As Good As It Gets

“Only those that risk going too far can possibly find out how far one can go.” – T.S. Eliot

I was reminded of that quote recently as I was reading a great piece by Tim Duy:

“Federal Reserve Chairman Jerome Powell took to the podium at the annual Jackson Hole monetary conference, delivering a message of support for the central bank’s policy of ongoing gradual interest-rate increases. This policy stance is less about commitment to estimates of key policy variables such as the natural rate of interest and more about data dependence. Unfortunately, Powell left the unsettling feeling that monetary policy can be summarized as ‘We plan to keep hiking until something breaks.’”

Tim makes a great point.

I have spilled a lot of digital ink discussing the problems with monetary policy in the past, and in particular, with the Fed’s rate hiking campaigns. The results have always been, without exception, either poor or disastrous.

“In the U.S., the Federal Reserve has been the catalyst behind every preceding financial event since they became ‘active,’ monetarily policy-wise, in the late 70’s. As shown in the chart below, when the Fed has lifted the short-term lending rates to a level higher than the 10-year rate, bad ‘stuff’ has historically followed.”

(Click on image to enlarge)

The same applies to stock market investors as well. As I wrote previously,

First, “record levels” of anything are records for a reason. It is where the point where previous limits were reached. Therefore, when a ‘record level’ is reached, it is NOT THE BEGINNING, but rather an indication of the MATURITY of a cycle. While the media has focused on employment, record stock market levels, etc. as a sign of an ongoing economic recovery, history suggests caution.”

In the “rush to be bullish” this a point often missed. When markets are hitting “record levels” it is when investors get “the most bullish.” Conversely, they are the most “bearish” at the lows.

It is just human nature.

“What we call the beginning is often the end. And to make an end is to make a beginning. The end is where we start from.” – T.S. Eliot

Despite the best of intentions, a vast majority of the “bullish” crowd today have never lived through a real bear market. You know such is true when you read a comment like this:

“What all equity investors need to do — is to be mentally prepared for a temporary (maximum 2 year) 33-50% drop. 90% drops like the Great Depression aren’t going to happen ever again. You may have a 50% drop but it will come back in two years max.”

Two charts show the ignorance in that statement.

(Click on image to enlarge)

(Click on image to enlarge)

Bull markets, with regularity, are almost entirely wiped out by the subsequent bear market.

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