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Real Business Investment, Interest Rates, Commercial and Industrial Loans, And Stock Prices

The Fed has long espoused that rising stock prices drive real business investment. As part of that, low interest rates are supposed to stimulate both investment in stocks, business credit, real business investment, and ultimately a growing economy that will benefit the greater good.

In essence, that’s the trickle down theory.

Liquidity moves markets!

Follow the money. Find the profits! 

Nice theory. In practice… not so much.

In the past 25 years we’ve only had three periods of falling interest rates. One was from 1995 through 1998. I don’t know if you can really call that a period of falling rates. The Fed Funds rate only went down from a little over 6% to 4.75%.

It’s virtually unthinkable today that rates could be that “high.” 4.75% was the bottom! Today, economists, the Fed, the Wall Street media, and the Trump regime are all terrified with the Fed Funds rate at 2.4%. That’s what happens when you build a monster that’s addicted to free money and a constant flow of new debt for its very survival.

Back during 1995-98 we had a booming economy, thanks to the beginnings of the internet revolution and a tech boom. Remember WWW? Real business investment boomed. Commercial and Industrial lending boomed. The stock market boomed. 4.75% was no problem.

Then the Fed decided to raise interest rates. The Fed Funds rate rose from 4.75% to 6.5% in 1999 and 2000. What happened? Real investment continued to boom! C&I lending boomed! The stock market boomed through Q1 2000! Rising rates stimulated!

Then from late 2000 until mid 2003, we had our second run of falling interest rates. The Fed Funds rate dropped from 6.5% all the way to 1%. What happened? Was that stimulative?

Nope. Commercial and Industrial lending collapsed. Stock prices plunged. Business investment collapsed.

It got so bad that the Fed took rates all the way to zero, and eventually started printing money so that securities dealers could buy stocks. That’s right, buy stocks. The financial war criminal Ben Bernanke, said it outright in his November 2010 Washington Post editorial justifying QE 2. The Fed’s money printing would stimulate higher stock prices, he said.

With that policy Bernanke burned millions of American seniors’ savings to death while he handed out cash to securities dealers so that they could buy stocks. Never mind the loss of consumption spending because seniors and other savers had no interest income.

When some observers complained, Bernanke smirked and said all monetary policies have winners and losers. He chose our parents and grandparents who worked hard and put money into risk free savings all their lives to be the losers. He chose bankers and speculators to be the winners.

But I digress.

ZIRP and QE– money printing directed at banks and leveraged speculators– worked. Stock prices soared, commercial and industrial lending boomed. Real business investment rallied.

But during the entire period of ZIRP and QE from 2009 until 2014 when the Fed ended QE, real investment on average never got back to the peak levels of 2006 and 2007. In fact, it barely exceeded 2007 levels.

Then, with ZIRP staying in effect, business investment actually began to contract in 2014. Suddenly ZIRP was no longer stimulating real business investment.

Meanwhile, curiously, Commercial and Industrial Lending continued to soar! And so did stock prices rising by more than 30% above the peak levels of 2000 and 2007. Do you think that there might have been a connection between that soaring business borrowing and the levitating stock prices?

Real Business Investment and Stock Prices

With the ending of QE in late 2014, stock prices began to stall out. Real business investment had already turned down. Rates were still near zero.

Stock prices stalled through 2015. The Fed raised the Fed Funds rate a tiny bit in late 2015, but rates were still near zero. Despite that, business lending dried up in 2016, election year.

Late in 2016, animal spirits returned with a vengeance. Investors sensed that a guy who loved debt financing might be good for the stock market. Stocks broke out. Real business investment began to rise again.

Commercial and industrial borrowing was muted through that year and 2017 however. The Fed had begun raising rates in earnest.

Then, right in the middle of that rising rate cycle, Commercial and Industrial Lending began to skyrocket again. But a funny thing happened. Real business investment stalled again. Business investment peaked just as the Commercial and Industrial lending business began to boom.

Where was all that money going? Along with the stall in business investment, the rising stock market balloon had hit some jagged edges, plunging in February 2018 before rising to new highs in the second half.

Business borrowing continued to surge. But the stock market had an even bigger swoon late in the year. By then, real business investment had been contracting for 3 quarters despite booming corporate finance.

Under pressure from the Trump Regime, which loves low interest debt financing for useless speculative development, Jerry Powell caved and ended the rate rise cycle.

So where are we now? Interest rates, at least superficially, are about to head down, according to those who should know. We have stock prices at an all time record level. Business borrowing appear to be starting to flatten out.

And real business investment remains in a slump. It’s not only well below last year’s level, it’s below the levels of 2006 and 2007. It is even below the 2008 level, when the Great Recession was beginning.

So let’s consider. Real business investment measured as of May is below the level of May 2008. In May of 2008 the S&P 500 was at 1500. Today it’s at 3000. Put that in your pipe and smoke it. The stock market has doubled since 2008. The US has 10% greater population than in 2008, but businesses are investing in plant and equipment at no more than the levels reached in 2008.

That’s scary. The last two bull markets in stocks were supported by constantly expanding real business investment. Today the bull market is supported by extremely volatile speculative gas — debt financing.

What’s even scarier is what history tells us about what happens when debt implodes and rates fall. Stock prices fall, and the commercial credit that contributed to the increase in stock prices and drove the booms in business investment, dries up.

So if you’re a bull, the last thing you want to see now with stocks unhinged and business investment weak, is the beginning of a Fed rate cut cycle.

Follow my regular updates of Commercial and Industrial Lending, Interest Rates, Real Business Investment and Stock Prices 7 times each month. Subscribe to read Lee Adler’s Liquidity Trader risk free for 90 days! Satisfaction guaranteed or your money back.

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish, and was lead analyst for Sure Money Investor. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both analytical and sales capacities. Prior to starting the Wall Street Examiner I worked as a commercial real estate appraiser in Florida for 15 years. I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. My perspective is not of the Ivory Tower. It is from having my boots on the ground and in the trenches of the industries that I analyze and write about today. 

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