Welcome to Money for the Rest of Us. This is a personal financial on money. How it works, how to invest it, and how to live without worrying about it.

I'm your host David Stein. Today is episode 388. It's titled, Will Quantitative Tightening Lead to Even Greater Losses for Financial Assets.

In 1955, William McChessney Martin Jr., the Federal Reserve Chair, the longest serving chair who served from 1951 to 1970,

he gave his speech before the New York Group of the Investment Banking Association of America.

In the speech he said, in the field of monetary and credit policy, precautionary action to prevent inflationary excessives is bound to have some onerous effects.

If it did not, it would be ineffective and futile.

Those who have the task of making such policy don't expect you to applaud.

The Federal Reserve, as one writer put it, is in the position of the chaperone who has ordered the punchball removed just when the party was really warming up.

Ever since then, the phrase Takeaway the Punchball has been associated with central bank actions to slow economies in which inflation is too high or at risk of getting too high.

Central bank actions to take away the punchball include raising short-term interest rates and quantitative tightening.

In this episode, we'll explore what those actions mean and what happened last time the Federal Reserve initiated quantitative tightening.

This is important because financial markets are absolutely freaking out.

Stock markets are down sharply this year. Bond prices have fallen. Cryptocurrency is cratering.

Pundits are predicting a recession, stagflation or other calamities.

Investors and fund managers are incredibly pessimistic.

The most bearish they've been since March 2020 at the start of the COVID-induced economic shutdown.

In this environment, there's a temptation to panic. To exit financial markets completely.

Go to cash. I have felt that. Most of the tactical asset allocation models I follow went to cash earlier this year. I did not.

Those models are based mostly on trend data. When financial markets sell off, the trend deteriorates.

Tactical asset allocation models don't ask why. They're quant models that look at the numbers and make dramatic swings from month to month.

Most of us don't have the willingness or the fortitude to make dramatic shifts with the bulk of our assets because of the potential tax consequences.

Having to pay capital gains tax on gains or because we have a long term time horizon and want to benefit from compounding of those cash lows.

...