Money Printing, the ultimate treatment for financial market ailments?

Disclaimer: Not financial advice (as with anything else in this blog)

With endless money ‘printing’ and liquidity injection, the US Financial Markets have almost completely (if not completely) decoupled from their underlying real economy. Financial markets globally no longer represent the general health of their respective economies by any reasonable measure I feel.

The decoupling I believe started way back in the Global Financial Crisis of 2008 when liquidity creation was employed to restart the economies. So far since then, it seems when any sort of crises happens to spook the market, the treatment response has been to pump even more liquidity into the system and it seems to have been surprisingly extremely effective at least at treating any symptoms for the last 12 years.

What the end game is? I don’t know. It goes back to a post I penned back in November 2019 where I asked what would be a trigger to a sustained correction? (Not just short sharp corrections of the types we’ve been having recently)

One potential threat which could end up defeating the effectiveness of such monetary policy would include some sort of catastrophic, devastating and tragic famine by way of insect plague or widespread natural disaster where food security gets impacted and food supply contracts causing food prices to spiral out of control (by way of hyper inflation) where people find themselves being forced to sell assets into a sliding market to feed themselves and their families just to survive.

A question currently on my mind, what is the stock market a barometer of if it no longer represents the real economy? For a lot of ordinary folk, they categorically mentioned as it being a casino for them and I have been noticing anecdotally a lot more people getting their thrills out of trying to pick the short term waves of the market and crowing about their monetary gains regularly on various social media channels and to their friends. This situation may have been enhanced by virtue that it is now easier and cheaper for the average folk to access the financial market and this may consequently actually make short term trading easier than it has been in the past.

Current forward looking summary for my own edification… (take with a healthy grain of salt)

  • The stock market appears to be supported (protected) by central banks. If something ails the market, Central banks come in to throw more money / liquidity to prop it up.
  • The only real risk that I can currently see which could topple this strategy is food security and supply issues or supply side shock of another essential item(s) where people are forced to sell assets into a sliding market to buy essential items at a hyper-inflating cost. Until that happens, it would appear the financial markets are well supported.
  • The U.S stockmarkets will likely continue to go up in the short term surpassing previous highs and it could be some months before we would see any possibility of a size-able pullback. I believe this current rally to be mostly sentiment based backed by a wall of speculative liquidity rather than based on sound forward looking evidence that the economy is going to be in a healthier state than prior to us entering into a period of COVID-19 counter measures.
  • While I did liquidate a lot of my long term equity positions in February as the financial markets started their sharp downturn. I am not sold on the idea of buying back in nor will I be selling any other equity positions at this stage in respect to long term holdings. (Holding current position). Much of instruments across all markets I feel have been unduly distorted as a result of this wall of liquidity and the information available has been too ‘noisy’ to base any sound longer term decision making off of.
  • The market may now be easier to short term trade for those who wish to do so, but it comes with Tax implications.
  • For me, I feel this is a good time to re-balance my longer term portfolio. Will be increasingly focusing on other investment classes.

As always, the above are simply opinions and are most certainly subject to change (as previously demonstrated)

Money Printing, the ultimate treatment for financial market ailments?

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