A Normal Market
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In the normal world of capital flows, bonds decline when stocks rise. The talking heads that claim lower interest rates are bullish for stocks once again try to reduce everything to a single cause and effect that applies to a single frame in a long movie. Here we can see that bonds declined when stocks rallied into 1929 as interest rates ROSE not declined!!!!!!! The explanations that the Dow is rising because of Fed Monetization and the bonds are rising because of a mismatch in quality, sorry, but that just does not cut it. It is capital inflows into the dollar both bonds and stocks as the dollar is being thrust into the single world currency thanks to the brain-dead decisions of Europe.
The capital inflows to the US were creating a cash shortage in Europe during the 1920s. The Fed in 1927 tried to lower rates to deflect capital inflows back to Europe. This led to hindsight blame being hurled at the Fed claiming the lowering of rates created the Bubble. FALSE!!!! The attempted manipulation of the capital flows CONFIRMED there was a problem in Europe, which eventually manifested in the wholesale defaults in 1931 where even Britain was forced into a moratorium on debt payments.
The capital flows were pouring into the USA for World War I and then invested in the USA helping to create the Bubble in 1929 precisely what we saw in Japan for 1989. At Princeton Economics, we invented capital flow analysis. Simply put – follow the money!
The whole idea of raising and lowering interest rates is again domestic myopic attempts to manipulate the markets. It never works. It is more than a single one dimensional relationship. It also includes the currency. If the currency is rising with stocks, you get international capital inflows for it will be profitable for the foreign investors. If the stocks are rising and the currency is falling, that is purely a domestic movement absent international capital inflows as the stocks will rise in proportion to the fall in the currency. We just saw this in the Nikkei in Japan – yen down stocks up.
