The Fed won’t allow natural price discovery

Manias, exuberance, despair and panic always appear through a cycle. It’s nothing new or “unprecedented”. All that happens is the the subject of love or disgust changes.

Even the increase of money supply isn’t an overly new practice, but what is……is best summarised in the extract below from Seth Klarman’s Q2 2020 newsletter;

“Central banks, led by the Fed, continue to be the predominant driver of financial markets. By holding down interest rates, they influence investors to bid up the prices of securities, irrespective of the economic backdrop. By maintaining these seemingly never-ending policies and wilfully ignoring developing bubbles, the Fed has engineered a strong market recovery even as the unemployment rate tests Great Depression levels……..Investors are being infantilised by the relentless Federal Reserve activity. It’s as if the Fed considers them foolish children, unable to rationally set the prices of securities so it must intervene.

When the market has a tantrum, the benevolent Fed has a soothing yet enabling response.

As with the 30-year-olds still living in their parents’ basements, we can only wonder whether the markets will ever be expected to make it on their own.”

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