The Fed’s Kryptonite

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  1. Two questions. (1) what measure of inflation of expectations do you like? with the Fed owning a big chunk of TIPS it seems like breakevens vs. Treasury is compromised as a signal. Are inflation swap markets liquid enough to provide reliable measures. (2) to what do you attribute the up-trend in the ERP over last two decades? It seems that more leveraged corporate balance sheets would justify some rise in the ERP.

  2. Peter is quite eloquent and descriptive. I applaud his analysis
    And agree with most of it.

    Retired now, yet I did have 35 years in Bond Portfolio management and have thoughts as well.
    Mine will be more to the point and likely less eloquent .

    Inflation is THE killer to the Greenspan/Bernanke/Yellen/ Powell monetary policy of the last 34 years.

    I agree with Peter that Inflation is coming back and not “reflation” ( a term I think means renewed economic growth with a side order of inflation).
    No, I think this is more like Inflation with a side order of growth.
    More like the 1970s Stagflation.

    Unlike Peter, I do not think the longer term part of the bond market will take kindly to a negligent Fed, where they willfully deny the existence of Inflation by promising not to tighten.
    In fact, I think the more the Fed denies, the more we’ll see a Bear Steepener In bond land.

    Because the denial of what Ben would call the Common Knowledge on Inflation means long term bonds are increasingly a terrible investment.
    I don’t think any bond rally based on a carry game ( based on Fed “promises” of no tightening) would last long.

    This is a completely different from the environment seen since the late 1980s.
    This regime of primarily Academic PhDs that control our FOMC will not change easily or willingly. They really do believe they are smarter than the collective wisdom of free markets.

    Equities will eventually have to live without the Fed Put.
    Long Term Equity Valuations will have to fall.

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