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Digital Subscriptions > The Hedge Fund Journal > Issue 126 - September 2017 > Taking Away the Punch Bowl

Taking Away the Punch Bowl

The potential outcome of inflation rising faster than expected

Large-scale, continuous, and at least somewhat coordinated, fiscal and monetary responses from governments and central banks around the world have changed the landscape of markets and the pricing of assets. Like an open-minded and overtly obliging doctor, the Fed has been doling out prescriptions of reduced fear and enhanced greed to anyone needing a fix. Driven by investor feelings of bravado from being handed a free put option and expectations of a new normal (low interest rates for the indefinite future), most measures of market value have skyrocketed to all-time highs as speculators have demonstrated disregard to the quality of earnings or credit. Interest rates have been kept at rock-bottom levels, while quantitative easing, once little more than a footnote in textbooks, has become a common monetary policy mechanism that the market has, at least implicitly, taken for granted. Now investors scratch their heads as they ponder the implications of tighter monetary policy as the Fed heralds the “long march to normal” as they “embark on the great unwinding”. Call it what you will, but note with near certainty that this is the beginning of the end of easy money. The market, if weaned gradually, may traverse a non-traumatic transition to a not-so-new new normal. But it just may be that the Fed, in the famous words of William Martin, its longest serving Chairman, is abruptly fulfilling its duty “to take away the punch bowl just as the party gets going”. If so, the hangover comes next.

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Informing the Hedge Fund Community. With access to some of the industry’s biggest names and an astute and talented group of writers and contributors, The Hedge Fund Journal has established itself as a trusted source of information on the hedge fund industry.