Weekly Bear: Backhoes Show The Fed Is Lying

The one chart you need to see this weekend is a chart of real business investment that shows that the more the Fed raises rates the more it encourages businesses to spend on plant and equipment. That’s exactly the opposite of what the Fed tells us. Rising rates are supposed to cool the economy. Instead, they cause it to heat up.

Real Business Investment

Increased business spending on plant and equipment may boost the economy for the short run, but if demand isn’t rising as well, the capital spending boom only leads to overcapacity and a subsequent bust. Furthermore, in an environment of falling liquidity, such a boom diverts funds away that from what’s needed to absorb the ever increasing supply of financial assets — stocks and bonds.

Breakthrough: This shape-shifting metal is a game-changer

Rising interest rates are likely to accompany the Fed’s draining of cash from the system under its promised program of balance sheet “normalization.” In the initial stages of a rate increase cycle, rising rates typically stimulate business investment. As businesses anticipate even higher rates to come, they increase their investment in the short run to beat expected future rate increases. Such an increase in real investment may steal funds away from the financial engineering games that corporate CEOs had been playing.

An enormous divergence opened between the path of stock prices and the trend of real investment starting in 2016. Real investment has remained well below the levels of both the housing bubble, and the earlier tech bubble in 2000. Bankers may have been confident in business expansion prospects, but the biggest customers of the banks apparently weren’t. They preferred to play the stock buyback game. The huge divergence between real business investment and stock prices over the past 2 years was another sign that stocks were in a mania that would end badly.

Predicted market drop (sooner than you thought)

Real business investment in plant and equipment reached a new April high for the current recovery. This year it also broke out of a range that it had been in since 2014. Here again we have evidence that rising interest rates are stimulative, which is exactly the opposite of what economists and the Fed tell us. The Fed is always behind the curve because as it raises rates it pushes the curve further ahead.

If you’re interested in the short side, you can look at our ideas here, or check out Shah Gilani’s put play research and recommendations in Zenith Trading Circle.

Have a very bearish weekend!


Lee Adler

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