Fed put is kaput

https://www.wsj.com/articles/what-to-know-if-you-want-to-buy…

**What to Know if You Want to Buy the Stock Market Dip**

**The Federal Reserve is giving the stock market a fright as it ramps up its efforts to control inflation. The volatility may last longer than investors have come to expect over the past few decades—but you can still prosper with discipline, patience and courage.**
**By Jason Zweig, The Wall Street Journal, May 13, 2022**

**For years, investors have believed the Fed would listen to their cries of pain. Think of 2018-19, when the Federal Reserve raised rates but then retreated after stocks fell almost 20% — or early 2020, when the Fed slashed interest rates again and infused the markets with cash. Investors celebrated.**

**Professional investors call this the “Fed put,” a notion derived from trading in put-option contracts. Owning a put enables you to sell the underlying asset for a specified price by a given date. That shields you from any declines below that price until the option expires....**

**But with inflation above 8%, cutting interest rates anytime soon would be like testing a flamethrower in a dynamite factory.**

**“The Fed put is kaput,” says Ed Yardeni, president of Yardeni Research Inc., a firm that advises on investment strategy. “The Fed can’t possibly respond to the cries of the stock market when inflation is such a big problem.”...** [end quote]

Look at the history of the fed funds rate. The Fed acts in cycles. They form a strategy which lasts months.
https://fred.stlouisfed.org/series/FEDFUNDS

In order to control inflation, the Federal Reserve has to stop paying people to borrow money. They have to raise interest rates to “neutral” – which will theoretically neither stimulate nor inhibit real economic growth. There has never been an example where the Fed raised rates enough to reduce inflation from 8% to 2% without causing a recession.

The Fed is still very early in the cycle. Don’t expect them to reverse quickly as they did in 2018. Inflation was controlled in 2018 but it’s out of control now.

Wendy

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The mystery to a layman like me …

How much of this inflation is due to the rampant money printing, and oh we can’t let pretty people with 401K’s lose money… AND/OR how much of this is just due to unique market conditions:

*China manufacturing is not churning out stuff thanks to Covid. (Remember, depending on substandard countries for daily goods is great and to suggest otherwise means one is a caveman so here we are)

*Worker shortage - we paid people to stay home. Some had warned not to do it that way, to save some of the assistance as ‘return to work’ bonuses at the end - otherwise many, especially at lower levels will lose what little work skills they had in a rapidly changing economy.

*Energy shortage - good people can disagree as to why - but I do believe we didn’t pass out medals for oil drillers anytime recently.

A glaring part of this is chip shortages - again - some said it’s ok to depend on foreign countries for day to day vital goods. (See how the Boer War taught the British Empire a lesson… about being stretched too thin and depending on foreign entities for gods) and these chip shortages have jacked up car prices. I feel this was little to do with monetary policy - SAAR will return to 16-17 million cars once things normalize - but that wasn’t different than many previous years.

So if chip and car production returns. If the same people cheering not buying Russian oil out of “principle” – will gleefully buy oil from the likes of Iran and Venezuela and keep trading with China (as homosexuals are killed in Tehran, Uyghurs are killed in China, women are beaten in Saudi…but hey, we’re too good to buy Russian Oil because we have a dusty SaveDarfour t-shirt in the closet that nobody thinks of anymore because, well, it’s not fashionable…:wink: …once the “Principled” people allow energy purchases for these fine world citizens… I wonder if those measures won’t alleviate much of the inflation - - causing the Fed to actually DECREASE rates unexpectedly sooner or at least be a bit less hawkish. (Perhaps 2 years down the road)

But then again I admit I don’t know much. I play a mean game of online scrabble and read the weekend Journal and Economist, that’s about it:)

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The mystery to a layman like me …

*Energy shortage - good people can disagree as to why - but I do believe we didn’t pass out medals for oil drillers anytime recently.

Oh, in fact the heavy distain from very senior politicians … followed by the sudden demand for increased deliveries when the bottom fell out … because you know they were relying on Russia … not so much for oil but rather for high margin finished products such as gasoline, diesel, jet fuel and the like.

Hard to feel urgency in such self inflicted politically painful situations isn’t it? The frackers certainly were not going to fall for that story again. The oil sands guys all remember the war on pipelines that would be needed to come to the rescue and carried on at their normal pace.

Anymouse <likes high gas prices, the little Micra just sips gas and I’m retired and don’t have to drive to work. My producers and pipeline guys seem to thrive?>

depending on foreign entities for gods

I thought that was the Romans

–sutton

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When the Covid crash happened - I was barely into stocks but I did buy some oil - XOM/CVX/RDS.B and of course, am pleased with it.

I love the industry, I find it to be ‘real’ - from products to workers to consumers to uses to profits.

BUT - eventually - I question if the Ruling Class is going to tolerate these prices and that being said…aren’t there levers they can pull such as…

*Getting Saudis to pump tons more.

*Releasing an irresponsible amount of reserves.

*Venezuela, Iran, Iraqi oil.

*If the Generals tell Putin to go suck an egg - perhaps the “international community” will have a face saving way to get Russian oil back on to all the markets too.

If that happens - I wonder what oil prices would be, and if the oil stocks would keep going along, or be the next tech-wreck.

Oh, in fact the heavy distain from very senior politicians … followed by the sudden demand for increased deliveries when the bottom fell out … because you know they were relying on Russia … not so much for oil but rather for high margin finished products such as gasoline, diesel, jet fuel and the like.

It’s not just disdain from politicians. Usually that can be dealt with … via contributions. But now, a new concept of ESG has emerged, and that inhibits the providing of capital to “oily” enterprises. If banks are loathe to supply capital, many projects simply can’t be done. Sure there may be some projects that are so lucrative that they can be funded with all equity, but those kinds of projects are rare, most projects require some equity and a heap of [rolling] debt to happen … because most of them don’t produce cash flow for the first few years.

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