Dont Take Your Eyes off of the Ball, Inc. (NASDAQ:AMZN)

As, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX), and Alphabet Inc (NASDAQ:GOOGL) hit all time highs, make sure you don't take your eyes off the ball and maintain a concrete understanding of current economic conditions.

What kind of economy is this, what will happen when interest rates start to increase, how will those increases take place, and where should my money be?  All of these questions and more are pressuring investors in today's market environment, but mainly because they have been used to a different type of economic environment and that type of economic environment no longer exists.

I'm specifically referring to stimulus policies and infusions of capital into the economic system that would not be there otherwise.  These capital infusions fabricated growth, which arguably was desperately needed when the policies began.  The infusions of capital encouraged activity in the financial sector specifically, the bond market, and that trickled into the stock market and housing.

Economic conditions that accompanied the stimulus policies of the FOMC were warm and fuzzy, but those conditions don't exist anymore, certainly not in the same way, and in my opinion we run the risk of experiencing a 180 degree reversal.  Instead of warm and fuzzy, it could be dark and dreary.

I premise my opinion on my macroeconomic work, which is called the investment rate.  The investment rate told us back in 2002 that 2007 would mark a longer term peak in economic activity and that natural demand cycles for investments in the US economy would decline continuously thereafter until that longer term down period came to an end.  That did not imply that there would be no demand, simply that demand would decline and as demand declines growth rates become more subdued.

The trickle down would suggest that if growth rates are more subdued the willingness to assume more risk would also diminish and the risk of multiple contractions would become real.

In many ways that is exactly what happened in 2007-2009, directly in line with what the investment rate had suggested, and I should point out that the investment rate has never been wrong about longer term economic cycles since 1900, but something took place in 2012 which changed the demand side of the equation.  The stimulus policies of the FOMC influenced demand for asset classes in an unnatural way, and largely distorted the identification of a weak economic cycle provided by the investment rate.

The investment rate tells us that we are still in the third major down period in US history, akin to the great depression and stagflation, and that natural demand levels are substantially lower than where they seem to be.  This is where my recognition of risk in today's economy is based.

The risk in today's economy is subtle, but very important to respect.  If declining demand ratios naturally exist between 2007 and the end of this third major down period in US history, which is far from over I might add, the natural demand today would naturally be lower than it was at the end of 2007, but that certainly doesn't seem to be the case.  Demand levels actually appear to be much more robust than they were back then.

There are two ways to look at this.  Either the fabricated demand infused by the FOMC will somehow change the natural demand levels defined by our society, societal norms, and lifetime investment patterns, which are the criteria upon which the investment rate is based, or there is a much larger gap to fill between where demand levels appear to be today and where natural demand levels actually are.

In general terms, it natural demand levels today are much lower than where they were in 2007, but stimulus efforts have made perceived demand levels appear to be much higher than they were in 2007, the risk is the spread between where demand seems to be and where natural demand for investments in the us economy actually is.  That difference is 66%.

As I stated earlier, demand for investments will not go to zero, nowhere close to it, but naturally declining demand ratios influence lower growth rates, which in turn discourage investors from assuming excess risk and that results most commonly in multiple contractions.