Blog | CB Investment Management

Flawed Flows Financing Fundamental Fantasies.

Gold in Yen terms is up a multiple of 14x over the last two decades.

The Yen is challenging Keynesian/MMT policy complacency. Which currency will be next?

Long term investors need to urgently reconcile underlying economic conditions with US equity valuations. The gap is extreme and widening but unsustainable.


Policy returned to stimulus with a reacceleration since the March 2023 banking crisis. However, the economy continues to fail to deliver on either growth or inflation objectives, and the banking crisis is far from resolved. Unproductive spending and excessive liquidity are creating record market value distortions. This encourages misallocation of capital and excessive speculation which may further damage the economy, in addition to deepening stagflation.

This is not a good time for financial conditions to tighten as they have begun to do.

At the same time, the Japanese Yen has broken below recent intervention support levels signaling the profound consequences of Keynesian/MMT policies taken too far. This is now a global problem.

While flawed flows continue to force US equities higher, the economically weighted ISM economic barometer is declining again and hitting new 4-year lows, with a widening record gap to S&P 500 performance.

Now the economy is clearly weakening again, notably in real estate, the labor market, retail sales, and broadly signaled by the economic surprise index, the ISM and Leading Economic indicators.

The Bank Crisis is not resolved

Policy “Stimulus” went into overdrive with the bank crisis of March 2023. Yet The number of banks on the FDIC Problem Bank List, those with a CAMELS composite rating of “4” or “5,” increased from 52 in fourth quarter 2023 to 63 in first quarter 2024.

Bank lending has collapsed since March 2023. Such sharp declines have usually ended in recessions.

Extreme policy measures still failing on inflation

Relentlessly, policy has continued to recklessly exceed prior norms. Reckless because with the sole exception of interest rates, every measure of policy stance has remained excessive by historical norms, as discussed previously in these notes.

Interest rates have remained unchanged as inflation has failed to trend sufficiently to the Fed’s 2% target to credibly cut rates. Even so the Fed has clearly indicated it is biased in favor of rate cuts. This demonstrates complacency on top of a failed record on inflation.

Private sector growth remains weak

Despite record policy stimulus Leading economic indicators (LEI) have been falling for a record period, which in the past has ALWAYS coincided with a recession. LEI is down 14.7%. In the last 65 years, such a drop only happened during recessions.

Retail sales are reported in nominal terms. Notice that in real terms, which is what matters, they have been declining in real terms

 Job openings are rapidly declining

Just as the consumer has run out of excess savings and is holding record levels of debt.

Now the real estate market is suddenly showing problems

Policy continues to deliver record market pricing distortions

The Mag 7 stocks outperformed the S&P 493 by $3 Trillion in market cap in Q2 2024.

 Q2 2024 S&P 500 Performance Split

Big market capitalization companies benefit disproportionately from economic policy, and they benefit most from excessive government spending, can handle excessive and unproductive regulation better, can strengthen their balance sheet better through issuing bonds, and can operate big buyback operations to further support prices.

Furthermore, passive investing has become excessive and continuing flows are accentuating the trends in favor of big capitalization stocks.

In addition, the constant support for the markets and excessive liquidity have fostered a speculation mania, which is evident in the explosion of options trading and the return of “meme” stock trading.

Many of these issues were covered in detail in our recent notes.

The chart below shows that the Russell 2000 is facing the worst 5 years in history relative to the S&P 500 and it is accelerating!

SPX top stocks: 37% of the index, 27% of earnings

The chart below shows that the big stocks overrepresent their earnings contribution to the index by over 25%! This could only make sense if the big caps systematically and persistently outgrow small caps. That has never happened in a free market economy.

Economists Eugene Fama and Kenneth French provide a quality data set to show this. They have proved that since 1927, U.S. small caps have outperformed large caps by roughly two percentage points on an annualized basis.

This serves to demonstrate that markets today reflect financial flows. Economic value is no longer the driving factor. That will change.

US stock market economic value has been left for dead

In the chart below, the green line is the current level that would historically be associated with 10% subsequent average annual nominal S&P 500 total returns. The green line is over 60% below current levels. The yellow bubbles set up long journeys to nowhere. Passive investors take note.

Without a near term rate cut on the back of falling inflation, financial conditions rising could add to downside economic impact at a difficult time.

The signal from Japan should not be ignored

Developed economies are running into problems with excessive Keynesian, or MMT, economic policies. Japan can’t seem to resolve it’s debt/currency trap. Europe persists with chronic long-term growth and rising fiscal deficits and the US has similar problems. Confidence in economic policy globally will become a growing issue.

Current trends represent a warning.

Gold is already 14x in Japanese Yen terms since 1999.


Japan has gone further for longer down the Keynesian/MMT policy road. The collapse of the yen shows enduring instability.Investors will start to look at other currencies differently. Developed economies are on the same track.

Policy makers in the G10 should think again about the urgency of getting off the Keynesian train to currency crisis. This would require a courageous near-term major reversal of policy so don’t hold your breath.

Long term investors need to urgently reconcile underlying economic conditions with US equity valuations. The gap is extreme and widening but unsustainable.

Best Practice is a matter of your Best Interest.

Education and a Commitment to Informed Consent is an Obligation.

Chris Belchamber is an IRMAA Certified Planner

Medicare’s IRMAA impacts every retirement plan. Learning how to mitigate it is available via IRMAA Certified Planners designation.

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