Disinflation has reigned since 1980, but real interest rates were positive until the last decade. But for 10 years now, real 10-year Treasury note yields have been flat at zero (see my Nov. 19, 2018 column, “Zero Real Yields Are Tripping Up Investors”). This and the flat yield curve have pushed state pension funds and other investors far out on the risk curve in search of real returns, bidding up stocks to vulnerable levels.
Earlier, the Fed was run by Ph.D. economists who clung to widely-held theories even though they didn’t work. Fed Chairman Jerome Powell is proving to be much more practical, backing away from rigid Fed policies such as the 2% inflation target and a zero-bound policy rate as well as unsuccessful forward guidance.
In this different economic climate, it’s hard to time the end of the current recovery. Still, it will end, due either to Fed overtightening or a financial crisis, like the 2000 dot-com blow-off or the 2007-2009 subprime mortgage collapse. In the current excess supply-savings glut-deflationary world, it’s likely a recession will unfold due to a shock before the Fed overtightens.
The distortions quantitative easing and other extraordinary monetary measures have created will be debated for decades. There is no arguing with the fact that relationships between asset classes which were reliable lead indicators in the past are less relevant in an environment where central banks are manipulating the yield curve. However, we need to remember that bull markets thrive on liquidity and price charts tell us what people are doing with their money.Click HERE to subscribe to Fuller Treacy Money Back to top