The appeal of E/P-CPI is undeniably strong, but only for the rational. A better indicator than E/P or the real value(=E/P-CPI) is the "yield premium"=E/P-RFR (risk free rate: 2,5,10yr T-note), where the CPI cancels. By design, the CPI underestimates the real inflation (based on same-for-same replacement cost and without other "corrections" applied by the Fed). But even there, when mania sets in (such as 1999-2000, 2008-9, and 2023-5, still does not have much predictive power, and the price often leads it. It can stay at absurd levels (e.g. negative) and mad-crowd still screams for more. Having said that it's hard to resist seeing the updated history of all three: E/P, E/P-CPI and E/P-RFR. The latter currently stands well below 0.5%.
The appeal of E/P-CPI is undeniably strong, but only for the rational. A better indicator than E/P or the real value(=E/P-CPI) is the "yield premium"=E/P-RFR (risk free rate: 2,5,10yr T-note), where the CPI cancels. By design, the CPI underestimates the real inflation (based on same-for-same replacement cost and without other "corrections" applied by the Fed). But even there, when mania sets in (such as 1999-2000, 2008-9, and 2023-5, still does not have much predictive power, and the price often leads it. It can stay at absurd levels (e.g. negative) and mad-crowd still screams for more. Having said that it's hard to resist seeing the updated history of all three: E/P, E/P-CPI and E/P-RFR. The latter currently stands well below 0.5%.
Excellent read, Callum.
cheers, stay tuned for the next one :-)
Thanks for sharing this 👍
cheers! hope it was interesting/useful
Definitely interesting. If I am able to see even 20% of these signs in 2025/2026 that'd be good for taking profits
Would be great to see an update on these charts to compare their current levels