Probabilities: Why you shouldn't fight the Fed...

[crgarcia]

Don't fight the Fed, one of the oldest adages in Wall Street.

The Fed has extremely deep pockets, virtually unlimited in fact.

If you flipped a coin, -a entirely fair game with 50% chance for each player-, but you play with someone who has much, more money than you (in this case the Fed), you have a 100% chance of going broke if you let your losses increase.

See:
http://en.wikipedia.org/wiki/Gambler's_ruin

 

[street carp]

If you "Fight the Fed" does it mean you short the stock market? In other words the Fed dropping rates guarantees a continued rise in equity markets? I just don't understand what this thread is supposed to be inferring.

 

[MKTrader]

You inferred correctly.

However, if you look at a chart in January 2001, the last time the Fed started cutting aggressively, there wasn't exactly a "continued rise in equity markets." More like a 20-month plunge.

Fed/monetary policy is one factor to monitor, but it's a far cry from a sure-fire, stand-alone indicator.

One other note: when the Fed was cutting hard in 2001, crude oil was in the high 20s and gold was around $265. Oil has quadrupled in price whle gold has tripled. So the Fed has a much more serious inflation threat to deal with this time.

Bottom line: rate cuts don't guarantee a reversal (other than very short-term) or bull market.

Quote from street carp:

If you "Fight the Fed" does it mean you short the stock market? In other words the Fed dropping rates guarantees a continued rise in equity markets? I just don't understand what this thread is supposed to be inferring.

 

[nazzdack]

"Don't fight the Fed" is more relevant to shorter-term interest rate instruments than stocks.

 

[crgarcia]

Quote from street carp:

If you "Fight the Fed" does it mean you short the stock market? In other words the Fed dropping rates guarantees a continued rise in equity markets? I just don't understand what this thread is supposed to be inferring.

I'm talking short term. Such as shorting
Often rate cuts are made in bear markets, so they may keep plunging for some time.

 

[street carp]

And those "deep pockets" are printing presses.

Man, lower rates encourage inflation; in the meantime savings are rotting away in 2% MM accounts. The big positive I'm personally looking for is getting a house next year at a decent price at a very good rate.