In some sense, I have buried the lead on this because right now, the bank crisis, which has already spread to Europe, is indeed the equivalent of a contractionary monetary policy shock to the US and global banking systems. By shrinking these reserves, this bank crisis effectively axis contractionary monetary policy. The money creation process occurs through the expansion of bank reserves via the Federal Reserve. And here’s another key economic principle I want you to master: The last dynamic I want to explain is what the bank crisis has done to the monetary policy war on inflation. The reality is that the stock market is likely in for another sustained bearish lay down over the next 3 to 6 and possibly twelve months simply because inflation is going to erode the real value of corporate earnings and, by the rule I explained above, investors are going to have an expectation of lower real earnings and therefore pull money out of equities. To put this all another way, anything that looks like a bullish stock market these days is a mirage. Second, the kind of seemingly bullish moves that we are witnessing now after the bank crisis has started are simply bear trap feints: They are the result of an expectation of massive amounts of additional money creation about the flow through the system. Rather, they reflect two kinds of movements.įirst, every time investors think that the Federal Reserve is going to ease up on its rate hikes, investors move a little bit of cash out of their bond portfolios and into their stock market portfolios as part of an asset allocation strategy and this drives stock prices up.īut these kinds of asset allocation transfers are not healthy bullish moves but rather the perverse outcome of an asset allocation strategy whereby money is simply moving between stocks and bonds. Instead, any perceived bullish moves upward are not really bullish at all. The problem in this particular stock market, however, is that this standard principle is not operative. On the other hand, if investors expect recession and slower growth in corporate earnings, it’s a bear market and stock prices will be falling. So, if investors expect robust economic growth and associated stronger earnings, these are the conditions for a bull market and stock prices will rise. In normal times, stock prices reflect an expectation of future stream of earnings. The current disease in the stock market can be summarized with this simple observation – and it’s the kind of thing that I teach in my macro course. Right now, we very much have a stock market and bond market trying to decide whether there is going to be recession and/or inflation – that is, stagflation – and whether the Federal Reserve, Congress, and the White House are going to adopt appropriate policies to combat these problems as well as the bank crisis which has been thrown on top of this.
Now let’s get to the market wrap, and it is not a particularly pretty picture. Just click on the link below but note that you will only have FOUR DAYS from today to take advantage of this offer. In fact, as a salute to Steve Bannon’s Warroom University, for the first 1000 students who enroll in the next four days, the course will be totally free. This course is now available on the outstanding Udemy online teaching platform but the best way for you to access the course is by going to my substack where you’ll be able to click a simple link and get a nice discount on the course as a substack subscriber or member of the Warroom Posse. My expertise in teaching has always been to keep things as simple as possible without dumbing them down, and that is what I have done in my course Strategic Macroeconomics for Businesses and Investing. By way of background, I taught applied macroeconomics to MBA students at the University of California-Irvine for the better part of 25 years and in the course of my career, I developed what is arguably the most sophisticated, but easy to understand, strategic macroeconomics course available on the market today.
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