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