Bond and Stock Market Volatility Is Collapsing Post-QE3
If history is any guide, investors getting long that trade are flirting with disaster.
The economy and earnings are weak, and getting weaker, but the interest rate used to discount the future earnings stream keeps getting more and more negative, and that in turn raises the future profit expectations. It's that simple. And the fact that the S&P dividend yield is triple the yield in the belly of the Treasury curve has also lifted the allure of equities, or at least those that have compelling dividend yield, growth and coverage characteristics.
...[A]lmost 74% of the stock market movement can be explained by the level of the Fed's total assets ALONE since the QE1 announcement.
Give me a break. How do these people still have jobs? He's been pounding the table on low interest rates for years while still being bearish on stocks. Only now is he capitulating. Their analysis is wrong so they want to blame monetary policy. His bullish conclusion isn't even correct. In fact, I argue it's the opposite.
This is the proper way you analyze how the market prices risk premiums. From Helicopter Ben Rides Again:
Most consensus valuation models measure credit and equity risk premiums over the risk-free rate, normally the 10YR Treasury. I have found that a far more consistent benchmark to measure the premium is the YOY growth rate in the CPI. In fact, while the earnings yield on the S&P 500 will routinely trade at a premium to the 10YR yield, it rarely trades through CPI. Going back 40 years, only during the inflation spikes in the mid-1970s and early 1980s did you see the S&P trade through the CPI; the two biggest market tops of the subsequent bull market in 1987 and 2000 actually occurred when the earnings yield equaled the YOY CPI.
In other words, market valuation is much more sensitive to inflation and the discount of inflation than to the actual level of interest rates. In July 2008, the 5.6% CPI spike hit the S&P 500 earnings yield, which I believe was the final straw that broke the market's back.
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