The markets are moving up and down and we give Central Banks a lot of credit and blame these days regardless of the reason. The extremists call for a 50% drop in the market. Finding your way as investors requires an aware of the extremes out in the distance as well as paying attention to the details right in front of us. As we climb the accumulation mountain there are cliffs we can fall off of, but we are more likely to trip on a root.
Here's two type of writing I come across today. The first from Business Insider editor Henry Bodgett which calls for the over the cliff scenario:
stock-market-crash-2014The second article is from Asia Confidential which is a blog that I follow. The blog reacts to Blodgett's article this way:
"Asia Confidential believes Blodget makes a number of valid arguments and could end up being right. But he’s way too early with the call. And the principal reason is that history shows Fed tightening has been bullish for stocks, at least initially.
Today’s newsletter will explore Blodget’s views in detail, the holes therein as well as the more plausible risk to markets in the short-term: a deflationary bust precipitated by Japan and/or China."
why-stocks-wont-crash-for-nowAC Speed Read- A marginal pullback has led to a number of commentators suggesting a market crash is imminent.
- Henry Blodget is among the most prominent, calling for a potential S&P 500 market decline of up to 50% over the next 1-2 years.
- There are some flaws in his argument though, as Fed tightening is typically bullish for stocks, at least in the two years after an initial rate hike.
- Given a rate hike is likely to happen next year at the earliest, that means a more substantial market correction will have to wait to 2017, if history is any guide.
- The key risk to this scenario is a deflationary bust, precipitated by Japan and/or China.
Comments
Q-Ratio-and-Market-Valuation
I rely upon Ray Dalio (again, a shout out to Catchh22 and others for posting) to explain the inner working of these things, but my understanding from his simplistic model (I'm sure the Fed has a whole host of tools in their toolbox) is that the Fed does influence long term interest rates through purchases of bonds of certain duration (say, LT Treasuries to influence mortgage rates) and short term rates through the Fed"s Fund rate.
Historically they have been often slow to react to a raising rate of inflation, but eventually will. They have been all hands on deck when it comes to deflation which is a bigger economic worry from the Fed's standpoint.
If the saying still holds that we should not "Fight the Fed" then understanding Central Banks and their attempt to influence credit, currencies, equities and bonds is the wind we should adjust our sails to. European, Chinese, and Japanese Central Banks have their own set of goals and strategies. All create economic weather patterns.
Here again is Ray Dalio's 30 minute video (worth bookmarking):
economicprinciples.org/
on a separate note, i recall blodget was an art history major and a chearleading internet stock analyst during the bubble of the late 1990s and was later kicked out from the industry for life. what made HIM an expert on economy?