Is the Emperor Really Clothed? The Facts Are Pretty Skimpy…

Working on a Ukraine rant, but noting a few “Fed” source pieces here from people more qualified than I am.  They also keep looking in vain for fact-based evidence to support the dominant Fed/markets/inflation/liquidity narrative.

They don’t replace that simple, “one-factor trade” narrative with anything but complexity and nuance.  But that’s kind’ve the point, no?  Maybe this is why faith in the Fed is so resistant to facts?  People like simple stories with no loose ends…

stories about “recombobulation” — the fading away of pandemic-era distortions — driving disinflation are clearly supported by the data. Claims that Fed tightening drove it are sketchier and much more speculative.

Another claim I’ve been seeing is that inflation would be much worse right now if the Fed hadn’t raised rates. This might well be true, but it’s also something of an evasion — it’s offering a counterfactual rather than answering the question of how we’ve achieved disinflation so far.”

A simple linear regression exercise tells us ‘’liquidity’’ is pretty bad at predicting stock market returns: as shown by the R2 data, in the last 15 years US liquidity only explained 3-4% (!) of the variation of SPX returns.

So, yes: both series trended up over time and plotting them on a dual-axis chart looks great but stocks go up over time because earnings grow and not because Central Banks pump ”money” in the ”system”.

Money in this case means bank reserves, and banks can’t and won’t use reserves to buy stocks – the direct relationship and simple narrative suggested by mainstream macro commentators…

…simply doesn’t exist.

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