Investors Ignore What May be the Biggest Policy Error in History

The comments above & below is an edited and abridged synopsis of an article by John Mauldin

We are now at an all-time high in the expectation that the stock market will go up.

The CNN Fear & Greed Index topped out at 98 a few weeks ago. It has since retreated from such extreme greed levels to merely high greed levels. This is not a sentiment index; it uses 7 market indicators to show how people are actually investing.

Charts tell us that economic policy uncertainty is at an all-time high, yet uncertainty about the future of the markets is at an all-time low. We are in a bull market stimulated by complacency.

The growing uncertainty over monetary policy is both terrifying and enlightening. The Fed, the ECB and the Bank of Japan went to great lengths to assure us that the massive amounts of QE they pushed into the market would help turn the markets and the economy around.

Now they say that easing out of QE will have no effect on the markets, and investors are simply shrugging their shoulders at what is called ‘quantitative tightening’ (QT).

In the 1930s, the Federal Reserve grew its balance sheet significantly. They left it alone, the economy grew, and the balance sheet became a nonfactor in the following decades. Today, the Fed could do the same thing.

There is little inflation; we all want our stocks and home prices to go up, so there’s no real reason for the central bank to lean against inflationary fears; and raising rates and doing QT at the same time seems to be taking more risk than necessary. And they’re doing it in the middle of the greatest bull market in complacency ever.

Do they think taking trillions of dollars off their balance sheet over the next few years won’t have a reverse effect on asset prices? Or at least some effect? Is it really worth the risk?