Adapting To The Coming Change In The New Normal
Some good charts, links take you to the full post.
Last week I touched on the housing market, the yield curve and the Federal Reserve’s expected continued taper action. Cruising through earnings, it is now time to revisit certain indicators that speak to the underlying health of the economy and that of the US equity and Treasury bond market. The Federal Reserve’s QE policy has punished savers in terms of real rates of return in an effort to spur spending to drive a recovery. Looking at the difference between the 10 Year Treasury Note and the annual change in the CPI, otherwise known as the Real Rate, the pressure from the Fed on savers to spend is evident:
The spread on the US Treasury 10-Year Note and its 3-Month Bill shows how large an impact the Fed’s buying program has had on the fixed income market. Their purchase of MBS securities and Treasury paper has dropped long-term yields in an effort to spur the housing market with cheaper rates.
The knock-on effect of the Fed QE policy has driven up the Equity Risk Premium as money flows into the equity market. Now as participants prepare for the Fed to cease QE, the ERP has dropped dramatically since 2012 relative to its past 30 years.
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