Chart Of The Day: The Great Regime Change

We call it chart of the day, but it could just as easily be the chart of the century, as this one chart, presented courtesy of Sean Corrigan of Diapason Securities, captures without a shadow of doubt the revolutionary regime change that occurred in US (and global) capital markets with the advent of cheap credit policy in the aftermath of America's near brush with hyperinflation in the early 1980s. The chart demonstrates the "great regime change" that occurred some time in the 1980s-90s, and confirms that whereas inflation used to be the biggest threat to equity returns (and thus stock prices), as can be seen by the inverse correlation between the S&P and bond yields in the 1962-1974 period (note the UST10 yield is inverted for this period), this correlation flipped in the late '90s and and 2000s, and it has become a direct correlation. In other words, whereas before a surge in yields (and thus a drop in bond prices) would cause stocks to drop, now we see a stock market which correlates directly with yields (and inversely with prices). As Corrigan summarizes: "T-Bonds used to trade with, but now trade against equities. Growth, not inflation, is the limiting factor in the market's calculations."

We would add that growth in the past three decades has only occurred on the back of ever cheaper credit, confirming the Fed's primary role in defining risk asset prices. And since inflation is irrelevant, stocks no longer are a natural check to deranged monetary policies, and in fact welcome the deluge of endless (and virtually free) credit money. This means that Bernanke is now convinced that the only way to grow the economy, which per his earlier admission is equivalent to the Russell 2000, is to continue flooding stocks (something we have known). Yet to those who expect to see an inverse correlation between bond yields and stock prices, our apologies: you are about 45 years too late to the party.