Hyman Minsky.

Twaddle, thanks for posting this.

Ha
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Old 12-01-2007, 02:29 PM   #3
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Quote:
Originally Posted by haha View Post
It may even be true.
I want to believe. I never understood where the "100% stock" types were getting their kool-aid. Man, that's tasty stuff. It potentially explains the structural change in the market since the 1980's.
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Old 12-01-2007, 02:39 PM   #4
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Originally Posted by twaddle View Post
How many investors today maintain portfolios robust against the possibility of inflation of the magnitude experienced in the 1970s or deflation of the magnitude experienced in the early 1930s? The answer, I believe, is “not many.”


The same is true for changes in household and firm behavior reflecting the greatly reduced risk of economic depression or even severe recession of the magnitude of 1981-82.
I guess this means that we don't need to do anymore FIRECALC runs and can RE with an 8% withdrawal rate

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