10Y dollar economy fed recession

One Strategist Thinks You Should Ignore The “Prophets Of Doom”

"The Fed’s decision to tighten rates in the face of sluggish growth and limp inflation has encouraged a narrative that they are embarking on a policy error, with the flattening of the yield curve cited as a primary piece of evidence. Upon closer inspection, however, the prognostications of peril appear wide of the mark."

"The Fed’s decision to tighten rates in the face of sluggish growth and limp inflation has encouraged a narrative that they are embarking on a policy error, with the flattening of the yield curve cited as a primary piece of evidence. Upon closer inspection, however, the prognostications of peril appear wide of the mark."
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3 comments on “One Strategist Thinks You Should Ignore The “Prophets Of Doom”

  1. John Watts

    The more I look at things, the more it seems that using traditional measures of inflation with current monetary policy is somewhat flawed.

    You have a large sudden increase in base money supply with a steady increase into M2. The money is flowing through capital markets, from bonds/FX to equities, depressing yields and increasing valuations. That’s simply where the money ends up under current monetary easing policy. People expect that this flow of money will eventually trickle down to employment, higher wages, and GDP growth, looking at traditional CPI for inflation of every day goods. But this is where things get complicated. If you increase the money supply but most remains trapped in increasing equity valuations and low yield bonds, with large scale misallocation of capital for good measure, the channels for transmission of wealth are not efficient enough for sustained inflation of every day goods. Look at the fact we are near full employment with insignificant nominal wage growth. Most people did not participate in the 8 year long bull run and thus are not really that much richer; most of the wealth accumulation occurred in a minority of the population. Given this, it may be worthwhile to examine inflation in a new context, namely in increased equity valuations, which coincidentally closely follow central bank balance sheets.

    in·fla·tion
    [ECONOMICS]
    – a general increase in prices and fall in the purchasing value of money.

    Does this sound familiar in the context of equity valuations?

  2. John Watts

    Obviously that’s a little simplistic and lacks substance but just trying to get a point across.

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