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Fed Tapering: The Math Investors Need To Know

Saturday, August 17, 2013 - 4:00 PM
I found this article interesting.  Though it isn't the point of the article, I think it offers another reason why rates may remain (ie:  continue to be manipulated) Low.

Fed tapering: The math investors need to know - Brett Arends's ROI - MarketWatch

Full article in link (the comments after the article offer much to consider), A portion below :
Commentary: What ‘normal’ interest rates would do to stock valuations ...

So let’s do the numbers, shall we?

As recently as May, as a result of the policies of the Federal Reserve, the basic interest rate which underpins financial markets — the interest rate on the 10-year Treasury note — was as low as 1.6%. Today it’s already risen to 2.7%. Furthermore, history says the interest rate has typically fluctuated around 2% above inflation. Over time, that’s what people who’ve been willing to own ten-year Treasury bonds have expected as an average return on their money. As the bond market currently predicts inflation of about 2.5% over the next decade, we can estimate that when the Fed stops rigging interest rates and they go completely back to normal, the rate on the ten-year would probably be around 4.5%.

Now let’s look at what that means for stocks.

...

To put this in very simple logic: The Federal Reserve has been suppressing interest-rates to boost the economy. That suppression artificially hiked the value of the stock market, by a simple mathematical equation. Now that suppression is coming to an end, interest rates can be expected to rise. That rise ought — again, by a simple mathematical equation — to reduce the value of the stock market. Dramatically.

8
MikeMike327 posts since
Feb 22, 2010
Rep Points: 876
1. Saturday, August 17, 2013 - 5:20 PM
Good post Mike. I think your comment regarding the article is probably correct. The rate "manipulation" won't end any time soon under Chairman Bernanke, or his successor, whomever that may be.
3
ShorebreakShorebreak2,695 posts since
Apr 6, 2010
Rep Points: 14,611
2. Saturday, August 17, 2013 - 5:33 PM
Thanks Shorebreak.  

One day at a time.
3
MikeMike327 posts since
Feb 22, 2010
Rep Points: 876
3. Saturday, August 17, 2013 - 7:59 PM
"to reduce the value of the stock market. Dramatically."

SB stated it rightfully; it is not a matter of whether this (rate increase and the associated stock value reduction; etc.) will happen; but when. 

Politically I would say: It will be a long time when you see this happening.
3
51hh51hh1,476 posts since
Jan 16, 2010
Rep Points: 6,427
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