Markets Stop Panicking When Central Banks Start Panicking
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First, an update:
Last year, we at Consilience Asset Management added a Macro-Economic component to our Relative Capital Flow Model*. Using market action, through a process of reverse engineering, we seek to identify which macro-economic climate is being represented in the market at any given time.
This is an important addition to our discipline as central banks across the globe are attempting to unwind decades of monetary expansion. As this unwinding occurs, it could have significant ramifications for the financial market. Thus, there is an increased need to monitor this process and the corresponding macro-economic result.
Below are the ratings of securities in the five scenarios that we are monitoring:
Inflation – Neutral,
Deflation – Negative,
Stagflation – Neutral,
Recovery – Positive,
Financial Crisis – Negative.
The above scenarios reflect the current Capital Flow* composite rating of the securities that have historically generated positive returns in the above economic environments.
In addition, our Global Macro Indicators* are as follows for the seven asset classes we invest in for our clients:
Global Equities – Neutral,
Global Bonds – Neutral,
Commodities – Positive,
Gold – Positive,
U.S. Dollar – Neutral,
Real Estate – Neutral,
Cryptocurrencies – Neutral.
Now, to this month’s report:
Are we there?
First Europe, then the US and finally China, are all panicking slashing rates and easing across the board, in hopes of avoiding, or reversing, the inevitable.
Central banks are cutting rates and announcing stimulus (money printing) at the fastest pace since the covid crash in March 2020.
According to BoA Research, China’s announcement last week equals a stimulus package equal to 3% of their GDP or $560 Billion.
But aren’t these efforts, globally to push down long-term interest rates and increase monetary stimulus in direct conflict with what they have been trying to accomplish since they began hiking its policy rates? Yes, but…
In the short run, this is likely a net positive for stocks. This will reduce mortgage rates, encourage corporate leverage, and loosen financial conditions. But… this comes on top of the vast deficit spending, which also adds inflationary fuel to the economy.
Then what?
The good news: A recession will likely be avoided.
The bad news: The expected return to 2% inflation will likely prove to be an illusion. Cutting rates is the easy part. The problem is what happens when you have cut rates a few times and suddenly inflation is roaring back with a vengeance.
Just as stocks, home prices, rents and food are at all-time highs... money growth has recently been in a period of relative calm.
But based on the actions of global central banks, money supply is once again positive and if history is any guide, it’s about to surge!…
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