FAST FIVE: When We'll Know The Bear Market Is Over

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In a recent Fed paper presented at Jackson Hole, the authors show that when investors do not believe large fiscal imbalances will be stabilized the job of the central bank becomes extremely difficult.

Due to the lack of fiscal credibility, debt buyers assume the rise in the ratio will have to be inflated away, and therefore expect higher inflation.

The paper shows the massive fiscal interventions in Covid led to this loss in fiscal credibility in the US (although it is arguable it predated that, when Modern Monetary Theory came into vogue).

The real-yield curve began to flatten hard in 1980 as short-term real yields started to rise faster than long-term ones, and inverted in April 1981.

Still, buying at that point would have been on the early side, before the multi-year rally started in August 1982.

Categories: ZH