Things are Evolving…

We are now some six months into Making America Great. So far chaos has reigned in a number of areas, but trends on employment and interest rates have been steady. To a certain extent that is due to a steady hand by the FED on rates. As I mentioned yesterday the emphasis and buy in by Wall Street on the AI buildout helps push up tech stocks and companies involved in building the AI Data Centers. This effect on total employment is probably going to fade as time moves forward.

As such, the employment/interest rate equation appears to be close to a big change. The result will be a lower rate direction into the first quarter of 2026. I like to monitor the 2 year rate for directional inputs. Below is a chart using weekly data spanning a five year period, July 2021 pandemic lows through my projections into July 2026. I tend to work around work done by long-term economists that show for maybe the last 1000 years, a 3.5 percent rate is kind of the mid-level for the 2 year rate. (see Green Line on Chart)

During the five year span shown on this chart, the range of the 2 year rate has been 0.141 % to 5.259 %.

In September 2022 the FED pushed the 2-year rate up through the mentioned long-term 3.5 % rate and has maintained it above that established and recognized rate for economies doing well. My sense is that we are coming up to a period where the economy will not be doing well in spite of the AI obsession. Note the Red Line on the chart is for a rate of 4.88 % that has served as the topping rate during this period.

What this means is down the road another important level will come into play, the 2.43 % two year rate. This rate became what I call the flip / flop rate going back to the period leading into the pandemic. It became important in March 2019 and again in May 2022. In a sense this rate will be the strange attractor whenever the FED is forced to act. (see Blue Line on chart) By saying forced I am hoping that it is the economy, not the White House that will be doing the forcing.

What does this all mean to stocks.

The Russell / Nasdaq 100 ratio (RUT/NDX), for me, has been a good proxy for the health of the overall economy. The Russell has lost to the Nasdaq since 2006, starting before the 2008 crash, accelerating through the Bernanke funny money, and continuing through the Trump Chaos. It is ironic, but one of the things that Bannon and Trump talk about and seem to be correct about, is that the U.S. economy and resulting stock market has a low quality / funny money look to it. (See chart here.) So far, Trump policies have not changed this direction, but everyone is watching, especially the bears, to see if this ratio ever turns. In the meantime, the dominance of the tech stock / AI Buildout should continue to inflate the bubble.