Are we finally seeing monetary conditions ease?

Real rates are dropping fast

I finally got around to creating a FRED chart which combines two series. I could probably do it better, but I’m pleased with the result. This is for the US, but global monetary conditions are usually closely correlated (proof?).

What is interesting is that this is exactly what Scott Sumner has been saying for years: monetary policy has been too tight because real interest rates are too high, in spite of nominal ones being historically low. Inflation comes from labour costs rising. The mass movement of peasants into factories in China was a huge disinflationary shock. That is largely over. Maybe we’ll see something different over the next couple of decades. Of course, I might be totally off the mark.

This trend would of course explain the stonking equity market performance of late. Low inflation favours stocks, but eventually the runaway cost of capital and labour overwhelms the benefit of cheap debt.

It also argues that the dollar should continue to fall, assuming that other currencies aren’t going as rapidly to sub-zero real rates (which they may well be).

Maybe a better measure of real rates:

We are hitting a forty-year low in govt. yields. With real rates finally rising and central banks determined (this time) to keep re-filling the punchbowl, what could possibly go wrong? (I’m sorry, the iframe doesn’t work and I don’t have time to work out why now, but you can click here to see the chart on Koyfin.)

Koyfin is not perfect, but the speed of data retrieval for charts is totally astounding. I don’t know what the business model is, but if I were Mike Bloomberg I’d be worried. Well, OK, I probably would be too rich to be worried, but, seriously, the competition is catching up fast on The Terminal.

Expensive rents are dropping fast

In San Francisco, but surely London won’t be far behind. Why pay through the nose for a studio flat in Zone 3 when you can get a detached house in Beds for less?

Opening bell

The trade-weighted dollar is back to where it was in 2018. It is, from a multi-year perspective, definitely on a downward trend. Precious metals are weak.

Bonds are weak. With the exception of German and France, basically yields are up across all maturities and all sovereign issuers.

The VIX hasn’t move much, but I read that the term structure is very steep, reflecting the election uncertainty. (I can’t locate this on Koyfin: logically it should be $VXn where n=2.. but it’s not).


I still can’t get over the fact that a manufacturer of cellphones, a notoriously low-margin business, with a market share of well under 20% of the global market, which share is also declining, has zoomed up to a market cap which now exceeds the sum of all companies in the FTSE-100. At some point that has to be worth shorting …

More dovish talk


I can’t improve on Zerohedge today. (I can’t believe that Twitter disabled ZH’s account: it has some excellent content, such as this. Both articles are worth reading in detail. The second one concludes that debt at 180% of GDP by 2050 will result in a war is not convincing: I believe that Japanese debt is around 270% of GDP and that’s an exceptionally peaceful place. We might get “fiscal dominance” (which, as I understand it, is the state of the nation when the central bank no longer even pretends it’s independent from the treasury).

In summary, equity markets all went up, but you knew that, because the market was open.

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