# The effects of Fed tightening



## MARKETWAVES (26 May 2005)

THE  EFFECTS .....


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## DTM (26 May 2005)

*Re: THE EFFECTS OF FED TIGHTNING*

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.


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## ob1kenobi (26 May 2005)

*Re: THE EFFECTS OF FED TIGHTNING*

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!


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## Smurf1976 (26 May 2005)

*Re: THE EFFECTS OF FED TIGHTNING*

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???


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## MARKETWAVES (29 August 2005)

MILLIONS OF NEW DAY TRADERS COMING SOON
by Peter J. Nelson
August 22, 2005


A PREVIEW OF THE POSSIBLE RAMPANT STOCK MARKET SPECULATION TO COME
AS THE UNEMPLOYED HOUSING SECTOR MOVES TO THE STOCK MARKET FOR ASSET 
APPRECIATION AND TO EARN A LIVING

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 
encouraged....Period!

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


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## wayneL (29 August 2005)

MARKETWAVES said:
			
		

> MILLIONS OF NEW DAY TRADERS COMING SOON




Hooray!

Volatility cometh once more!


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## excalibur (29 August 2005)

MARKETWAVES said:
			
		

> MILLIONS OF NEW DAY TRADERS COMING SOON
> 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...


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## Milk Man (29 August 2005)

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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