Never
But Never Fight the Fed
by James L. Rapholz, editor
Economic Advice
Stock
markets are nothing more or nothing less than great big money
eating machines. Simply putwhen money goes into a stock market
faster than it comes outthe market will go up, and if more money
comes out than goes inthe market will go down.
The amount of money
which is available to make the stock markets move is, for the
most part, regulated by the Federal Reserve System and its chief,
Dr. Alan Greenspan. If these people decide that the economy (and
the stock markets) are growing too fast, they can slow things
down by raising interest rates and removing money from circulation
and can also do the opposite if things are moving too slow.
If you never learn
anything else about stock market investing, try to remember the
following: "Never, but never, fight the Fed!"
If they want the market to go, it will go. If they want it to
slow down, it will slow down. At the present time, Greenspan
and Company are raising interest rates and removing currency
from circulation. There is a great amount of controversy about
the Fed's ability to slow the new market (the Nasdaq's .coms
and .bombs). If these conventional methods don't slow the untouchables
down and the Fed wants them down, they will come down! Dr. Greenspan
and his old boys have another tool in their back pocket, which
is alluded to as margin requirements. Approximately 40% of all
the money invested in the .coms and .bombs is borrowed money
and if Old Alan decides to raise the margin requirements, he
will and Humpty Dumpty will come tumbling down!
Below you will find
a very basic and easy to use formula which can be mastered by
any beginner to predict the future direction of the stock marketbefore
making an investment decision.
1. Interest
rates are, by far, the most important reason for stock markets
to go up or down. So, we place great emphasis on the value of
the thirty-year bond yield. We will add or subtract a value of
four points for each 1/4% the bond is yielding above or below
our neutral reading of 5%. Example: if the 30 year bond is yielding
5-1/2%, the first figure that we write down this week is 8.
2. The money
in circulation is the second most important reason for stock
market movement. There are three separate measurements of currency
in circulation M1, M2 and M3. M1 consists of currency, checking
accounts and traveler's checks. M2 consists of certificates of
deposit, savings deposits and retail money market funds. M3 is
made up of jumbo CDs, institutional money-market funds, eurodollars
and repurchase agreements. This is all the money that is in circulation
and it can be changed at the whim of the Federal Reserve System.
If they choose to expand this supply, they can print vast amounts
of new paper money right out of thin air. And, if they have the
desire to shrink the supply of money in circulation, they can
take currency away from the banks in return for government bonds.
To use these numbers we add all three (M1, M2 and M3) together
and then add or subtract the total from last week's total. We
use one point for every $ Billion above, or below, the preceding
week.
4. The last indicator that we'll be using is the amount of money flowing into or out of equity mutual funds. This is the best current indicator of investor sentiment that we know of. Each billion dollar change will equal one positive or negative point in the formula.
All the numbers you need to work this formula are available in the workshop section of Barron's Financial Weekly for just $3.00 a copy at your local news dealer.
Let's try out our formula:
(1) The current yield on the 30-year bond is just about 6.25%. This gives us a 1.25% interest reading above our ideal or neutral point of 5%. So we multiply 4 five times and come up with a -20 reading.
(2) We add up M1, M2 and M3 (not adjusted) for the current week and get 12329.1 billion dollars. The total from last week was 12334.5 which we find to be 5.4 billion greater. So we come up with a reading of -5.4 because that amount of money was taken out of circulation.
(3) The CRB index stood at 214.06 as of 3/10/00. It was 190.50 one year ago. This shows us that the CRB grew by 23.56. We end up with a figure of +2.36.
(4) 10.2 billion dollars came into equity mutual funds over the past week. This gives our formula a reading of +10.2.
Our total reading is 12.84 which we consider to be bad for the future of the stock markets.
Our formula works out well when we look at the New York and American Stock Exchanges. But, it does not fall in with what's happening on the Nasdaq. I guess my simple little formula doesn't apply to the new economy and all of its high technology that is for certain to make the earth turn faster and do away with winter forever.!
But, I'm so old that I can remember an assignment back in graduate school. Old Professor Stevens wanted us to come up with the cause of the great depression. I was shocked to find out that those fools back in the 20s actually believed that the good times could go on forever because of the momentous technological revolution. They had electricity introduced into their everyday lives.
I dare say that it was by far much more important and exciting than the introduction of personal computers, the Internet, hot wires, bent wires and all the rest of the trumped up B.S. Wall Street is yelling about. And, how about the huge boost in productivity brought about by factories converted to run on electricity? And, let's not forget about the new production methods (such as Henry Ford's assembly line).
I even found out that there was more than 3,000 new automobile companies at the time, whose start up capital was provided by an army of euphoric investors hoping they'd find the next Ford.
New electric products and patents from promising new-tech companies were popping up in every corner of the nation. The likes of Marconi, Emerson and RKO were the Microsofts, Intels and Yahoos of that time.
And that era even had its own Bill Gates and Warren Buffett, in the form of John D. Rockefeller and Joseph P. Kennedy, one an industry builder, and the other a super-sharp investor.
But then came that cold dark day, the one that all the boys on Wall Street said "was gone forever" and it became obvious that even though a technology revolution creates longer economic booms, it also allows the excesses in the economy and markets to reach extremes! Result: Larger declines are required to correct such excesses.
So, I feel grateful, even though my formula doesn't work here, that this is not another 1929 or a Japan, Inc. this time around it really is different isn't it?
Editor's Note: James Rapholz is editor of Economic Advice, 1 year, 12 issues, $99; 6 months, $59. He is president of Rapholz Silver, Inc. and has two decades of experience in every phase of gold and silver production. In a recent letter, Rapholz explores $14 Silver by 6/30/2000 Find out why Bill Gates invests $16 million into a $5 Silver mining stock, just $1.00 for a complete report. Make check payable to J.L. Rapholz, 3910 NE 26th Ave., Lighthouse Point, FL 33064.
