
The Fed caused 93% of the entire stock market's move since 2008 - aburan28
http://finance.yahoo.com/news/the-fed-caused-93--of-the-entire-stock-market-s-move-since-2008--analysis-194426366.html
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Obi_Juan_Kenobi
I'm deeply suspicious of these 'just so' explanations. While it's not at all
surprising that QE would be a major driver of the past several years, I'm not
convinced that the flat graph is so meaningful. The regression is interesting,
but ultimately it is just correlation, and only one of many tested.

I also don't think the market is neatly divided into segments of having a
single dominant driver. That's a major assumption about how the market works,
and is supported by simply finding 'flat spots' on the many charts produced.

I think this is valuable analysis, but conclusions like "the Fed caused ..."
are just nonsense. A smart investor could use this information to look for
trend changes, but they do not explain the market.

~~~
Kaizyn
Are former Fed Chairman Bernanke's comments on the cause of the Great
Depression another case of a 'just so' story? Why would it be so hard to
believe that the Fed could cause massive changes in the market?

[http://www.federalreserve.gov/boarddocs/Speeches/2002/200211...](http://www.federalreserve.gov/boarddocs/Speeches/2002/20021108/default.htm)

~~~
justin_vanw
The point is that any theory made after events are observed cannot use the
events it is explaining as evidence that it is correct.

The reason is that given any dataset, you can come up with thousands of
stories that explain the data perfectly, but have no predictive power. This is
also called 'overfitting' in machine learning contexts.

However, a prediction made before events can use those events as evidence of
the correctness of the theory.

What is the evidence for the theory in this article? Well, it is that it
explains past events. But those events can't be used as evidence for the
theory, and if that is all there is, this is a 'just so story'.

Another way to say this is: "The fact that a theory does not conflict with
existing observations is not evidence that it is correct."

~~~
throwaway_xx9
> The point is that any theory made after events are observed cannot use the
> events it is explaining as evidence that it is correct.

That's complete nonsense. Theories are almost always made after collecting
observations.

They may be confirmed using future observations, or by statistical analysis,
however.

~~~
refurb
He's right. It's the same reason why the FDA forces you to state your
hypothesis prior to running a clinical trial. If you just run a trial then
it's pretty easy to cherry-pick the data that supports your claim.

There is nothing wrong with looking back to see if a variable explains an
observation. However, the true test of the hypothesis is predicting future
events.

~~~
eru
They don't have to be future. They just have to be unknown when the hypothesis
is formulated or selected.

Because we can't trust people, future is a safe and sufficient choice. It's
not necessary. (That's why machine learning people use hold-out sets.)

------
ZoeZoeBee
One of the issues I have with the article, and many simple financial articles
is the assertion that the Fed "stopped" purchasing bonds in late 2014.

The Truth is the Fed Continues to purchase Treasury Bills and Mortgage Backed
Securities for all that reach maturity. More than half of the purchases during
QE mature within 5 years, as it stands now rather than allowing the Bonds to
Mature and Come off the balance sheet the Fed simply repurchases them, what
they aren't doing is increasing the amount of purchases as they were during
QE.

This is why the amount of Treasuries and MBS owned by the Fed has remained
constant more than a year after QE ended.

$2.4 Trillion in Treasuries
[https://research.stlouisfed.org/fred2/series/TREAST](https://research.stlouisfed.org/fred2/series/TREAST)
and $1.75 Trillion in Mortgage Backed Securities
[https://research.stlouisfed.org/fred2/series/MBST](https://research.stlouisfed.org/fred2/series/MBST)

~~~
iofj
So apparently the government has fixed matters.

One starts with a big risks banks would go bankrupt as a result of an asset
bubble.

One gets the government to fix things using an unlimited supply of government
spending. Stir thoroughly, and we get :

Big risk that big banks AND the government will go bankrupt (ie.
hyperinflation, because "governments can't go bankrupt") as the result of an
asset bubble.

------
kloob
I have many problems with this article and its title. The title first implies
that there is causation here -- and does little to prove causation, and
instead the article cites correlation to back up the title.

The economy is highly complex, and I suspect that using 5 variables to
describe it is wrong.

Additionally, the writer doesn't mention this, but if the Fed bought up
equities as part of their quantitative easing program and the market grew and
recovered further, then their assets would naturally grow with the market. I
don't think this was accounted for.

~~~
ZoeZoeBee
$4 Trillion dollars between 2008 and 2014 added to the Fed's balance sheet,
coupled with zero percent interest rates afforded to the Special Few who were
able to take out loans and sell bonds to buy back stocks to drive up the price
per share, definitely caused the stock market to go up.

The stock market is not the economy...

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opheicus
I'm skeptical of the methodology and explanation as presented in this article,
but similar things have been observed in the academic literature.

The most famous one I can think of is the pre-FOMC announcement drift
([https://www.newyorkfed.org/medialibrary/media/research/staff...](https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr512.pdf)).
The authors observe that "80% of annual realized excess stock returns since
1994" are accounted for by the 24 hours of trading before an FOMC
announcement. If we take this as evidence that the Fed "causes" most of the
stock market's move (which we probably shouldn't), the effect is nothing new.

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tostitos1979
Interest rates NEED to go up now. The housing market in many major cities is a
disaster. Toronto seems to have a bubble of epic proportion. You can buy a
million dollar home at 3K a month. As home buyers, our jaws are on the floor.
It is absolutely unfair what has happened to people of my generation. We just
had a kid and I'm just sad how bad of a situation we are in wrt housing.

~~~
gozur88
>As home buyers, our jaws are on the floor. It is absolutely unfair what has
happened to people of my generation.

I agree interest rates need to go up, but rising rates aren't going to improve
the housing market. When I graduated from college the housing market in my
area was booming while rates were at 12%. If you think you can't afford a
house now, wait until your 3k monthly payment buys you a $150k house.

~~~
tostitos1979
When I factor in taxes, I'd prefer a 150K home with 20% interest rates. Making
200K and 1.5 million houses (with me paying a 50% marginal tax rate), I feel
life is impossible.

~~~
gozur88
Which would you rather be selling after 30 years - a $1.5m house, or a $150k
house?

Also, house prices do not necessarily go down when interest rates go up. If
interest rates are rising because of inflation people rush into the housing
market looking for an asset that will hold its value. You may end up with the
worst of both worlds - $1.5m houses (in constant dollars) and 12% interest
rates. Just because all you can afford is a $150k house doesn't mean one will
be available at that price.

~~~
tostitos1979
Canada has another weirdness, which is most mortgages are 5 years (amortized
over 25 years). I agree with your argument that housing may not fall
precipitously when interest rates rise. I am REALLY worried what will happen
to us in 5 years when we have to refinance the home loan. I guess if things
get bad, we'll just have to sell the house (assuming that prices didn't fall).
The whole thing makes me feel uneasy.

~~~
iofj
That's not the worst of it. Currently interest rates do not cover the risk of
non-payment. If you calculate out, at the standard default rate, plus risk-
free interest rates, plus a certain amount to do all the admin work on a
mortgage.

It just doesn't make sense for the banks to do mortgages at the moment.
They're losing money on it. A little bit at the moment, but if the default
rate were to go up by even 1%, God help us. Banks would be dropping like
flies.

That's of course what bubbles do : they make the system more unstable. But
that's what everybody's denying as well, despite the fact that a trivial excel
sheet will tell you the obvious. A tiny problem will crash the system at the
moment. Especially in Europe.

~~~
tostitos1979
In Canada, we have something called "CHMC". Basically, the govt will insure
mortgages. The banks have little risk IMHO ... majority of the risk is assumed
by the taxpayer and the borrower.

~~~
ZoeZoeBee
The US basically did the same when it took over Fannie and Freddie in 2008,
it's not something which is spoke of often in the US but for all intents and
purposes the US govt and Federal Reserve own most of the mortgages in the US.
The US nationalized Fannie and Freddie, under the false premise they would be
re-privatized after paying back the government. Instead they paid back the
government in full years ago and now the interest from mortgage payments goes
right to the treasury. They also for all intents and purposes Nationalized
Student Loans with Obamacare and the "Health Care and Education Reconciliation
Act of 2010"
[https://en.wikipedia.org/wiki/Health_Care_and_Education_Reco...](https://en.wikipedia.org/wiki/Health_Care_and_Education_Reconciliation_Act_of_2010),
where by all of the Interest Rates made off of student loans helps pay for
Obamacare. As it stands the US Treasury is profiting to the tune of over $100
Billion a year, though its hardly mentioned, I'd venture to bet 90% of the
general population is completely unaware. [http://www.wsj.com/articles/fannie-
and-freddie-forever-14515...](http://www.wsj.com/articles/fannie-and-freddie-
forever-1451520683)

~~~
iofj
But all that is even worse. It doesn't help for the fundamental problem :
mortgages are losing money slowly and (I just checked) corporate loans and
bonds are losing money a bit faster.

If the government owns those loans, once their losses accelerate ... well ...
we know how they "fixed" that problem for student loans.

[http://www.forbes.com/sites/stephendash/2015/10/25/why-
stude...](http://www.forbes.com/sites/stephendash/2015/10/25/why-student-
loans-are-so-difficult-to-discharge-in-bankruptcy/#779b10f11430)

[http://www.bankrate.com/finance/student-loans/student-
loan-h...](http://www.bankrate.com/finance/student-loans/student-loan-horror-
stories-1.aspx)

~~~
ZoeZoeBee
Oh we're on a collision course with reality, and it is not going to be pretty.
Buckle Up and Enjoy the Ride.

------
shard
This seems strange to me. If the author "scoured hundreds of different
factors" to find the ones to make the graph flat, isn't he just picking the
data to match his theory? Surely if he searched through enough factors he
would eventually find ones to support his theory. For those of you who
understand regression analysis, does his claim that his thesis is confirmed
with regression analysis hold water?

~~~
mywittyname
This is what I think too. The damn ratio of equity prices to fed assets is
pretty much flat during 80-90% of his graph. If you truncated the graph at
1995, it would show the same trend.

In fact, I think his graph suggests the _opposite_ of his conclusion: which is
that fed assets should maintain a steady ratio with equity values for strong
economic growth. The times when they diverge coincide with economic bubbles.

------
ikeboy
Blogspam of [http://feddashboard.com/one-force-drove-each-stock-market-
bo...](http://feddashboard.com/one-force-drove-each-stock-market-boom-do-you-
know-which)

