Englund

With inflation raging, the famous ‘Fed put’ to save the day with cheap money might not be available. For more than 30 years we have become used to a reassuringly familiar pattern in business cycles.  As the economy expands, the Fed raises interest rates to curb inflationary pressures. Eventually some combination of credit squeeze or inventory over-accumulation then precipitates a downturn in the economy.  The Fed cuts rates—and in recent cycles, supplied the added sugar of quantitative easing through asset purchases—and soon there’s enough free money to revive the animal spirits and get demand moving again. Gerard Baker WSJ 23 May 2022  https://www.wsj.com/articles/rescue-from-recession-wont-be-easy-inflation-fiscal-crisis-401k-baby-formula-housing-gas-prices-federal-reserve-biden-11653337995

 That’s not encouraging for investors betting on the imminent exercise of a “Fed put” -- in which the central bank alters policy to prop up equity markets after a sharp decline.  Bloomberg Economics Says... “I think the Fed welcomes it. The stock market has to decline a lot more -- double the current drop -- before it will get close to wiping out the stock gains during the pandemic. This sounds callous, but declining stocks will get more people to come out of early retirement.” --Anna Wong, chief U.S. economist Bloomberg 19 May 2022 https://www.bloomberg.com/news/articles/2022-05-19/fed-plans-for-half-point-hikes-won-t-be-shaken-by-stocks-rou t If you have only been in markets for, say, 15 years,  you are seeing the collapse of everything that you have been told is true and have also observed to be true about markets. Bonds prices rising in the bad times. Mostly when things look tricky in equity markets there is a reason (or central banks at least manage to find one) to c...

 The next few months could be ugly if inflation fails to drop to tolerable levels The lesson from the 1970s is not encouraging. This continued until central banks, most notably the Volcker Fed, engineered their own recession, raising interest rates sufficiently to put millions of people out of work. From an investor point of view, this was the worst of all worlds — countercyclical inflation (stagflation) Dario Perkins MarketWatch 19 May 2022 https://www.marketwatch.com/story/the-worst-of-all-worlds-for-investors-what-if-higher-interest-rates-and-a-recession-dont-tame-inflation-11652968911

The so-called Federal Reserve put option, which is shorthand for the belief the U.S. central bank will rush in to rescue tanking markets — an approach that has been denied by previous Fed chairs. “Restoring price stability is an unconditional need. It is something we have to do,” Powell said in an interview Tuesday during the Wall Street Journal’s Future of Everything festival. “There could be some pain involved,” Powell added. The Nasdaq Composite could plunge 75% from peak, S&P 500 skid 45% from its top, warns Guggenheim’s Scott Minerd. MarketWatch 19 May 2022  https://www.marketwatch.com/story/a-summer-of-pain-the-nasdaq-composite-could-plunge-75-from-peak-s-p-500-skid-45-from-its-top-warns-guggenheims-scott-minerd-11652901040?mod=home-page