By now it is common knowledge that the Fed (and the ECB) have not only missed on their recent economic forecasts, but also acted aggressively on these wrong forecasts that they now have to unwind. Amongst the many distortions that faulty policy has created there are three that have distorted the signaling mechanism of financial markets.
Market prices not only reflect demand and supply, but also signal what the market is thinking in aggregate about the future. Once the market “thermometer” is forced to stick to a preferred reading, it is impossible to tell whether it is freezing cold outside or sweltering hot. Right now, Central Banks are in a zone of maximum confusion created by their own actions, and the market is in the zone of maximum uncertainty, and the traditional indicators are not helping point to a clear outcome. The resolution of this confusion won’t be pretty, but as always there are opportunities that are presented in times of uncertainty and elevated risks.
The full note on this important topic can be downloaded at this link: LTA Thinking – Moving The Goalposts How The Fed Will Fix Distorted Perceptions It Created And What Investors Can Do To Score