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« Financial Blogs and MSM | Main | Enhancing Trader Performance by Brett N. Steenbarger »

February 06, 2007



Thanks for your comment. I do understand the original context: Does this affect the Fed model? Your question is a good one, and I'll try to answer, at least a little.

I have several more posts on my writing agenda for the Fed model, so I'll be covering these topics in more detail.

For now, I'll suggest where I am going. As to the direction of interest rates, there is no logical reason why it should matter, since the ten-year subsumes the "strip" of forward rates. But it might matter to the market. There is still a "don't fight the Fed" mentality-- even when the rates were moving from extremely low to neutral. Arguably, they are only mildly restrictive at the moment.

I am going to take up various efforts to "tweak" the Fed model and show some of the problems.

I do have some criticisms of my own, relating to variables left out of the model, and the overall range of applicability.

Having said this, I am very comfortable with the idea that stocks are undervalued, even if rates rise a bit more -- something I think is likely.

Developing this theme takes time, and it is mostly an after-hours thing for an active manager:)


Am glad to make it to the front page :). Anyway, the context I brought it up was with regards to the Fed model which intuitively makes sense -- should I put my money into stocks or bonds despite the fact that forward PE averages around 12. At the same time, forward earnings are available only for the period of falling interest rates and the relationship fails for trailing earnings if you go back more than fifty years (I understand financial markets have changed and so on). So today, the persistent undervaluation may (and I may be eating my words before summer is out) be due to a higher risk premium demanded from stocks since the question asked today is not just "stocks or bonds" but also "stocks or gold".

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