The Fed, Naive Intervention, And Iatrogenics

There's a term I came across this week perfectly capturing what the Fed's antics will lead to:


Defintion: Unintended, harmful side-effects from naive intervention.

Example: People storming the US Capitol.

Iatrogenic is often used as a medical term. I'm here to raise awareness from a financial perspective.

Naive Intervention:

The economy is a complex system with too many moving parts. The randomness of markets can't (and shouldn't) be regulated at current levels.

Like an immune system going through a fever, an economy is best left to fix itself. It's a much longer (and harsher) process, but it'll come out stronger as a result. Intervention will just lead to fragility.

It's more likely to break after suffering a collapse.

I've talked about the Fed's plan for "market efficiency" in previous newsletters.

The naive intervention will eventually lead to harmful unintended side-effects. Iatrogenics:

"We have stumbled into very unhealthy codependences; codependences between central banks and investors, between central banks and debt issuers which are governments and companies, and between central banks and politicians. They are all in this unhealthy codependency. It’s like a bad marriage: They’ve ended up relying on each other, and they just don’t know how to get out of it. Every time the central banks have tried to get out of it, the markets were at risk of becoming disorderly."
--Mohamed El-Erian

The toxic relationships between politicians, central banks, stock markets, and the economy aren't sustainable. We don't know when (or if) we'll see any harm. But we should be wary of how fragile things are currently.

Here's my main man Sven's take on it:

For now, I've just been saving. Bull markets cause me to lose interest, so I leave my portfolio alone to grow. Intervening my positions would just lead to iatrogenics.