. . . The market since 2008 has been in a weird period where a few words from Central Bankers move the price of almost everything. No longer does the market care about fundamentals or growth.

GDP down? Stocks rise because they expect the Fed to come out and protect our backs.

Stock prices fall? No worries, the Fed will pause hiking rates and possibly reverse course.

Due diligence be damned! And, cheap words prevail.

But – words are easy to mince. And, even easier to go back on. So, for the speculator to really keep their head above water, they need to think two moves ahead and remember that being skeptical is wise.

Modest doubt is called the beacon of the wise – William Shakespeare

Last week, I wrote an article about how the Fed is leading us into the next recession. And today, we remain on course.

Hiking rates is one thing, which the Fed has postponed until further notice because of softening inflation and slowing growth. But talks of unwinding its bloated $4.5 trillion dollar balance sheet is another thing.

Wednesday’s decision not to raise rates was expected. Markets anticipate that the central bank might raise interest rates again by the end of the year, which would mean three rate increases this year. – the Washington Examiner.

The Fed has imprinted in our minds that the economy is recovering. The crisis times are over. And that it is time to get rates back into “normal” territory.

The problem I have with this is that it has been almost 10 years since 2008. Even if the Fed did not intervene, wouldn’t markets have corrected over time on their own? The Fed takes credit for home prices increasing and a lowering unemployment rate. But just like every crash before 2008, don’t things get better on their own? Humankind moves forward, no matter the small bumps.

This is where I fear many have believed that correlation (a relationship connecting variables in a pattern) is causation (cause and effect). Instead of, “don’t confuse correlation for causation.”

Correlation: a mutual relationship or connection between two or more things.
Causation: the action of causing something. the relationship between cause and effect; causality – from the Dictionary.

For example of this, by looking at the chart below, one could make a well done graph and statistical diagram explaining how fresh lemon imports have reduced highway fatality rates.

Or, my personal favorite, who could have ever guessed that the number of people who drowned falling into a swimming-pool correlated with the number of films Nicolas Cage appeared in?

Illusory correlation is the phenomenon of perceiving a relationship between variables (typically people, events, or behaviors) even when no such relationship exists.

Of course, this is absurd. These are simply coincidences. But you would be surprised how many people get duped by nice correlated graphs and then decide on its causation.

Especially in economics and finance…

It is easy for us to disregard silly coincidences when we read headlines stating, “Economy Recovering Thanks to the Fed’s Low Rates.” Couldn’t the markets have recovered on their own?

Everything since 2008, the market has correlated it all from the Fed’s doing. As if the central banks were our saviors. . .

Read the rest here . . .