The first quarter saw an accelerated normalization in markets, as equities hit new highs, while Treasury yields rocketed higher. With widespread dissemination of demonstrably efficacious vaccines underway, the market has shifted its focus to continued stimulus and the potential for inflation.

The table below highlights the dramatic recovery across the markets.

Besides the vaccine distribution, the other major event of the first quarter has been the advancement of broader fiscal stimulus measures, courtesy of the Democratic sweep of the Georgia runoff that gave the Democrats a majority in the Senate. This has buoyed risk taking across markets, at the expense of Treasuries. Particularly telling is the fact that the MOVE Index, which measures the volatility of Treasury options, has risen sharply, in the absence of equity volatility (VIX). Economic data across the spectrum have exceeded expectations across most, if not all segments of the economy.

The question is whether this manifests as inflation. We have a potent concoction with the fed funds rate pegged at zero, quantitative easing, and fiscal stimulus as many risk assets are breaching new highs - not to mention creative stores of wealth, including cryptocurrencies and trading cards. The consumer’s balance sheet has largely improved over the past year, save for those whose jobs have been disrupted by pandemic lockdowns. This is in stark contrast to the period that followed the Global Financial Crisis (GFC). In that time, the consumer withstood a double whammy of falling equity prices and falling home prices, with homes representing the largest asset for many. Real estate assets back then were often recklessly levered, courtesy of extremely lax lending standards.

The post-GFC experience has led many to debate traditional monetary theory vs. Modern Monetary Theory. Specifically, one can point to the period of QE1-3 (2009-2014) as a time when extraordinary monetary stimulus failed to stoke inflation. Let’s take a deeper look at this period, compared with today’s experience.