The Fed just “rang the bell.”
One of the oldest adages in investing is that “they don’t ring a bell at the top.”
This is quite misleading.
While it’s true it’s impossible to predict the exact day of a market top, what is totally false is that there are not clear signals that a top is being made.
The clearest one of all, is the Fed aggressively tightening monetary policy. Indeed, the last two major bear markets (2000-2003 and 2007-2009) were both triggered by the Fed.
Because the markets move in similar cycles. And for over 20 years, the most important cycle has been the following:
1) The Fed ignores clear and obvious signs of a bubble for far too long.
2) The Fed is finally forced to act to attempt to deflate the bubble waaaaay past the point at which a soft landing is possible.
3) The bubble bursts in spectacular fashion triggering a crisis.
This was the case in 2000, 2007, 2018, and it’s the case today.
Yesterday Fed Chair Jerome Powell confirmed this with the following statement made to the U.S. Senate.
“If we see inflation persisting at higher levels, longer than expected, if we have to raise interest rates more over time, then we will.”
This is coming from the same Fed Chair who told the markets for the last year that inflation was “transitory” and didn’t require the Fed to act.
So what changed?
Inflation is now a politically toxic issue for voters. 2022 is an election year. And a CNN poll from December shows that the the #1 issue for voters is higher prices.
In this context, the Fed is receiving tremendous pressure from the Biden administration to stop inflation NOW. We know this because Fed Chair Jerome Powell only changed his tune on inflation AFTER he was nominated for a second term by President Biden.
That’s the bell.
Both the White House and the Fed want inflation killed. This means the Fed must now act aggressively to try to stop it by hiking rates faster and more frequently than most investors believe.
Given the Fed’s success with deflating the last two bubbles (both instances lead to crises), what are the odds it is able to succeed this time without a crash?
Put another way… what are the odds this time it’s any different?
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