Another Shibboleth Bites the Dust

日期:2013/10/04

I had to intervene yesterday when David Stockman gave one shibboleth about the coming armageddon after another advising people to put their money under the mattress, and to anticipate tremendous increases in interest rates, and the end of civilization all caused by the increase in the Fed's balance sheet.

I hated to have all the junta attendees nod in agreement as this ruinous guidance, similar to the chronic bear at Barrons, sunk in. At most such epicylic presentations, none have the courage to get up to present an academic, or empirical, or systematic rebuttal. But since it's my junta, I felt I had to point out that the scenario he envisioned was rated at 1 in a billion by market options, that following his advice over the years would have led to multiple bankruptcy and poverty, and that the fears he discussed in recent years were not any greater than those that occur on average every other year.



I referred him to Dimson and Ibbotsen, paid him his fee, and felt like Odysseus coming home to Ithaca to find his home overrun by imposters and suitors of the wife. It's my junta, but the economics editor of Barrons moderates it now, and he's one of those who believes that 6% interest rates are a good average for the next 10 years, as used by the "impartial" congressional budget committee.

In any case, one of the shibboleths most often bandied about is that the POMO from the Fed is the cause of all the market rises. Indeed many anecdotal reports on such sites as Zero have limned this theme. Easy way to make money. Just buy on days that POMO is in play. The days they buy the bonds and mortgages and the amounts are announced in advance on the Fed web site to give an aura of non-flexionism to it all.

But, have you tested it one wants to ask. I did with the assistance of Tim Hesselsweet.

Let's divide the days up three ways big QE buying, small QE buying, no QE buying: number of obs were 406, 258k, 144, respectively. The average move is up for each of the days and each of the afternoons. But the greater the QE, the less the average rise, but for the whole day, and the afternoon following the POMO. The average change respective: 8/10 of a point, 1 point, and 1.4 points. Where there was no POMO, the market went up the most. Thus, another mumbo jumbo, and easy way to make money, and untested reason to hate the system bites the dust.