All assets slide in lock step

Investment Analysis Clubs Macro Economic Trends and Risks
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When the Federal Reserve cut interest rates to a negative real yield, literally paying speculators to borrow money, the price of all assets (stocks, bonds, real estate, crypto, etc.) rose in lock step.

Why is anyone surprised that rising interest rates are causing the bloated prices to fall together?

Stocks Move in Lockstep as Fed’s Rate Increases Show No Mercy

The S&P 500’s one-month realized correlation has climbed to highest level since March 2020

by Hardika Singh, The Wall Street Journal, 10/12/2022

Shares of everything from technology giants to household-goods companies and utility providers have been trading in lockstep over the past month, a potentially worrying sign to investors trying to navigate a turbulent market.

The S&P 500’s one-month realized correlation — a measure of how stocks in the benchmark index have moved in relation to one another over the past 30 days — climbed to 65.3% on Sept. 13, according to Susquehanna International Group…A correlation of 100% means stocks are all moving together, while a correlation of zero means their moves aren’t related at all. [A chart shows that the correlation in 2021 averaged about 25%.]…

The tandem moves extend well beyond stocks. Government bonds, which are considered a haven during times of financial turmoil, have slipped alongside stocks for three consecutive quarters for the first time since 1974…Gold, another haven, has fallen 8.1%…[end quote]

Housing prices are also beginning to drop. The huge bubble will deflate as mortgage rates have doubled in the past year.

The fed funds rate, which is 3.25% with a prediction to rise to 4.5% by early 2023, is still well below the inflation rate so the real rate is strongly negative. Even if inflation declines to the Fed’s targeted 2% the fed funds rate of 4.5% would still be the average historic real rate of 2.5%. It wouldn’t be too high by historic standards. Despite investors’ screams, the Fed would be reasonable to maintain it at that level for the long term. And that’s assuming that inflation really does fall to 2%, which probably won’t happen until 2024, if ever.

The markets are still hoping that the Fed will quickly drop the fed funds rate to the emergency 0% level they maintained for so long.

Maybe they are right. Or maybe the Fed will finally realize the many harms caused by ZIRP, described in the book “The Price of Time.”

For the short term, the Fed will be raising rates and all asset prices will slide in lock step as they rose in lock step.

Wendy

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Yep totally obvious. No surprises.

I am not invested in Eth or BTC. I have $360 of Eth for working purposes. I am not at this time looking for any appreciation in Eth.

But I am following it for business purposes. It such an odd duck. It is much less interest rate sensitive. It has already bottomed. Double bottom? Maybe. But it can go higher from here. As the possibility of an odd man out as the rest of the asset world crashes this fascinates me.

The other assets are commodities and metals. Watch out for those who would sell you they will go higher.

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Hyperbole and overstatement check.

Bold claim. Inflation won’t get back to 2%, ever? Really?

This claim is almost impossible (but maybe I am taking your wording too literally).

Not so long ago (pre-pandemic), central banks were very worried about deflation. What has irreversibly changed to such a degree to reverse that prior deflation trend?

In the meantime, the march forward of deflationary technology has not changed.
What about the rise of cloud computing, chip design, green energy, machine automation, mRNA technology?

The Fed and its decisions are month-to-month, but the above trends are beyond our horizons.

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@mostlylong, I enjoy your well-reasoned challenges.

Inflation occurs when consumer demand growth exceeds supply growth of goods and services.

What about the problems between the U.S. and China which might decrease the import of low-cost goods (that quelled inflation for the past 20 years)?

What about the increase need for services in a tight job market that are increasing wages?

Most of all, what about the staggering future government spending that will act as fiscal stimulus – mostly entitlements like Medicare and Social Security, but also unemployment, military and other spending that doesn’t increase production of goods and services?

I think that these are massive “bulk” inflationary trends that will overwhelm the marginal deflationary effects of the advances you mentioned. But you make a good point. I hope that you are right.
:slight_smile:
Wendy

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That is just what we were told. There is very little truth in buying a less expensive cellphone cover or a less expensive pair of socks that inflation has been quelled.

We were in a disinflationary period prior to 2000 and then a potentially deflationary period, so printing was used to create the inflation. It was a purposely low inflation period of time.

Now we are in an inflationary period of demand side economics. Where marginally higher effective tax rates on the wealthy keep inflation down. Those monies can be used to do incredible things in building our industrial base, expand the middle class, and make the country wealthy. China is a non issue.

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Agree with all of these counter factors, but the long-term trend of technology has been durably deflationary, while the factors above have not been as consistent (for replacing services, look at the rise of self checkout, as one case).

On deficit spending, if the US simply reduces deficit spending as a percent of GDP, and the economy still grows, then this could be deflationary. Interesting that Japan has such large debt to GDP yet struggles to fight off deflation.

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There are certain factors that don’t matter until they do. There are certain other factors that matter until they don’t. Nobody really knows in advance when a certain factor will transition from not mattering to mattering (or vice versa).

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The economists have been down these roads. The mob forgets where it has been. How to explain things to the mob for today when they are still digesting yesterday is vexing.