Powell Faces 2018 Demons With Stock Crash Dilemma
"The continuing global recovery faces multiple challenges as the pandemic enters its third year," the IMF's Gita Gopinath said Tuesday, in an editorial accompanying the Fund's latest World Economic Outlook, which featured downward revisions to growth forecasts and upward revisions to inflation projections.
She exhorted policymakers to stay vigilant, keep apprised of the incoming data, prepare for "contingencies" and, crucially, "be ready to communicate and execute policy changes [on] short noti
Stocks and credit are linked closely. Usually credit leads stocks. This time around, stock market is having a tantrum first. The reason is that much of the equity market has a long duration and the economy is more leveraged with a lower long term baseline growth rate (leverage and demographics). Powell would be wise to stick to his guns here, only in the sense of tapering and then discussing liftoff. He should at his press conference state that the FOMC will raise rates as necessary, but do not have a predetermined path of timing, speed or magnitude and will work to use monetary policy to reduce inflation to the extent possible. It was a mistake for the Fed to start talking about 3-4-5 hikes. They know they have to reduce accomodation. That is it.
@RIA, I’m afraid that in that event stocks would rip and (less confidently) that rates would fall.
If Goldman is right and equity prices are the largest part of loosening/tightening, then Powell would have inadvertently loosened by his words, and potentially made things worse. I don’t think he’s got the Greenspan gift of skillful obfuscation.
I admit I’m set up such that a market rip up led by crapcos and ARKK is exactly what I don’t want right now, so I am biased.
Powell, contrary to his statements about data-based (past-based) decision making, must be relying on macro predictive models so we don’t get into the boom and bust cycles of yesteryear. The pandemic was a massive shock to a dynamical system with bifurcations: tiny changes to inputs cause the system to snap to a different stability path.
The only way to control such a system is to have a model, make decisions based on the model, and tweak the model as the outcomes are realized. You can learn about the system and make your model predictive enough if and only if your control inputs are tiny.
I posit they’ll mention that they’ll keep moving slowly as long as inflation is shrinking but that they’ll act decisively if there is data showing inflation is still increasing (their inflation predictions showed it should have peaked already). Such message is scary enough to speculators to keep them at bay and supportive enough that long-term investors won’t panic.
In any case, hats off to central bankers around the world. It’s not an easy job: decisions must be technical and research-based, but the pressure is very political and personal.
“The only way to control such a system is to have a model, make decisions based on the model, and tweak the model as the outcomes are realized. You can learn about the system and make your model predictive enough if and only if your control inputs are tiny.”
@Manuel Lopez you are obviously a thoughtful, kind, and generous spirit when it comes to your fellow man. That said ?, the above quote I selected is “scary” to me. The Universe, at least, the one I’ve become accustomed to, indiscriminately smashes our delicate models like boys kill flies. When the Economy goes where no Economy has gone before, it probably needs a Chuck Yeager on the stick, or at least waiting in the ‘wings’ close by, instead of a tinkering watchmaker. Don’t get a bee in the bonnet over anything I scribble. I know you are attempting to formulate a reasoned interpretation of a staggering complexity in the confines of a comment box. Within such confines I think we might do better sometimes to make our propositions in poetry.
Maybe it was the juxtaposition with the first paragraph’s, “the pandemic was a massive shock to a dynamical system with bifurcations: tiny changes to inputs cause the system to snap to a different stability path”, that jarred me? At first glance it seemed as though these were two incompatibles being called upon to serve the same end. Until I remembered a line I’d read earlier today, “wisdom is the co-existence of contradictory truths…”. That said ?, I go along with what you “posit” in paragraph three, mostly. “They’ll keep moving slowly”, sounds like Powell so far. The possible fly in the ointment concerns, “data showing inflation is still increasing”. Does that suggest an aggressive or excessively hawkish Powell means Thursday and Friday inflation related Economic releases will likely not support the “transitory” inflation confabulation? Meaning, if one is inclined to capture as much of the bubble gains remaining as possible, then sell Wednesday. Whereas, a “tiny” moves Powell, suggests he still believes in the “transitory/temporary” inflation narrative? Meaning, pile in Wednesday.
What happens in a three-axis stall?
https://www.youtube.com/watch?v=I7p6f6tPEuU
Did the prior experience help the next time?
Fickle Universe!
This all seems contradictory to me. If you’re leveraging monetary policy to fight inflation, it seems counter to expect that inflated stocks wouldn’t also be impacted. How many index records have been set in the past 5 years? Is the expectation that we just continually always set new records? Inflated stocks are a reflection of inflated housing, inflated used cars, and inflated consumer prices. If you want to reduce those prices then stock prices must fall too. Otherwise we just all end up with a bunch of worthless Dinarius’. Instead of being upset that telegraphed QT and rate hikes are causing stock valuations to tumble, everyone should be upset at themselves for ignoring Powell when he told all of us that this was about to happen. The market is completely dependent on the Fed at this point because of how far it’s been inflated and how reliant on debt it has become. I don’t like it either but it doesn’t change the fact that this is reality.
“Is the expectation that we just continually always set new records?”
Over time, yes. That’s absolutely the idea. Just ask Warren Buffett.
Remember: This is all make-believe. None of it is real. Dollars, stocks, bonds, corporations etc., are all figments of our imagination and a product of a system we created.
Given that, it’s hilarious that so many people are continually astonished that we (the people who created the system) continue to change the rules so that it keeps making the people who own the relevant assets richer.
Fighting this has (and always will be) a fool’s errand until some manner of societal breakdown and/or an ecological calamity “resets” things.
The US government/Fed are absolutely ok with as much inflation as they can get away with. Continually testing the waters and pushing to see how much they can get away with. When things go a little “too far” and the population gets testy- they pull back. But make no mistake, as soon as everyone calms down about inflation- they will be letting inflation ride again because inflating away the US debt is the only plausible long term path.
No model exists for this plan, however, what other long term plan is a possible contender, besides inflating away our massive debt? I can not think of another option that isn’t synonymous with “the end of the US- as we know it”.
You can laugh, but I know I am correct! (haha)
Hopefully the markets have a higher bar for Powell than to clear being “deliberately obtuse.” If he can’t top that the markets should panic…I still expect a hawkish statement, a steady and confident Powell, and a moderately volatile period of market activity over 1-2 weeks that may feel acute to many given the walk in the park feeling of the markets these past 12-18 months…perhaps we’re about to move from monetary morphine to monetary methadone…