What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing with inflation running at multi-decade highs in both the us and the eurozone. A key question on investors: minds is how central banks will react if they raise rates rapidly to fight inflation. That could derail the bull rally in tech stocks, which we've experienced over the past year and a half both the u.s and europe are suffering from widespread labor shortages, which are pushing up wages and threatening to make high inflation far less transitory than originally predicted. Investors are bracing for a so-called taper tantrum, where global central banks finally decide to pull away the punch bowl of easy money.

But recent developments suggest both the american and european central banks may be willing to keep their money printers on for quite a while longer, despite rising inflation fears. This could allow the historic tech bull market to continue for a few more years before we continue we'd like to thank our patrons for their support of the channel. If you want to support us check out our patreon link in the description below on patreon, you can look at our main stock portfolio and merge your arbitrage portfolio. We also have a general support tier, which is much appreciated.

On wednesday november 3rd, the u.s federal reserve announced that they will start tapering their pandemic era. Quantitative easing, starting later this month, they've been purchasing 120 billion dollars worth of bonds and mortgage-backed securities every month. They will slowly start reducing this at a rate of 15 billion dollars per month at first. This might sound like bad news for the markets.

Less bond buying means less money, printing and less liquidity to pump up the stock market, but it's important to note that they are still actively printing money to pump into the economy they're, just printing less than they were in the past. The money supply will continue to increase. Furthermore, investors were already anticipating that tapering would start by the end of the year, so the announcement didn't come as much of a shock. There were also two other aspects to the fed's recent announcement that were very bullish for the markets.

Firstly, they kept the federal fund's interest rate anchored near zero. It's widely believed that they will not hike rates until at least after they finish tapering, given the slow rate at which they'll taper their asset purchases. We probably won't see a rate hike until at least the summer of 2022, but perhaps the most important aspect of the fed's recent announcement was jerome powell's comments about inflation. The supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors, in particular, bottlenecks and supply chain disruptions are limiting how quickly production can respond to the rebound in demand in the near term.

As a result, overall, inflation is running well above our two percent longer run goal. Supply constraints have been larger and longer lasting than anticipated. Nonetheless, it remains the case that the drivers of higher inflation have been predominantly connected to the dislocations caused by the pandemic. Specifically, the effects on supply and demand from the shutdown, the uneven reopening and the ongoing effects of the virus itself.

We understand the difficulties that high inflation poses for individuals and families, particularly those with limited means to absorb higher prices for essentials such as food and transportation. Our tools cannot ease supply constraints like most forecasters. We continue to believe that our dynamic economy will adjust to the supply and demand imbalances and that as it does, inflation will decline to levels much closer to our two percent longer run goal. He acknowledges that the current high levels of inflation that we're observing has been more persistent than he originally expected.

But importantly, he continues to say that inflation is transitory and the result of supply chain bottlenecks, for example, worker shortages and a strong rebound in consumer demand, have caused record-setting backlogs in the port of la which on some days, has a backlog of more than 100 cargo Ships powell says that the fed's monetary policy does not have the power to alleviate supply chain problems, so there's no reason to raise interest rates prematurely. They will instead wait until these issues sort themselves out in the real economy over the next year, or so. The main takeaway from palo's press conference is that he still believes that inflation is transitory and interest rates will likely remain near zero well into next year. The stock market took this news very favorably, with the qqq technology index bouncing about 2.5 percent, and it's not just the fed.

That's been reassuringly dovish recently, on november 4th the bank of england shocked investors by failing to hike interest rates, despite storing inflation in the uk. On november, 4th their monetary policy committee overwhelmingly decided to keep their policy interest rate at its current record low level of 0.1 percent. That came as a major surprise to many economists and market observers similar to the us. The uk is facing problems with supply chain issues and demand outpacing supply.

This has caused their consumer price index to increase to three percent. According to the bank of england's own estimates, they expect it to continue rising to five percent in the spring of 2022.. The surprising decision to not hike rate, send the pound tumbling more than one percent against the us dollar. This is a big move for a currency that is usually very stable.

Their rationale for keeping interest rates low was pretty similar to the federal reserve. They say that inflation is transitory and will probably fall down towards their two percent target throughout 2022 and with unemployment still above pre-covered levels. The risks of prematurely hiking rates outweigh the benefits. In addition to the us and uk, the european union is also striking.

A surprisingly dovish tone on interest rate policy, the european central bank plans to keep its policy interest rate at negative point, five percent until at least 2023, despite inflation, which is expected to soon exceed four percent ecb chair christine lagarde, also said they will continue their quantitative Easing program to keep long-term bond yields, low and credit rating agency fitch ratings believes they won't hike interest rates until 2025.. The three major central banks of the western world, the u.s federal reserve, the bank of england and the european central bank are all saying that inflation is transitory and will plan to continue pumping trillions of new dollars into their respective economies over the coming years. While some of the current inflation is transitory, a significant portion is structural. Labor shortages have caused many service sector employers to significantly increase hourly wages, as consumer prices rise, workers will start demanding wage increases going forward to offset this.

The companies will then increase prices to offset the higher wage expense, leading to a vicious cycle of higher nominal wages and consumer prices. In the us alone, the federal reserve has created more than 5 trillion dollars of new money. It's naive to think that this will not have any long-term consequences on inflation, given the outlook for higher inflation commodity producers such as oil companies, could see their profits skyrocket as oil prices rise and inflation wipes out the real value of their debt loads. That's why we've liked occidental petroleum for a long time as it offers attractive leverage exposure to oil and natural gas prices, in our opinion, with central banks leaving the money printers on the path of least resistance for the stock market is probably higher.

While this video is not financial advice, the two asset classes that investors probably shouldn't own for the next few years, are bonds and cash. The bond is nothing more than a promise to pay a fixed amount of dollars in the future, as inflation eats away, the purchasing power of the dollar bondholders will be the biggest losers. The real value of cash will similarly deteriorate over the coming years, given how unattractive bonds in cash are, the one place investors have left to put their wealth is the stock market. That is exactly what has pushed prices to record high after record high over the past year.

Alright guys that wraps it up for this video. What do you think about the fed's decision to keep interest rates at zero? Do you think the us or europe could be headed towards hyperinflation? Let us know in the comments section below, if you enjoyed this content, make sure to hit the like button and subscribe. So you don't miss future uploads as always. Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.

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