In his article Goldilocks and the Liquidity Bears, Jesse Felder explains why he thinks this could ultimately spell bad news for the bulls. The implications of this argument are grim, so understanding his investing advice is important in case he proves right about future inflation.

While most investors and pundits are currently focused on optimistic analyst earnings estimates for the coming year, there’s another far more important phenomenon underway that deserves more attention. Three years ago, Stan Druckenmiller gave a very important speech to a very exclusive group of listeners in which he disclosed the single greatest source of his tremendous success as an investor: central bank mistakes. Well, it looks as if some at the Fed are beginning to worry, like Stan, that they have now made the same mistakes they made in prior cycles all over again.

In that same speech several years ago, Druckenmiller also disclosed what he sees as the single most important factor behind major market moves:

“Earnings don’t move the overall market; it’s the Federal Reserve Board… focus on the central banks and focus on the movement of liquidity… most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.”

And the Fed is not only removing liquidity now. According to Ms. George, they are clearly considering doing so at an even faster rate in the future. This has important implications for asset prices.

It’s important to note, too, that it’s not only Ms. George expressing more hawkish views today. As indicated by her colleague, Lael Brainard, hawishness at the central bank, it seems, is now the consensus. As Edward Harrison wrote this week:

“New Fed Chair Jerome Powell used his first public remarks before Congress to say so. His view: ‘While many factors shape the economic outlook, some of the headwinds the U.S. economy faced in previous years have turned into tailwinds.’ Don’t let the understated language fool you. This one sentence encapsulates a marked shift in tone. And now policy dove Lael Brainard is on-board too. The fact that she is giving the first major speech after Powell echoing the same theme is significant. It tells you that the messaging is coordinated. And it also tells you that there is a general consensus on that messaging.”

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