Financial conditions in the U.S. are the loosest they have been in three years, according to the Chicago Fed’s National Conditions Index (NFCI), a weekly gauge that takes into account factors such as leverage, debt and equity markets and traditional banking.
The readings provide insight into three specific areas: risk, credit and leverage. For the week ended Nov. 22, the index dropped to -0.64, a level not seen since August 2021 in the aftermath of the Covid-19 pandemic.
A negative reading suggests financial conditions are looser than average indicating that liquidity is readily available. A positive reading, in contrast, means tighter-than-average conditions with capital hard to come by, as during the 2008 global financial crisis.
Zooming out, we’re in one of the most financially loose periods since data started being collected in 1971. With U.S. headline inflation at an annual 2.6%, well above the Federal Reserve’s 2% target since February 2021, it’s possible 75 basis points of interest-rate cuts since September and a 4.75% rate now have done little to rein in investors’ appetite for risk.
The S&P 500, for example, has ratcheted up its 55th all-time high this year, adding 28% since the start of January, according to Zerohedge. Bitcoin (BTC) has surged 118% and the total crypto market cap has more than doubled to approach $3.5 trillion, according to the TOTAL metric on TradingView.
Bitcoin and DXY rise together
Risk assets tend to have an inverse correlation with the DXY index, a measure of the U.S. dollar against a number of other major currencies. Typically, the index is considered strong when it’s over 100. It’s held over 106 since Donald Trump won the U.S. presidential election.
That makes bitcoin’s rally particularly interesting, because it breaks the inverse behavior. The 30-day correlation between bitcoin and the DXY index is at 0.66 over the past seven years, one of the strongest levels for that period.
As financial conditions loosen and total U.S. debt hits a record $36.17 trillion, the largest cryptocurrency seems to be thriving with its ability to soak up liquidity overriding the strong dollar.
