07-May-2006
The Source, from Kim Zussman
Recently recalling the late 90's, with all the magazine covers sporting smiling tech CEOs, ads for online brokerages, and overheard waiting-room boasting about positions in Cisco, Amazon, and Broadcom. One scruffy fellow even used the words "due diligence" about his position in MSFT circa 2000; evidently something he read on TV. Which leads to many questions, including whether bubbles only form in liquids.
The recent two years in So. California have been wetter than usual; last year second highest on record and this one not far behind. During frequent hillside forays, it is easy to see the result at all levels in the ecosystem. Flora is more abundant and lush than what is usual in semi-arid terrain. Heavy growth of sage and other scrub, grasses, and flowering plants impinge the trails, many plants carry odd fruit or berries, with the verdant hills more resembling forests of the deep south.
This lead to an explosion in the insect and helminth population: bees busy at flowers, beetles and flies zipping and darting, worms and caterpillars creeping and chewing. Vegetation and insects feed higher forms, including birds, rodents, and deer, with the short-gestation folk partying most. Rabbits, squirrels, and birds are busy everywhere, while rats and mice proliferate in hiding. The yard has enough food to support a scrub-jay nest near the house, filled with four fat chicks served by programmatically industrious mama and papa.
Reptiles too are booming. Ordinarily hidden snakes are now seen often (three Pacific rattlesnakes and a bull snake within one week). Human encounters with rattlesnakes are usually uncommon, since they hunt in the brush while hidden from the hungry red-tailed hawks circling silently above. But now there are so many serpents bulging onto over grown trails that hikers have to watch their steps more than the scenery.
So the effects of unusually plentiful liquidity has fed growth, and all the various species flourish. Are there historical effects which correlate with prior changes in Fed liquidity? To look at this, historic monthly effective Fed rates were used to calculate QTR/QTR* change in interest back to 1954, and this was taken as a proxy for water. A similar series of QTR stock returns was obtained using SP500 index monthly closes. Then multiple and step-wise regression was done to identify whether any lagged QTR change (i.e., lags of 1, 2, 3 Qtr) in Fed effective rate predicted stock QTR returns.
Turns out only the prior QTR change in Fed interest rate approached significant negative correlation with the subsequent change in stocks (T=-1.87, p=0.063); recently declining interest is slightly bullish for stocks.
* To include recent April showers, series was divided into 3-month periods, "QTR", counting back with April. Thus these are not calendar quarters. Here is the series:
INT SP500 DAT QTR CHG QTR RET Apr-06 1.117 1.019 Jan-06 1.135 1.025 Oct-05 1.160 1.024 Jul-05 1.168 1.024 Apr-05 1.224 0.990 Jan-05 1.295 1.025 Oct-04 1.397 1.063 Jul-04 1.260 0.985 Apr-04 1.000 0.979 Jan-04 0.990 1.082 Oct-03 1.000 1.050 Jul-03 0.802 1.046 Apr-03 1.016 1.146 Jan-03 0.709 0.898 Oct-02 1.012 1.022 Jul-02 0.989 0.858 Apr-02 1.012 0.964 Jan-02 0.695 0.971 Oct-01 0.660 1.005 Jul-01 0.785 0.903 Apr-01 0.803 1.013 Jan-01 0.919 0.943 Oct-00 0.995 0.866 Jul-00 1.086 1.068 Apr-00 1.105 1.040 Jan-00 1.048 0.984 Oct-99 1.042 1.052 Jul-99 1.053 1.014 Apr-99 1.024 1.051 Jan-99 0.913 1.064 Oct-98 0.915 1.216 Jul-98 1.017 0.878 Apr-98 0.980 1.040 Jan-98 1.011 1.098 Oct-97 0.996 1.062 Jul-97 1.002 1.060 Apr-97 1.050 1.073 Jan-97 1.002 1.045 Oct-96 0.970 1.161 Jul-96 1.034 0.974 Apr-96 0.939 1.045 Jan-96 0.965 1.058 Oct-95 0.985 1.077 Jul-95 0.967 1.053 Apr-95 1.094 1.094 Jan-95 1.162 1.074 Oct-94 1.117 0.954 Jul-94 1.197 1.042 Apr-94 1.167 0.977 Jan-94 1.020 1.012 Oct-93 0.977 0.996 Jul-93 1.034 1.030 Apr-93 0.980 1.015 Jan-93 0.974 1.028 Oct-92 0.954 1.042 Jul-92 0.871 0.997 Apr-92 0.926 1.006 Jan-92 0.774 1.100 Oct-91 0.895 0.949 Jul-91 0.985 1.014 Apr-91 0.855 1.062 Jan-91 0.852 1.139 Oct-90 0.995 0.999 Jul-90 0.987 0.893 Apr-90 1.004 1.088 Jan-90 0.931 0.959 Oct-89 0.957 0.984 Jul-89 0.939 1.096 Apr-89 1.079 1.110 Jan-89 1.099 1.055 Oct-88 1.071 1.047 Jul-88 1.128 0.998 Apr-88 1.006 0.979 Jan-88 0.937 1.163 Oct-87 1.108 0.698 Jul-87 1.033 1.137 Apr-87 0.991 1.021 Jan-87 1.099 1.140 Oct-86 0.892 0.985 Jul-86 0.938 1.023 Apr-86 0.859 1.090 Jan-86 1.019 1.122 Oct-85 1.014 1.072 Jul-85 0.953 0.995 Apr-85 0.990 1.046 Jan-85 0.836 1.108 Oct-84 0.890 0.981 Jul-84 1.091 1.107 Apr-84 1.076 0.959 Jan-84 1.008 0.944 Oct-83 1.012 1.012 Jul-83 1.065 1.012 Apr-83 1.014 1.097 Jan-83 0.894 1.069 Oct-82 0.771 1.159 Jul-82 0.843 1.068 Apr-82 1.130 0.989 Jan-82 0.877 0.895 Oct-81 0.792 1.029 Jul-81 1.211 0.926 Apr-81 0.824 1.010 Jan-81 1.489 0.934 Oct-80 1.419 1.148 Jul-80 0.513 1.100 Apr-80 1.274 0.979 Jan-80 1.004 1.071 Oct-79 1.315 0.971 Jul-79 1.046 1.103 Apr-79 0.994 1.029 Jan-79 1.124 1.017 Oct-78 1.147 0.917 Jul-78 1.134 1.062 Apr-78 1.028 1.117 Jan-78 1.036 0.918 Oct-77 1.194 0.980 Jul-77 1.146 1.007 Apr-77 1.026 0.963 Jan-77 0.918 0.978 Oct-76 0.945 0.992 Jul-76 1.102 1.027 Apr-76 0.990 1.005 Jan-76 0.837 1.093 Oct-75 0.954 1.050 Jul-75 1.111 0.953 Apr-75 0.770 1.117 Jan-75 0.709 1.166 Oct-74 0.779 0.970 Jul-74 1.229 0.827 Apr-74 1.089 0.907 Jan-74 0.964 1.003 Oct-73 0.963 0.920 Jul-73 1.461 0.993 Apr-73 1.199 0.940 Jan-73 1.179 0.957 Oct-72 1.108 1.050 Jul-72 1.091 1.014 Apr-72 1.191 1.028 Jan-72 0.673 1.134 Oct-71 0.979 0.949 Jul-71 1.280 0.994 Apr-71 1.002 1.030 Jan-71 0.668 1.110 Oct-70 0.860 1.070 Jul-70 0.890 1.065 Apr-70 0.902 0.855 Jan-70 0.998 0.954 Oct-69 1.045 0.982 Jul-69 1.162 0.923 Apr-69 1.176 1.054 Jan-69 1.066 0.906 Oct-68 0.982 1.096 Jul-68 1.045 1.002 Apr-68 1.252 1.104 Jan-68 1.186 0.951 Oct-67 1.024 1.004 Jul-67 0.936 1.051 Apr-67 0.820 1.027 Jan-67 0.893 1.079 Oct-66 1.043 1.043 Jul-66 1.135 0.895 Apr-66 1.057 0.944 Jan-66 1.083 0.996 Oct-65 0.998 1.051 Jul-65 1.000 0.986 Apr-65 1.049 1.011 Jan-65 1.161 1.036 Oct-64 0.982 1.032 Jul-64 0.986 1.018 Apr-64 0.997 1.033 Jan-64 0.994 1.062 Oct-63 1.159 1.010 Jul-63 1.041 1.024 Apr-63 0.993 1.101 Jan-63 1.007 1.033 Oct-62 1.070 1.053 Jul-62 0.975 0.991 Apr-62 1.293 0.852 Jan-62 0.951 0.981 Oct-61 1.932 1.048 Jul-61 0.785 1.023 Apr-61 1.028 1.049 Jan-61 0.587 1.142 Oct-60 0.765 0.975 Jul-60 0.824 1.020 Apr-60 0.982 0.995 Jan-60 1.003 0.963 Oct-59 1.147 0.978 Jul-59 1.172 1.016 Apr-59 1.194 1.059 Jan-59 1.378 1.056 Oct-58 2.647 1.099 Jul-58 0.540 1.083 Apr-58 0.463 1.080 Jan-58 0.777 0.979 Oct-57 1.171 0.923 Jul-57 0.997 0.953 Apr-57 1.056 1.096 Jan-57 0.959 0.960 Oct-56 1.076 0.949 Jul-56 1.050 1.051 Apr-56 1.069 0.997 Jan-56 1.094 0.996 Oct-55 1.333 1.054 Jul-55 1.175 1.139 Apr-55 1.029 1.031 Jan-55 1.635 1.074 Oct-54 1.063 1.148