In a recent post I described how to import current stock market data into your spreadsheet. Given the build up we have had over the last few years to the momentous decision to change interest rate policy, think of how much our perceptions of Fed power will change, if stock and bond markets respond with yawns to an interest rate policy shift. Investors have abdicated their responsibilities for assessing growth, cash flows and value, and taken to watching the Fed and wondering what it is going to do next, as if that were the primary driver of stock prices. It is to pick a combination of the risk free rate and ERP and see the consequences for stock prices.
The Fed has happily accepted the role of market puppet master, with Federal Bank governors seeking celebrity status, and piping up about inflation, the level of stock prices and interest rate policy. I wonder…stock options are basically the pairing of two transactions: 1) a subsidy to workers based on changes in the share price, which are an expense, and (2) an arbitrary stock transaction that happens as part of the compensation, which creates an accounting shadow of financial cash inflows and outflows. They write that about 44%-47% of cash, now is returning to investors (it is near historical normal value).
If we imagine a risk-free world where all options are exercised, and firms sterilize financial cash flows by buying shares when they issue stock options, we would see that this would cause gross cash distributions to rise, even though there would be no net effect on firm capitalization. We try to stretch this number in a somewhat-flawed statistical manner by using rolling 30-year periods of historical data, but there are still only 112 of those.
Can you share the chart on Fed asset purchase vs Bond yields, Corporate yields, Stock prices, GDP for these years (2009-2014) Also share dollar index chart during this period. A Repo is where the federal reserve buys short term treasuries (3 month maturity) from the primary dealers (e.g The main American banks) which adds liquidity to the reserves of the banks and this reduces the need for them to borrow against each other. Take Apple, for example, who’s issued $20+ billion in debt this year just for stock buybacks (even though they have $200 billion in cash). There is a big difference between a negative real interest rate at a 10% nominal rate and one at at a 2% nominal rate.
To illustrate, let’s look at historical returns using the Robert Shiller data and the spreadsheet from the Retire Early Home Page and see what the historical results would have been for 2% real rates of return over past 30-year periods with a 4% withdrawal rate. Nonetheless, the terminal portfolio values for a $1,000 portfolio of 50% equities and using a 4.5% withdrawal rate with historical returns data can be shown as follows.