Blackrock calling for the end of the Great Moderation Era

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Blackrock calling for the end of the Great Moderation Era

Post by jacob »

https://www.blackrock.com/corporate/lit ... utlook.pdf

This effectively means a compression of the multiplier (investors pay less when earnings are more uncertain as companies can or can not easily pass inflation along to consumer vis-a-vis eat the cost). Thus the price of stocks can go down even as earnings increase due to inflation.

steveo73
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Re: Blackrock calling for the end of the Great Moderation Era

Post by steveo73 »

It's a good article in that these points are in my opinion basically correct.
First, production constraints – stemming from a massive shift in spending and labor shortages – are hampering the economy and driving inflation. Second, record debt levels mean small changes in interest rates have an outsized impact – on governments, households and companies. Third, we find the hyper-politicization of everything amplifies simplistic arguments, making for poorer policy solution
It's a bad article because I don't agree with the conclusion and it's sort of meaningless. I think as typically is the case with investment firms and investment advice people want to talk about stuff that they get wrong all the time.
Our conviction is that portfolios will need to change more quickly in a regime of higher volatility.
This goes against good portfolio management principles. If you set your portfolio up correctly and accept the world is going to do what it is gong to do you should be safe.

The only time I've lost money is when I had my trading account with a firm that was going bust. I got a chunk of my money out because I reacted quickly but other people would have lost everything they had with that company.

I'm not stating don't react. I'm stating reactive investing is typically stupid.

Predicting the future is exceptionally hard. Smart (which means successful) investing is easy.

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Re: Blackrock calling for the end of the Great Moderation Era

Post by unemployable »

Our conviction is that portfolios will need to change more quickly in a regime of higher volatility.
Oh for the love of Graham, that's what causes the volatility!

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Re: Blackrock calling for the end of the Great Moderation Era

Post by steveo73 »

Third, we find the hyper-politicization of everything amplifies simplistic arguments, making for poorer policy solution
This is a funny one. It was a good article but it's the conclusions that get drawn that can be the issue.

I agree with the first past of this point for instance although they are being politically correct. It's not really hyper-politicization it's the emergence of a religious conservative right wing. I think America is about the worst in relation to this but maybe that is because it's on the news all the time. In Australia we recently had elections and we had a conservative right wing Prime Minister. The thing is his conservatism and his party was nothing at all like Trump conservatives. They'd be considered Commies by Trump supporters. Anyway they were still voted out but interestingly lost a lot of traditional right wing seats because they were too conservative. Parts of their electorate wanted action on climate change and they wanted nothing to do with religion.

We have these Teal independents who want budget reform, increased immigration and action on climate change and I think they are predominantly atheists. I find it awesome. They are like socially responsible right wingers.

Anyway the whole point of my post is that the second part of their statement above is really really hard to judge. In what ways are poorer policies implemented ? How do you know the policies are poorer ? I think it's a judgement value.

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Re: Blackrock calling for the end of the Great Moderation Era

Post by unemployable »

steveo73 wrote:
Mon Sep 26, 2022 10:53 pm
Anyway the whole point of my post is that the second part of their statement above is really really hard to judge. In what ways are poorer policies implemented ? How do you know the policies are poorer ? I think it's a judgement value.
Perhaps it's because we Americans tend to lurch back and forth between one extreme and the other, with each regime overcompensating for the perceived excesses of the previous one, and as a result becoming more extreme in an absolute-value sense at each iteration.

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Re: Blackrock calling for the end of the Great Moderation Era

Post by steveo73 »

unemployable wrote:
Mon Sep 26, 2022 11:09 pm
Perhaps it's because we Americans tend to lurch back and forth between one extreme and the other, with each regime overcompensating for the perceived excesses of the previous one, and as a result becoming more extreme in an absolute-value sense at each iteration.
I honestly don't know. It's not just America as well. It's definitely not Australia. We have the crazies but it's so less mainstream. It was fascinating seeing the conservative party lose the recent election in Australia because they are more a middle right. In saying that both parties are middle right. The previous PM is religious and I think it worked against him.

I saw that in Italy it appears an extreme right wing politician may get in.

In France an extreme right wing politician nearly got in.

I don't know many other countries though apart from like Russia or other non democratic governments that are as extreme as America and I'm not even sure if France or Italy are as extreme.

I don't think though America has ever had a real socialist government or anything close to it. America also appears to be very religious and gun toting and I don't know any other country like that.

In Australia it was awesome seeing these right wing politicians promoting action on climate change and increased immigration. Can you imagine that in America ?

We had gun reform in Australia and it was the conservative government who bought it in. No one cared either. We had pretty harsh lockdowns and there were protests but the vast majority of people were completely supportive.

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Re: Blackrock calling for the end of the Great Moderation Era

Post by unemployable »

I read through this and it strikes me as equal parts unprovocative and self-serving with a dash of condescension thrown in, as if they're the first people to discover that volatility persists in long regimes, for example. (Google Hurst exponent.) Having met with Blackrock and managers in its peer group during my career and with that experience now well in my rear-view mirror, it's easier to see how these are basically sales pitches gussied up with intellectual-sounding window dressing.

Looks like it was written as of July, and it hasn't taken long for parts of it to feel a bit dated. In particular this forecast has aged poorly:
We now overweight UK gilts as we see the Bank of England turning dovish.

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Re: Blackrock calling for the end of the Great Moderation Era

Post by ducknald_don »

unemployable wrote:
Mon Sep 26, 2022 10:28 pm
Oh for the love of Graham, that's what causes the volatility!
More trades means more fees for Blackrock.

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Re: Blackrock calling for the end of the Great Moderation Era

Post by IlliniDave »

This time it's different.

Does read a bit like a subtle sales pitch for professional management services--the era of market timing is upon us!

I enjoy reading that sort of stuff though. If they are correct I am probably in trouble over the long haul. First time I've seen over-politicization explicitly mentioned as an adverse economic driver, something my intuition has been keyed in on for a few years now. Of course, I'm not as well read as I once was, so maybe that's been out there in the investing conversation for a while. All the places I visit for things financial squelch any conversation that's even vaguely political in the interest of civil discourse.

Hard to see what's actionable for me though. I'm not a trader or a timer. In the end I'll either be broke or not broke.

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Re: Blackrock calling for the end of the Great Moderation Era

Post by Mister Imperceptible »

unemployable wrote:
Tue Sep 27, 2022 12:24 am
Having met with Blackrock and managers in its peer group during my career and with that experience now well in my rear-view mirror, it's easier to see how these are basically sales pitches gussied up with intellectual-sounding window dressing.
Wow, are you suggesting a small group of bankers do not actually have any particular insight or genius, but they benefit from printing money and being closely associated with the central bank that prints money? Is this called the Cantillon Effect?

It is almost as if what Ford said was right: If the public understood how the banking system operated, there would be a revolution tomorrow morning.

Think of all the extreme right-wing movements that have to be denounced and the all the pesky civil liberties that have to be stripped away in order to protect the interests of these genius bankers!

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Re: Blackrock calling for the end of the Great Moderation Era

Post by Bonde »

What drove the Great Moderation Era? Luck or good monetary policies?
Not surprisingly did Isabel Schnabel from the ECB highlight monetary policies as an important factor in a speech at Jackson Hole (Aug. 2022).
There is broad agreement that better monetary policy was an important factor behind the Great Moderation. As central banks took up the fight against spiralling inflation in the late 1970s and early 1980s, they brought down and stabilised inflation expectations at levels that provided a solid nominal anchor for firms and households.
The subsequent advance of inflation targeting around the world is believed to be a prime reason why the global financial crisis of 2008 merely interrupted the Great Moderation. Afterwards, macroeconomic volatility quickly dropped back to its previous low levels.
Yet, monetary policy was not the only factor behind the Great Moderation. Good luck, in the sense of a smaller variance of the shocks hitting the global economy, is widely believed to have played an important role as well. Compared with the 1970s, for example, real oil prices traded in a much narrower range from the second half of the 1980s until the mid-2000s.
It is an interesting speech. Contrary to Blackrock she it not sure that the Great Moderation Era is over and she thinks that keeping inflation on target is key to people's trust in a stable purchasing power.

She do not recommend lowering interest rates when economic growth suffers:
This is another key lesson of the 1970s. If the public expects central banks to lower their guard in the face of risks to economic growth – that is, if they abandon their fight against inflation prematurely – then we risk seeing a much sharper correction down the road if inflation becomes entrenched.
Her conclusion:
High inflation has become the dominant concern of citizens in many countries.
Both the likelihood and the cost of current high inflation becoming entrenched in expectations are uncomfortably high. In this environment, central banks need to act forcefully. They need to lean with determination against the risk of people starting to doubt the long-term stability of our fiat currencies.
Regaining and preserving trust requires us to bring inflation back to target quickly. The longer inflation stays high, the greater the risk that the public will lose confidence in our determination and ability to preserve purchasing power.
Trust in our institutions is even more important at a time of major and disruptive structural change that brings about larger, more persistent and more frequent shocks. A reliable nominal anchor eases the transition towards the new equilibrium, and improves the trade-off facing central banks in the future.
All in all, therefore, an important lesson from the Great Moderation is that it is also up to central banks whether the challenges we are facing today will lead to the Great Volatility, or whether the pandemic and the war in Ukraine will ultimately be remembered as painful but temporary interruptions of the Great Moderation.
It will be interesting to follow in the coming months/years.

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Re: Blackrock calling for the end of the Great Moderation Era

Post by ertyu »

Good luck, in the sense of a smaller variance of the shocks hitting the global economy, is widely believed to have played an important role as well.
in essence, this is the debate of, how much power do central banks have to influence the economy. is it that CBs started using interest rates as a policy tool or is it dumb luck? Maybe I have receincy bias but I don't see energy prices stabilizing soon. We're about to test this out

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Re: Blackrock calling for the end of the Great Moderation Era

Post by unemployable »

ertyu wrote:
Tue Sep 27, 2022 10:26 am
in essence, this is the debate of, how much power do central banks have to influence the economy.
They have quite a lot.

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Re: Blackrock calling for the end of the Great Moderation Era

Post by zbigi »

ertyu wrote:
Tue Sep 27, 2022 10:26 am
in essence, this is the debate of, how much power do central banks have to influence the economy. is it that CBs started using interest rates as a policy tool or is it dumb luck? Maybe I have receincy bias but I don't see energy prices stabilizing soon. We're about to test this out
They can stabilize energy prices by crippling the economy, and thus crippling the demand for energy. Let's hope it doesn't come to that.

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Re: Blackrock calling for the end of the Great Moderation Era

Post by WFJ »

Summary,

Lower rates = higher asset prices
Higher rates = lower asset prices

What nobody knows is the timing/lags that reveal this relationship. We are in the "Higher rates = lower asset prices" regime now, after being in the "Lower rates = higher asset prices" regime for roughly the last 40 years. Post WWII in the US was the previous Lower rates = higher asset prices and higher rates = lower asset prices from 1966-1982. P/E of the S&P 500 during the nifty 50's were 50+ and bottomed around 7 in 1982 for reference.

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Re: Blackrock calling for the end of the Great Moderation Era

Post by steveo73 »

unemployable wrote:
Tue Sep 27, 2022 10:47 am
They have quite a lot.
They have a huge influence. Increase rates to 20% and I bet inflation comes down.

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Re: Blackrock calling for the end of the Great Moderation Era

Post by Jean »

in eurooe, people vote so simply because they don't like the consequence of having millions of uneducated altercivilized young males coming in. When normal parties start to act against it, people don't vote for extremes (like in danemark)

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