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Eric Parnell, CFA

 
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  • A Once In A Generation Change For Stocks [View article]
    Hello DoctoRx,

    Thanks for your comment and excellent questions.

    As for true equilibrium, my contention is that stock prices are currently artificially inflated well beyond what would be considered a normal valuation due to the distorting effects of monetary policy and more recently QE stimulus. I am actually preparing an article for SA specifically on this point.

    As for my confidence in the Fed and their ability to let stock prices down gradually, I actually have little confidence that they can do so in an orderly way, particularly given how far they have pushed stock prices to the upside at this point. My concern is that the higher stock prices are allowed to levitate, the more chaotic the final corrective process will be (both to the upside and the downside). But I expect that they will go to great extent to use all resources possible in the meantime to try and achieve this goal.

    Thanks again for your comment and for raising some excellent questions.
    Nov 1, 2014. 08:16 AM | Likes Like |Link to Comment
  • A Once In A Generation Change For Stocks [View article]
    Hello pvonk,

    Thanks for your comment and excellent point. I completely agree that we live in a world today where central bankers are running wild including pursuing policy initiatives that should not be put in place by an single autonomous appointed government official on the monetary side but instead by traditional fiscal policy makers in Congress and the executive branch. But until these unusual actions are checked, they are only likely to continue and expand. And just like QE was once extraordinary and exceptional, they can quickly become expected and the norm, particularly if people are benefiting in some way just as they have with the sugar high in capital markets in recent years. No matter if someday it all ends badly for stocks as history has repeatedly shown I suppose.

    Excellent point and thanks for raising it.
    Nov 1, 2014. 08:12 AM | Likes Like |Link to Comment
  • A Once In A Generation Change For Stocks [View article]
    Hello Doug,

    Thanks for your comment and for making a number of great points. And as mentioned to creese above, I suspect that if the Fed is going down this road that they would take a more targeted, micro approach to future stimulus programs versus the broad brush macro approach associated with QE asset purchases. And such programs would likely have a different effect than boosting the stock market (the same way that periodic MBS purchases had a far more indifferent impact on stocks than daily Treasury purchases did during the various QE/Twist programs).

    Great points and thanks again.
    Nov 1, 2014. 08:07 AM | Likes Like |Link to Comment
  • A Once In A Generation Change For Stocks [View article]
    Hello The Long Tail of Finance,

    Thanks for your comment and excellent point. The Fed will likely continue to pursue different, new and alternative ways to inject stimulus into the economy going forward. And some are likely to adhere more closely to the policy objectives being laid out by Ms. Yellen versus the priorities of her predecessors. And one of the most important considerations in this regard and to your point is whether such future programs are as effective in supporting stock prices if at all. It will be interesting to see.

    Thanks again.
    Nov 1, 2014. 08:04 AM | Likes Like |Link to Comment
  • A Once In A Generation Change For Stocks [View article]
    Hello everyone,

    Thanks to all who have commented so far on my article. I have read all of the comments and genuinely appreciate the various thoughts and perspectives shared by readers both in agreement and in objection to the views that I expressed in the article. The insights from the commenters are as always outstanding, educational and adds a tremendous amount of value to the discussion. I will be following up soon with more individual responses, but wanted to express my appreciation generally in the meantime.

    Thank you again to everyone for their comments.
    Oct 30, 2014. 09:54 PM | 3 Likes Like |Link to Comment
  • A Once In A Generation Change For Stocks [View article]
    Hello Chester,

    Excellent point. Recent history has shown time and time again that monetary policy makers can talk a good game about what they would like to do, but follow through is an entirely different story. So I completely agree - "if" remains the operative word in any such discussion on the topic and I appreciate the fact that you picked up on this in my article (in retrospect I should have emphasized it more).

    Thanks again.
    Oct 30, 2014. 02:14 PM | 1 Like Like |Link to Comment
  • A Once In A Generation Change For Stocks [View article]
    Hello vermille,

    Thanks for your comment and for raising a good point. You may very well be right that Yellen's comments were designed instead to be words of encouragement to the President and Congress of ways that they can address the problem. It will be interesting to see if this is the case instead, although I suspect given her past comments on the issue that she may find more creative avenues to pursue such policy goals on the monetary policy side. At a minimum, taking further actions like more QE to exacerbate what see already sees as a major problem seem highly unlikely following comments like these at her October 17 speech.

    Great points and thanks again.
    Oct 30, 2014. 02:12 PM | 1 Like Like |Link to Comment
  • A Once In A Generation Change For Stocks [View article]
    Hello newbeach861 - Great comment and well said. Thanks for sharing your thoughts and perspectives.
    Oct 30, 2014. 02:07 PM | 1 Like Like |Link to Comment
  • A Once In A Generation Change For Stocks [View article]
    Hello tallguyz,

    Thanks for your comment and for some very good points that are worth discussion. Your point about the paper gold market is particularly important, as some of the activities that took place, particularly in 2013, highlight the risks that major financial market participants impose on the precious metals market. For those that operate in these areas, owning the physical is certainly a more preferred way to go in many cases.

    Great points. Thanks again!
    Oct 30, 2014. 02:06 PM | 3 Likes Like |Link to Comment
  • A Once In A Generation Change For Stocks [View article]
    Hello User 132765,

    Thanks for your comment and for raising some important challenges to the discussion. My intent in writing articles is not to suggest that the stock market has nowhere to go but down. In fact, I suspect that we will likely reach new all time highs on the S&P 500 before the current bull market has run its course. And if the Fed opts to launch a QE4 stimulus plan that includes daily Treasury purchases, I would say with a high level of probability that the future direction of the stock market would be up.

    Instead, my deep concern over the past several years has been concentrated on the fact that the gains in the stock market have been driven not by strong fundamentals and economic growth but instead by the artificial forces of stimulative monetary policy (and it seems from Ms. Yellen's and Mr. Greenspan's recent comments that they may actually agree with this point). This policy approach sets up a dangerous environment for investors in the private market, however, for if the economy does not accelerate to fill the valuation gap created by such policies, financial markets will eventually break under the pressure and fall back lower to find their true equilibrium price.

    Unfortunately, this has essentially been the outcome that has come to pass, as economic growth remains uneven and sluggish with most of the gains concentrated among the top 5%, and has set up a precarious situation for the markets going forward. This is what led me to the point about slowly letting air out of the market. For if the Fed can at least sustain asset prices at current levels or at least periodically let some of the steam off the top of the market in a more deliberate manner until the economy has the time to catch up with valuations, it would be a far better outcome for private markets than simply letting the stock market cascade lower the way it seemed to want to in the summer of 2010, the summer/fall of 2011 and even the spring of 2013.

    Great points and thanks for the challenge on this topic.

    Oct 30, 2014. 02:03 PM | 6 Likes Like |Link to Comment
  • A Once In A Generation Change For Stocks [View article]
    Hello Mike,

    Thanks for your comment. I appreciate it and I share your interest in consumer staples, particularly at this stage of the economic and market cycle.

    Thanks again!
    Oct 30, 2014. 01:52 PM | Likes Like |Link to Comment
  • A Once In A Generation Change For Stocks [View article]
    Hello birder,

    Great point that is worth discussion. Gallup recently conducted a poll that determined roughly 43% of American households are invested in the stock market either through individual securities or mutual funds including their defined contribution plans such as a 401(k) plan. And I agree that the Fed has no interest to see the stock market suffer a sudden sharp drop of 30% or more, as it would not only destroy wealth but erode confidence for those not invested in the stock market. But at a minimum, it appears at least based on Yellen's comments that she has no interest in artificially inflating the stock market any more than the Fed already has. And a decline in value of stocks in the range of -20% to -30% that takes place in fits and starts over the course of a few years is far different from a psychological and wealth destruction standpoint than a market that plunges by this amount all at once. I'm not suggesting that this is an outcome that the Fed wants for the markets, but it may be the end result of any new policy directive if they do indeed decide to change course.

    Great point. Thanks again.
    Oct 30, 2014. 01:51 PM | 1 Like Like |Link to Comment
  • A Once In A Generation Change For Stocks [View article]
    Hello gardencove,

    Thanks for your comment and for raising a good question. If Yellen is indeed considering a different approach to monetary policy to address these issues, I would suspect the most likely course would be replacing broadly based stimulus like QE with highly targeted programs where assets are purchased or liquidity is provided potentially with some form of conditionality to specific segments that the Fed believes are in greatest need of economic support. In short, a micro approach instead of a macro approach, as liquidity would no longer be free to simply leak into financial markets the way it has under recent QE programs since the financial crisis. Other scenarios are also credible, but this is just one possibility.

    Great question. Thanks again.
    Oct 30, 2014. 01:45 PM | 6 Likes Like |Link to Comment
  • A Once In A Generation Change For Stocks [View article]
    Hello creese,

    Thank you for your comment and for raising some excellent points. In my article, I am not suggesting that she will succeed any potential efforts to address these problems. Instead, I am suggesting that she through her words seems intent to try. andrew02110 makes a good point in his reply, and he may be correct that this was a speech designed to encourage fiscal policy action. But given that she has spoken on the topic in the past and hinted that monetary policy should work to take these types of issues into consideration suggests that more may be going on here.

    In terms of exactly what she might seek to do, a look at the asset purchase plan that was recently offered up by the ECB's Mario Draghi provides some clues. After all, he presented his proposal not long after traveling to the annual Fed meeting in Jackson Hole, so perhaps some collaboration on ideas took place along the way. Basically, instead of providing unconditional stimulus through programs such as daily asset purchases with the hopes that banks will deploy these funds into the economy as they and the market sees fit, the Fed may pursue programs including asset purchases that are highly targeted and designed to promote very specific areas of the U.S. economy. In short, more of a micro approach to Fed policy instead of the macro approach taken by Greenspan and Bernanke over the past few decades. But exactly how anything like this might play out remains to be seen.

    Thanks again for your excellent and thoughtful comment. I appreciate it.
    Oct 30, 2014. 01:40 PM | 5 Likes Like |Link to Comment
  • A Once In A Generation Change For Stocks [View article]
    Thanks Moderation. I appreciate it!
    Oct 30, 2014. 01:24 PM | Likes Like |Link to Comment
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