what is overshot in stock

In economics, overshooting, also known as the exchange rate overshooting hypothesis, is a way to think about and explain high levels of volatility in currency exchange rates using the concept of price stickiness.

Overshooting was introduced to the world by Rüdiger Dornbusch, a renowned German economist focusing on international economics, including monetary policy, macroeconomic development, growth, and international trade. Dornbusch first introduced the model, now widely known as the Dornbusch Overshooting Model, in the famous paper "Expectations and Exchange Rate Dynamics," which was published in 1976 in the Journal of Political Economy.

Before Dornbusch, economists generally believed that markets should, ideally, arrive at equilibrium and stay there. Some economists had argued that volatility was purely the result of speculators and inefficiencies in the foreign exchange market, such as asymmetric information or adjustment obstacles.

Dornbusch rejected this view. Instead, he argued that volatility was more fundamental to the market than this, much closer to inherent in the market than to being simply and exclusively the result of inefficiencies. More basically, Dornbusch was arguing that in the short run, equilibrium is reached in the financial markets, and in the long run, the price of goods responds to these changes in the financial markets.

The overshooting model argues that the foreign exchange rate will temporarily overreact to changes in monetary policy to compensate for sticky prices of goods in the economy. This means that, in the short run, the equilibrium level will be reached through shifts in financial market prices, rather than through shifts in the prices of goods themselves. Gradually, as the prices of goods unstick and adjust to the reality of these financial market prices, the financial market, including the foreign exchange market, also adjusts to this financial reality.

So, initially, foreign exchange markets overreact to changes in monetary policy, which creates equilibrium in the short term. Then, as the prices of goods gradually respond to these financial market prices, the foreign exchange markets temper their reaction and create long-term equilibrium. Thus, there will be more volatility in the exchange rate due to overshooting and subsequent corrections than would otherwise be expected.

Although Dornbusch"s model was compelling, initially it was also regarded as somewhat radical due to its assumption of sticky prices. Today, sticky prices are accepted as fitting with empirical economic observations, and Dornbusch"s Overshooting Model is widely regarded as the forerunner to modern international economics. In fact, some have said it "marks the birth of modern international macroeconomics."

The overshooting model is considered especially significant because it explained exchange rate volatility during a time when the world was moving from fixed to floating rate exchanges. Kenneth Rogoff, during his stint as economic counselor and director of the research department at the International Monetary Fund (IMF), said Dornbusch"s paper imposed "rational expectations" on private actors about exchange rates. "Rational expectations is a way of imposing overall consistency on one"s theoretical analysis," Rogoff wrote on the paper"s 25th anniversary.

Many of the three-swing-point setups lead to a reversal after they overshoot a trend channel line. This overshoot is the only reason for a trader to enter the market, regardless of the fact that the shape of the pattern may not exactly resemble a wedge.

This happens when the market breaks support and resistance level and you assume it"s broken. Thus, we trade the breakout but only to realize it"s a false breakout. THIS TYPE OF PRICE ACTION CALLED UPTHRUST AND SPRING ...

The new strategy is built on two pillars: (1) "curve control", which aims at directly controlling both short-term and long-term yields, and (2) the "inflation-~ing commitment", by which the BoJ undertakes to expand the monetary base until inflation rises stably above the 2% target.

Sentiment influences perception, which is why stocks tend to ~ their valuations in strong bullish markets and undershoots during weak bearish markets, as the adage of a "rising tide lifts all boats" rings true.

Price has ~ 61.8% level and touched 78.6% level (which is a better price to enter). Having said that, of course, there is a risk that price may just continued to fall and take out the lows of the double bottom.

First, who very clearly is that when over-extended market to ~ or extreme ~ line, then there is most likely price will bounce back, let alone supported by confirmation from other indicator2.

How can you be sure that you will not ~ the best price options or miss a good rate because you are unavailable to place a buy order or sell order with your broker? Is there a way to set limits on your trades? Next, we will discuss ways to protect your investments and limit your risk factors.

The Aussie has not traded at this level since July 2010. Currency pairs have a tendency to ~, so waiting for Aussie to turn down from the 23.6% downtrend Fibo level (0.9108) and the 38.2% uptrend Fibo level (0.9138). A stop can be placed above the last swing high once the down trend resumes with a limit of 0.

What if a strong swing ~s the channel line? An experienced trader may shift his tactics and hold a little longer, perhaps until the day when the market fails to make a new high.

Disadvantage: Pullbacks can ~ the neckline due to this a stop-loss placed too close can be blindly hit. To prevent this, wait for the pullback on the neckline before opening a position. This makes it possible to place stop-loss better.

Currencies rarely spend much time in tight trading ranges and have the tendency to develop strong trends. A large volume is speculative in nature resulting in a market that frequently ~s and then corrects itself.

Do not expect exact support and resistance levels from moving averages, especially longer moving averages. Markets are driven by emotion, which makes them prone to ~s. Instead of exact levels, chartists can consider using support and resistance zones around a moving average.

It"s worth mentioning that ranges are not perfect and while it"s easy to establish support and resistance zones, the market may not always respect them to the point and can ~ or undershoot them, depending on different factors such as volume and momentum.

A runaway gap has all of the features of a breakaway gap, except that a runaway gap simply augments a trend rather than starting a new trend and is usually the result of news that supports the trend. In both kinds of gaps, trading is highly emotional and often ~s what many traders consider to be a ...

The involvement of so many people and processes in the making of a film lead to several uncertainties. In fact, big budget films in India are known to well ~ their original release schedule. Insurance enables the producer to mitigate the risks involved in making the film to some extent.

Wall Street starts to perspire with concern that the Fed could ~ and cool growth. If a too-hot report surprises the market, you"ll likely see a negative reaction in equities. The opposite is true, too. Since job growth fuels spending, overly weak numbers aren"t too bullish for stocks, either.

markets are very efficient which makes the foreign exchange market, which is the largest and most liquid one of the most efficient market in the world. Efficient market have all the information that is currently available incorporate into the price at any specific time. Sure occasionally the markets will ~ a ...

When coupled with a trend line or support/resistance violation, the signal becomes quite reliable. Averages give traders an idea of support and resistance areas, but they should not be used alone to determine trade triggers. ~s of averages are common although using an envelope of the averages of highs and of ...

The former is used when an economy is accelerating at a pace that puts goals at risk, e.g. the threat of higher inflation. By raising interest rates or selling assets--which removes cash from the system--a central bank can reduce the money supply and thereby contract an economy that is at risk of ~ing its ...

You will notice that is always a currency moving up or down. From a price-action perspective, currencies rarely spend much time in tight trading ranges and tend to develop strong trends. Remember, most of the currency trading volume is speculative in nature and, as a result, the market frequently ~s and then ...

"I do think the economy is on a pretty good trajectory so it"s really a matter of if there"s more or less fiscal policy that maybe tilts that trajectory," Mr Williams said. Speaking about the Fed"s inflation target, Mr Williams said "We need to make sure that we"re purposely ~ing that moderately for some time ...

From euronext.com we downloaded 2 years of historical daily AEX data running from 20 October 2006 until 17 October 2008. For our analysis we use opening prices (approximately 500 observations). The interesting feature of this specific historical window is that it contains both the upswing (the AEX was at 563 on 13 July 2007) and the subsequent downturn because of the subprime crisis below the 400 limit and even below the 300 frontier (the AEX was at 294 on 8 October 2008). On 17 October 2008 the AEX value was 259.95, which is 54 per cent lower than the peak of 563, which occurred only 15 months earlier.

We will show how an algorithm that has been developed using the first half of the series as the development set can make a profit when applied to the second half of the set. The underlying driver is that commonalities exist within the entire series in terms of overshooting and mean reversion.

The basic idea behind the algorithm can be summarised as follows:The algorithm uses only the stock price index window of approximately 500 days. It does not use any other information.

The time window is separated in a development set (first 210 days) and a test set (the rest of the time series). The development set equals one cycle in that the AEX index at the end of the first 210 days is back at its initial level.

A minimum model and a maximum model are estimated with the help of the development set. This is the development set on which the parameters of the minimum and maximum models are calibrated. We will present the specifications of the minimum and maximum models below.

When a local minimum has been identified, the algorithm buys stocks at the current prices for a monetary amount of 40 per cent of the initial liquidity balance, that is €400. The liquidity balance decreases with €400 and the stocks bought are added to the portfolio.

When a local maximum has been identified, the algorithm sells stocks at the current prices for a monetary amount of 40 per cent of the initial liquidity balance, that is €400. The liquidity balance increases with €400 and the stocks sold are subtracted from the portfolio.

The entire portfolio is liquidated at the end of the period contained in the test set. The performance is assessed in terms of outperformance of a buy and hold strategy and the ratio of mean daily return and standard deviation of the daily returns (Sharpe ratio).

Notice that the amount of stocks that are bought or sold whenever a local extreme has been identified is independent of the current liquidity balance and the current number of shares that are in the portfolio. That means that short selling is needed for an effective application of the algorithm.

The definition implies that a local minimum occurs at moment t if the index value at that point in time is both lower than the minimum of the index values in the previous d1 days and lower than the minimum of the index values in the following d2 days after day t. Generally, for lower values of d1 and d2, we will identify more local minima than for higher values of d1 and d2.

In this graph, the local minima have been marked with black boxes and the local maxima with red stars. We also show the separation between the development set (at the left of the vertical line) and the test set (at the right of the vertical line). What is interesting about this separation is that the vertical line is positioned in such a way that the big decline of the AEX index owing to the credit crisis is entirely in the test set. Our algorithm is trained on the development set and applied to the test set, a totally different regime.

The distance in days to the most recent local minimum (D_Min); if this distance is less than d, it is set to zero for reasons that we will explain below;

The distance in days to the most recent local maximum (D_Max); again, if this distance is less than d, it is set to zero for reasons that we will explain below.

The coefficients, t-values and probabilities of these t-values are summarised in Table 1 for the minimum model. We see that the influence of the GR and the number of successive downs have a significant influence on the probability of encountering a local minimum. The coefficient of the GR has the expected negative sign in the minimum model.

An in-sample validity check is carried out by defining a cutoff point for the probability. If the estimated probability is higher than this cutoff point, we conclude that the model has identified a minimum and the new variable, Model_Mint, is given the value 1, otherwise it equals 0. When comparing the minima identified by the minimum model with the real local minima (according to the definition above with d=3), the percentage correctly classified (PCC) equals 87.0 per cent, so

We see that our in-sample validity is at a sufficiently high level to provide confidence in the model. The PCC and the PMC are illustrated in Figure 2. Again, we use black boxes for the local minima. We see that, with the cutoff value equal to 0.1, we have identified all local minima. At the same time, we have some ‘false-positives’ in that we have high probabilities at a time t that is not a local minimum. Generally, a higher cutoff point generates fewer false-positives. However, a higher cutoff point may fail to identify a local minimum. Based on these considerations during the in-sample validation, we have chosen the cutoff point to be set at 0.1.

The minimum and maximum models have been estimated separately for the AEX index and the CAC40 index. In both cases we have only used the development set to obtain specifications for these models. Subsequently, we have applied the specifications obtained to the test set to predict the occurrence of a local minimum or a local maximum. For each day t in the development set, we have established the values of the independent variables: GR, number of successive ups (or downs for the minimum model), distance to last minimum and distance to last maximum. As we can only establish whether an observation is a local minimum or maximum with a time lag of 3 days (given the definition used above with d2=3), the values for these distances are either 0 or equal to or larger than 3. In this way, we only use information that is available at the start of day t.

As explained above, we use an initial liquidity balance equal to €1000. We invest €400 at a local minimum. At a local maximum, we sell €400 worth of stocks. At the end of the (development or test) period, the portfolio is liquidated and performance is determined. The algorithm"s parameters such as d1, d2, the cutoff value (0.10) and the tranche value (40 per cent of the initial liquidity is traded at each occurrence of an identified local minimum or maximum) have been established using the development set.

The overshooting model, or the exchange rate overshoot hypothesis, first developed by economist Rudi Dornbusch, is a theoretical explanation for high levels of exchange rate volatility. The key features of the model include the assumptions that goods" prices are sticky, or slow to change, in the short run, but the prices of currencies are flexible, that arbitrage in asset markets holds, via the uncovered interest parity equation, and that expectations of exchange rate changes are "consistent": that is, rational. The most important insight of the model is that adjustment lags in some parts of the economy can induce compensating volatility in others; specifically, when an exogenous variable changes, the short-term effect on the exchange rate can be greater than the long-run effect, so in the short term, the exchange rate overshoots its new equilibrium long-term value.

Dornbusch developed this model back when many economists held the view that ideal markets should reach equilibrium and stay there. Volatility in a market, from this perspective, could only be a consequence of imperfect or asymmetric information or adjustment obstacles in that market. Rejecting this view, Dornbusch argued that volatility is in fact a far more fundamental property than that.

According to the model, when a change in monetary policy occurs (e.g., an unanticipated permanent increase in the money supply), the market will adjust to a new equilibrium between prices and quantities. Initially, because of the "stickiness" of prices of goods, the new short run equilibrium level will first be achieved through shifts in financial market prices. Then, gradually, as prices of goods "unstick" and shift to the new equilibrium, the foreign exchange market continuously reprices, approaching its new long-term equilibrium level. Only after this process has run its course will a new long-run equilibrium be attained in the domestic money market, the currency exchange market, and the goods market.

As a result, the foreign exchange market will initially overreact to a monetary change, achieving a new short run equilibrium. Over time, goods prices will eventually respond, allowing the foreign exchange market to dissipate its overreaction, and the economy to reach the new long run equilibrium in all markets.

That is to say, the position of the Investment Saving (IS) curve is determined by the volume of injections into the flow of income and by the competitiveness of Home country output measured by the real exchange rate.

The first assumption is essentially saying that the IS curve (demand for goods) position is in some way dependent on the real effective exchange rate Q.

That is, [IS = C + I + G +Nx(Q)]. In this case, net exports is dependent on Q (as Q goes up, foreign countries" goods are relatively more expensive, and home countries" goods are cheaper, therefore there are higher net exports).

If financial markets can adjust instantaneously and investors are risk neutral, it can be said the uncovered interest rate parity (UIP) holds at all times. That is, the equation r = r* + Δse holds at all times (explanation of this formula is below).

It is clear, then, that an expected depreciation/appreciation offsets any current difference in the exchange rate. If r > r*, the exchange rate (domestic price of one unit of foreign currency) is expected to increase. That is, the domestic currency depreciates relative to the foreign currency.

In the short run, goods prices are "sticky". That is, aggregate supply is horizontal in the short run, though it is positively sloped in the long run.

comparing [9] & [10], it is clear that the only difference between them is the intercept (that is the slope of both is the same). This reveals that given a rise in money stock pushes up the long run values of both in equally proportional measures, the real exchange rate (q) must remain at the same value as it was before the market shock. Therefore, the properties of the model at the beginning are preserved in long run equilibrium, the original equilibrium was stable.

The rate of exchange is positive whenever the real exchange rate is above its equilibrium level, also it is moving towards the equilibrium level] - This yields the direction and movement of the exchange rate.

Both [11] & [12] together demonstrates that the exchange rate will be moving towards the long run equilibrium exchange rate, whilst being in a position that implies that it was initially overshot.

This demonstrated the overshooting and subsequent readjustment. In the graph on the top left, So is the initial long run equilibrium, S1 is the long run equilibrium after the injection of extra money and S2 is where the exchange rate initially jumps to (thus overshooting). When this overshoot takes place, it begins to move back to the new long run equilibrium S1.

A lot has been said recently about how the stock market is expensive, high valuations, too optimistic estimates, and so on. Most of the analysis focuses on valuations and earnings growth, and most people probably agree that earnings growth is the most important underlying driver for stock prices. But what if the real driving force behind EPS growth, multiples expansion and, consequently, the stock market is the immense money creation we have seen in recent years? This is not an original thesis to be clear, but apparently many people forget about it when discussing the market outlook. Analyzing the correlation between money and the stock market leads us to think that a 10% selloff in the SPDR S&P 500 (NYSEARCA:SPY) should occur to get things back to normal.

First, let us take a look at the correlation between the S&P 500 and the US monetary base. The first chart shows the data up to the end of 2009, capturing just the beginning of the massive increase in money supply that followed the financial crisis. The second chart shows the data from 2010 onwards.

In the first chart, the correlation between money supply and the stock market is only 0.47. But in the second chart, it jumps to incredible 0.93. The stock market started to move hand-in-hand with the money supply after the financial crisis. The massive liquidity not only contributed to inflated valuations, as investors chased yield and returns anywhere they could find it, but it also teased companies to raise money at rock-bottom interest rates to buy their own shares back. We discussed share buybacks in a previous article here, but its effect is also evident when we look at the discrepancy between net income growth and EPS growth as shown in the charts below for some of thelargest S&P 500 stocks (with some exceptions, as in the case of JNJ below).

There is no consensus, however, regarding cause and effect in this analysis. Some economists (e.g. Austrian) argue that money creation leads to stock prices appreciation, which makes more sense to me, while others (e.g. Keynesian) believethe opposite is true. There is an interesting articleherefrom the Mises Institute that discusses this. It is true that correlation does not necessarily mean much, but it seems quite reasonable that all the money creation of the past years have contributed to boost the stock market, and not the opposite. Let us look at the Fed balance sheet, in terms of total assets, compared to the monetary base and the S&P 500.

Looking at the chart above makes it clear that an expansion in the Fed balance sheet preceded both an expansion in the monetary base and an appreciation of the stock market. It also shows that the S&P 500"s post-election rally defied the recent trend of following the Fed and the monetary base. This is also evident when we see the trends in the S&P 500 and the monetary base over the last twelve months, when the correlation inverted to -0.44.

So, from a monetary perspective alone, the stock market does not have any reason to sustain the recent rally, and a correction towards the 2,125 level looks reasonable. This means that the SPY should fall around 10% (to around US$210) for things to get back to the recent normal. The rally was clearly based on optimistic assumptions regarding reforms and stimulus that are starting to prove themselves hard to materialize. Moreover, the potential negative impacts from some proposed policies (e.g. immigration and import tariffs) are probably not yet priced in.

An overshoot period riding on public enthusiasm and confidence is not the same as a bubble, or a mere short-term sugar rush. It"s when a bull market most acts and feels like one — though the gains it creates often don"t survive the next bear market, whenever that might come.

Stocks were probably in an overshoot for nearly three years from 1997 to early 2000, as the market doubled before collapsing back to early-1997 levels over two years. And the equity market never really got to this phase before the 2007 credit-bubble peak.

A decent characterization of an overshoot is when stocks accelerate upward from already-high levels, as public eagerness to chase equities pushes the market up faster than the fundamentals are improving, and investors extrapolate good economic trends well into the future.

We"ve certainly seen acceleration, with stocks up more than 4 percent in two weeks. As strong as 2017 was, it was an orderly climb taken in small steps. This year, the Dow industrials have had three 0.8 percent gains in the first nine trading sessions; it averaged fewer than one such gain per month last year.

"Panic buying is a difficult term to define. Panic selling is easier, because everyone can see the market imploding to the downside at a rapid pace," said Larry McMillan of McMillan Analysis. "When panic occurs on the upside, it is much tamer and less volatile. But what we"ve seen since the turn of the new year could certainly be qualified as panic buying."

Strategists at BAML have been calling for the peak of a crescendo of bullishness to arrive and say it"s close but not here yet: "Investors are unambiguously long and likely will stay so until rates go up and/or [earnings] go down. ... Peak positioning is on its way, but we expect asset prices to overshoot first," they told clients Friday.

Here are two ETFs, one tracking riskier and more cyclical "high-beta" stocks and the other defensive "low-volatility" names. Notice how high-beta lifted off versus low-vol last fall. This is helped by rising rates, stronger economic growth and aggressive risk appetites:

The "overshoot" dynamics are also evident in the way stocks have been rising faster than profit forecasts. Since the tax-cut law passed on Dec. 20, S&P 500 projected earnings growth for 2018 has climbed by 2 percent, atop already-healthy expectations of 11 percent gains, according to FactSet.

The S&P 500 itself has climbed 4 percent since Dec. 20 — doubling the penciled-in boost from lower taxes. This extends a trend of stocks getting richer even as earnings rebound:

Strategist Binky Chadha of Deutsche Bank, a staunch bull for some time, says, "After strong, uninterrupted rally, much is now priced in at the market level." He adds: "S&P 500 trailing multiple at 20.8x, are well above historical averages and in our reading also somewhat above levels implied by their historical drivers, partly reflecting immediate pricing in of future tax cut benefits."

Valuation is an atmospheric condition with big implications for future returns, but little influence on how the market acts for months or years at a time. For now, the demand for stocks even at rich prices is swamping supply.

The Ned Davis Research Crowd Sentiment Poll — a composite of several ways to track investor attitudes — hit an all-time high last week. A measure of upside momentum known as the relative strength index surged to heights seen only a few times since the 1990s.

All of this says the market is running quite hot at the moment and has stretched to a point where a rest would make sense and not much would be needed to prompt a quick air pocket.

But mostly these stats — combined with the broad strength among most stocks and solid credit conditions — tell us the market is in a sturdy uptrend and the first setback won"t likely be a serious, or lasting, downturn.

For a decisive market break, the economy would have to disappoint dramatically, the Fed would need to get more aggressive or credit markets would have to sour — and perhaps create one of those "financial accidents" that sometimes strike an overconfident and over-extended investment community and rudely interrupt a bull market"s overshoot phase.

His initial goal was to raise £1,000, but the overachieving nonagenarian overshotthings a little, finishing his 100 laps two weeks early on April 16, and raising, as of this writing, almost £19 million.

Noun Akatsuki spacecraft closed in on Venus seven years ago, its main engine failed and with no way of slowing down, the spacecraft overshotthe planet and barreled into orbit around the Sun.

In 1981, A Korean Air Lines Boeing 747 jetliner overshotthe runway while taking off from Manila’s international airport and skidded to a stop at the edge of a major highway.

These example sentences are selected automatically from various online news sources to reflect current usage of the word "overshot." Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

A downhole tool used in fishing operations to engage on the outside surface of a tube or tool. A grapple, or similar slip mechanism, on the overshot grips the fish, allowing application of tensile force and jarring action. If the fish cannot be removed, a release system within the overshot allows the overshot to be disengaged and retrieved.

This website is using a security service to protect itself from online attacks. The action you just performed triggered the security solution. There are several actions that could trigger this block including submitting a certain word or phrase, a SQL command or malformed data.

NEW YORK, July 8 (Reuters) - Investors at some of the largest U.S. asset managers are holding fast to the view that bond yields will move higher in the second half of this year, despite the recent slide in Treasury yields, which they see as a temporary move.

But big U.S. bond managers including BlackRock, PIMCO, DoubleLine and TCW still expect the reopening economy to drive growth and inflation, even if at a slower pace in the second half of this year, and send yields higher again. They see the broader move lower in yields since mid-May, and the accelerated move on Tuesday and Wednesday, as largely the result of investors" unwinding an overblown bet earlier in the year on higher rates.

"The view for a while there in February and March seemed very clear," said Gregory Whiteley, U.S. government securities portfolio manager at DoubleLine. "Everyone was getting on board, everyone was getting short, every strategist you heard from was calling for higher rates by the end of the year.

Some traders said the move this week was due to an unwind of bets by hedge funds. A weekly survey of JPMorgan clients on July 6 showed that net bearish bets against Treasuries fell to their lowest level since April. read more

"The recent rally hasn"t changed our fundamental outlook. This move for us looks more technical," said Bret Barker, Treasury portfolio manager at TCW, who sees the 10-year yield at 1.6%-2% by the end of the year.

"Right now the reflation trade is not dead, but it"s certainly hibernating," said Michael Sewell, portfolio manager at T. Rowe Price, who sees yields rising, though he believes the 10-year peaked for 2021 in March at 1.776%.

The spread between two- and 10-year yields - the most common measure of the yield curve – has narrowed by more than 50 basis points since hitting a six-year peak in March.

"All of that is telling you that the market is reaching this peak growth, peak inflation inflection point. And that really accelerated yesterday and today," said Browne.

Asset managers have been looking for ways to take advantage of the moves. BlackRock in its mid-year investment outlook presented Wednesday said it views current bond market valuations as "very full" and has turned more bearish on U.S. Treasuries.

"We"ve used that opportunity of falling yields to establish a shorter or a more underweight duration position," said Scott Thiel, chief fixed income strategist at BlackRock, during the presentation.

U.S. stocks continued a steep selloffon Thursday after disappointing earnings reports from Target and Walmart affirmed fears over inflation, which remains close to its highest level in 40 years.

In a recent interview with Yahoo Finance, hedge fund founder Josh Friedman acknowledged that Federal Reserve Chair Jerome Powell is currently doing a good job of trying to “wring out” this sky-high inflation.

Still, he suggested that the Fed may have stoked inflation with its responseto the pandemic. That response included slashing interest rates to near-zero and injecting liquidity into the market in 2020. The Fed did not begin to raise rates again until this March, a year after inflation began to creep up.

“I do think they overshot dramatically," said Friedman, co-founder of Canyon Partners hedge fund, whose comments came in the latest episode of Influencers with Andy Serwer.

The rhetoric changed because inflation was being recognized as more persistent than initially predicted, Friedman acknowledged. The shift also could have occurred “maybe because he was looking at a different set of variables when he was determining whether or not he"d be reappointed,” he said.

"Once you are reappointed, he has a little bit more liberty in how he acts and can be subject to more criticism and maybe be able to take it better,” said Friedman, who worked at Goldman Sachs and Drexel Burnham Lambert before founding Canyon Partners.

In terms of the timeline, Friedman is broadly correct that Powell hasn’t discussed inflation as a transitory phenomenon in recent months. However, the Fed Chair first retreated from the term during a press conference on Nov. 3, 2021, about three weeks before Biden announced his re-nomination.

“It means different things to different people,” Powell said at the time, adding he had always defined it to mean it would not leave behind permanent or persistently high inflation.

President Joe Biden looks on after announcing Jerome Powell as his nominee for Chair of the Board of Governors of the Federal Reserve System on November 22, 2021. (JIM WATSON/AFP via Getty Images)

William McChesney Martin, one of Powell’s predecessors, famously described the Federal Reserve as “in the position of a chaperone who has ordered the punch bowl removed just when the party is really warming up." That is to say, the Fed should raise interest rates before the economy begins to overheat.

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As explained well by Lance Roberts in Corporate Profits Are Worse Than You Think,  the S&P 500 stock index price (in blue) has now overshot corporate profits (orange) by the most since the late 1920s and the 2000 bubble top.

In typical late-cycle fashion, consumer confidence is high while corporate leaders are worried about falling revenues and focused on cost-cutting.  As shown below, the sentiment spread between CEO and consumer expectations is the widest today since the tech wreck top in 2000.

Part of the issue here is that realistic corporate executives know they have had one hell of a liquidity-driven-run over the past several years, and extremely favourable financial conditions never continue forever.

Would-be investors who believe or argue that share prices are rising because they or their asset managers are savvy and picking ‘good companies’ with ‘solid earnings’ are deluded and missing the plot here.