Macro Optics: Shadow QE Has Been Going On For 2 Years

Most investors have had some caution over the past few years. Why? Rising interest rates. That’s because interest rates represent the cost of money. And those rates rose from near zero percent to their highest level in 15 years.

Consequently, the cost to borrow money has increased significantly. However, that’s just the headline news. Behind the scenes, the banking system has continued to create money. That has expanded the money supply.

As the money supply expands, asset prices generally rise. So even though interest rates have been rising, it’s the increased money supply that have kept markets high.

Rising bank credit indicates that the economy is likely to keep trending higher for now. That’s also a sign that the stock market can trend higher. Improving credit market conditions continue to lead the financial markets.

Signs of financial stress have been on the decline as well. That’s another sign that borrowers and lenders are sitting comfortably right now. But the current read of financial stress is at its lower bound, and could see a spike higher given the current low levels.

Meanwhile, central bank demand for gold continues to rise. As does demand for physical gold by major non-government banks. That could be a sign that markets are preparing for a rainy day now, even while conditions are calm.

To see the full analysis behind today’s market conditions, click here.