Updated: Nov 16, 2020
The United States Federal Reserve stepped in and saved the United States from the worst depression in history by printing an enormous amount of money. Creating the expectation for more if a similar scenario ensues, so what happens next?
Will the United States Federal Reserve step in and support equities once again, risking hyperinflation to the USD. Or will they let equities slide in order to protect against an inflationary scenario, and if so, how will the market react?
“The bigger concern is that we go into the next recession and we don't have ammo, you cut rates to zero and you do quantitative easing, that is the nightmare."- Adam Posen
This is exactly what we just saw... So what happens next?
The average P/E ratio of the S&P500 is under 15, currently the S&P500 has a PE ratio above 35. We believe this leaves a large chance at another crash in equity markets similar to what we experienced in February, with potentially much more dire consequences... Here's why.
“Never bet against the fed” - Everyone who's tried.
As the US Federal Reserve stepped in and supported markets through large scale money printing & asset purchases there will be an overwhelming expectation for this trend to continue if another similar situation follows. With 22% of the total USD supply created in 2020 this raises a major concern about the Fed being able to offer this type of support in the future without hyperinflation hitting the USD.
Equally as likely, the Fed understands the situation the USD is in and will NOT step in to support financial markets in the same capacity as we witnessed in February. This would ultimately cause a severe market crash, but could potentially be the only choice to keep the USD from experiencing hyperinflation.