- A record rebound…
- Time to stop focusing on interest rates?…
- Robert Kiyosaki’s latest book shows you the compounding power of weekly income…
Dear Reader,
“We are witnessing history.”
This we learn from the Kobeissi Letter. From which:
- On Friday, the S&P 500 closed at an all-time high for the first time since February, marking a +24% rebound from its April low.
- It took 89 trading days to recover between record highs, the fastest rebound following a -15% drop in history.
- This breaks the previous record of 90 trading days set in 1998…
- We are witnessing history.
I find it increasingly difficult to maintain pace with history.
Just last week the United States bombarded Iran’s nuclear installations.
We were told we were witnessing history.
And here we are once again witnessing history.
Some Humble Advice for History
I do not know what history has planned next. I request merely that she pauses some to think things through… to plan with prudence.
I would advise her that movement is not necessarily progress. And that faster is not always better.
Yet I let it go. Let us take to our bosum the stock market history we presently witness.
Why has the stock market just registered record heights?
Is it because Israel and Iran have ceased battening each other upon the head? Is it due to peaceful trade developments?
I hazard both factors added their contribution. Yet I also hazard they provide inadequate answers.
The Deeper Currents Driving Markets
We must glance beneath the swirling surface of events… and observe the deeper currents that hold things together in coherent patterns.
I have noted recently that the money supply runs to record heights. It has expanded eight of the past 12 months.
I noted further that the stock market marches largely in step with money supply.
Thus we must consider the expanding money supply a driving current. It is operating inexorably yet silently beneath the turbulent surface.
Meantime, interest rates are not superficially… accommodative.
The president is not one whit pleased about it. And he has denounced Jerome “Too Late” Powell for his intransigence.
Yet as I have also noted recently: The real interest rate — that is, the inflation-adjusted interest rate — hovers beneath 1%.
Another helping current!
Next we come to overall financial conditions.
Looser Than a Prostitute
ChatGPT informs us that:
- Financial conditions refer to the overall state of financial markets and the ease with which money and credit flow through the economy. They are a combination of various factors that influence borrowing costs, asset prices, and overall economic activity.
Financial conditions are presently looser than nominal interest rates may indicate.
Are they looser than a prostitute?
Reports The Real Economy blog:
- The RSM US Financial Conditions Index turned positive six weeks ago…
- The rebound in equity markets… suggests that investors since May have simply shrugged off the imposition of tariffs, and it is as if the 12-day war in the Middle East, which included American involvement, never really happened…
- This latest increase in financial conditions is a product of reduced levels of volatility in both the equity and bond markets, and a money market able to work around the upcoming debt ceiling debate. All of this has put overall financial conditions at 0.25 standard deviations above zero, which signifies normal levels of risk and returns.
- And so the deep, forceful current of financial conditions pushes the stock market along.
Are We Focused on the Wrong Metrics?
Let us now alternate themes… to the sportly variety.
Assume the American sport of baseball. In recent years advanced statistical analysis has deemphasized traditional performance metrics such as batting average.
On-base-percentage, on-base-plus-slugging and similar esoterica have risen above them.
Now translate the sportly analogy to markets. Here is a question:
Do we focus antiquely on traditional batting average — on interest rates?
And should we instead turn our attention to the more advanced metric of financial conditions?
The Centre for Economic Policy Research is a European outfit professing to foster “high quality, policy-relevant economic research.”
It argues against the traditional batting average of interest rates… and for the modern emphasis upon on-base-percentage.
We’ve Been Focusing on the Wrong Indicator
Beneath the title, “Financial Conditions Matter More Than Interest Rates: A New Framework for Monetary Policy,” this bunch writes:
We’ve been looking at the wrong indicator.
Thus the Centre for Economic Policy Research concedes — regretfully — that it has wrongfully centered its attention upon misleading batting average.
More from the same organization:
- In practice, monetary policy works through financial conditions: when the Fed changes the policy rate, it induces changes in corporate borrowing rates, stock prices, mortgage rates, house prices, the dollar, and so on. Households and firms react to these changes in financial conditions rather than the policy rate itself…
- While policy rates and financial conditions are often correlated, this relationship has broken down recently. The dramatic stock-market rally of the last two years (with prices up more than 50%) and the associated decline in credit spreads have helped loosen financial conditions despite relatively high rates and a strong dollar…
- This financial markets perspective generates new challenges for monetary policy.
Forget About the Damn Policy Rate
I am confident — supremely — that the on-base-percentage theory of markets outdoes the batting-average theory of markets.
The Centre for Economic Policy Research, in conclusion:
- The immediate takeaway is simple: policy discussions should focus on financial conditions rather than the policy rate.
Yet mainstream analysis centers nearly exclusively upon the policy rate.
That policy rate is likely the false rate.
Let us consider instead the real rate.
Let us consider history.
Brian Maher
for Freedom Financial News
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