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Mitch, your chart didn't come through on the message I received, but here's
a few things to consider. In general, lower interest rates are bullish for
stocks because lower returns on bonds makes stocks look more attractive on a
relative value basis. However, this is only true WITH ALL ELSE BEING EQUAL.
That's the most important part, because "all else" rarely is equal. Just
three of the other important factors are the money supply, the general price
level, and leverage.
In 1929, investors were able to buy stocks by only putting up 10% of their
face value (10 to 1 leverage). This made potential gains in stocks, even on
a small rise, much greater than the returns on bonds, even when rates were
rising. After the crash, the Fed did lower rates significantly, but the
general price level was falling at the same time (deflation), so the drop in
real interest rates was quite small (I think real rates actually went up for
a brief period of time in the 30's). Furthermore, the money supply was
actually contracted after the crash as well (the gold standard required the
Fed to defend the value of the dollar relative to gold). This monetary
contraction was what ultimately caused the Great Depression. The stock
market crash was only a small part.
In 1987, many people did predict a market crash, and they did it based
primarily on the fact that stock prices were rising rapidly at a time when
interest rates were also rising. These people turned out to be right, and
the stock/bond relationship ultimately proved true. In contrast to 1929,
however, this time the Fed flooded the economy with money (even though
interest rates were rising) to make sure the stock market crash did not
affect the overall economy, and it worked.
Bruce
>The myth that lower interest
> rates are BULLISH for stocks and higher interest rates are BEARISH,
> is perhaps the single greatest lie of all time. As illustrated here,
the
>Fed raised rates from 3.5% in 1927 up to 6% in 1929 and the Dow Jones
> DOUBLED. The Fed responded quickly to the debacle of 1929 and
> lowered rates from 6% to 1.5% within less than 2 years while the Dow
> Jones collapsed by 70%. In the 1994, interest rates were at the low.
The
>Fed raised rates 8 TIMES between 1994 and 1998 and the Dow Jones
> again DOUBLED! Now that the Fed is lowering rates, take a look at the
> above chart one more time just for the hell of it. Ask yourself, Did
the
>Fed lower rates in 1929 because of problems? Is the Fed lowering rates
> now because of problems?
>
>
>
>
>Mitch Ryder
>Ynos@xxxxxxxxxxxx
>
>____________________________________________________________________
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