November 02, 2020

The orthodoxy outlook mostly focusses on the Biden-Harris probable increases in government spending its impact on aggregate demand and the pace of economic activity while mostly ignoring the substitution or supply side effects. These models project an increase in economic activity with a corresponding increase in earnings. Add to this the Believe in the Philips Curve and it is easy to see why the Fed will expect an increase in the inflation rate. However the Fed new operating procedures and it symmetrical inflation argument, suggest that the Fed will let the inflation rate wonder above the 2% for “some time” while simultaneously keeping interest rates low for “quite some time”. Under most asset valuation models , steady and low interest rates combined with rising earnings lead to a rising valuation . Hence the conventional models will forecast a rising stock market. What happens when one adds the supply side effects to the orthodoxy valuation forecast?

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