7 ms·

The Fed caused 93% of the entire stock market's move since 2008

53 points by aburan28 11y ago

Obi_Juan_Kenobi 11y ago
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 11y ago
  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/2002/20021108/default.htm http://www.federalreserve.gov/boarddocs/Speeches/2002/200211...
  - justin_vanw 11y ago
    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."
    - x5n1 11y ago
      Well then you would need to find an incidence of someone stating the theory before it actually happened.
      - justin_vanw 11y ago
        Before the theory happened? I don't follow. Edit: If you mean that you need to state the theory before you make the observation for the observed data to be valid evidence for or against the theory, you are correct, this is very nearly contrapositive of the scientific method.
        iofj 11y ago
        This is economics, not physics. Since we have institutions like the Fed and "fiscal policy" (where and if it differs from "government spends more money NOW") you cannot have a widely accepted economic theory without influencing the economy. Two things immediately come up when looking at economic theories: 1) a LOT of them (the ones "followed") are "by" high-level Fed officials. Biggest example: Keynesianism. 2) They all seem to have the same conclusions (government needs to spend more, either directly or through the fed or finance dept) 3) because these people want to but can't be bothered to manage an economy (meaning hundreds of thousands of small companies) they massively advantage large corps over everyone else.
    - dreamdu5t 11y ago
      But if the Fed and economists do that, people embrace the conclusions as scientific :p
    - throwaway_xx9 11y ago
      > 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.
      - 11y ago
- iaw 11y ago
  I was waiting for him to prove a point. I'm still waiting. There was nothing rigorous about his analysis, while I'm inclined to agree with his hypothesis I just don't see a logical line of reasoning.
- deleted 11y ago
  [deleted]
- homerowilson 11y ago
  I think you're right to be a bit suspicious. The quote "This isn’t just a spurious correlation" appears in the article followed by..."regression analysis" with a link to an analysis that is, unfortunately, not immune to spurious results. Engle and Granger came up with a stronger measure of time series association called "cointegration" that would be more appropriate to use here than regression. Including such an analysis would strengthen the article.
- ArkyBeagle 11y ago
  Most of QE existed only as propping up reserves in various banks. The Fed then paid Interest On Reserves (IOR) as an incentive. For static measures - balance sheet type things - it was huge. For dynamic measures - increased M3 or GDP or what have you - it was a non-event.
ZoeZoeBee 11y ago
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 11y ago
  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.
opheicus 11y ago
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_reports/sr512.pdf https://www.newyorkfed.org/medialibrary/media/research/staff...). 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.
ikeboy 11y ago
Blogspam of http://feddashboard.com/one-force-drove-each-stock-market-boom-do-you-know-which http://feddashboard.com/one-force-drove-each-stock-market-bo...
tostitos1979 11y ago
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 11y ago
  >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 11y ago
    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 11y ago
      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 11y ago
        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.
kloob 11y ago
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 11y ago
  $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...
shard 11y ago
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 11y ago
  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.

53 points by aburan28 11y ago

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 11y ago
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/2002/20021108/default.htm http://www.federalreserve.gov/boarddocs/Speeches/2002/200211...
- justin_vanw 11y ago
  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."
  - x5n1 11y ago
    Well then you would need to find an incidence of someone stating the theory before it actually happened.
    - justin_vanw 11y ago
      Before the theory happened? I don't follow. Edit: If you mean that you need to state the theory before you make the observation for the observed data to be valid evidence for or against the theory, you are correct, this is very nearly contrapositive of the scientific method.
      - iofj 11y ago
        This is economics, not physics. Since we have institutions like the Fed and "fiscal policy" (where and if it differs from "government spends more money NOW") you cannot have a widely accepted economic theory without influencing the economy. Two things immediately come up when looking at economic theories: 1) a LOT of them (the ones "followed") are "by" high-level Fed officials. Biggest example: Keynesianism. 2) They all seem to have the same conclusions (government needs to spend more, either directly or through the fed or finance dept) 3) because these people want to but can't be bothered to manage an economy (meaning hundreds of thousands of small companies) they massively advantage large corps over everyone else.
  - dreamdu5t 11y ago
    But if the Fed and economists do that, people embrace the conclusions as scientific :p
  - throwaway_xx9 11y ago
    > 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.
    - 11y ago
iaw 11y ago
I was waiting for him to prove a point. I'm still waiting. There was nothing rigorous about his analysis, while I'm inclined to agree with his hypothesis I just don't see a logical line of reasoning.
deleted 11y ago
[deleted]
homerowilson 11y ago
I think you're right to be a bit suspicious. The quote "This isn’t just a spurious correlation" appears in the article followed by..."regression analysis" with a link to an analysis that is, unfortunately, not immune to spurious results. Engle and Granger came up with a stronger measure of time series association called "cointegration" that would be more appropriate to use here than regression. Including such an analysis would strengthen the article.
ArkyBeagle 11y ago
Most of QE existed only as propping up reserves in various banks. The Fed then paid Interest On Reserves (IOR) as an incentive. For static measures - balance sheet type things - it was huge. For dynamic measures - increased M3 or GDP or what have you - it was a non-event.

ZoeZoeBee 11y ago

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 11y ago
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.

opheicus 11y ago

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_reports/sr512.pdf https://www.newyorkfed.org/medialibrary/media/research/staff...). 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.

ikeboy 11y ago

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

tostitos1979 11y ago

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 11y ago
>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 11y ago
  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 11y ago
    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 11y ago
      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.

kloob 11y ago

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 11y ago
$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...

shard 11y ago

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 11y ago
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.