Three Centuries After Kipper und Wipperzeit, Modern Data Points Us Down a Similar Path
Part II of Volume II, Issue II
For the first time in more than two decades, some of the world’s most risk-free securities are delivering bigger payouts than a 60/40 portfolio of stocks and bonds. The yield on six-month US Treasury bills rose as high as 5.14% Tuesday, the most since 2007. That pushed it above the yield on the classic mix of US equities and fixed-income securities for the first time since 2001, based on the weighted average earnings yield of the S&P 500 Index and the Bloomberg USAgg Index of bonds.
The shift underscores how much the Federal Reserve’s most aggressive monetary tightening since the 1980s has upended the investing world by steadily driving up the “risk-free” interest rates — such as those on short-term Treasuries — that are used as a baseline in world financial markets. The steep jump in those payouts has reduced the incentive for investors to take risks, marking a break from the post-financial crisis era when persistently low interest rates drove investors into increasingly speculative investments to generate bigger returns.
~ Bloomberg, February 28, 2023
Editor’s Note: This is Part II of Volume II, Issue II of The Macro Value Monitor. Part II, A Year After the End of Ultra-Low Yields, a White Whale Breaches the Surface, can be found here. A full PDF of this issue is available here.
Swan Attacked By Dog, by Jean-Baptiste Oudry
A little over a year into the Great Inflation, there were few visible signs that the decade ahead would come to be known among historians as the Federal Reserve’s Second Great Mistake.
In early 1966, the year-over-year rate of inflation had poked above 2% for the first time in nearly a decade. It was a relatively modest uptick in the rate of increase in prices, and the public hardly noticed. Prices had been rising at rates between 1%-2% for most of the prior decade, and reliably low inflation had allowed concerns about prices to fall out the public’s consciousness.
For those who closely tracked inflation, however, including those at the Federal Reserve, the increase above 2% marked a noticeable shift from the long period of stable prices leading up to that moment.
The early signs of the shift had prompted the Fed, under Chairman McChesney Martin, to increase interest rates in late 1965 for the first time in a long time. As we have discussed, this earned him a grilling from President Lyndon Johnson at his Texas ranch in December 1965, but it also preserved the positive inflation-adjusted interest rates which had long kept a lid on inflation.
If history teaches us anything about inflation, it is that expanding the supply of money and credit eventually results in an increase in prices, at least to some degree.
However, there are a number of important caveats to that conclusion, and those caveats often determine when and to what extent prices begin to be impacted.
Keep reading with a 7-day free trial
Subscribe to The Macro Value Monitor to keep reading this post and get 7 days of free access to the full post archives.