The Capital Market Is The Negligible Mass In A Three-Body Problem
The Capital Market is the equivalent of a planetoid in a restricted three-body problem whereby the movements of a body of negligible mass (the Capital Market) is influenced by two, extremely large bodies (Fiscal and Monetary Policy in our analogy).
The force that the Capital Market exerts on Fiscal and Monetary policy is negligible. However, when the Federal Government (Fiscal Policy) decided to mail $2+ trillion to Americans, this massive liquidity injection (made possible by the Fed’s monetization), of course greatly influenced the Capital Market. For example, the NASDAQ Composite is up 118% off of the Covid trough on March 20th 2020. That increase is largely due to excess liquidity injected into the economy by Fiscal and Monetary policy.
Similarly, when the Fed decided to buy equities (technically against the Fed’s charter) in 2020, when it purchased $90 billion of Treasuries per month and $120 billion per month including MBS’, when it took the Fed Funds rate to zero, when it offered various non-recourse loans in 2020, when it offered the BTFP bailout to banks - all of these actions significantly influenced the Capital Market by flooding it with excess capital and low interest rates, thereby devaluing the Dollar and inflating asset prices.
As is the case with a three-body problem, when these game-changing policies are executed, chaos results:
Asset values become inflated;
Debt spikes;
The Money Supply spikes;
Speculation runs rampant;
Fraud spikes;
Fiat currency is devalued;
Moral hazard spreads like a virus;
Inflation spikes and persists.
The resulting chaos makes it very difficult to predict the daily, weekly and monthly direction of the Capital Market.
The Capital Market has become deeply subordinate to Fiscal and Monetary Policy. Its movements are largely determined by the central planners in Washington D.C.
