More views on when the Fed stops, via WSJ’s MarketBeat:

"David Rosenberg, chief North American economist at Merrill Lynch, goes one point
further. He said in an interview that not only do markets display a lackluster
performance, but often periods of crisis come shortly after the Fed goes on
hold. "If we take a look in the past Fed pauses, they’re the periods the
arteries tend to harden and financial strains come in," he said.

The market plunged in October 1987,
but the Federal Reserve was on hold by early September, he said. "It wasn’t a
case where the Fed was tightening on the 16th and the market crashed on the
19th," he said.
 
In 2000, strains started to show in the technology sector,
but the Nasdaq Composite was virtually flat on the year in mid-2000. The Fed had
ended its tightening campaign (six increases in 11 months) in May; the Nasdaq
lost more than 40% in the second half of 2000.
 
The Fed
tightened rates six times in 1994 and once more in early 1995, but the strains
on the economy were felt in 1995. GDP growth was 1.1% and 0.7%, respectively, in
the first two quarters of 1995, as investors felt the effects of a 30% rise in
Treasury yields in the previous year."

>

Source:
Post-Fed Strife
David A. Gaffen
WSJ, August 7, 2006 3:04 p.m.
http://online.wsj.com/article/SB115495242802128625.html
 

Category: Federal Reserve, Fixed Income/Interest Rates, Inflation, Markets, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

22 Responses to “Beware Periods of Crisis Post Fed”

  1. Craig H says:

    “but the strains on the economy were felt in 1995″

    1995 was a +35% year for $SPX, and up 18% for the first 2 quarters. An anomalous year, with very low oil prices and the tech bubble beginning. Those conditions don’t exist today.

  2. ss says:

    We’ll see Craig.

  3. j d ess says:

    completely off topic, but, barry, could you move the “recent comments” section higher in the right column, maybe above the favorite links? you could also move that picture of your dog (i assume) up as well. it puts a smile on my face.

    BR: I am about to do a modest redsign — more functional than appearance — and add a 3rd column for that exact reaon — the right hand column puts too many good things too low.

    I am taking the comments from the December feedback and will be asking later this week for some more ideas/feedback on the blog

  4. tjofpa says:

    Gee, was I off. 3 downgrades (though mild) on the Trannies. Ouch.

  5. ss says:

    Biryini did an intersting re-hash of the dismal returns after thr Fed stops hiking. What’s interesting to note, however, is that if one removes the horrific numbers of the periods where it went into a recession, it looked dramatically different. 1987 was the only “non-recession” example that had horrible numbers.

    So for me, the key will be if we have a recession. If we do, I expect dismal equity returns…if not, well you know what I think.

    On that score, the SLOPE OF THE CURVE will be one of the best tells of an impending recession…and how the bank stocks act. You’ll note that the 2 / 10 spread is now positive. I expect it to get more so.

    What say ye BR?

  6. Mark says:

    Re: SmartMoney article “After The Pause”

    I know Jim Stewart. Hell, I know his FAMILY. I have got to think that someone did some really crappy research for him and it led to this deeply flawed article. He’s not a perma-bull or flag-waver, believe me. (Shaking head.) I’m going to forward him a heads-up on this one.

  7. Craig H says:

    “We’ll see Craig.”

    What do you mean? Do you see another bubble on the immediate horizon?

  8. Josh says:

    Thanks for all the post-pub fact checking on the Smart Money article. I’m amazed things like that can be published and in a place that I thought was respectable like Smart Money.

    I just can’t believe all the bulls that have come back out.

    Barry–I love this blog. It provides such good balance.

  9. yc32 says:

    Maybe the horrible return post Feb really reflects that Fed often overshoot?

  10. Craig H says:

    tjopfa,

    Trannies blew through the 4250 support. Look out below!

  11. Alaskan Pete says:

    Recession is a funny thing. We look at all these “official” periods of recession as designated by NBER. Yet, to accept those parameters, we must implicitly believe the GDP deflator is accurate. My contention is that the deflator is wildly inaccurate, thereby overstating growth and understating both the depth and duration of recessions.

  12. Get Long Vega says:

    Alaskan Pete, I agree with you. I know the market’s perception of whatever ‘reality’ we entrain is what really matters, but it’s still nice to know that the GDP deflator, jobs numbers, and NAR stats are total b.s.

    http://www.shadowstats.com/cgi-bin/sgs/

  13. albiegf13 says:

    I think that it’s too early to talk about resession, although it’s a given. My question is timing. I truly believe that we will still have to focus on inflation. This is just a “pause” as far as I can tell and if the outcome of this action results in further tightening in the future, then we can anticipate a real crisis. Chasing inflation is not a fun game, especially in a weakening economy. Sell now and avoid the Christmas rush. For all the hype that this so called pause was getting, we surely havent seen any significant results in values. They sure can talk the talk, I’d like to see them walk the walk..

  14. kdawg says:

    hmmmm….did the Fed really annouce a pause in rates in Sept 1987 ?
    Greenspan took office in Aug 1987. Fed raises rates by .50 in Sept. Market crashes Oct 1987.

  15. Ronnie says:

    I saw an interesting chart awhile back. Sorry I can’t remember where but it was a fairly simple chart. It showed the nominal Fed Funds Rate from around 1970 to the present and noted the various “crises” and/or recessions that followed many (most?) peaks. OK, so a rise in rates can cause problems. Nothing really new there.

    What struck me about the chart however, was that even if you set aside the Volcker years as an aberation, each problem occurred at successively lower nominal levels including the most recent in 2000 at 6.5%. Now, we have a Fed (except for Lacker I suppose) worried that 5.25% might be too much.

    Hard to believe this progression is a coincidence. I suppose that the simplest answer might be that as we get more and more leveraged and indebted over time, the lower the level of interest rates we can tolerate. But I’d be interested in any other opinions.

  16. qw says:

    MAXIMUM PAIN

    Feeling any yet SS?

  17. HT says:

    Per my post yesterday, I, being perplexed by the failure of gold to rally as it has done typically with a dovish fed statement, postulated the adults will go home and sleep on it and realize this pause was a poor move from an inflation standpoint. So i doubled up yesterday. Gold up today.

    Not gloating however. Even though my lose-lose [which can be a win-win trade wise] inflection point scenario = positions in cash, gold, and short R2K is holding up well, there was admitedly low volume in GLD today. We’ll see if this thesis holds. It’s august after all, volume is harder to read, although I would have liked to have seen more to confirm my thesis.

    cheers

  18. Bynocerus says:

    I have no position in gold at the moment, as I am waiting for a definitive move before acting. However, I saw a chart to day from an angle I hadn’t seen before, and Gold’s chart looks eerily similar to the Nasdaq’s circa 2000. It’d be scary if Gold kisses 660 again only to head down below $400 over the next 18 months.

  19. I know this chart has been reposted here and there, but for anyone seeing it for the first time it’s not simply a light going on, its a frickin wall full of flash bulbs SMACKING your retina. Click here: The Pause That Refreshes? NOT!

  20. HT says:

    Byn–

    thanks for input–i use technicals/charts only in moderation [primarily a macroecon trader] but will take a look @ your point.

    Gold is certainly a trade [I'm no gold bug]–my thesis is only inflation threat is greater than fed position warrants, so until that changes–either by higher rates, or recession, it’s worth a look as a trade. [plus some other macros like ?foreign central bank buying, weaker dollar worries, increased middle class demand form india/china yada yada]

    cheers

  21. Mike_in_Fl says:

    My guess as to what might “blow up” this cycle? The “junk” mortgage lenders. Anyone see the action in FMT, NEW, CFC, LEND, etc. this week? U-G-L-Y. Risk is finally being priced back in … fast.

  22. rpbwalsh says:

    kdawg are you refering to Bill Gross’s August col. with chart? Talk about some old school pumping “the last bull-run in bonds” or aka the next great carry trade in the works. Dont see BRIC gettin much ink lately do u-great buy signal!