I disagree that they will pivot and decrease rates when the monetary policies are doing what it is supposed to do - reduce inflation by decreasing demand. Moving rates back and forth as a reactionary measure while high inflation still exists will create uncertainty that will do more damage to value of assets. One thing that will lead to more depressed assets is higher risk, including those created by a Fed that folks cannot predict. That is one reason why there are so many efforts by the Fed to provide long-leading sentiment and outlook. As one of those asset owners, I would be concerned if the Fed did such a pivot while inflation was still not under control. As you may recall, the late 70s stagflation resulted partly from the Fed extending loose monetary policies despite inflationary pressures as a response to political pressure. The resulting stagflation did not help the asset owners at all.Unit2Sucks said:I tend to agree with dajo9 that the FED will protect asset owners and from what I've heard from a number of members of the hedge fund community - they tend to agree.calbear93 said:DiabloWags said:dajo9 said:
The Fed, with its current anti-inflation zeal, could easily deliver a recession.
The FED always has that capability.
And as I've mentioned in a previous post, they have shown a historical propensity to NOT be able to engineer a "soft" landing. That having been said, anyone that has been involved in the markets knows full well that they are really good at "jawboning" rates to where they want them, without having to do much. And by the time they do actually raise Fed Funds, the market has already discounted that.
I wonder if there is any risk of stagflation? When you have a significant supply chain shock, whether oil embargo and COVID related shortages, doesn't inflation get built in to expectation after awhile that drives pricing? That was why I think the FED may have acted too slowly, trying to say inflation was transitory and not a problem. The CEOs and CFOs that I was talking to in early 2020 was seeing something completely different where supply shortage, hunger game type of behavior by manufacturers that needed supplies (especially chips), and labor shortages were unlike anything they had seen before, with no sign of getting better. Isn't one big danger of continued inflation that it keeps self-perpetuating because suppliers expect inflation to continue, which leads to continued higher prices overall, etc.
I don't think the FED will do something idiotic like Dajo is predicting by going back and forth on interest rate. That would confuse the heck out of the markets and the additional risk would impact valuations even more. I definitely know that they won't do QE anytime soon that will pour gasoline on inflation and supply shortage if they were to pivot so quickly. There is still a danger of idiots in Congress or White House who may think you can keep giving money and stimulating demand when there is a finite amount of supply, with supply not as flexible as just giving money to stimulate demand. One thing that has to happen I believe is we do need a bit of a recession to lower the demand and allow demand to fall down to the level of supply. The question is how transparent and reliable the FED is to allow for that recession not to fall into a depression. Recession seems inevitable unless we invest in the supply and transportation side and taking control of the COVID related labor shortage. That is different than free colleges or keep giving money to everyone without some sharp means testing. Yes, the government won't be the lord of all, but just maybe making people's lives better for most would be enough?
High crime rate, high inflation, high infection rate will not save any party in power no matter which side. There will be a bloodbath during mid-term no matter how much validity there is to this not being their fault (high crime is really their fault though). The only other argument would be that they are powerless anyway so why bother. Not a good counter argument.
If the prices start falling consistently as a result of decreased demand, then hopefully the fear of inflation won't continue to contribute to a self-fulfilling prophecy. We need smarter people than those who think they are too smart to learn from the last stagflation or who thinks either fiscal policy or monetary policy does not matter when there is a supply shock.
While I stopped giving any investment advice long time ago, for those who are young, I will say this. If there is a bloodbath in the market (this is not a bloodbath right now) and all speculators have capitulated, that is the best time to invest big and go long. That is what I did as a young law firm associate. But that also means that they need to do the research now and identify not by hype but by market leading technology or product, balance sheet and cash flow health, and management and it also means they need to live way below their means and have enough dry powder to invest. That daily Starbucks or heavily financed Tesla 3 will cost a lot more when they consider 15 years down the line the lost opportunity for investment. But when the fear in the market takes quality with junk, you can generate wealth by picking up the quality. There is an opportunity to become the wealthy that others will envy instead of spending all those calories coveting and envying. It just requires work, research, and sacrificing that immediate gratification.
As for high crime rates being "their fault", would love to hear your basis for that.
Finally, while personally I agree with your advice on investing (and followed much of that same playbook early in my career), I think that it's the sort of advice that you can't really give to people because anyone capable of executing on it doesn't need the advice, if that makes sense. The vast majority of people can't beat the market. They can't evaluate market leading technology, they can't ascertain which managers are good (hell, I'm not sure how anyone does that reliably and in a way that is differentiated from others), they can't evaluate financial health from balance sheets, cash flows and footnotes), etc. etc. What you are talking about doing is quite hard. I know that officially it's a bad idea to time the market but what people can do is make certain personal finance tradeoffs when the market really has tanked. That's what I did on the way down in 2008 and early 2009 and there was almost nothing you could buy back then that wouldn't have been a good idea.
So my simpler suggestion is that if the market tanks, consider freeing up cash to move into broad based index funds like Vanguard Total Market (VTI) or any S&P 500 fund. No knowledge is necessary other than recognizing there is blood in the streets. Right now VTI is trading at $233 which is within spitting distance of its all time high. It was around $100 when Trump took office. If it goes below $150, I will move aggressively to buy.
As far as crime rate, I am not blaming Biden. I am blaming the liberal policies of bail reform, mandatory decrease in prisons (which was what the CA voters approved) resulting in raising what constitutes grand larceny that gangs exploited, defund the police rhetoric and sometimes execution that reduced police force, etc. More example of hell being paved with good intentions. For people like us with means and with a family, we would never live in a high crime neighborhood and expose our spouses and kids to violent crime. So, all of this is theoretical and academic for us. We have our gated communities with our own neighborhood security and, if needed, can hire our own personal security like some of the liberal politicians. Those who are most impacted are those who have no choice.
Agree with you that for most, broad based funds will suffice but real wealth is created by making the right bets on companies and not on market timing (other than seeing quality like Apple being taken down like overvalued companies like Roku and StitchFix). For someone like you who has access to hedge fund community, you should have some insight into which players are real and which ones are not. Knowing AI, automation, data analytics will continue to be where the real value add will be, it should not be too difficult to filter through the leaders from those who are just riding the wave.
