The Lemon Fool

As a regular viewer of Bloomberg, the following phrases are mentioned by nearly EVERY contributor. These are The Fed, Easing, Tapering, Punchbowl, Yield curve flattening, Interest rate dot plots, Transitory inflation, Sticky inflation, Monitory policy, Fiscal Policy, Biden Build Back Better etc etc.

I get the impression that Money Managers are now wholly relying on Government Policy to transfer wealth into their funds.

It seems to me that the equity markets, particularly in the USA, are becoming fully dependent on Central Bank policy.

Is this a form of capitalist nationalisation ?

Sorry if I haven't expressed my point too well.

scotview wrote:As a regular viewer of Bloomberg, the following phrases are mentioned by nearly EVERY contributor. These are The Fed, Easing, Tapering, Punchbowl, Yield curve flattening, Interest rate dot plots, Transitory inflation, Sticky inflation, Monitory policy, Fiscal Policy, Biden Build Back Better etc etc.

I get the impression that Money Managers are now wholly relying on Government Policy to transfer wealth into their funds.

It seems to me that the equity markets, particularly in the USA, are becoming fully dependent on Central Bank policy.

Is this a form of capitalist nationalisation ?

Sorry if I haven't expressed my point too well.

Up until about twenty odd years ago governments directly controlled interest rates rather than just setting their independent central banks an inflation target. Hence it is arguable that despite QE and its tapering etc markets are more independent of government than they were back then.

scotview wrote:As a regular viewer of Bloomberg, the following phrases are mentioned by nearly EVERY contributor. These are The Fed, Easing, Tapering, Punchbowl, Yield curve flattening, Interest rate dot plots, Transitory inflation, Sticky inflation, Monitory policy, Fiscal Policy, Biden Build Back Better etc etc.

I get the impression that Money Managers are now wholly relying on Government Policy to transfer wealth into their funds.

It seems to me that the equity markets, particularly in the USA, are becoming fully dependent on Central Bank policy.

Is this a form of capitalist nationalisation ?

Sorry if I haven't expressed my point too well.

Capitalism isn't what it used to be. Since 2008 central bank cash injections were the dominant driver of short-term and medium-term performance.

But now we're beginning to see some cracks appearing, in the form of sticky inflation, along with the nonsense of bonds guaranteeing a loss of a 1 - 2% per year.
Some blame it on Covid but the truth is that monetary policy has been too loose for too long and central banks have pushed things far from where they would be without all the asset purchases/QE which everything now depends on like a life support system.

As the Fed brings taper to an end and starts to raise rates, I expect financial markets to become very volatile as they suffer withdrawal symptoms, eventually forcing the Fed to intervene again with vast quantities of additional asset purchases. I think we're on the verge of what could be a historic bear market (in real terms) in US equities.

We are now so far along the path of markets being dependent on asset purchases that there is no way to engineer a 'soft landing'.

scotview wrote:It seems to me that the equity markets, particularly in the USA, are becoming fully dependent on Central Bank policy.

It may be the other way around i.e. that the government is dependent upon buoyant financial markets.

Household net worth is now arguably a more important driver of prosperity than traditional income. Incomes have been relatively flat in recent years, not least because of low inflation. But that same low inflation and accompanying low interest rates has boosted the value of financial assets such as shares, bonds and property.

According to this recent article equities now represent about half of all US household wealth. We have become income-poor but asset-rich. The implications of puncturing that wealth are significant, and so the Fed gives every appearance of being willing to do what it takes to prop up share prices. You may recall that Powell did a 180 about 3 years ago when shares took a sharp fall. He reversed his previous policy and the markets breathed a sigh of relief and returned to new all-time highs. The "Greenspan Put" never went away.

The Fed used to care only about inflation and unemployment - the so called "dual mandate", Now I suspect the Fed board members look at the markets every day and take their cues from that.

https://www.cnbc.com/2021/10/01/stocks- ... ealth.html

Lootman wrote:The Fed used to care only about inflation and unemployment - the so called "dual mandate", Now I suspect the Fed board members look at the markets every day and take their cues from that.

Yes, the Fed are no longer in control which I think is comical, pathetic and sad.
The Fed's persistence with aggressive stimulus (QE and low rates) after the 2008 crash - despite a good economic and financial recovery - was when things began to really spiral.
The economy didn't need so much stimulus. Yes, the 'recovery' would have been slower if QE and low rates had been gradually unwound, but it would have much more stable underpinnings.

The Fed now merely administer the next increasingly large shot of caffeine and sugar when the markets are tired or grumpy.

The eventual consequences will probably be fascinating and unpleasant to be a part of.

BT63 wrote:

Lootman wrote:The Fed used to care only about inflation and unemployment - the so called "dual mandate", Now I suspect the Fed board members look at the markets every day and take their cues from that.

Yes, the Fed are no longer in control which I think is comical, pathetic and sad.
The Fed's persistence with aggressive stimulus (QE and low rates) after the 2008 crash - despite a good economic and financial recovery - was when things began to really spiral.

The economy didn't need so much stimulus. Yes, the 'recovery' would have been slower if QE and low rates had been gradually unwound, but it would have much more stable underpinnings.

The Fed now merely administer the next increasingly large shot of caffeine and sugar when the markets are tired or grumpy.

The eventual consequences will probably be fascinating and unpleasant to be a part of.

The problem with that is that you could have made that argument 5 or 10 years ago. And would have been wrong both times.

So could that be right? Sure. It might even be probable but without a sense of when and at what level that happens, I am not sure how helpful it is. You could lose an awful lot more money waiting to be finally proven right.

BT63 wrote:

Lootman wrote:The Fed used to care only about inflation and unemployment - the so called "dual mandate", Now I suspect the Fed board members look at the markets every day and take their cues from that.

Yes, the Fed are no longer in control which I think is comical, pathetic and sad.
The Fed's persistence with aggressive stimulus (QE and low rates) after the 2008 crash - despite a good economic and financial recovery - was when things began to really spiral.
The economy didn't need so much stimulus. Yes, the 'recovery' would have been slower if QE and low rates had been gradually unwound, but it would have much more stable underpinnings.

The Fed now merely administer the next increasingly large shot of caffeine and sugar when the markets are tired or grumpy.

The eventual consequences will probably be fascinating and unpleasant to be a part of.

Never read or agreed with any Krugman?

GS

GoSeigen wrote:Never read or agreed with any Krugman?
GS

I have heard of him but I'm not knowingly familiar with what he has to say. Do you have a summary or some links?

scotview wrote:It seems to me that the equity markets, particularly in the USA, are becoming fully dependent on Central Bank policy.

This observation has been discussed elsewhere and in the past

https://en.wikipedia.org/wiki/Socialism ... r_the_poor

BT63 wrote:

GoSeigen wrote:Never read or agreed with any Krugman?
GS

I have heard of him but I'm not knowingly familiar with what he has to say. Do you have a summary or some links?

Unfortunately not easy to point to anything right now without doing a bit of work. Essentially the reason I mentioned Paul Krugman is that he spent quite a lot of time thinking and writing about the themes you were discussing in that post. His view was that monetary policy would become very difficult if interest rates neared what he termed the "zero bound" and that monetary policy would become ineffective (pushing on a string). The solution he proposed way back in 1998 IIRC was for central banks to convince the market that they would recklessly loosen monetary policy to the extent that inflation would be driven far past their target for an extended period (or "indefinitely"), and maintain this stance until inflation expectations were far above zero. So what we are seeing now may be an implementation of Krugman's ideas of 23 years ago. I think his paper was well read and highly regarded by some so it shouldn't be too hard to find using google... he commented on similar themes in his regular columns for years afterwards, until at least 2011.


GS

Hi All.

Krugman writes a column in the New York Times. If you are UK Resident (and perhaps other jurisdictions) you can get a digital subscription for 50p a week (for a year at least).

No doubt you can find some topic matters of relevance there - it's a decent paper anyway and more than good value for the money.

Regards, Newroad

scotview wrote:As a regular viewer of Bloomberg, the following phrases are mentioned by nearly EVERY contributor. These are The Fed, Easing, Tapering, Punchbowl, Yield curve flattening, Interest rate dot plots, Transitory inflation, Sticky inflation, Monitory policy, Fiscal Policy, Biden Build Back Better etc etc.

I get the impression that Money Managers are now wholly relying on Government Policy to transfer wealth into their funds.

It seems to me that the equity markets, particularly in the USA, are becoming fully dependent on Central Bank policy.

Is this a form of capitalist nationalisation ?

Sorry if I haven't expressed my point too well.

The EU (ECB) printed massive amounts to mostly buy up bad German bets (debts), swapped them over to the rest of the EU (had those bets paid off no doubt the benefits would have been kept solely for the benefit of Germany). France opine that print/spend should be extended much further, print and buy up all bonds, stocks, properties.

Bad banks that followed heads we win, tails the taxpayers bail us out gameplay has stepped up to being played at country levels, but where there is no higher authority to bail out those that flip a tails.

Had the US not printed also then any EU loans/currency it held would have deflated itself away, let the EU off the hook. The answer to that is to equally print and buy up more ... in lockstep or even in advance, which keeps the problems within the EU rather than permitting it to export its problems onto others.