Self-regulation of markets and rates

Publié le par Jean-Pierre Chevallier

The profit of American companies increased (year-on-year) approximately by 10% for 20 quarters, which is higher than the standard (5 to 7%).

The stock prices increase logically, but less quickly: the average PER of SP500 is at 16.9 what corresponds to an yield at 5.9% (EPR expressed as a percentage). This situation is dangerous because it is potentially inflationary (as in beginning of the Sixties).

The members of the FOMC were obliged to increase their target at 5.25% (above its neutrality) so that the spread between the yield of the stocks and the bonds (the 10-year fluctuated around 5%) is in the standards: around 100 basic points (it is the remuneration of the risk).

The high level of the basic rates creates a deceleration of the growth which can become negative, which will cause a drop in the profit, therefore the stock exchanges (it is the announced collapse), therefore the rates, and in particular those of the Fed.

The members of the FOMC will wait as much as possible to lower their target in order to cause a drop in core inflation in the band between 1 to 1.5%, with the risk to cause a recession, but the growth will set out again thereafter thanks to this fall of the rates because the fundamental ones are good.

The markets and the rates are thus more or less well self-regulated with cycles

It would have been possible to avoid them! It would have been necessary for that, that Alan Greenspan goes up earlier and more quickly the rates of the Fed.

The lack of reactivity and anticipation of the Fed creates these cycles which follow one another… since close to a half century.

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The benchmark PCE-PILFE fell to 1.9% in June after having culminated at 2.5% in March 2007:

http://research.stlouisfed.org/fred2/series/PCEPILFE/chart?cid=21&fgid=&fgcid=&ct=&pt=&cs=Medium&crb=on&cf=pc1&range=5yrs&cosd=1998-01-01&coed=2007-06-01&asids=+%3CEnter+Series+ID%3E

Inflation is close to its standard.

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