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Comparison to an earlier period of accommodative monetary policy- Sober Look

This is a syndicated repost courtesy of Sober Look. To view original, click here. Reposted with permission.

Here is an observation. The last couple of years show some interesting similarities to the period ending in early 2005. The reason for such a comparison is that then, just as now the Fed began to gradually exit its highly accommodative policy.

Now The Balance Begins To Shift

The balance between QE and Treasury supply will begin to shift in July. The underlying bid it has provided for stocks and Treasuries will begin to fade.

This report tells why, and what to look for in the data and the markets.  GO TO THE POST

The periods show similar trends in the unemployment rate, although the absolute levels are quite different.

Similarly housing prices show an upward momentum during both periods. Obviously the speculative fervor of the pre-recession housing market is (supposedly) not present in the current environment.

The Fed’s stimulus of course came in different forms for the two periods. In the pre-recession era, the Fed used the overnight rate to provide accommodation, which dipped down to 1% at the peak of the stimulus. In the current environment – with the overnight rates effectively at zero – the stimulus is in the form of longer-term rates which are adjusted via securities purchases. The chart below shows the stimulus (blue) and the start of the exit for both periods. The trends in the “risky” assets are quite similar during those periods.

What does this say about the current environment? The accommodative period that started with the burst of the tech bubble and ended in 2005 may have been overdone, igniting the housing bubble through artificially low rates (see post from 2009). The exit did not end well, as rising rates sent shock waves through the overleveraged housing market. The current stimulus cycle is of course quite different. Nevertheless the lesson here is that the longer the accommodation period the more dangerous the exit (as we already saw with the emerging markets rout).

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Wall Street Examiner Disclosure: Lee Adler, The Wall Street Examiner reposts third party content with the permission of the publisher. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler, unless authored by me, under my byline. I curate posts here on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. Some of the content includes the original publisher's promotional messages. No endorsement of such content is either expressed or implied by posting the content. All items published here are matters of information and opinion, and are neither intended as, nor should you construe it as, individual investment advice. Do your own due diligence when considering the offerings of information providers, or considering any investment.

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