fed halts rates? NOT!

[mathjak107]

i can't seem to find one time in the last 80 years when the fed halted or dropped rates when:

unemployment was so low
oil at record levels
gold was rising

commodities were soaring

the market was poised to make new highs

long bond was below 5.5%



so why does the markets think this time will be different?

 

[Craig]

I can only credit it to the optimism of momentum.

March of 2000 ... Dell, Cisco, etc. will not go down, it is a new economy, the Internet is nirvana. Bang.

2005, interest rates are down, they'll go up a little, don't worry. Gold, lumber, oil, real estate, all soaring ... no big deal. The dollar is solid, we'll be fine. Inflation is dead, deflation is the concern.

Hard for me to see the dollar getting better any time soon, but I'm an amateur, along for the ride. We'll see.

 

[mathjak107]

problem is i only see demand growing for commodities...even if we slow down here world wide demand is growing beyond supplies.of course this is what we read and hear and have to believe its true to some extent because none of us really know ourselves whats up............eventually these prices have to work its way thru to us eating into our nest eggs and pressuring rates.....
the thing about inflation is maybe this year it didnt effect you ,and maybe next year but in the blink of an eye all of a sudden it gets to us eventually....just about everything has doubled in price over the last 2 decades with few exceptions....theres a lot of inflationary pressure out there

 

[Maximillion]

US Companies are getting less Foreign Currencies to buy their goods, earnings will be down.

Foreign Companies are paying less for US Goods, not passing on these savings, their earnings will be up.

Bernake at one point must step to the plate, make a decision that will show a clear Fed direction, you either want a Weak or Strong $ Policy, not just Talk, but Action.

My guess is you will not see anything major until after your Elections, then you will get the Blame Game.

 

[audreyh1]

I think it's been wishful thinking more than anything.

This has been a particularly long string of rate hikes because the Fed started from such an extremely low interest rate.

You see, the market usually rallies big time once the Fed stops raising rates. People have been chomping at the bit anticipating this rally. But in fact we've already had a big rally anticipating the end of tightening.

This is why I hold to my "sell on the news" prediction. If everyone is anticipating a bit end-of-raising-rates rally, it won't happen (especially since it already did).

Maybe another thing..... The market really hasn't been taking inflationary forces that seriously - neither bonds nor equities. If the market does start taking inflation seriously that's grounds for a pretty good sell off on both sides.

Audrey

 

[perinova]

Audrey does it mean you think that the market will go on the upside when the rate hikes will be really over?

My biggest fear is a 1989 Japan type situation where the market drops by ~50% and stays there for several decades. And they now are at 0% interest rate not good for bonds either. I hope that there are no similarities. There is at least one: They had an overinflated real estate market.

A "Japanese" scenario is the worst for ER.
It is the biggest reason for getting into a high ratio of foreign securities. I personally put a 2:1 US:foreign but I sometimes think that I should go to a 50:50 ratio.

 

[Nords]

My biggest fear is a 1989 Japan type situation where the market drops by ~50% and stays there for several decades.  And they now are at 0% interest rate not good for bonds either. I hope that there are no similarities. There is at least one: They had an overinflated real estate market.

We lived through that in Hawaii. The Japanese RE market of the '80s was right up there with NASDAQ 5000. Today's American RE markets aren't anywhere near that silliness, even including Manhattan & SF.

The Japanese banking system was totally corrupt with many businesses cross-holding each other's stocks and boards of directors. Insider trading, collusion, price-fixing, and general sloppy lending ran rampant. I'm not trying to claim that the American banking system is anything remotely resembling a paragon of virtue, but it's a long way from the Japanese system of the late '80s.

The Japanese govt refused for many years to acknowledge that some action had to be taken to fix the situation, and ... eh, well, I can see that this analogy is getting pretty shaky so I'll stop here.

I don't think I'd worry about Japan when you can have 1966-82, especially '73-74, made right here in America. That's one reason Siegel flogs dividend-paying stocks.

 

[audreyh1]

Audrey does it mean you think that the market will go on the upside when the rate hikes will be really over?

No I don't. My point is that the market has already anticipated this event so many times, and rallied on the "imminent halt" several times already without going back down, that it won't have the expected post halt rally, because it has already had it!

I rather expect instead that the Fed truly halting will cause fear that the economy is weakening and/or that the Fed figured out they overdid it with the interest rate hikes. So halting could actually precipitate a sell off event (unless, of course, the market has already sold off quite a bit for other reasons).

Audrey

 

[wabmester]

We lived through that in Hawaii.  The Japanese RE market of the '80s was right up there with NASDAQ 5000.  Today's American RE markets aren't anywhere near that silliness, even including Manhattan & SF.

Nords, what are you basing that statement on?

At the peak of the Japanese real estate bubble, the total value of their real estate was about 140% of GDP.

Guess where the US is right now. Yup, at about 140% of GDP.

 

[Nords]

Nords, what are you basing that statement on?
At the peak of the Japanese real estate bubble, the total value of their real estate was about 140% of GDP.
Guess where the US is right now.   Yup, at about 140% of GDP.

I'm basing it on Gensiro Kawamoto buying over 150 homes for their rental income without even bothering to exit his limo.  I'm not sure whether he actually got out of the limo when he pulled a similar stunt in California.
I'm basing it on the number of incomplete golf courses on these islands in the 1990s... imagine Jarhead as the weeping Indian in that 1960's pollution commercial.
I'm basing it on Japanese investors overpaying for Rockefeller Center, Pebble Beach, and many fine Hawaii properties-- all of which have since changed hands at much lower prices.

Finally, I'm basing it on DESERT STORM stopping the Japanese RE market in its tracks.  I haven't seen a similar event with that impact.  One might even think that the second Gulf war was that event and that RE wasn't overvalued enough at the time to be affected.

I'm not saying that RE isn't overvalued.  The majority of it is overvalued.  I'm saying that the next landing will be a lot softer than the last one, and there won't be as brutal & bloody or as prolonged a period of retrenchment before values take off again.

 

[wabmester]

I'm basing it on Gensiro Kawamoto buying over 150 homes for their rental income without even bothering to exit his limo.  I'm not sure whether he actually got out of the limo when he pulled a similar stunt in California.

Heh. I was in SoCal back then. Affordability had reached an all-time low. The affordability index had reached about 14%, if I remember correctly. Today, it is at 10-12%.

Today, we have Hollywood actors becoming Las Vegas real estate developers. We have a couple of TV shows. One called 'Flip This House' and another called 'Flip That House'.

Buckle your seatbelts. It's deja vu all over again.

 

[dusk_to_dawn]

I think it's been wishful thinking more than anything.

This has been a particularly long string of rate hikes because the Fed started from such an extremely low interest rate.

You see, the market usually rallies big time once the Fed stops raising rates. People have been chomping at the bit anticipating this rally. But in fact we've already had a big rally anticipating the end of tightening.

I agree. I think many months from now we may see headlines saying something like "FED raises an unprecedented XX time in a row." I think the market believes the rate hikes will stop soon. If it doesn't stop soon, I think many will leave stocks for short term interest bearing investments.

 

[Nords]

I think many will leave stocks for short term interest bearing investments.

Speaking as an ER with a high percentage of our portfolio in equities, I say...

... bring it on!

 

[wabmester]

... bring it on!

You have a lot of cash just waiting to buy on the dips or something?

Here's the thing that worries me about a potential crash: if we crash, we'll probably crash hard and long.   Perhaps on an unprecedented scale.

Remember that stat I gave you about the housing market?   140% of GDP.   That datum was apparently stale.   I read one report today suggesting that we were at 159% of GDP in 2005.    Historically unprecedented.

So, what would life be like if housing did a little mean-reverting?    We'd be looking at a 40% drop in home values.

What would happen to those jobs created in the housing sector these last few years?   Vaporized.

What would happen to consumer spending funded by a negative savings rate and home equity loans?   Poof!

I'm not predicting a Japan-1990-scale downturn, but I don't think you should write off the possibility, and certainly shouldn't wish for such a thing to happen.

 

[laurence]

Best way out is to inflate away the real value. A few years of 10% inflation and a flat housing market would set things to right.

....what? What's that you say about market inneficiencies, hurting those on fixed incomes, weakening balance of trade? Hey man, I got a 300k mortgage fixed at 5%, sometimes I gotta think of me!

 

[Nords]

You have a lot of cash just waiting to buy on the dips or something?

Yup. Not a lot sitting around right this minute, but we wouldn't hesitate to raise it. We'd be happy to sell off more Tweedy if necessary. Especially now that it appears cap gains rates are staying low.

Another advantage of a recession market is dividends. Since we're selling off Tweedy over the next few years for spending money, we have our IRAs and our value/dividend ETFs set to reinvest their dividends. I'd rather reinvest dividends in a 2001-2003 market than during a 1995-2000 market.

I'm not predicting a Japan-1990-scale downturn, but I don't think you should write off the possibility, and certainly shouldn't wish for such a thing to happen.

Somewhere in the next 10 years we'd like to buy an investment condo. Part of it is helping the kid with a leg up into the housing market after she graduates college should she decide to stay on Oahu, other parts of it are if my parents-in-law decide to downsize, if my father decides he's had enough of Colorado winters, or if spouse just wants to flex her flipping muscles. We're also surrounded by military bases with decent transient tenants who'd be happy to rent a condo from us.

But we don't think we'd need to spend $300K for a nice 3BR/2BA, which is approx the Oahu condo median. Having real estate back off 10-20% would push enough IO-mortgaged homeowners over the edge to start bringing up those $225K distressed sales or even those $180K "good starter condo" places.

This is the first time in my life where I have a long-term appreciation for the recession part of the business cycle as well as enough time on my hands to be able to do something about it. I also know enough about my sense of timing to make sure I don't leap all over the next MOVI-style investment too early. Yes, a recession would bring pain and suffering, but it would also bring very profitable opportunities.

I'm also pretty tired of all "The sky is falling!!" screeching that we've been hearing ever since the market bottomed out in 2003. Enough already, the anticipation is killing me...

 

[wabmester]

I'm also pretty tired of all "The sky is falling!!" screeching that we've been hearing ever since the market bottomed out in 2003.  Enough already, the anticipation is killing me...

The sky is falling, but it's in no hurry. 

I felt that stocks were getting expensive in 1995, but I didn't bail till 1999 when valuations had become absurd.   I still had to wait six more months for the sky to fall.

In 2001, I thought houses were getting expensive.    But I didn't bail till last month when valuations finally looked unjustifiable by any metric.   I'd have no trouble waiting a couple more years to get back in.

But sometimes it does take a ton of patience waiting for a recovery.    I think the SoCal real estate market was largely under water for about 8 years.    Japan showed no sign of recovery for 13+ years.   And I believe that the real returns from US stocks were essentially zero for about 14 years starting in 1968.

If you're getting antsy waiting a few years for the next crash, imagine how you'll feel waiting a decade or two for the recovery.

 

[cute fuzzy bunny]

I'll feel ducky about it, as we're still investing new money and just taking dividends, similar to Nords situation. In a full withdrawal situation where we might be selling shares down to pay the mortgage, I'd be starting to get scared shitless...

In the meanwhile, it'll probably be a good 18 years before I need to raise cash for Gabe's education. I'm still mulling over doing a 529 for him for that and a nice near term downturn for me to invest into that would be pretty dang welcome.

Remember folks...its not an irrevocable "loss"...its a "sale". The longer the "sale" goes on for, the better off you are if you're buying or reinvesting.

If you're selling the same goods into the same market...maybe not so much.

 

[wabmester]

Remember folks...its not an irrevocable "loss"...its a "sale".  The longer the "sale" goes on for, the better off you are if you're buying or reinvesting.

Unless, of course, the sale outlives you.

Here's one of my favorite fed economists who will tell you that sometimes you have to wait 25 years for stocks to outperform bonds:

How Long is a Long-Term Investment?

 

[cute fuzzy bunny]

I think my main pivot point is that over 10-20+ year periods, stocks usually outdo inflation. Bonds...not so much.

I guess you can take a lower risk option that you know is going to lose you money over the long haul, or take one that has a good chance of winning. No brainer for me.

And dont get going on the ibonds/tips thing...unfortunately I dont live in an area where CPI=> inflation.

 

[TargaDave]

The sky is falling, but it's in no hurry.
I think the SoCal real estate market was largely under water for about 8 years. Japan showed no sign of recovery for 13+ years. And I believe that the real returns from US stocks were essentially zero for about 14 years starting in 1968.

If you're getting antsy waiting a few years for the next crash, imagine how you'll feel waiting a decade or two for the recovery.

Wab, I completely agree with you.

10 year patience you say? You're talking to a general group here that can't go three days without checking their portfolio status or what the weekly sentiment is. Sounds crazy but I think most people would have an easier time handling a quick crash rather than a '66 to '82 scenario. I think they will all go nuts in a long term flat market with no quick way to out smart it.

I am guilty of the same impatience myself but at least I am not in a burning rush to hang up my spurs with "just enough" to pass Firecalc.