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@MrBlackhill you'll notice that on the 'Rational Reminder' forum, people seem to think it's crazy and irrational when stock prices swing around as Powell opens his mouth.
Honestly oftentimes I don't understand them. They believe in the efficient market hypothesis, so every information is priced in, which also means that every new information makes the market move and Powell definitely brings new information every time he opens his mouth. If that information was mostly expected, volatility decreases as the market will price that reduction in the risk of unexpected information since the expectations were confirmed. If that information was mostly not expected, volatility will increase until it stabilises to a new level pricing it that unexpected information.
 
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Central banks claim they will start significantly reducing the balance sheet (QT) in the fourth quarter, but they haven't done it yet. I can't predict what central banks will do, so that's why I'm not going to try to predict market direction or get out of stocks.

Also notice how the stock market has become extremely sensitive to comments from the Fed. This is rational IMO... it's showing that stock prices are basically determined by liquidity and stimulus policy. That's something I've talked about for many years: liquidity fuels the rise in stocks.

Many years ago, even the BMO published a report showing the amazingly high correlation between the Fed balance sheet and S&P 500. This is a well known relationship.
It was always a thing but it's become the thing now

More and more of the market participants are dialed in on the Fed now. Even if you don't believe central banks have that much influence enough of the market now believes it that it is so

One meeting a few words were misinterpreted or misspoken and the market went insanely volatile for a few days as they clarified. Insanity
 

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Discussion Starter · #183 ·
It was always a thing but it's become the thing now

More and more of the market participants are dialed in on the Fed now
That's a good point. Fed policy was always important but it's now absolutely critical.

Recently, Powell said (or implied) that the current Fed rate is about neutral, which is an amazing thing to say. Stocks went crazy, interpreting that as meaning the Fed is now going to pause or hold off on more aggressive hikes.
 

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Stepping back a moment, let's remember that there has been intense financial stimulus thanks to the Federal Reserve (and BoC, ECB, BoJ) ever since 2008. This is when Quantitative Easing (QE) was combined with zero interest rate policy (ZIRP). The combined QE + ZIRP stimulus has been pumping liquidity into financial markets for many years.

We've now had 14 years in an environment with QE + negative real interest rates. That's incredible stimulus. It still continues today by the way.

And there was a massive stock market and real estate rally, something many of us have benefited from. But I think we've all forgotten how much of this was amped up by QE and ZIRP. They accelerated and fuelled the rise; it was a liquidity-driven bull market.

Conversely, I really think these asset prices will weaken very significantly if QE and ZIRP are taken away. It's the same liquidity story at play. You pump liquidity into markets, assets rise. Take away the liquidity and assets fall, or at least, perform poorly for a while.

So now you might ask, why do I remain invested if I expect the end of QE and ZIRP. The answer is that I'm not convinced that central banks have the balls to take away QE and ZIRP. They talk a big game, but are they really going to follow through? I'll believe it when I see it.

Right now we're more than a year into very high inflation, and there's a tiny bit of Quantitative Tightening (QT), and still effectively zero interest rates. We still have negative real interest rates.

The central banks haven't really tightened yet, and QT hasn't started (seriously) yet.

Central banks claim they will start significantly reducing the balance sheet (QT) in the fourth quarter, but they haven't done it yet. I can't predict what central banks will do, so that's why I'm not going to try to predict market direction or get out of stocks.

Also notice how the stock market has become extremely sensitive to comments from the Fed. This is rational IMO... it's showing that stock prices are basically determined by liquidity and stimulus policy. That's something I've talked about for many years: liquidity fuels the rise in stocks.

Many years ago, even the BMO published a report showing the amazingly high correlation between the Fed balance sheet and S&P 500. This is a well known relationship.

@MrBlackhill you'll notice that on the 'Rational Reminder' forum, people seem to think it's crazy and irrational when stock prices swing around as Powell opens his mouth. I think it's totally rational, and those people don't get it -- they don't understand the forces that move stocks. Liquidity and central bank policy is the biggest factor in the S&P 500 level.
So if they pull out, wouldn't this be a wealth destroyer for everyone? Pensions rrsp etc. Stocks must move up in order for people to obtain a decent living in retirement. Pulling out and let it ride for years would be disasterous for many that depend on growth in the equities markets
 

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Discussion Starter · #185 ·
So if they pull out, wouldn't this be a wealth destroyer for everyone? Pensions rrsp etc. Stocks must move up in order for people to obtain a decent living in retirement. Pulling out and let it ride for years would be disasterous for many that depend on growth in the equities markets
And home prices too. Yes this is the argument for the Federal Reserve and Bank of Canada to continue with stimulus, forever.

But you're forgetting the consequence: inflation. This problem never came up in preceding years because inflation was always around 2%. Those were amazing years... stimulus without consequences.

Now that inflation is more like 8% to 9%, there's a potential big problem with continuing stimulus. Make no mistake, the central banks would love to continue with stimulus forever (it makes rich people happy).

So let's say everyone insists the central banks continue with stimulus / QE now. What happens then? Well yes, assets rise in value, but the cost of living keeps increasing at 10% a year, possibly rising even more towards 15% a year. Commodities and energy go absolutely crazy, we end up with $200 or $300 oil, retirees struggling to survive the soaring cost of living, poor people completely screwed.
 

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And home prices too. Yes this is the argument for the Federal Reserve and Bank of Canada to continue with stimulus, forever.

But you're forgetting the consequence: inflation. This problem never came up in preceding years because inflation was always around 2%. Those were amazing years... stimulus without consequences.

Now that inflation is more like 8% to 9%, there's a potential big problem with continuing stimulus. Make no mistake, the central banks would love to continue with stimulus forever (it makes rich people happy).

So let's say everyone insists the central banks continue with stimulus / QE now. What happens then? Well yes, assets rise in value, but the cost of living keeps increasing at 10% a year, possibly rising even more towards 15% a year. Commodities and energy go absolutely crazy, we end up with $200 or $300 oil, retirees struggling to survive the soaring cost of living, poor people completely screwed.
This is F'd up. We've reached a point of no return. Pun intended....
 

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Discussion Starter · #187 ·
This is F'd up. We've reached a point of no return. Pun intended....
Well I think investments will still perform well over the long term. We just might have to deal with 3 or 5 years of poor returns.

And we could get lucky. Inflation might come down for other reasons, maybe saving the central banks from having to do too painful tightening.
 
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