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There is no reason why the Fed's actions would particularly benefit the stock price of Amazon, Netflix and Tesla. Providing easy money should give a boost to a

There is no reason why the Fed's actions would particularly benefit the stock price of Amazon, Netflix and Tesla. Providing easy money should give a boost to all stock prices, and in fact the Feds actions should give the biggest boost to low risk investments since they are the closest substitutes for what the Fed is buying.

7Figures2Commas 13y ago
> There is no reason why the Fed's actions would particularly benefit the stock price of Amazon, Netflix and Tesla. These are not the only stocks benefiting, but they're great examples. > Providing easy money should give a boost to all stock prices... I don't know when you last checked, but the S&P just hit a new all-time high this past week, and the Dow achieved a new all-time high last month. The NASDAQ is within striking distance of 4,000, a level last seen in 2000. So yes, easy money has boosted all stock prices. > ...in fact the Feds actions should give the biggest boost to low risk investments since they are the closest substitutes for what the Fed is buying. No, that is not how this works. The Fed's actions encourage (if "force" is too strong a word for your liking) investors to bid up riskier assets because it's damn near impossible to find returns anywhere else.
- yetanotherphd 13y ago
  If I'm right that all stocks benefit equally, then it makes no sense to pick certain companies as "examples". Certainly we wouldn't expect a large differential impact on share prices, and so only a small portion of Amazon's excessive wealth can be explained by the Fed's actions. Furthermore, it's very hard to separate the direct effect of low interest rates, from improvements in the economy in general. You cite the current price of stocks as an example, but the Fed has had low interest rates since the financial crisis, so you to explain why now in particular is a bubble caused by low interest rates. On the final point, I am correct about the mechanics of which stocks benefit the most. Suppose instead of high risk stocks, low risk stocks, and bonds, we had apples, oranges and mandarins. When the Fed buys lots of mandarins, it creates excessive demand for mandarins, and so the price increases. This causes people who were buying mandarins to buy oranges and apples, instead but the total demand for mandarins has still risen. We would expected the biggest price increases to be in mandarins, then oranges, and then apples. Similarly the biggest price change is in the bond market (which the Fed effectively has complete control over), and then in low risk stocks, and then high risk stocks. The effect you observe - people being driven from the low-risk to high risk markets by low interest rates - is ignoring the initial price increase that caused this shift.
  - 001sky 13y ago
    If I'm right that all stocks benefit equally You are wrong on this. That's your problem. A dollar today does not equal a dollar tomorrow. Those promising more dollars the day after tomorrow, and those promising a dollar tomorrow will see differential pricing.
    - yetanotherphd 13y ago
      I see your point now. However, it's important to note that the Fed's regime of low interest rates is temporary and everyone knows this. So yes, the market will discount investments that pay off in 1-2 years at a low interest rate. But since the low interest rates aren't expected to last, we shouldn't expect huge price increases for stocks whose investments will pay off in 5-10 years.
      - 001sky 13y ago
        At the risk of cross-threading the discussion, you need to account for 2nd and 3rd order impacts when trying to figure out where supply and demand will reach equilibrium. In particular, r->0 (asymptotically) is problematic because of somewhat opaque issues with DCF pricing. In particular, R(r) where R is the market discount rate and (r) is the risk free rate. Lets assume the fed is manipulating (r) and that R(r) is directionaly (+). That is fair enough. But R is also impacted by exogenous preferences setting (for risk, weath effects, substitution effects). While these preferences may be stable in theory at "normal r" (~econ 101 assumption), they are empirically not independent of (r) as r-->0 and so are not stable at all in our test case. In fact, as (r)-->0, it becomes more and more rational to take on extreme risk (especially so if (r) is temporarily/ artifically low. After all, you are playing with "free money". Now, lets assume that you have shifted gears in this way. Lets further assume you have a choice of two investment classes: (a) Low risk and (b) High Risk. Its clear you will weight your portfolio towards (b), purely through the change in preferences. This change in <preferences> will change R(r) and show up in your DCFs (ie, when implied by market pricing). In other words, the only way 'DCF' will make sense is when you plug in R'(r)=|=R(r). But now lets consider the subset of (b) in isolation. Given the result above, R'->0, stocks that have non-transparent, distant income will become relatively more attractive. That is to say, the current prices will look too low. So, you will overweight these stocks (bidding up prices). But not only will you in general bid up all assets (due to little r) you will bid up disporportionately equity vs debt and furthermore non-transparent risk equity vs lower-risk equity. As a result, you <should> expect huge price increases for stocks whose investments will pay off in 5-10 years. Or at least, so the theory goes.
adventured 13y ago
That's not true at all. The Fed's policies encourage money to chase risk. When money is 'free' it becomes wildly risk seeking. People that acquire free money do not do the responsible thing and seek safe investments (ask most lottery winners). That's why you see massive asset bubbles develop with low interest rates. The Fed has in fact said it wants to create an artificial wealth effect by leveraging asset bubbles, they wanted to re-inflate the housing bubble for example with toxic mortgage purchases and low mortgage rates. Don't take my word for it. The US Treasury has stepped forward to admit as much. http://www.zerohedge.com/news/2013-08-13/us-treasury-finally-admits-truth-its-all-pomo-and-no-one-dares-fight-fed http://www.zerohedge.com/news/2013-08-13/us-treasury-finally... Or take a look at the S&P without the Fed: http://www.zerohedge.com/news/chart-year-fed-has-doubled-sp-admits-fed?page=1 http://www.zerohedge.com/news/chart-year-fed-has-doubled-sp-... Or overlay the S&P with the Fed securities: http://i.imgur.com/QFHnbBv.jpg http://i.imgur.com/QFHnbBv.jpg There is now an endless parade of evidence available as to exactly how the Fed creates asset bubbles (we're on our third bubble period right now in just 15 years), and how their programs directly inflate the value of the stock market. The Fed has even taken direct credit for being responsible for as much as 40% of the stock market's value.
- yetanotherphd 13y ago
  On which stocks are most affected by the fed, see my reply to the other reply (which makes roughly the same point) here https://news.ycombinator.com/item?id=6623769 https://news.ycombinator.com/item?id=6623769 On the evidence you are presenting: This doesn't prove that the Fed is causing a stock bubble. The stock market, if anything, is forward looking. Even if the fed was causing a bubble, the kind of patterns you are showing wouldn't be expected. Take the second link, for example. The article clearly states that the stock price gains are made before the FOMC announcements. So somehow the act of making any announcement is causing the market to react in anticipation. I don't know how to explain these patterns, but they are certainly not good evidence for the Fed causing a bubble. Monetary policy is very simple and in accordance with the best macro theory we have. The Fed lowers interest rates in recessions, in the hope that it will cause people to consume/invest more and "save" less where saving might include holding hard currency, or safe physical investments. Put in more conventional language, the Fed lowers interest rates to stimulate economic activity. But this should not be interpreted as trying to cause a bubble. The aim of the Fed is to stimulate economic activity so that both the current efficiency of the economy improves, and beliefs about the future efficiency of the economy are more optimistic. In doing so, it hopes to cause the economy to move from the "unnatural" state in which people are fearful about the future, expect high interest rates, and are unwilling to invest or consume, to the "natural" state in which people are optimistic about the future and expect low (short and medium term) interest rates.

7Figures2Commas 13y ago

> There is no reason why the Fed's actions would particularly benefit the stock price of Amazon, Netflix and Tesla. These are not the only stocks benefiting, but they're great examples. > Providing easy money should give a boost to all stock prices... I don't know when you last checked, but the S&P just hit a new all-time high this past week, and the Dow achieved a new all-time high last month. The NASDAQ is within striking distance of 4,000, a level last seen in 2000. So yes, easy money has boosted all stock prices. > ...in fact the Feds actions should give the biggest boost to low risk investments since they are the closest substitutes for what the Fed is buying. No, that is not how this works. The Fed's actions encourage (if "force" is too strong a word for your liking) investors to bid up riskier assets because it's damn near impossible to find returns anywhere else.

yetanotherphd 13y ago
If I'm right that all stocks benefit equally, then it makes no sense to pick certain companies as "examples". Certainly we wouldn't expect a large differential impact on share prices, and so only a small portion of Amazon's excessive wealth can be explained by the Fed's actions. Furthermore, it's very hard to separate the direct effect of low interest rates, from improvements in the economy in general. You cite the current price of stocks as an example, but the Fed has had low interest rates since the financial crisis, so you to explain why now in particular is a bubble caused by low interest rates. On the final point, I am correct about the mechanics of which stocks benefit the most. Suppose instead of high risk stocks, low risk stocks, and bonds, we had apples, oranges and mandarins. When the Fed buys lots of mandarins, it creates excessive demand for mandarins, and so the price increases. This causes people who were buying mandarins to buy oranges and apples, instead but the total demand for mandarins has still risen. We would expected the biggest price increases to be in mandarins, then oranges, and then apples. Similarly the biggest price change is in the bond market (which the Fed effectively has complete control over), and then in low risk stocks, and then high risk stocks. The effect you observe - people being driven from the low-risk to high risk markets by low interest rates - is ignoring the initial price increase that caused this shift.
- 001sky 13y ago
  If I'm right that all stocks benefit equally You are wrong on this. That's your problem. A dollar today does not equal a dollar tomorrow. Those promising more dollars the day after tomorrow, and those promising a dollar tomorrow will see differential pricing.
  - yetanotherphd 13y ago
    I see your point now. However, it's important to note that the Fed's regime of low interest rates is temporary and everyone knows this. So yes, the market will discount investments that pay off in 1-2 years at a low interest rate. But since the low interest rates aren't expected to last, we shouldn't expect huge price increases for stocks whose investments will pay off in 5-10 years.
    - 001sky 13y ago
      At the risk of cross-threading the discussion, you need to account for 2nd and 3rd order impacts when trying to figure out where supply and demand will reach equilibrium. In particular, r->0 (asymptotically) is problematic because of somewhat opaque issues with DCF pricing. In particular, R(r) where R is the market discount rate and (r) is the risk free rate. Lets assume the fed is manipulating (r) and that R(r) is directionaly (+). That is fair enough. But R is also impacted by exogenous preferences setting (for risk, weath effects, substitution effects). While these preferences may be stable in theory at "normal r" (~econ 101 assumption), they are empirically not independent of (r) as r-->0 and so are not stable at all in our test case. In fact, as (r)-->0, it becomes more and more rational to take on extreme risk (especially so if (r) is temporarily/ artifically low. After all, you are playing with "free money". Now, lets assume that you have shifted gears in this way. Lets further assume you have a choice of two investment classes: (a) Low risk and (b) High Risk. Its clear you will weight your portfolio towards (b), purely through the change in preferences. This change in <preferences> will change R(r) and show up in your DCFs (ie, when implied by market pricing). In other words, the only way 'DCF' will make sense is when you plug in R'(r)=|=R(r). But now lets consider the subset of (b) in isolation. Given the result above, R'->0, stocks that have non-transparent, distant income will become relatively more attractive. That is to say, the current prices will look too low. So, you will overweight these stocks (bidding up prices). But not only will you in general bid up all assets (due to little r) you will bid up disporportionately equity vs debt and furthermore non-transparent risk equity vs lower-risk equity. As a result, you <should> expect huge price increases for stocks whose investments will pay off in 5-10 years. Or at least, so the theory goes.

adventured 13y ago

That's not true at all. The Fed's policies encourage money to chase risk. When money is 'free' it becomes wildly risk seeking. People that acquire free money do not do the responsible thing and seek safe investments (ask most lottery winners). That's why you see massive asset bubbles develop with low interest rates. The Fed has in fact said it wants to create an artificial wealth effect by leveraging asset bubbles, they wanted to re-inflate the housing bubble for example with toxic mortgage purchases and low mortgage rates. Don't take my word for it. The US Treasury has stepped forward to admit as much. http://www.zerohedge.com/news/2013-08-13/us-treasury-finally-admits-truth-its-all-pomo-and-no-one-dares-fight-fed http://www.zerohedge.com/news/2013-08-13/us-treasury-finally... Or take a look at the S&P without the Fed: http://www.zerohedge.com/news/chart-year-fed-has-doubled-sp-admits-fed?page=1 http://www.zerohedge.com/news/chart-year-fed-has-doubled-sp-... Or overlay the S&P with the Fed securities: http://i.imgur.com/QFHnbBv.jpg http://i.imgur.com/QFHnbBv.jpg There is now an endless parade of evidence available as to exactly how the Fed creates asset bubbles (we're on our third bubble period right now in just 15 years), and how their programs directly inflate the value of the stock market. The Fed has even taken direct credit for being responsible for as much as 40% of the stock market's value.

yetanotherphd 13y ago
On which stocks are most affected by the fed, see my reply to the other reply (which makes roughly the same point) here https://news.ycombinator.com/item?id=6623769 https://news.ycombinator.com/item?id=6623769 On the evidence you are presenting: This doesn't prove that the Fed is causing a stock bubble. The stock market, if anything, is forward looking. Even if the fed was causing a bubble, the kind of patterns you are showing wouldn't be expected. Take the second link, for example. The article clearly states that the stock price gains are made before the FOMC announcements. So somehow the act of making any announcement is causing the market to react in anticipation. I don't know how to explain these patterns, but they are certainly not good evidence for the Fed causing a bubble. Monetary policy is very simple and in accordance with the best macro theory we have. The Fed lowers interest rates in recessions, in the hope that it will cause people to consume/invest more and "save" less where saving might include holding hard currency, or safe physical investments. Put in more conventional language, the Fed lowers interest rates to stimulate economic activity. But this should not be interpreted as trying to cause a bubble. The aim of the Fed is to stimulate economic activity so that both the current efficiency of the economy improves, and beliefs about the future efficiency of the economy are more optimistic. In doing so, it hopes to cause the economy to move from the "unnatural" state in which people are fearful about the future, expect high interest rates, and are unwilling to invest or consume, to the "natural" state in which people are optimistic about the future and expect low (short and medium term) interest rates.