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"Interest Rates Drive Stocks"? See 4 Charts That Tell You the Truth
These 4 charts show why you should be careful with this common investment "wisdom"
By Elliott Wave International
Robert Prechter's monthly Elliott Wave Theorist once published a ten-part study explaining why traditional financial models failed to foresee the 2007-2009 financial crisis -- and, more importantly, why they are doomed to fail again (and again).
On Thursday (Sept. 17), the Fed decided to keep interest rates unchanged. On Friday, stocks opened down big. But before you join those who blame it on the Fed, please read this excerpt from Prechter's eye-opening study.
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Economic theory holds that bonds compete with stocks for investment funds. The higher the income that investors can get from safe bonds, the less attractive is a set rate of dividend payout from stocks; conversely, the less income that investors can get from safe bonds, the more attractive is a set rate of dividend payout from stocks. A statement of this construction appears to be sensible.
And it would be, if it were made in the field of economics. For example, "Rising prices for beef make chicken a more attractive purchase." This statement is simple and true. But in the field of finance such statements fly directly in the face of the evidence.
Figure 3 shows a history of the four biggest stock market declines of the past hundred years. They display routs of 54% to 89%.
Figure 3:
In all these cases, interest rates fell, and in two of those cases they went all the way to zero! In those cases, investors should have traded all their bonds for stocks. But they didn't; instead, they sold stocks and bought bonds. What is it about the value of dividends that investors fail to understand? Don't they get it?
As in most arguments from exogenous cause...one can argue just as effectively the opposite side of the claim. It is just as easy to sound rational and objective when saying this:
"When an economy implodes, corporate values fall, depressing the stock market. At the same time, demand for loans falls, depressing interest rates. In other words, when the economy contracts, both of these trends move down together. Conversely, when the economy expands, both of these trends move up together. This thesis explains why interest rates and stock prices go in the same direction."
See? Just as rational and sensible. On this basis, suddenly the examples in Figure 3 are explained. And so are the examples in Figure 4. Right?
Figure 4:
No, they're not, because, as the first version of the claim would have it, there in fact have been plenty of times when the stock prices rose and interest rates fell. This was true, for example, from 1984 to 1987, when stock prices more than doubled. And there have been plenty of times when stock prices fell and interest rates rose, as in 1973-1974 when stock prices were cut nearly in half. Figures 5 and 6 show examples.
Figure 5:
Figure 6:
At this point, conventional theorists might try formulating a complex web of interrelationships to explain these changing, contradictory correlations. But I have yet to read that any such approach has given any economist an edge in forecasting interest rates, stock prices or the relationship between them.
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This article was syndicated by Elliott Wave International and was originally published under the headline "Interest Rates Drive Stocks"? See 4 Charts That Tell You the Truth. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
When stuck, who do you call?
When you are faced with a challenge and become stuck, you may seek the services of one or more of these professionals:
- a consultant
- a lawyer
- an accountant
- a therapist
- a mentor
- a personal coach
- or some other advisor.
However, your self-selecting choice matters.
Choosing the wrong expert can waste time, money and put your organization on the wrong course of action. That is why knowing what kind of help you need and who is best able to supply that specific type of help is important.
The water can be muddy when sorting out the roles advisors play today; especially, when many consultants, therapists, lawyers and mentors may also call themselves personal or business coaches. When you really need a professional coach, it would be a mistake to engage to some other professional.
Personally, I am a recovering management consultant. At some point, it seemed to me that solutions for client problems seldom became a permanent fix due to leadership blind spots preventing seeing why the problem arose in the first place. So, I began doing more business and executive coaching by helping clients to fix their own problems and personally excel in their personal and professional lives.
Yet, few potential clients seem to know what a business coach is and does---many continue to categorize me as a consultant. Conversely, management consultant firms are working to transform themselves into becoming more coach-like since personal and business coaching works well in situations where consulting may not.
So, what's the difference between coaching and consulting?
A consultant is brought into an organization because of his or her knowledge and experience to solve a specific business problem. The consultant proactively solves the problem and then disengages. Whereas a coach is brought in to guide the executive or business owner in solving their problem and then disengages. The difference is subtle but important.
The coach assists the client to understand whatever is causing the problem so the client can solve the problem today and when or if it reoccurs. Whereas, the consultant knows or discovers what caused the problem, solves the problem and leaves without transferring this knowledge to the client. When the problem reoccurs, the client may simply call the consultant in again to resolve the problem, time-after-time.
If you are willing to call or recall someone to fix problems as they occur, call a consultant. If you want to learn what is causing the problem and how best to fix it now and in the future, call a coach. The choice is yours.
The Art of Marketing
The "art" of marketing can be very mysterious to engineers, accountants, computer specialists, and other technically-oriented people. This is especially true when it comes to the commercialization of a new product or process or the startup of a technically-driven business venture.
Many technically-oriented people think that the key to marketing success is to learn the secret marketing "formulas." They take all the marketing courses at their local business school. They read all the books on marketing. But it still doesn't happen. The "formulas" aren't there.
In fact, they aren't anywhere. Marketing is much more an "art" than a science. It's simply a mistake to look for scientific formulas in a field of "art."
Successful commercialization combines the "science" of formulating a winning physical product/process with the "art" of marketing strategy and implementation. In a way, this combination of product science and marketing art emulates the craftsmen of yesteryear who applied crude tools with a system of methods and principles into a skillful performance that could not be learned solely by study.
In today's high-tech world, most technically-oriented product developers would be well advised to seek out a marketing artist to work with — rather than trying to become the all-in-one craftsman.
The development of xerography is a good example of the combination of product science and marketing art. Chester Carlson, a physicist and patent attorney, obtained a patent on xerography and searched for a way to commercialize it. He happened to be an attorney for a client of Battelle (a research organization in Columbus, OH), and sent a copy of the patent to them for review.
Battelle was interested. For 55% of the patent rights, Battelle agreed to invest in the technology, with Battelle research making three technical improvements. However, it was the little Haloid Company (a market-oriented 100-employee company in Rochester, NY) that figured out how to commercialize this expensive and very-service-intensive machine ($15,000 cost). As a result, in 1963 the Xerox 914 was born.
Joe Wilson, Haloid Company's president, is given the credit for the marketing "art" that led to the success of xerography — Lease the Xerox 914 copier for only $100 a month, but pay an additional penny per copy made on the machine.
It was Haloid's addition of marketing "art" to Battelle's solid product "science" that created a winning product. The marketing-oriented Haloid Company changed its name to Xerox Corporation, and the technically-oriented Battelle received $350 million of Xerox stock.
Don't underestimate the need for marketing "art" in your own product or business development activities. Find a good marketing "artist" to work with — and do so as early as possible.
Source: Ask the Coach
The Art of Marketing
The "art" of marketing can be very mysterious to engineers, accountants, computer specialists, and other technically-oriented people. This is especially true when it comes to the commercialization of a new product or process or the startup of a technically-driven business venture.
Many technically-oriented people think that the key to marketing success is to learn the secret marketing "formulas." They take all the marketing courses at their local business school. They read all the books on marketing. But it still doesn't happen. The "formulas" aren't there.
In fact, they aren't anywhere. Marketing is much more an "art" than a science. It's simply a mistake to look for scientific formulas in a field of "art."
Successful commercialization combines the "science" of formulating a winning physical product/process with the "art" of marketing strategy and implementation. In a way, this combination of product science and marketing art emulates the craftsmen of yesteryear who applied crude tools with a system of methods and principles into a skillful performance that could not be learned solely by study.
In today's high-tech world, most technically-oriented product developers would be well advised to seek out a marketing artist to work with — rather than trying to become the all-in-one craftsman.
The development of xerography is a good example of the combination of product science and marketing art. Chester Carlson, a physicist and patent attorney, obtained a patent on xerography and searched for a way to commercialize it. He happened to be an attorney for a client of Battelle (a research organization in Columbus, OH), and sent a copy of the patent to them for review.
Battelle was interested. For 55% of the patent rights, Battelle agreed to invest in the technology, with Battelle research making three technical improvements. However, it was the little Haloid Company (a market-oriented 100-employee company in Rochester, NY) that figured out how to commercialize this expensive and very-service-intensive machine ($15,000 cost). As a result, in 1963 the Xerox 914 was born.
Joe Wilson, Haloid Company's president, is given the credit for the marketing "art" that led to the success of xerography — Lease the Xerox 914 copier for only $100 a month, but pay an additional penny per copy made on the machine.
It was Haloid's addition of marketing "art" to Battelle's solid product "science" that created a winning product. The marketing-oriented Haloid Company changed its name to Xerox Corporation, and the technically-oriented Battelle received $350 million of Xerox stock.
Don't underestimate the need for marketing "art" in your own product or business development activities. Find a good marketing "artist" to work with — and do so as early as possible.
Source: Ask the Coach
Doing What You Do Best.
Q: I just returned from vacation where I had a chance to think about how I want to live my life differently. I know that I want do something else in my career but I am not sure what. Do you have any advice on what I can do about this discontent that I am feeling?
A: Every year, we gain a clearer understanding that without positive change, decline is inevitable. Still it's easy to lose hope: barriers to change seem to be everywhere. We work in organizations that aren't much fun. We fail to gain work/life balance that is so important to us but so difficult to sustain. Looking ahead, the challenge is to recognize that what we are now tolerating can be reinvented.
Most people returning to work from a relaxing vacation, where they took stock of their life, question if they are on the right career path but don’t do anything about it. "I'll be happy when...." is the way many people think they are living their lives. A fortunate few decide not to languish in their present job and begin the process of engineering a mid-career correction. Here is how these very few do it.
They recognize that happiness is not something that happens to you. Happiness is inside you now. You are motivated from within as you discovered while on vacation. You only have to allow happiness to continue to surface after the vacation in your work and personal lives.
The formula for happiness is to know yourself, discover what you do best and understand that you get what you tolerate. In medicine, you look at how "well tolerated" a drug will be related to its side effects. At work and at home, many people evaluate new opportunities related to what can be well tolerated. Yet after life, most people don't want their tombstone to read, "She tolerated stuff for other people because they paid her." Especially, when we realize that we can make more money and have more fun doing work that engages our passions. Life is too short for doing work you don't enjoy.
That said, I don’t recommend that you immediately leave your job but do begin the career transition process to visualize where you want to be. The first step is to change the way you think about yourself. Since what we think, we become, it is important to convince ourselves that we can change, so we do change. Believing comes first, then change, not the other way around. This rethinking who we are helps us to begin to consciously separate ourselves from our current job and life.
As you become clearer on where you want to be, you begin to modify your career path to be more in line with who you have become. Clarity happens as you get to know more about who you are by engaging in self-learning exercises. You also speed up the career transformation process through taking some self-assessments to match your strengths, interests and personality with potential work choices.
Everyone should know the important things in their life---your family, your partner, your health and well-being, your children---anything that is so important to you that if it were lost, you would be devastated.
After you know what’s important to you, engage in selective reading and take a few personality and career self assessments to get to know you better. Here are some self-assessments in books that you can buy at your local or online bookseller:
Tom Rath: StrengthsFinder 2.0
Marcus Buckingham: StandOut: The Groundbreaking New Strengths Assessment from the Leader of the Strengths Revolution
Kevin W. McCarthy: The On-Purpose Business: Doing More of What You Do Best More Profitably
The results of practicing the new discoveries and habits you learn over time are that they become part of your new real self.
Often, with changes in your habits, come changes in your aspirations and dreams. Going through the discovery of uncovering an ideal vision of yourself motivates you to develop new abilities to create and sustain the new habits. That is, you see the person you want to be---living with the new habit. This becomes the source of the energy required to work at the difficult and often frustrating process of change.
Source: Ask the Coach
Don't Get Ruined by These 10 Popular Investment Myths (Part IX)
Interest rates, oil prices, earnings, GDP, wars, peace, terrorism, inflation, monetary policy, etc. -- NONE have a reliable effect on the stock market
By Elliott Wave International
You may remember that after the 2008-2009 crash, many called into question traditional economic models. Why did they fail?
And more importantly, will they warn us of a new approaching doomsday, should there be one?
This series gives you a well-researched answer. Here is Part IX; come back soon for Part X.
Myth #9: Inflation makes gold and silver go up.
By Robert Prechter (excerpted from the monthly Elliott Wave Theorist; published since 1979)
This one seems like a no-brainer. The government or the central bank prints more bonds, notes and bills, and prices for things go up in response. Gold is real money, so it must fluctuate along with the inflation rate.
Once again, it doesn't happen that way. Let's examine the history of inflation and the precious metals since the low of the Great Depression.
Inflation occurred relentlessly from 1933 to 1970, yet gold and silver remained unchanged over the entire time. True, the government fixed the price. But markets are more powerful than any government, and if the market had wanted precious metals prices higher, it would have made them go higher.
The government still fixes the price of gold. The official, legal price today is $42.22 per ounce. If you were to ship gold overseas, and it got lost, a domestic insurer would have to pay you only $42.22 per ounce to cover it. But investors in 1970 began forcing gold beyond the official price. They could just as well have done so anytime between 1933 and 1970, but they didn't. Had you held gold for that period, you would have held the worst investment on the board. Investors in the stock market were making 20 times their money through capital gains alone and 30 times their money assuming a 4% (non-reinvested) dividend. Bond investors made nearly as much money through compound interest. Yet your investment -- based on one-to-one, mechanical causality -- was dead in the water.
Inflation continued from 1970 to 1980, and gold and silver soared. Inflation was all in the news, so people credited inflation for making these prices rise. They also predicted that the rise would not stop, because inflation was not going to stop. They were right about the inflation part.
Inflation continued from January 1980 to April 2001, too. But gold and silver lost 83% of their combined value during these 21 years, as shown in Figure 19.
Investors who held these precious metals during that time were once again stuck in the worst investment available, but this time it was far more devastating. It was the only major investment that lost dollar value during those decades. Real estate went up, stocks went up, and bonds had a positive return. At the end of this period, a basketful of gold and silver was worth 17 cents, in inflated-dollar terms, for each full dollar that it was worth in January 1980. In terms of CPI purchasing power, the value of this investment fell to about six pennies per 1980 dollar. Stock prices, over the same period, rose 13 times in terms of dollars and 45 times in terms of gold.
Inflation continued from 2001 forward, and gold and silver rose four-fold into 2008-2009. So for eight years, this investment was once again profitable. Thus, out of a total history of 76 years of inflation, gold and silver rose for 18 of them. For 58 of those years, they went sideways or down.
However you look at it, the "basic physics" model failed to deliver. According to that model, gold and silver would have adjusted to the amount of inflation month by month, year after year. But nothing even remotely like that scenario happened.
(Stay tuned for Part X of this important series, where Prechter examines another popular investment myth: Namely, that "Central banks and government policies control the markets.")
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This article was syndicated by Elliott Wave International and was originally published under the headline Don't Get Ruined by These 10 Popular Investment Myths (Part IX). EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.