(Editor’s note: This article was originally published on Real Money Pro Dec. 8 at 8:16 a.m. EST.)
-- George McFly: " Lorraine. My density has brought me to you."
-- Lorraine Baines: "What?"
-- George McFly: "Oh. What I meant to say was..."
-- Lorraine Baines: "Wait a minute. Don't I know you from somewhere?"
-- George McFly: "Yes. Yes. I'm George. George McFly. I'm your density. I mean, your destiny."
Perhaps we are going Back to the Future sooner than anyone thinks!
We can argue if the U.S. economy has reached self-sustaining growth and escape velocity. From my perch, while the jobs data are healthy, the manufacturing sector activity remains subpar. Capital spending, in particular, is moribund. Auto and home sales (and housing prices) have flatlined.
We can argue whether or not there is a disconnect between asset prices and the real economy.
But what we can't argue about is that the Fed has made a mockery of fundamentals.
Central bankers possess a powerful tool that can be described as a monetary monopoly, as they fix (or influence greatly) most interest rates with monetary policy. This money creation influences portfolio balancing. Typically, if a central bank prints money and increases the money supply, the yield on money declines and investors rebalance their portfolios as they seek higher-yielding investments. When investors move out of money and into non-monetary assets (like stocks or real estate), it generally tends to raise the price and lower the yield on those non-monetary assets. The rise in price and reduction in yield boosts wealth and lowers borrowing costs, which should in turn boost investor spending.