Michel Pireu Columnist

From Bridgewater Daily Observations: What  is Classic? In the "late-cycle" phase of the short-term debt/business cycle, when a) an economy’s demand is increasing at a rate faster than the capacity for it to produce is increasing; and b) the capacity to produce is near its limits, prices of those items that are constrained (like workers and constrained capital goods) go up. At that time, profits also rise for those who own the capacities to produce those items that are in short supply. Then the acceleration of demand into capacity constraints and rise in prices and profits causes interest rates to rise and central banks to tighten monetary policy, which causes stock and other asset prices to fall because all assets are priced as the present value of their future cash flows and interest rates are the discount rate used to calculate present values. That is why it is not unusual to see strong economies accompanied by falling stock and other asset prices, which is curious to people who w...

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