This is why you shouldn't take the Fed at its word
Janet Yellen has obviously read Kahneman’s work. That’s the only way I can think of to explain what she said about “asset values” yesterday. She hopes that if the Fed, probably the greatest “authoritarian institution” on the planet today, says it enough then people will just take it as fact.
However, the facts are the median price-to-sales ratio for the S&P 500 has never been higher than it is today. Indeed, it’s never been anywhere near this high.
https://twitter.com/mims/statuses/776442336939081730
S&P 500 median price to sales ratio 2.3 in record territory - #valuation matters while it may be ignored short term pic.twitter.com/F6puoiFYXx
Bond yields have been driven to record lows as a product of massive quantitative easing. In terms of valuation, the 30-year treasury bond now yields less than core inflation, a very rare extreme.
https://twitter.com/mims/statuses/765574664080863233
For the first time in 30 years the US 30-year Treasury yield has traded below inflation: https://t.co/S1j7T9T4Dv pic.twitter.com/EPQBpPp3HB
…with the valuations of these bonds recently reaching “bubble” territory.
https://twitter.com/mims/statuses/775703014212415488
Corporate America is now more leveraged than ever https://t.co/qsHoeJmdMk pic.twitter.com/F6pMd3vvVU
Finally, residential real estate has also become bubbly once again.
https://twitter.com/mims/statuses/778322177464504320
NEW POST: Junk Bonds Officially Enter ‘Bubble’ Territory https://t.co/QDkfxv2tQ6 ht @lcdnews pic.twitter.com/c5uOOoxV6L
If by “historical norms” Ms. Yellen is referring to just the past 20 years of Fed-induced asset bubbles then yes, asset values aren’t necessarily “out of line.”
https://twitter.com/mims/statuses/730088431871614979
Jeremy Grantham calls the current real estate market a "classic echo bubble" https://t.co/lZVJHySG2k pic.twitter.com/02kJNWEz34
I think she knows better. The past 20 years are a historical aberration culminating in a financial bubble that is now more pervasive than anything we have ever seen before. It’s not just stocks or bonds or real estate this time; it’s all of the above. I am certain she hopes the Fed can engineer a “permanently high plateau” simply because it’s too difficult to imagine otherwise. But students of history understand that there is no amount of ‘frequent repetition of falsehoods’ that can overcome the truth.
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