The Federal Reserve's quantitative easing policy is simply a magical existence; it makes bear markets meaningless! The current market optimism is soaring, and the flow of capital has also changed dramatically.

Now, individual investors' confidence in the market is close to historical highs. 46% of American individual investors believe that the likelihood of a market crash in the next six months is less than 10%, which is the highest value since June 2006, and it has doubled in the past two years! This means that investors' concerns about the stock market have fallen to a 14-year low. Looking at the S&P 500 index, it has rebounded about 50% since hitting bottom in October 2022.

However, investors also feel that the current market valuation is a bit high, the most overvalued since the internet bubble burst in April 2000. But market sentiment is still extremely exuberant; isn't that crazy?

Even crazier is that, in the long run, optimists are usually right. The Federal Reserve broke the market operating mechanism about 16 years ago, and since then, we have never really recovered. I even feel that we will never fully recover.

There are two views on asset inflation: one believes that asset prices cannot keep rising indefinitely, and if quantitative easing causes this trend, the asset bubble will eventually burst. The other believes that as long as central banks are willing to lower interest rates and print more money when asset prices fall, the asset bubble will not burst. I tend to agree with the second viewpoint; I believe that as long as the dollar remains a legal tender, the U.S. economy will not experience a bear market lasting more than 18 months.

Current economic policies have entered a new normal. Central banks around the world have mastered the operation of quantitative easing, and the speed of interest rate cuts and money printing is remarkable. Just like when the pandemic broke out in 2020, the Federal Reserve urgently cut interest rates to 0% and created trillions of dollars in a short time. Although asset prices once collapsed, they rebounded to new highs a few months later.

This is the new normal now; asset prices seem to always be rising, and the optimism in the market is thick. For those who grew up before quantitative easing, this new situation may be confusing. But data tells us that we have entered a completely new economic system. As the book says, modern currency is no longer real physical money but rather numbers created out of thin air through electronic operations, ultimately distributed to a few primary dealers.

Quantitative easing is actually quite simple; it involves creating a large amount of new money and injecting it into the banking system to stimulate economic growth. The Federal Reserve has a powerful tool, which is a group of major financial dealers connected to New York, who are responsible for buying and selling assets. The Federal Reserve creates funds in their reserve accounts by purchasing assets from these dealers; this is the key way the Federal Reserve creates funds.

In simple terms, the Federal Reserve influences the market and stabilizes the economy by 'creating funds'. If the Federal Reserve starts printing money, asset prices will continue to rise. The question now is, what if the Federal Reserve stops printing money? The U.S. has become dependent on cheap and abundant funds, so it is almost impossible for a bear market lasting more than 18 months to occur. If asset prices drop significantly, the Federal Reserve will quickly intervene in the market.

The market is not completely controlled by the Federal Reserve, but the Federal Reserve will act according to changes in the market. The Federal Reserve, once led by Ben Bernanke, planned to conduct quantitative easing slowly and on a small scale, but ultimately had to meet market expectations due to concerns that a divergence between market expectations and actual actions would lead to a drop in asset prices.

So, the current market optimism is so important because the Federal Reserve is almost required by the market to intervene, pushing asset prices higher. Market participants expect that the Federal Reserve has to act. Now the market is truly the helmsman.

As an investor, you now face a choice: to believe that the market is crazy and a bear market lasting several years is imminent; or to recognize that the Federal Reserve has broken the stability of the financial market and will intervene through economic stimulus measures whenever any problems arise in the market?

I am an optimist and a historical observer. Looking back at the situation during the global financial crisis, you will understand that the rules of the market have long changed. The key to investing is not about 'timing' the market, but rather about the long-term holding of assets. Those who are bearish may sound smart, but those who are bullish are the real winners!

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