Since the last CoTD, Bloomberg’s US financial conditions index has eased to fresh14-plus year highs. This index looks at money markets, various credit spreads and equity markets. However Bloomberg also compiles a financial conditions “plus” index where they include indicators of asset-price bubbles incorporating tech shares, housing markets and additional yield deviations from the mean. This “plus” index has really exploded higher over the last few weeks to comfortably be at record highs. When we add in combined fiscal deficits and Fed balance sheet expansion as a % of GDP one can easily see why financial conditions are so loose and bubbles have appeared in various places over the last few months. Will policymakers regret such extreme stimulus in the quarters ahead? Much will depend on whether inflation comes roaring back as a result of the trends seen in the graph.
My take is a bit different. If the stimulus is so extreme right now then which is the only way it can go from here? Down.
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David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
