A Fly In The Ointment | WHAT REALLY HAPPENED


A Fly In The Ointment

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

Many financial assets, especially those that are the riskiest, are priced well above their respective fundamental values. A thank you primarily belongs to unprecedented monetary policy conducted on a domestic and global scale. The vast financial rewards and temporary economic stability attributed to central bank actions appear to be blinding many investors to the longer-term consequences of these actions and the implications for their investments in an era of monetary policy normalization.

Accordingly, we discuss the proverbial fly in the ointment, or what might prevent central bankers from being able to successfully “manage” markets with their extraordinary policies.

The Fed Put
Many investors assume that, if the equity markets decline in a meaningful way, the Federal Reserve (Fed) will once again spring into action to halt the decline. The so-called “Fed Put” is not new; in fact, it was originally coined the “Greenspan Put” due to the actions of Fed Chairman Alan Greenspan following the 1987 stock market crash. At that time, the Fed led by Greenspan added liquidity to the financial system to comfort investors and make them willing to buy financial assets. Ever since the Fed has been increasingly active vocally and via monetary policy in attempting to stem sharp market declines.

It is important to understand that the Fed does not stop stock market declines by purchasing stocks directly. They provide verbal influence and liquidity to banks which works its way through the financial plumbing to the markets. Therefore, and of huge importance, the effectiveness of Fed actions is highly dependent on the trust and willingness of investors. To retain this trust, the Fed must remain vigilant of market conditions.

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