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IR & QE

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Shaunt
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IR & QE  Reply with quote  

Hi,
I'm trying to get my head around the following scenario.

First of facts:
- IR (interest rates) been low for a long time and there were worries that inflation will eventually kick in.
- QE does push the bond prices high and as the result yield of it drops and that result if price of dollar to be dropped and investors to move into stock to get a better yield.

Now the question:
- with interest rates rising, the bond investors will demand the yield to rise and and as the result some investors will leave the stock market, unless Fed will continue with the QE.
- What I am trying to anaylise is that if we have IR rising while Fed it continuing with QE, what long term effect will that have on value of $? infilation ?Commodities ? stock and bond?
Regards
Post Mon Sep 09, 2013 11:13 am
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coaster
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Your premise:

Interest rates: UP
Money supply: UP

The known historical correlations based on your premise, and over the long term:

Dollar value: DOWN
Inflation: UP
Bond yields: UP
Bond prices: DOWN
Stock prices: UP
Stock yields: DOWN

While these known correlations have been demonstrated time and again, the future degree of change and the velocity of change cannot be predicted; and it is these two unknown factors that can cause you a world of grief if you try to play the trends too close. Furthermore, while the correlation is known (direct or inverse), the degree of correlation is always relative and changing over time due to other factors, such as economic strength, world political events, sovereign monetary, fiscal and tax policy, and so forth.

In other words; you can be right on the macro scale, but if you try to apply the macro scale to a short-term micro-scale methodology, you will get crushed by the short-term counter-trends. Your best method is to play the long-term trend and ignore the short-term trends.

~Tim~
Post Mon Sep 09, 2013 9:51 pm
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Shaunt
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Thanks Tim
Post Tue Sep 10, 2013 2:21 pm
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