Contrary to popular ways of understanding, the stock market doesn't have causative powers so far as economic activity is concerned. The prices of stocks only reflect individuals' assessments regarding the facts of reality. As a result of central bank monetary pumping, these assessments tend to be erroneous. But once the money rate of growth starts to fall, individuals can see much more clearly what the actual facts of reality are and can scale down previously distorted evaluations.
While individuals can change their evaluations of the facts, they cannot alter the actual facts themselves--i.e., the facts that influence the future course of events. Our analysis continues to indicate that the pace of economic activity is likely to decelerate sharply by the year's end--if not earlier.
Also, a flattening in the yield curve points to a likely softening in economic activity in the months ahead. As a rule, loose monetary policy gives rise to overinvestment in the production of capital goods relative to the production of consumer goods, and as we have shown, the ratio of capital goods to consumer goods still remains at lofty levels. This, in turn, precludes any meaningful economic recovery soon.
There is a high likelihood that the real pool of savings--the driving force of the economy--is in trouble. Without an adequate buildup in the real pool of savings, no sustainable economic recovery is possible. In short, if real savings are in trouble, then regardless of what the Fed does, economic activity will decline.
