Smart Macro: Lags, Liquidity, and LEIs

June 23, 2023 – In today's Smart Macro segment of the Financial Sense Newshour, Chris Puplava, CIO of Financial Sense Wealth Management, discusses the growing divergence between the stock market and leading economic indicators, the lagged impacts from Federal Reserve rate hikes, and how global liquidity has now turned negative.

lei spx divergence
Source: Bloomberg, Financial Sense Wealth Management. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

He highlights that last year's market reaction resulted primarily from increasing interest rates, bringing valuations back to normal levels. Puplava suggests that the market has not yet experienced its economic decline, which he predicts will be marked by a collapse in corporate profit margins and overall revenue.

Rising interest rates' impact on loans and other financial commitments, particularly those previously manageable due to lower interest rates, could significantly hit the economy. Puplava emphasizes that the effects of such monetary policy changes usually take a year or two to materialize fully.

The higher interest rates also impact financing consumption, affecting consumer, commercial, and corporate loans. Puplava warns that the effects of the Federal Reserve's rate hikes, which began about a year ago, will soon be felt and may continue into 2024. He adds that for there to be no recession, one would have to argue that the impact of monetary policy has already been fully discounted by the stock market, a viewpoint he finds unlikely.

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Despite the Fed pausing its rate hikes, Puplava notes that it is still shrinking its balance sheet through quantitative tightening, and most Fed governors are inclined towards more hikes. The combination of this tightening and a lack of substantial fiscal stimulus suggest the economy may be decelerating or entering a recessionary phase.

Despite the Fed's "higher for longer" stance on interest rates, Wall Street's focus on AI and ignorance of high borrowing costs might bring about the deflationary impact the Fed desires. Puplava indicates that current market support is temporary, creating a false positive economic outlook, and warns of an incoming economic storm.

Notably, Puplava points to the slowdown in global money supply growth, which hasn't been reflected in the market, hinting at a significant shift. He expresses concern over the Federal Reserve's continued policy tightening and a decrease in the money availability, banks tightening their lending practices, and a consistent fall in leading economic indicators.

spx global money supply
Source: Bloomberg, Financial Sense Wealth Management. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Consumer spending and the fiscal stimulus have temporarily kept the economy afloat, but the end of supports like the Inflation Reduction Act and the student debt payments moratorium could hurt consumption.

Lastly, Puplava mentions that the current bullish market sentiment, along with major institutional players being almost fully invested, limits further upside. In summary, he suggests these factors, combined with the removal of market supports, decrease the likelihood of the market maintaining its upward trajectory.

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Advisory services offered through Financial Sense® Advisors, Inc., a registered investment adviser. Securities offered through Financial Sense® Securities, Inc., Member FINRA/SIPC. DBA Financial Sense® Wealth Management.

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