Greenspan on Interest Rates and the Stock Market

I make fun of the MSM, including Bloomy, for its often sensational headlines and click-baiting content…

R.I.P. Bond Bull!!!!

…but Bloomberg especially has a lot of useful content and quality stories as well.

No Bubble in Stocks But Look Out When Bonds Pop, Greenspan Says

For instance, this…

Right now, the model shows U.S. stocks at one of the most compelling levels ever relative to bonds. Using Greenspan’s reference of 10-year inflation-adjusted bond yields, currently around 0.47 percent, the gap with the S&P 500’s earnings yield at around 4.7 percent, is 21 percent higher than the 20-year average. That justifies records in major equity benchmarks and P/E ratios near the highest since the financial crisis.

The US stock market has disconnected to the upside from most other fundamentals, from nominal P/E to dividend yields vs. Treasury yields to its long-term correlations with cyclical commodities. But it is undervalued when cherry picking the metric noted above per the Fed Model. After the psychological adjustment of 2008 it has been a long road in finally instigating manic behavior and ‘investors’ are driving the market higher because hey, it’s not pervasively overvalued.

fed model

But if the bond market is a bubble and proves to be very overvalued, does that not paint this fundamental metric as merely an effect of that bubble and in jeopardy? Well, yes it does.

There is a reason I follow bonds so closely and keep an NFTRH segment called ‘Bonds & Related Indicators’; bonds are only at the center of everything. We obviously make a big deal about bonds as a market indicator with a would-be rise in the yield curve probably being the most significant item. The curve can rise under inflationary or deflationary pains. Greeny’s view is that it would be inflationary and we have been developing a view right along those lines as well.

From NFTRH 458, a big picture view of the Silver/Gold ratio (in an interlude discussing the precious metals within the bond segment)…

Now look again at the chart. Are we in inflationary signaling or deflationary signaling? My point here is that SGR may well be in a process of double bottoming and so too gold, silver and the miners. That is why we need to track the items in the Bond segment.

silver/gold ratio

Here is a monthly view of 30, 10 & 5 year yields perched below what would be ultra-critical limiters (i.e. bond bull terminators).

treasury yields

Before an inflationary regime would begin however, I am still on the USD bounce (yes, the captain is still sinking with that ship) theme. But if the Buck breaks sooner it could be the signal that an inflation phase is in the offing and the more traditional beneficiaries of inflation (precious metals and commodities) would get bid relative to stocks, which have benefited from inflationary policy (against a global deflationary backdrop) since 2011.

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