Visualizing The Triumph Of Hope Over Reality

The Federal Reserve’s extreme monetary policy has done nothing but repress ‘safe’ assets to the point of making ‘risky’ assets relatively cheap. This is of course not the case were you to isolate each risky or safe asset and consider its value standalone. Choosing stocks over bonds because “well, what is the alternative?” is akin to the red-pill/blue-pill choice from The Matrix and the reflationary ‘normal’ that we are supposed to believe in is what ‘apparently’ justifies a 1.7x rise (12%!) in multiples since QE4EVA was announced. During that same period, consensus earnings expectations have plunged (merely pushed out one more year for the renaissance) and global trade and growth has collapsed. However, while we have shown many divergences from reality in the past, it is the manic/depressive difference between inflation expectations and stock valuations (implicitly supported by reflation) that is the clearest example of the short-term triumph of hope over reality.


The plunge in consensus 2013 earnings since August is stunning (as is the resplendent rise in 2014 expectations)… just one more year….


but that didn’t matter as P/E ratios surged… on the back of QE4EVA – though ‘cyclically’ we appear to be nearing the Central Banker limit for short-term impacts…


But this time, the inflationary pull of rising P/E ratios simply does not fit with the deflationary ‘pricing’ the market assigns to forward inflation expectations…


In fact, inflation expectations have now faded all the way back to QE3 levels – which can mean only one thing (for fear of the dreaded deflation)… moar QE…


Charts: Barclays, Bloomberg


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