I want to explain the markets in really simple language, since there are some very basic problems in the largest securities market in the world and the projections associated with what is going on.
Fed chair Janet Yellen is in a tough spot. Yellen & Co. wants to raise rates but the rate of inflation is not growing. The Fed’s tools for the economy are to control inflation from getting too high, by raising rates.
Late last week Yellen gave the markets all they need to know by intimating that a pause in rate rises is on the table after seeing prices stagnating and retail prices are falling fast.
On Monday morning the 30-year US bond is 2.9% yield and the 2-year US paper is 1.35%. The difference between the two rates is too tight for the 28 years of duration. That is called flattening of the yield curve. Bank stocks hate tightening since that squeezes the profits on loans.
When there is little inflation — like now — raising rates can cause deflation. Deflation or stagflation (a less sever form of deflation) is when prices fall because too few dollars chasing goods.
The Fed was said to be raising rates quicker recently in order to have the ability to lower rates later in the event of economic slowdown like a deflationary hiccup.
So what does the stock market see? A celebration.
As I have often said here, capital goes where it is treated best. So look for stock indices to set all-time highs on just about a daily basis, since little cash will go into debt with the diminished returns.
Another factor in the summer stock surge is equities are buoyed by low inflation. Shares always move higher in a low-inflation environment. So we have a perfect storm in the markets.