You may have noticed that one of my pet peeves is the tendency of journamalists to observe that an asset price has moved to some sort of superlative in the wake of an event and then attribute that superlative to the event itself.
For example, sterling went to its lowest level since the mid-1980s in the wake of the surprise Brexit result. And US equities have surged to a record high in the wake of the US election. (Yesterday, my age took out the old highs. What a day! Yuuuge.) The implication is that Brexit was worth 30 years of depreciation and the election is record bullish.
I see the latter sensationalism channeled by El-Erian, predictably, on Bloomberg today, while he argues that central banks are hoping that the new president will “relieve their burden.”
This is challenging the long-held perception of an establishment stuck in political gridlock. One result of this paralysis has been the lack of a comprehensive policy response to economic weakness, while placing way too much of the burden for too long on central banks. As a consequence, markets have rushed to price in the prospects for faster nominal gross domestic product growth, taking all three major U.S. stock markets to record highs. At the same time, interest rates have risen throughout the yield curve, increasing the probability that the Federal Reserve will raise rates in December.
I think the Fed leader’s main concern is that the new president will relieve her of her job and I really doubt she is breathing this huge sigh of relief here. She is, after all, a liberal Democrat. And I am pretty sure she is well studied in the history of fascism.
As for the markets, the S&P500 rallied 225% from its March 2009 lows through the late summer of 2016. Since then, it is up
1 1/2 2 % from that same range, although it is up slightly more impressively from the lows achieved when the election results first hit. (Aside: event studies don’t work.) So 2% is meant to reflect “faster nominal growth.” What did the 225% reflect?
The reaction in the 10-year Treasury is a bit more impressive, as its yield has gone up about
80 90 bps to 2.4% over this same period. With this surge, it is near where it was in the middle of 2015. Not to disparage the prospect of a move higher from here. Yields remain low. To me, bonds remain return-free risk, to paraphrase Jim Grant this one time only.
But can we have a bit of perspective about what we are talking about having already happened? Equities have rallied slightly post the election, as often. And Treasury yields have gone back to where they were just over a year ago. A new day has dawned!
The last tick reflects the combined effect of marginally higher equity prices and a slightly more meaningful move in bond yields. The measure is explained here.
Separately, it is one of El-Erian’s hobby horses to claim that politicians have placed too large a “burden” on central banks and that there have been these huge “unintended consequences.”
The reality here is simpler, if not so clickable. The equilibrium interest rate has fallen and central banks have followed it lower. In the US, this has allowed full employment to be restored and for inflation to move tentatively back up towards target. There is no need for such drama As for unintended consequences, name one. And don’t say lower interest rates reduce the yield to savers. That was intended, as well as unavoidable.
Ideally, we would have more pro-growth policy which would lead to – you know – possibly quicker growth. Is the new guy that?
This is all so ridiculous. The weaklings are deferring to authority, as they always do. And Wall Street economists are repeating themselves, as they always do. You know that. Right?