Fed Cuts, Stocks, the US Dollar, Gold, & Commodity Prices

O

oc-conservative_IHB

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<p>I find it interesting that everyone has already posted how commodity prices will soar, the dollar will tank, etc. based on Fed rate cuts. How do you know this is true? Is it all theoretical or group think or just mainstream media group think or just personal opinion?</p>

<p>There have been 8 easing cycles since 1971. Does anyone care to guess what % on average the Dow, US Dollar, Gold, & Commodity Prices (via the CRB index) were at 1 year later after the Fed started easing?</p>

<p>I will give the answer after some of the brave on here venture to guess.</p>
 
<p>They dropped due to demand destruction brought on by economic recession.</p>

<p>That doesn't help me to afford gasoline for the rest of the year. </p>
 
<em>"I find it interesting that everyone has already posted how commodity prices will soar, the dollar will tank, etc. based on Fed rate cuts. "</em>





During the last rate cut cycle, we were in concert with other central banks around the globe, so our currency did not take a big hit internationally which would have caused the above problems. This time, we are moving against the prevailing trend around the globe which is to still raise rates. That is what makes the difference.





Besides, we are seeing the dollar tank now, and commodity prices are rising. This isn't speculation it is observation.
 
<p>The dollar will/is going down... just how badly depends on how much American's are willing to tighten their belt. Do it early and often then the recession will be not that bad. Unfortunately I see alot of baby late boomers as spoiled self-centric crybabies. They forgot what hard work is and that the world owes them nothing. Unfortunately they have children my age and they will be right along side their parents making the same stupid decisions....</p>

<p>-bix</p>
 
<p>>>>During the last rate cut cycle, we were in concert with other central banks around the globe, so our currency did not take a big hit internationally which would have caused the above problems. This time, we are moving against the prevailing trend around the globe which is to still raise rates. That is what makes the difference.<<<</p>

<p>Observation is also noting how all these asset classes acted during previous rate cut cycles, not just the last one. I have data on the past 8 rate cycles, and how these asset classes performed after 1 year. The results are surprisingly lopsided and statistically significant.</p>

<p>What do you surmise the results would be?</p>

<p>>>>Besides, we are seeing the dollar tank now, and commodity prices are rising. This isn't speculation it is observation. <<<</p>

<p>The Fed just began its rate easing cycle last month. This will begin to alter money flow and these events will take place over the course of many months.</p>
 
Yes, can someone explain how lowering rates will cause the dollar to go down? Are there other factors at play? Or just the Fed. rates will do.
 
Please correct me if I am off but here goes my explanation:





Value of any currency is based on 1) the perceived strength of the country's economy and 2) the availability of the currency. Like other commodities in demand, the more "money" that a country puts out in circulation, the less valuable it is. Additionally, a country's efforts to "print" more money is an indirect sign of troubles in the economy. It is very similar to stocks for a company. The more stock that a company that is put out there, the lower the value of each stock (i.e. stock splits)





The dropping of the Fed fund rates affects both factors. First, Fed is trying to increase borrowing of the U.S. dollar by lowering the rate. This means more dollar in circulation in the world. Two, the Fed's drop is a sign to some that the U.S. economy is struggling and needs a kick start from the government. Additionally, foreign countries actually buy the U.S. dollar in their reserves for emergencies (Dollar generally seen as a "safe" currency"). An increase in circulation could cause those countries to dump their holdings and convert them to a different currency (i.e. the Euro). If this happens (as threatened by China), it would flood the market with U.S. Dollars and great destroy its value.
 
Additional explanation: <a href="http://www.cnbc.com/id/20841360/site/14081545">www.cnbc.com/id/20841360/site/14081545</a>





"Lower interest rates, used to jump-start the economy, can weaken a currency by giving investors less return on investments denominated in the currency.:
 
<em>"The Fed just began its rate easing cycle last month. This will begin to alter money flow and these events will take place over the course of many months."</em>





So you are saying that lowing interest rates will not weaken the dollar?
 
<em>"The results are surprisingly lopsided and statistically significant.</em>

<p><em>What do you surmise the results would be?"</em></p>




<p>If you have some data, or a link to some data, please share it.</p>
 
<i>"Can you back that up with some facts?"</i><p>


Dollar is at 79.16 on the Tocom @ 19:43 PDT. Today the USD hit historical lows against most currencies.<p>


oc-con - Do you have access to a USD chart? If not, go to www.stockcharts.com and check out $USD. Play with the parameters a bit and see what the dollar has been doing for the past year or two. And the past week or so.<p>


And you thought today's featured blog home was UGLY?
 
Just in case anyone missed my comment about T. Boone Pickens saying that oil will continue to go up and that it could hit $100. I don't know about anyone else but he has been right for as long as I can remember. He probably made more money today than I have in my life.
 
All I know is our heavily foreign 401ks jumped up BIG today. One in my wife's account was up almost 4% today alone. One of our post tax foreign accounts has already picked up 18% just on the devaluing dollar over the last 3.5 years, not counting strong returns.





However I am concerned about sharply rising prices due to inflation which the Fed lied today and said they were supposedly concerned about.


I wonder if its going to be the Peter Schiff scenario, where home prices are flat but "it doesn't matter because it will be $500 to buy groceries and $100 to gas up the car"


<a href="http://www.europac.net">www.europac.net</a>
 
<p>IrvineCommuter - thanks for the explanation. it is sound, but is it valid based on what has historically happened? this is what i want to discuss.</p>

<p>>>>So you are saying that lowing interest rates will not weaken the dollar?<<<</p>

<p>I actually have no opinion on this. I don't trade bonds or currency so I haven't given much thought on what it <em>will </em>do. I am just saying that I hear everywhere that lowering interest rates will weaken the dollar. Well, it needn't even be explained. Simply look at all the times that interest rates have been lowered by the Fed, and look its effect on the dollar.</p>

<p>>>>If you have some data, or a link to some data, please share it.<<<</p>

<p>I have said that I would do that. I just wanted people to come out and give their thoughts on what the results might be before I did that. </p>

<p>>>>oc-con - Do you have access to a USD chart? If not, go to www.stockcharts.com and check out $USD. Play with the parameters a bit and see what the dollar has been doing for the past year or two. And the past week or so.<<<</p>

<p>The dollar has been going down the past year. What I am discussing is what the Fed lowering rates will do to the dollar. And the Fed only starting lowering rates last month. And that is not enough time to see its macro effect is it?</p>

<p>What I asked initially was <strong>what % on average the Dow, US Dollar, Gold, & Commodity Prices (via the CRB index) were at 1 year later after the Fed started easing?</strong></p>

<p> </p>
 
oc-con - The Fed lowering rates is mostly a psychological cause of a devalued dollar. The real cause is the increase in the money supply, of which the Fed has allowed for the last few years. The Fed stopped publishing M3 in May of 06, but there are sites which are still calculating M3, and the sites pretty much agree on an increase of at least 11% in the last year. and M3 doesn't necessarily include all increase in USD credit.
 
<p>awgee - Wouldn't lowering the interest rates cause the money supply to increase even more? Then the money supply would be the result?</p>

<p>I just think when you try to explain certain things, like what the FED, etc. did and why they did it, you go around and around and around.</p>
 
<p>rickhunter - It probably does seem like I am going round and round and to a certain extent, that is the nature of the beast.</p>

<p>Lowering the interest rates may indirectly cause the money supply to increase, and it usually does, but the main cause of the increase in the money supply is the Fed's and other's purchasing of government treasuries and the Fed's monetizing of the those treasuries. The next largest cause of the increase in the money supply is the fractional reserve banking system, and that is very much tied to the psychological effects of the raising or lowering of the Fed funds rate. As the Fed lowers rates, banks <strong>feel</strong> like it is safer to make loans, thereby increasing the money supply. But, and here is the big <strong>but, </strong>the banks do not have to make loans, so the lowering of the Fed funds rate does not guarantee an increase in the money supply.</p>

<p>To get a much better picture of the above, and get clearer more accurate info on this subject, try <a href="http://www.nowandfutures.com">www.nowandfutures.com</a>. My understanding is very limited and sometimes I am confused. My main interest is being able to make money, so my info is usually limited to that which I perceive as helping me in that regard, and is therefore very incomplete.</p>
 
<p>rickhunter - It just occured to me. If you are looking for direct cause and effect scenarios, I don't think you will find them. There is history, probabilities, and opinions, but absolutes in relation to finance are few.</p>

<p>Usually the LIBOR moves in concert with the Fed funds rate, but it didn't for a few weeks. It looks like it is correlating again. Will the LIBOR respond in a historic manner to the Fed cut? I would guess yes, but I wouldn't put money on it. Does that make sense? Do you know what I am trying to say?</p>
 
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