The market is telling us that the cost of money doesn’t matter.
It doesn’t matter that the Federal Reserve is raising interest rates, the United States economy, company earnings and consumer spending will keep growing.
It doesn’t matter that the real cost of money – the US 10-year real interest rate, which adjusts for inflation – is nearly three-times the long-term average, that new Fed chairman Kevin Warsh has made it very clear he’s worried about inflation, that the Strait of Hormuz still isn’t sorted, that inflation hasn’t been in range for five years and the market’s pricing in a few more rate rises in the coming year, that the US 10-year Treasury yield surged through the important 5 per cent barrier last week as the bond sell-off got very real – the party is still going.
Which is nuts. Each of those alone is scary, and when you add them together, you get a big bucket of risks. Yet equities on Wall Street keep drifting higher and even the ASX was having a good day on Monday, up 0.4 per cent in lunchtime trade. Credit spreads are also flat, which says credit markets are similarly unbothered.
What’s going on? It’s the great artificial intelligence party – the one that keeps breaking all the rules is apparently going to keep breaking all the rules until there are none left to be broken.