The pattern reverses when interest rates rise fast enough to reduce the growth of liquidity below that of the economy. Unfortunately, as Mr van Tuyll remarks, this is not a precise art and it is far from clear how much rates have to rise to put the brakes on. Certainly the US Federal Reserve's five increases to date do not seem to have done the trick. If this model is correct, there are big dangers ahead. We have seen this before in 1994, when leveraged investors were forced to bale out of bonds or in 1998 when they abandoned high-yield debt.
Markets can temporarily break down.
It will be a long hard drop to the bottom. The Economist Intelligence Unit Limited 2001. All rights reserved.