Two weeks ago, Janet Yellen finally - and shockingly - admitted that neither she, nor her Fed peers, "fully understand inflation" and that the "shortfall of inflation this year is more of a mystery." This, after engaging for nearly a decade in actions designed to stimulate said "mysterious" inflation, including injecting nearly $4 trillion in liquidity into the economy. We quickly came to aunt Janet's rescue, showing in one chart that while the Fed may have failed to stimulate inflation in real economic prices - and especially wages - it had unleashed hyperinflation in asset prices.
Today, it is SocGen's turn to follow up on what we said, and in a report from SocGen's Arthur van Slooten, the strategist writes that "while traditional inflation measures may not call for aggressive tightening, we believe high valuation (e.g. cyclically adjusted price-earnings, or CAPE, multiples above 30x) is a sign of inflation in financial assets that is hard to miss. This is the elephant in the room."
Slooten then slams the vol-selling activity of central banks, pointing out that "high valuation was supported by the drop in volatility, but now that volatility has reached near-historical low levels, further drops may even be dangerous. This situation would not have existed without the unprecedented liquidity support from central bankers over the last few year. "
Luckily, it's all coming to an end:
As the pressure on the ECB is increasing to provide a perspective on tapering, very soon the Fed will no longer be alone on tightening, which makes it easier to firm up. Also, the latest push by the Trump administration to cut taxes is likely to be embraced by the Fed as another reason to step up tightening.
And while SocGen is battening down the hatches, the French bank is surprised by how little credibility the Fed's stated tightening intentions have in the market, because as it writes, when looking at its monetary newsflow indicator "Nobody seems to believe the Fed dots" and with good reason. To wit:
The latest Fed dots point to four rate hikes until the end of 2018 but our US monetary newsflow indicator suggests that few market participants will expect the full implementation of these tightening intentions. The Fed only has itself to blame for this loss of credibility, as it has regularly delayed and toned down its initial forecasts.
And while stocks remain oblivious, expecting to be bailed out the moments there is even a 3% "crash", bonds are starting to get nervous: "the odds of at least one rate hike before September next year have risen in the last four weeks, as have 10-year US Treasury yields (chart below)."
SocGen's conclusion: "In this context, we have reduced our risk exposure." For now, nobody else is, in fact as we wrote yesterday, "There Are No Bears Left... None... Not A Soul."