Amidst the siren calls of financial stability concerns, it is worth remembering that not all indicators show asset price froth and excesses. In fact, some show the opposite. Here are a four:
(1) The risk premium as measured by the BAA corporate yield minus 10-year treasury yield is still elevated.
(2) Compared to recent years, households are still holding a relatively high share of liquid assets in their portfolios.
(3) Broad measures of money assets that include both retail and institutional assets have only recently passed pre-crisis peaks and are far below trend.
(4) The 10-year real risk-free treasury interest rate remains negative and closely tied to the output gap. This measure does not reflect the Fed's lowering of the term premium through QE, but of the expected path of the real economy. If the economy were frothy, we would expect it to be positive.
Divisia aggregates (broad money measures which confuse money with liquid assets), correlation coefficients aren't remotely close to those of money flows (our means-of-payment money times its transactions rate-of-turnover).
ReplyDeleteThe scientific evidence for the last 100 years is irrefutable. I.e., the trajectory in the rate-of-change (proxy for inflation indices), for MVt (the scientific method), projects a top in the inflation indices in May 2014. The fact that money flows (proxy for real-output), always mirror the seasonal factor's inflection points is tantamount to scientific proof.