6 ms·

Stocks plummet as interest rates keep on rising

georgeecollins 9y ago
This is the most normal, healthy thing. Interests rates have been unnaturally low. Now they are starting to rise and seem likely to rise. The ability to get a higher return on bonds will put negative pressure on stock prices, sending P/E rations towards their historical averages. And that is OK!
- skybrian 9y ago
  I'm wondering what "unnatural" means when it comes to a mostly-arbitrary human game like the economy? Seems like it's all artificial, and interest rates in particular are especially artificial (controlled by central banks).
  - dragontamer 9y ago
    Long-term interest rates are controlled by the auction the US Treasury holds: aka the free market. Only short-term interest rates are controlled by the central bank. And that's mostly because the central banks own something like a $$$TRILLION in short-term debt and raw cash, so they simply have enough money to shift the market direction. In essence: short-term interest rates are still determined by auction, just like any other debt from the US treasury. But when a trillionare is sitting there with ideas about how the market should look like, the trillionare has real power to manipulate the market. Note that these trillions of dollars are money from private banks. Under a "true free market" situation, the Trillionare would still exist! The pile of $TRILLIONS is the money that's been collected by all of the banks in the USA. In theory, if the central banks ran out of money, they would lose their power to manipulate the markets. But otherwise, the central bank is simply the largest "consumer" on the market. That's the extent of their control. Much like how Apple can buy out the entire 10nm or 7nm production chain for months at a time (preventing Apple's competitors from using TSMC's or GloFo's advanced nodes whenever Apple starts to prepare an iPhone). Entities with lots of money exert power over the entire market. That's the free market. Perhaps a better example would be the GDAX Bitcoin exchange. It only will take $25 Million to increase BTC's price to $9000 right now on GDAX: https://www.gdax.com/trade/BTC-USD https://www.gdax.com/trade/BTC-USD. It will only take 3000 BTC to drop BTC's price down to $7000, over the short term at least.
    - fwdpropaganda 9y ago
      It's a very special trillionaire. One that can create money.
      - dragontamer 9y ago
        No different than the $5000 credit line from your credit card "created money". The Fed creates money supply by manipulating accounts. But it never prints a physical bill. But this practice is almost the same as how your credit card can have $5000, $10,000, or $20,000 credit line created out of thin air.
        fwdpropaganda 9y ago
        Regular consumers and millionaires and billionaires have limits on how much they can borrow. This special trillionaire doesn't (for all practical purposes). My point here is that I don't think your characterization of the FED as just a market participant is very useful, nothing more.
        dragontamer 9y ago
        The special trillionare has a limit. It can borrow up to the point where people lose confidence. Because the special trillionare's goal is to ensure the stability of the US Monetary system. As soon as they start to threaten the stability of the US Monetary system, then they'd have failed their job. Ultimately, QE is safer than just "printing money", because at the end of the day, the Fed's QE program kept track of every single dollar in the QE account. And it is in the process of paying that money back and ending QE. ------------- Consider the "free-market" alternative to this situation. Tether-coin. Its literally an account made up by some dude that claims to be "similar to USD". The "legitimacy" of QE (and Tether) is in the strength and confidence in the promise to pay back the money. If Tether pays all of the USD back for all of the USDT they issue, then there's nothing wrong with what they did. Similarly, as long as QE is properly paid for over time, then it's not "money created out of thin air". It more accurate to state it as "credit created out of thin air", and "credit that eventually was paid back". There's little reason to trust Tether in their ability to pay things back. (They're failing the sniff test at the moment). But QE is legitimately being paid back by the Fed. And that's the difference. > My point here is that I don't think your characterization of the FED as just a market participant is very useful, nothing more. Under normal circumstances (ignoring QE), the Fed acts just as a normal market participant. But QE hasn't been done for years now. QE is a special case, but it is also a tool that is rarely used.
  - georgeecollins 9y ago
    Unnatural would be prices not supported by future cash flows, or prices that are not typical of historic norms based on concrete measurements such as profit, revenue, or growth. I take your point that pricing is arbitrary, particularly moment to moment. But economics theory dictates that all the arbitraryness resloves or cancels out into an efficient finding of price.
- deleted 9y ago
  [deleted]
dragontamer 9y ago
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield https://www.treasury.gov/resource-center/data-chart-center/i... Interest rates have been rising since January at least, and there's an expectation that the good economic news we got will encourage the Fed to raise interest rates in March. I'm thinking that the authors of the article just needed "something to say" about why people are selling stocks today. But I don't think its interest rates, mostly because interest rates haven't really been "moving quickly" or unexpectedly. I think recent volatility, especially the destruction of XIV (inverse volatility index tracking ETF) has caused some people to flee the market. Its been years since the stock market fell a bit, and people have forgotten what it feels like to lose money. Scared people contribute to the sell-off. Basically, your standard market correction. There might be some other explanations out there: but attributing it to the long-expected interest rate hike seems weird. The 30-year Treasury went +0.02% today. Its not moving very quickly.
- jacob019 9y ago
  It's amusing how there is a tendency in the media to attribute changes in the market to recent events when more often than not there is little evidence of correlation.
  - tehlike 9y ago
    It is called market making the news. Easy to attribute to recent events like you said.
adsfasdfsad111 9y ago
lol. "plummet"
cwperkins 9y ago
This reminds me of mid-2015 and early 2016. I believe it's a normal healthy correction and not the ominous beginning of something bigger. It feels like the economy has at least enough gas to keep moving to the end of 2018, but I'd be surprised if Trump completes his term without a market downturn.
rmrm 9y ago
Recessions are also normal, healthy things. Until the business cycle stops being a cycle, and debt cycles stop being cycles...people should expect....cycles. Its ok. With the fed not renewing QE, and unemployment and private debt where it is....expect a recession to come in the relatively near future. It has to happen, as sure as we need seasons.
ProfessorLayton 9y ago
I really wonder how the Bay Area housing market is going to fare when borrowing money becomes a lot more expensive than it is now. Right now the low interest rates are baked into the prices — Piled onto the lowered deductions in the new tax bill, and something's gotta give.
- georgeecollins 9y ago
  Do you really wonder? When interest rates go up, property that is mortgaged tends to go down in price.
WheelsAtLarge 9y ago
Interest rates are only part of the problem. The real culprit is a weak dollar. Hard for foreign buyers to stay invested in the US and make a profit. Also hard for exporters to make a profit outside the US. We are a net importer as a nation so a weak dollar will hit us with more expensive goods. We'll be seeing it soon.Thank Trump and his treasury secretary. The weak dollar is not Good even if we suddenly start to export.
- georgeecollins 9y ago
  >> The weak dollar is not Good even if we suddenly start to export. That's assuming that a decline in the value of investments is better than the increase in jobs due to more exports. For most people on this forum, I think that is true. For most people in the US, a decline in a portfolio of equities (that they don't generally hold) is a great trade off for jobs (through export).

This is the most normal, healthy thing. Interests rates have been unnaturally low. Now they are starting to rise and seem likely to rise. The ability to get a higher return on bonds will put negative pressure on stock prices, sending P/E rations towards their historical averages. And that is OK!

skybrian 9y ago
I'm wondering what "unnatural" means when it comes to a mostly-arbitrary human game like the economy? Seems like it's all artificial, and interest rates in particular are especially artificial (controlled by central banks).
- dragontamer 9y ago
  Long-term interest rates are controlled by the auction the US Treasury holds: aka the free market. Only short-term interest rates are controlled by the central bank. And that's mostly because the central banks own something like a $$$TRILLION in short-term debt and raw cash, so they simply have enough money to shift the market direction. In essence: short-term interest rates are still determined by auction, just like any other debt from the US treasury. But when a trillionare is sitting there with ideas about how the market should look like, the trillionare has real power to manipulate the market. Note that these trillions of dollars are money from private banks. Under a "true free market" situation, the Trillionare would still exist! The pile of $TRILLIONS is the money that's been collected by all of the banks in the USA. In theory, if the central banks ran out of money, they would lose their power to manipulate the markets. But otherwise, the central bank is simply the largest "consumer" on the market. That's the extent of their control. Much like how Apple can buy out the entire 10nm or 7nm production chain for months at a time (preventing Apple's competitors from using TSMC's or GloFo's advanced nodes whenever Apple starts to prepare an iPhone). Entities with lots of money exert power over the entire market. That's the free market. Perhaps a better example would be the GDAX Bitcoin exchange. It only will take $25 Million to increase BTC's price to $9000 right now on GDAX: https://www.gdax.com/trade/BTC-USD https://www.gdax.com/trade/BTC-USD. It will only take 3000 BTC to drop BTC's price down to $7000, over the short term at least.
  - fwdpropaganda 9y ago
    It's a very special trillionaire. One that can create money.
    - dragontamer 9y ago
      No different than the $5000 credit line from your credit card "created money". The Fed creates money supply by manipulating accounts. But it never prints a physical bill. But this practice is almost the same as how your credit card can have $5000, $10,000, or $20,000 credit line created out of thin air.
      - fwdpropaganda 9y ago
        Regular consumers and millionaires and billionaires have limits on how much they can borrow. This special trillionaire doesn't (for all practical purposes). My point here is that I don't think your characterization of the FED as just a market participant is very useful, nothing more.
        dragontamer 9y ago
        The special trillionare has a limit. It can borrow up to the point where people lose confidence. Because the special trillionare's goal is to ensure the stability of the US Monetary system. As soon as they start to threaten the stability of the US Monetary system, then they'd have failed their job. Ultimately, QE is safer than just "printing money", because at the end of the day, the Fed's QE program kept track of every single dollar in the QE account. And it is in the process of paying that money back and ending QE. ------------- Consider the "free-market" alternative to this situation. Tether-coin. Its literally an account made up by some dude that claims to be "similar to USD". The "legitimacy" of QE (and Tether) is in the strength and confidence in the promise to pay back the money. If Tether pays all of the USD back for all of the USDT they issue, then there's nothing wrong with what they did. Similarly, as long as QE is properly paid for over time, then it's not "money created out of thin air". It more accurate to state it as "credit created out of thin air", and "credit that eventually was paid back". There's little reason to trust Tether in their ability to pay things back. (They're failing the sniff test at the moment). But QE is legitimately being paid back by the Fed. And that's the difference. > My point here is that I don't think your characterization of the FED as just a market participant is very useful, nothing more. Under normal circumstances (ignoring QE), the Fed acts just as a normal market participant. But QE hasn't been done for years now. QE is a special case, but it is also a tool that is rarely used.
- georgeecollins 9y ago
  Unnatural would be prices not supported by future cash flows, or prices that are not typical of historic norms based on concrete measurements such as profit, revenue, or growth. I take your point that pricing is arbitrary, particularly moment to moment. But economics theory dictates that all the arbitraryness resloves or cancels out into an efficient finding of price.
deleted 9y ago
[deleted]

dragontamer 9y ago

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield https://www.treasury.gov/resource-center/data-chart-center/i... Interest rates have been rising since January at least, and there's an expectation that the good economic news we got will encourage the Fed to raise interest rates in March. I'm thinking that the authors of the article just needed "something to say" about why people are selling stocks today. But I don't think its interest rates, mostly because interest rates haven't really been "moving quickly" or unexpectedly. I think recent volatility, especially the destruction of XIV (inverse volatility index tracking ETF) has caused some people to flee the market. Its been years since the stock market fell a bit, and people have forgotten what it feels like to lose money. Scared people contribute to the sell-off. Basically, your standard market correction. There might be some other explanations out there: but attributing it to the long-expected interest rate hike seems weird. The 30-year Treasury went +0.02% today. Its not moving very quickly.

jacob019 9y ago
It's amusing how there is a tendency in the media to attribute changes in the market to recent events when more often than not there is little evidence of correlation.
- tehlike 9y ago
  It is called market making the news. Easy to attribute to recent events like you said.

adsfasdfsad111 9y ago

lol. "plummet"

cwperkins 9y ago

This reminds me of mid-2015 and early 2016. I believe it's a normal healthy correction and not the ominous beginning of something bigger. It feels like the economy has at least enough gas to keep moving to the end of 2018, but I'd be surprised if Trump completes his term without a market downturn.

rmrm 9y ago

Recessions are also normal, healthy things. Until the business cycle stops being a cycle, and debt cycles stop being cycles...people should expect....cycles. Its ok. With the fed not renewing QE, and unemployment and private debt where it is....expect a recession to come in the relatively near future. It has to happen, as sure as we need seasons.

ProfessorLayton 9y ago

I really wonder how the Bay Area housing market is going to fare when borrowing money becomes a lot more expensive than it is now. Right now the low interest rates are baked into the prices — Piled onto the lowered deductions in the new tax bill, and something's gotta give.

georgeecollins 9y ago
Do you really wonder? When interest rates go up, property that is mortgaged tends to go down in price.

WheelsAtLarge 9y ago

Interest rates are only part of the problem. The real culprit is a weak dollar. Hard for foreign buyers to stay invested in the US and make a profit. Also hard for exporters to make a profit outside the US. We are a net importer as a nation so a weak dollar will hit us with more expensive goods. We'll be seeing it soon.Thank Trump and his treasury secretary. The weak dollar is not Good even if we suddenly start to export.

georgeecollins 9y ago
>> The weak dollar is not Good even if we suddenly start to export. That's assuming that a decline in the value of investments is better than the increase in jobs due to more exports. For most people on this forum, I think that is true. For most people in the US, a decline in a portfolio of equities (that they don't generally hold) is a great trade off for jobs (through export).