The argument of monetarists (and thus the vast majority of all market participants and academia) is that due to a rising money supply, inflation must rise and this inflation can only be combated with rising interest rates, or market participants will only borrow money if they are sufficiently compensated against inflation. What we are seeing played out is the expected rise in prices (1), however contrary to the expected consequential rise in rates, the Fed has announced that they are committed to maintaining low interest rates for as long as necessary to support the economy (2).
The massive amounts of available capital coupled with an economy lacking sufficient profitability has created an upper bound on interest rates, which cannot be raised as the economy simply could not afford it (3).
Given the reassurance that rates cannot currently rise over a certain threshold coupled with price inflation, investors are presented with a unique opportunity in all “real” production (such as commodities, real economy, precious metals, etc.), as these industries can profit from both cheap financing and increasing prices. In contrast, investments which merely bubbled up will likely have a harder time. The price increase of nonprofitable stocks has been very strong since March 2020 (4), however, over the past month, the trend reversed and we now see flows more toward yielding assets (5), as the effect of fading central bank support in Chinese markets illuminates the true value of valueless stocks (6). Considering investors can make real money with safer investments, one questions why they would opt for riskier assets, which only serve to weaken economic cycles (7).
References
Philly Fed Explodes To Highest Since Interest Rates Were 14%
Cornered: Powell Can’t Raise Rates As Economy Remains On Life-Support
Non-Profitable Companies Implode Amid Flashbacks Of The Dot Com Crash
Chinese Stocks Tumble To 2021 Low, Hong Kong Enters Correction As Central Bank Support Fades