Chart of the Day: S&P500 and the Fed

Continuing our series of charts on the US S&P500 stock index, is today’s from Doug Short, plotting the US Federal Reserve’s (the Fed) intervention via the Fed Funds Rate and other programs that has arguably sustained asset prices.

The intervention has been a series of programs, emergency at first (TARP, TALF etc), then a series of Quantitative Easing (QE) – or “milky wilkies” – note the green bands in the chart indicating QE 1, QE 1.5 and QE2, and the latest “Operation Twist”.

Every series of QE has resulted in a major boost to the S&P500, and through correlation with other risk assets, asset prices around the world including the ASX200. This is no conspiracy – it has been openly stated by the Fed that that is one of the primary purposes of the credit swap program, to enhance liquidity and increase asset prices.

Unfortunately, the result is an expectation that the Fed has run out of bullets. The reality is untrue – the Fed has a Hollywood-style magazine – an unlimited supply of funds to do what it wants (perhaps buying up all the underwater mortgages might help??)

The Fed Funds Rate (similar to the RBA Overnight Cash Rate) is nearly zero – a so-called Zero Interest Rate Policy or ZIRP – and 10 year Treasury Bonds are yielding just over 2% and it seems they are on their way to a Japanese 1% level, although Operation Twist is trying to avert that.

The results of these policies, best said by Doug Short:

The past three years have been an exciting time for many professional traders and their seasoned amateur counterparts. And it’s been a dream-come-true for institutional HFT (high frequency trading) with computerized algorithms….

On the other hand, savers — those benighted souls looking for income from CDs, Treasury yields, and FDIC insured money markets — have had a rude introduction to the new reality, one that will apparently be with us for a very long time.

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  1. The US bond yields going lower with mounting debt, and global financial chaos shows how wacky the system is. So no risk in the US ever while it’s got the reserve currency….for the moment.

  2. I agree with Doug Short. It’s not a good time to be a saver. Even the RBA is coming after us now. But nor do I want to have to move large sums of cash in and out of the markets every time an intervention starts or finishes. That’s playing games. What to do, what to do …

      • European banks that can’t raise funds in the EU or anywhere else. Very similar to the Icelandic banks in the UK before everything blew up. If they’re offering above the cash rate (other than a bonus to get you in the first place) = higher risk in most cases.

  3. Wow!!!! 6.51% Holy Nellie which Caribbean Island will I go to next?
    Let’s see now Inflation 2.75%, hmmmmm inflation in utilities food etc that is what I really face is like 6%, so my net return is roughly….ah zero…..Whoops hold! Who the hell is that knocking….Oh you’re the damned tax man….you want 35% of what I earned? So that’s zero right….you mean you want 35% of my 6.51%?
    So RAT rate is -2.2%

    Yep that figures in a nation with a bulging baby boomer generation in the process of retiring and a chronic CAD!

    • Which is why high dividend yield shares are so enticing for many people at the moment…

      A possible strategy to use with Telstra (TLS) is to purchase just before XD and hold for 13 months – i.e you get 3 dividends, which works out at about 13.3% yield plus franking credits (so real yield is 19%, annualised around 17.5% taxable return)

      Of course, you expose yourself to the risks of TLS dropping during that timeframe. You could offset this by sacrificing some of your dividend yield and purchase a put option on TLS, thus protecting the downside.

      A naked/semi naked hedge (e.g CFD or short or covered call) is more dangerous because there is a probability of TLS spiking due to the NBN arrangements.

      Certainly not many FI choices out there….

    • 6.51% even after tax and inflation is better than losing money … which is what the equities and property have done since late 09.

      Good idea on TLS Prince. When is the next dividend?

      • Exactly Lorax. That is why I would rather have a 0 rate of real return on my rabo bank cash holdings at present, rather than touch equities or property etc with a 10 foot pole. Cash is king in my books at present, although I am a dumb non-economist…

  4. Are the stimuli being pumped into the US economy actually translating into anything real outside of the financial sector? After all previous QEs are mostly still sitting on bank’s reserves as there has not been an increase in lending they have not had any effect in the economy at large.

    Sure they can keep stimulating forever (seemingly) but will they if it has a negligible effect each time. Perhaps the need of regular QE is actually killing confidence which in turn ensures the QE does not end up as bank loans. I think a63 was correct, the only thing preventing a Japanese style deflation in America is that they’re the reserve currency.

  5. There is one investment that is performing well, is known to surge in both deflation and hyperinflation, and
    maintains its true value.

    It begins with “G” and ends in “old”.