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Your analysis is always inspiring!
ReplyDeleteWould the Bank of Japan be an issue down the road? Would abandoning the yield curve control trigger a massive US debts sell off?
Interestingly, I once came across a theory discussed by Mohamed El Erian about inflation. He said inflation will remind sticky dropping to 3%-4% by the middle of this year. Once that happens, the Fed will have to make a judgement call to either stick with the arbitrary 2% target or live with the reality of 3%-4%. My gut feeling is that they won't budge because of reputation reason.
I think this year is all about corporate earnings. Market valuations are still very high, 18X-20X, compared to the downturn of corporate earnings.
Overall, much appreciated for taking the time to create this great video! Thank You!
Thanks Sam! Yes, I do believe the BOJ ending, or continuing to expand its YCC range is market-relevant. Not just for US debt; Japanese investors are huge owners of foreign assets. A move that bolsters the yen can become reflexive and incite a serious rush back to the yen and out of foreign securities. Of course it's never the "crisis" we expect that does long-term harm to markets, but it's one to watch out for...
DeleteI actually sympathize with El Erian, from a practical standpoint... Meaning, I do not believe the 2% target is sustainable in the go-forward environment... It'll of course get there (and lower) in a serious recessionary environment, but I'm in the camp that says, structurally, it probably can't stay there and the Fed will have to live with something in that 3-5% range... Which from a debt to GDP standpoint is, frankly, the answer -- let inflation run hotter than rates (a la the 1940s YCC) over a few years and US debt to GDP abates... and (ycc) government can fund itself at less than devastating rates (as it rolls all that low-interest short-term debt).
I agree, current valuations do not appear to reflect where corporate earnings are likely to go during recession.