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  1. #1

    Thumbs up The effects of Fed tightening

    THE EFFECTS .....
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  2. #2
    DTM's Avatar
    Join Date
    Dec 2004
    Newington, Sydney


    Nice post. I'm very interested myself in that relationship because I think I can remember that the Japanese bubble was pricked by a 6% interest rate.

    Property prices came down 80% in value (from memory) and their stock market now is only about a quarter of what it used to be.

    Maybe the US economy is headed the same way followed closely by all other western countries. Looking at gold, you'd have to seriously think that it is more than likely to occur.

    I'm very bullish on gold just by looking at Market Waves charts.

  3. #3


    Thanks for that marketwaves. An interesting post. Certainly gives one reason to pause and think. I'll certainly use it when I'm teaching my HSC students about Global Business. Cheers!

  4. #4


    My trading is based substantially on this sort of thing. I think that we have seen the highs for quite a while and the next major move is down for the market.

    That's based on what the central banks are doing, yield curves, anecdotal evidence regarding the overall state of the economy, my perception of general sentiment etc. Of course, I'll trade whatever the market does but this is my expectation.

    I think that this conflicts somewhat with the views produced by a T/A approach???

  5. #5

    Default Re: The effects of Fed tightening

    by Peter J. Nelson
    August 22, 2005


    Everyone knows that for the last year and change the FED has been
    raising rates to contain inflationary pressures. It is also common
    knowledge that inverting the yield curve (when short term rates
    exceed long-term term rates) has always caused a recession in the
    past or some major dislocation in the economy. The yield curve is
    now approx. 20 basis points from inversion and the FED is still
    claiming that further rate hikes are necessary and they plan to
    raise at a measured pace into the future. So, I have to ask
    myself, "Why is the FED continuing to raise rates"? and "How high
    are they going to go"? "Are they crazy"? "Don't they realize how
    many jobs are at stake"?

    The following scenario is a possible outlook in the next few years
    as our economy slips into recession and the housing boom goes bust.
    Millions of new unseasoned day trader's all descending on the stock
    market in an attempt to earn a living because of losing their jobs
    as a result of the downturn in housing and other related sectors.
    This could be a very real reality and one possible consequence of a
    housing and construction downturn.

    We are all aware of the frightening aspects of a real estate bust or
    even a 2 year correction. The amount of jobs that are at stake will
    dwarf the lost jobs in manufacturing since 2000. Who knows exactly,
    but maybe 10's of millions. I never expected real estate to surge in
    the first place after 911. I completely missed this one. In fact, I
    quit the home building business myself, sold my personal home and
    have been renting since. Clearly, that now looks like a huge mistake
    as I should have gone all in. I guess we should all be thankful,
    because had it not been for the housing boom, we more than likely
    would be knee deep in a depression at this point.

    But lately, it appears that the seed are being sown by the Fed,
    bubblevision and by many market professionals that the next bubble
    to inflate will be the stock market. With the FED raising rates and
    the media talking housing bubble, the housing boom may be over or
    very nearly so as hot markets are showing signs of inventory builds
    and the average time to sell is increasing.

    The FED clearly engineered the housing boom after 911 with low
    interest rates and oceans of cash to keep the wealth affect in tact
    to keep the consumer spending. It now seems foolish to think that
    they do not have another demented plan to provide another financial
    vehicle to carry the baton for the American consumer. Unfortunately,
    I do not think they have the commodity and energy markets in mind as
    the replacement vehicle. Of course, they may not have a choice as
    this will be up to individual investors and market fundamentals.
    But, since when did the housing market have good fundamentals to
    almost double in the last 5 years? This was engineered and

    My point is simple. That the next financial vehicle to inflate has
    to be a vehicle that the general public can easily take part in and
    where they have a basic understanding: The stock market. The general
    population doesn't understand and don't know how to trade the
    commodity markets or the metals. This is why I think the stock
    market may inflate as millions of displaced construction workers,
    real estate agents, lumber salesmen, etc (this list could go on for
    a mile) will find themselves in front of their computers online day
    trading the market while trying to sell their home to escape the
    nightmare that has unfolded on them. The basic necessity to earn a
    living will force these people to bid stocks to ever higher
    valuations that may exceed the 2000 top and then some. This could be
    the next demented plan of the FED to keep the wealth affect in place
    and keep the consumer spending. Truth is stranger than fiction.

    When the housing market goes bust, what other jobs are going to be
    available? Pouring coffee at Starbuck's? Working at Wal-Mart?
    Flipping burgers at McDonalds? I don't think so. Most businesses
    will be contracting at this time because of slower consumer spending
    and lower demand. Also, a lot of these people are very well off and
    some have tidy little nest eggs and unless they can find quality
    higher-end jobs, they might be forced to turn to the markets for
    financial speculation. This might have something to do with
    explosion of gambling the last few years as many dot-commers and
    unemployed manufacturing working may have turned into professional
    gamblers in order to make a living because they were unable to find
    jobs. What a world we live in. Here's a job for people. Become a
    gambling addiction counselor and you will probably make a fortune in
    the future.

    For the last 2 years, the FED and bubblevision (Jim Cramer, Larry
    Kudlow) seem to be relentlessly trying to herd investors long the
    stock market, while at the same time trying to work the commodity
    markets lower with rate hikes and statements like "Commodities are
    OVER" (Jim Cramer) Commodity prices will go higher and higher unless
    they can slow the housing market and the economy to a crawl. They
    may succeed. The economy is slowing with every increased rate hike
    and we may already be slipping into a recession which would put
    major downward pressure on commodity prices for the next year or so
    as supplies build and demand slows. Recent market action might be
    confirming this. Lumber is down. Oil may be topping. Homebuilders
    are down and may be topping. Silver did not confirm gold's rise and
    now both are declining. Home Lenders are declining.

    The housing boom may be ending from its own weight and not because
    the FED is raising rates. One look at the mortgage statistics tells
    the tale as more and more interest only loans and negative
    amortization loans are being issued. This clearly shows that the
    market is running out of buyers at these lofty prices and is now
    scraping the bottom of the barrel to lend to anyone under any
    circumstance just to keep the gears moving. This looks like it will
    end in catastrophe for lenders as well as buyers and the job losses
    that will ensue will be horrifying once this trend reverses. I am
    quite sure the FED knows this and are working hard to come up with
    some other twisted scheme to keep us afloat for a little while
    longer. Stock market rally......

    I believe the real reason they are raising rates is to defend the
    dollar at all costs because of our growing need to attract foreign
    capital. The recent strength in the dollar has been greatly aided by
    the Repatriation Act, but this will end in October of this year.
    Then we shall see if the dollar can hold up or continues its slide.
    If it resumes its downtrend this will cause the FED to continue to
    raise rates regardless of what is happening to our economy. We
    cannot afford to let the dollar fall below the 80 level, as this
    could cause a tsunami of selling by foreigners and we could have a
    real currency crisis and a run on the banks. Therefore, inverting
    the yield curve seems inevitable at this point and that is why the
    bond market is not capitulating. The bond market is sensing a major
    slowdown in the economy and does not care that the FED is being
    forced to raise rates in order to defend the dollar. The FED is
    running out of options and may now be forced to use unconventional
    measures to get the bond market to sell.

    We need higher long term rates to keep the housing market from
    getting out of control. Too late. But how do you get the bond market
    to sell if they don't want to? Higher inflation? yea, that
    historically has always done the trick, but we have seen much higher
    inflation the past few years and still no capitulation. Shorting the
    market won't do it. You could stop issuing the 10 year and only
    allow selling, (kidding) as this would cause a bond crash and rate
    spike that would send us hurdling into depression. You could re-
    issue the 30 year, (in progress) in hopes that more supply will
    relieve pressure from the 10 year. Who knows if this will have any
    impact at all.

    How about a raging bull market in stocks? This would entice bond
    investors to sell in search of higher returns in the stock market
    and at the same time will cause higher interest rates that will
    attract even more foreign capital to our markets which will defend
    the dollar and keep inflation contained as we will not have to print
    as much money to fund our growing deficits. Seems logical to me. We
    need a raging bull market in stocks. This is why I think the stock
    market is the next bubble to inflate. The FED will engineer and
    encourage this. Seems demented, but recent signs seem to point to
    this. It might not be wise to fight the FED. This seems to be what
    they need and want. The next question is "How are they going to get
    a raging bull market in stocks"?

    I have been watching every tick in the market for the past 3 years
    and this past few months have been strange. I seem to be noticing a
    lot of bizarre market action that has me feeling that there may be a
    concerted effort underway to support stocks. What happened after the
    London bombings was no fluke. I do not want to be labeled a
    conspiracy theorist, but something is clearly happening that I can't
    explain. Last year the market was very sensitive to rate hikes and
    higher oil prices. Now it seems that this is completely being
    ignored and every break of key support levels in the market is met
    with rapid buying. Also, reports that some large player is in the
    S&P trading pit buying anything at any price. I wonder who that is?
    This is no longer a free market. Has anyone noticed all the short
    squeezes that have been created on many large cap stocks. Maybe its
    just sector rotation into large cap and since small caps may have
    peaked maybe this makes sense and can be explained. It feels like
    something more to me. Who knows, maybe the Chinese Government, at
    the request of the FED, is now purchasing U.S. stocks instead of
    Treasuries. Maybe we have told them that the U.S. housing boom may
    be over and our consumer will no longer be able to consume Chinese
    products unless we can provide another vehicle to provide asset
    appreciation to support further consumption. Higher stock market
    returns. Maybe China is upset because we would not approve the sale
    of Unical and now they are quietly going to purchase our companies
    one by one with our own money. All potential possibilities. I guess.

    Today, CNBC ran a story about how stock market returns have exceeded
    real estate returns over the last 20 years. They were actually
    hinting and telling people that it may be time to sell real estate
    and put the money into the market. People will probably do it to.
    The relentless bullish spin along with recent market action has me
    questioning whether this market might go a lot higher. Something may
    be brewing?

    They want us to move into large cap growth in an attempt to move the
    Dow above 11,000. If they can get the Dow above this level it might
    have a very big psychological impact on investors and the general
    public as well as foreigners. This could unleash the oceans of cash
    on the sidelines and in the bond market as well as cause massive
    short covering that could get the animal spirits of rampant
    speculation going in the market.

    Once the FED is done raising rates or signaling they are almost
    done, the market may explode to the upside. Not based on
    fundamentals or any credible economic reasons, but solely based on
    momentum and mountains of cash sloshing around the globe. Since when
    has the market cared about valuations anyway (BIDU @ 1,500 x
    earnings) As the housing sector corrects, I expect to see a
    explosion in day trading as millions of of out of work people will
    put whatever money they have or maybe even borrow money to get into
    the game.

    When I look around, I just do not see any other financial vehicle
    for the American consumer to inflate to facilitate their consumption
    needs. Yes, commodities, energy, gold and silver all have great
    fundamentals now, but these great fundamentals might not look so
    good if housing turns down in a serious way. With interest rates
    rising and a slowing economy and demand for goods slowing, who knows
    how this may look in a year? Gold and silver fundamentals seem good
    under either scenario as fear and a flight to safety may send metals
    much higher. Don't know about commodities or energy though. They
    more than likely would fall because demand would fall substantially.

    Of course this is just one of many predictions that have been put
    forth and I have no specific or insider knowledge to back this up.
    Only to say that, this business is about looking into the future and
    trying to predict human behavior and then positioning yourself to
    gain financially before the masses see what is coming. This is just
    my gut instinct for what will happen if the FED inverts the yield
    curve and/or is successful in taking down the housing market. I
    shutter to think of the amount of jobs that will be affected and
    what these people will do to find work to survive. A housing
    downturn is inevitable at some point. Housing just can't keep up
    this blistering pace forever.

    The long term fundamentals of the stock market are terrible and I am
    confounded as to why anyone would want to buy stocks given the
    historical overvaluations, low dividend yields, problems with Social
    Security, Medicare, underfunded pensions, outsourcing and the like
    that are getting bigger by the day. But, if you're out of work and
    you need to make money, the stock market is a potential source. I
    suspect that's why the gambling craze has become so big. Many people
    have turned to pure speculation to make ends meet. All these people
    are going to have to find work somewhere. Day trading may become the
    next big thing.

    Unfortunately, I'm sure that if this does happen it will turn out
    ugly in the end. I expect a blow off top as the professionals are
    distributing stock to the public all the way up and in the end the
    public will again be taught a valuable lesson about the treacherous
    nature of financial speculation. This time the crash may make the
    dot.com bust in 2000 look like a bad hand of poker at Vegas. And the
    public will hold for the long term as the 2000 decline and recent
    recovery has taught them to hold for the long term because the
    market always comes back. Not this time.

    I feel strange thinking that this may become a possibility as I have
    been such a bear on stocks since 2000. I also know that psychology
    of market participants is so important and at major turns the market
    has a very efficient way of changing investor sentiment at the very
    time when the market is finally about to go your way. Many prominent
    bears have defected to the bullish side lately, VIX near record
    lows, Bullish sentiment at or near record highs. Unbelievable
    complacency. All of these are not good signs of a major kick-off
    move to the upside. So, maybe this is just another sign that the
    bullish sentiment is coiling up to unleash a downside move that will
    make history. WAVE 3 DOWN - PHASE II OF THE BEAR MARKET. We'll see.

    But, 2 weeks ago when I bailed out of BIDU at $75 for a $10 gain,
    only to watch it trade another $76 points higher, I felt that I had
    witnessed a preview of things to come and that this was a
    psychological dinner bell for the Wall Street world that the bull is
    here to stay and set to begin once the FED is done raising rates. If
    we can get through the September, October massacre without any major
    dislocations, the market may unleash a rally that this bull cycle
    has not seen yet. Anything hot with descent fundamentals or anything
    associated with China will be granted license to be bid up to
    unimaginable levels.

    I plan to cover all shorts during this current correction unless
    selling pressure really picks up and support levels break. Lots of
    head and shoulders patterns have formed lately and these are the
    supposed to be the most reliable patterns. I will be watching
    closely to see if whipsaws start to occur or if support fails on
    high volume. Keep an eye on large caps for signs that a concerted
    effort to rally the heavily weighted percentage stocks in the Dow.
    What a strange world we are living in. But if you can't beat'em, I
    guess you got to join'em.

    Best Regards, Good trading.

    2005 Peter J. Nelson

  6. #6
    Rotaredom wayneL's Avatar
    Join Date
    Jul 2004

    Default Re: The effects of Fed tightening

    Quote Originally Posted by MARKETWAVES

    Volatility cometh once more!

  7. #7

    Default Re: The effects of Fed tightening

    Quote Originally Posted by MARKETWAVES
    by Peter J. Nelson
    August 22, 2005

    2005 Peter J. Nelson
    Nice article there Market. A few things start to make sence to me now. If Nelson is right, our long-term investments are in for a big surprise...

  8. #8

    Default Re: The effects of Fed tightening

    Maybe ride the wave up while profit taking and then using the profits to buy gold ingots to stash under the matress.

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