I always see investors poring over and fretting about economic data.
Like trying to read the tea leaves.
Sometimes, they even shell out big bucks to get all that data analyzed by some pointy-headed Wall Street high priest or academic. And some other times, they write to tell me to worry about the economy, too.
These folks, like so many other investors, are misunderstanding how the markets work, as well as the way economic and monetary policy works on those markets.
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Essentially, these investors are playing baseball. But instead of watching the ball fly out of the pitcher’s hand, they’re watching the fielders… and striking out.
Mighty hard to score hits that way…
Here’s How the Game Really Works
Not to belabor the baseball metaphor, but… the economy isn’t the hand that throws the ball. It’s just not the cause of market movements.
Monetary policy (the pitcher) impacts markets directly and first.
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At best, the economy is either secondary or tangential. At worst, which is to say, in the hands of Wall Street, it’s a deke to get you to take your eye off the ball.
But either way, it’s (almost) totally irrelevant.
Liquidity. Liquidity, liquidity, liquidity. That’s the pitcher, that’s what drives stock prices, bond prices, and (we’re not supposed to know this part) interest rates directly from the central banks to the markets, and not via the economy.
Here’s that secondary way the economy matters: The U.S. Federal Reserve makes policy primarily on the basis of economic data.
That fact is what’s going to drive this market over a cliff.
That’s why, at this stage, strong data, whether on economic activity or consumer price index (CPI), will reinforce the Fed’s decision in regards to tightening.
If we start seeing weaker numbers, then we can anticipate a policy change.
But for now, and for the foreseeable future, the Fed will be pulling money from the system.
Here’s What That Loud, Omnipresent Sucking Sound Means
And as we’ve seen time and again throughout the winter and into spring of 2018, the decline in the availability of money – the very lifeblood of the markets – means there will be less demand for all kinds of financial assets, including stocks, bonds, and short-term money market instruments, like T-bills.
More supply and less demand means that rates – the price of money – will rise, and all through a system of market mechanics, not because of any federal funds rate the central bank sets.
Anticipating policy change really isn’t necessary; market actors don’t discount the future very well, if at all.
The market responds to actual – not anticipated – changes in liquidity. We can usually wait for the policy announcement to be sure. The markets can’t sustain a reversal until the money is there.
In other words, money talks!
Where we can draw sketchy conclusions about the economy, the data continues to hint that those at the top of the income spectrum are still doing well enough to skew the top-line economic numbers positive.
Think about the implications of that… and know that will keep the Fed tight.
The economy may do well, but the stock market won’t. Part of the reason will be that rising market interest rates will attract money. Stocks will be sold to raise cash for that purpose.
But mark my words: Massive Treasury supply will put downward pressure on the prices of all financial assets, not just Treasuries.
Under quantitative easing, the Fed was funding all-new Treasury supply. Under quantitative tightening, the central bank is actually adding to supply at the same time as it is pulling money out of the banking system.
That’s as bearish as can be, and it’s the clearest possible signal for investors to get out and get to cash immediately – if not sooner.
“Trouble Is Brewing”: According to Bloomberg‘s latest report, America could be heading for an economic disaster that would rival the Great Recession. Billionaire Ray Dalio’s hedge fund, Bridgewater Associates, has made a $22 billion bet against the market. And Citibank calls our present situation “eerily reminiscent of the mortgage crisis.” To see why we believe some of the richest players in the world are preparing for a market collapse, click here.
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