Mohacsy's Safe Portfolio Member Forum

[santafe2]

I should have figured this out when I first observed it a couple of days ago, but the sharp drop in interest rates over the last couple of days is likely tied to the contraction in the money supply over the last month or so. A contraction in M2 simply means that no matter how cheap money is, people don't want to borrow it as much is they did before. Since there is virtually no new savings in the US to be used - borrowing is how we like to grow our economy.

I suspect, although one could not likely prove it, that the Fed is busy making sure the economy doesn't move into recession before the election. This means that intrest rates cannot start to rise, nor can money supply begin to shrink until summer. That should give the economy the six months it needs to begin to feel the pain. The stock market on the other hand may not be so kind as it tends to be a leading indicator of what's on the economic horizon.

If this scenario plays out it should provide some interesting views into inflation management and how the Fed will explain away some obvious signs of inflation for another 8 months. Also, a renewed disconnect between interest rates and the markets, will provide a good indication when the economy will next turn down.