Real Yields vs. Gold (Divergence of the Year)

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What are real interest rates? The real interest rate is the rate of interest an investor, saver or lender receives after allowing for inflation. It can be described more formally by the Fisher equation, which states that the real interest rate is approximately the nominal interest rate minus the inflation rate.

Now, two scenarios unfold. One, the gap in the chart closes when real yield goes back below zero. As we transitioned into QE this year--rightly so with bonds inverted 6 months before-- before COVID. It was the catalyst. Now with 5 years of the fed funds rates being near 0 to "average out" inflation, how to you think this chart will respond?

A tip. QT is the opposite of QE.

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As bears are capitulating and markets keep making new highs on the heels of yet another dovish speech by Jerome Powell investors continue to chase historic valuations.

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Imbalances keep building and money relentlessly pushes into high cap tech in anticipation of Jay Powell delivering more dovish goodies tomorrow with expectation he will make an announcement suggesting the Fed won’t raise rates for another 5 years and the Fed would be willing to let inflation run hot. In other words: The Fed is implicitly endorsing an asset bubble.

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Only 59% of S&P 500 members are trading >200d moving averages. That’s an unusually low number w/S&P 500 at a record high, BBG's Xie writes. The only comparable period was in late 1999 and early 2000, before the burst of the Internet bubble.

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We've never had it so good: Global equities now worth >90tn, highest value in history.

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* Breakevens/TIPS rates are moving mostly because of liquidity, not inflation expectations.

* The macro signals (lower inflation AND growth expectations) happened quickly in the spring and are not being reversed.

* No surprise that nominal rates stay low.

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Into December of 1919, the CAPE was at an all-time low. With so much focus on 1919 going into the COVID-19 pandemic among market commentary, the comparison that this chart allows to make is 1919 to 2019, with a suggestion of downtrend.

If the SPX indeed returns to multiples in 1919, that would put a market valuation of the SPX at around $500 according to the CAPE ratio.

May 15
Comment: In 1998, Robert Shiller--the Yale economist and Nobel Prize winner-- formalized that idea in a paper, "Valuation Ratios and the Long-Run Stock Market Outlook" and a book, "Irrational Exuberance." The latter made Shiller something of an economic prophet. In his book, which came out shortly before the dotcom crash, he warned that stocks were overvalued.

What is the CAPE ratio? It describes the price-earnings ratio over 10 years, rather than on a particular date. Called the Shiller P/E, it is calculated by dividing the price of a stock by its average earnings over the past 10 years, adjusted for inflation . It can also be used on an index such as the S&P 500 .

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Epic Divergence Between the (CAPE) Ratio and the S&P500

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By pursuing a policy of higher inflation, the Fed will actually widen the wealth inequality gap, particularly along racial lines, that many now want to put it in charge of narrowing. Higher #inflation raises the cost of living for the poor while raising asset values for the rich.

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