LIQUIDITY ANALYSIS. A MARKET-BASED "GOLDILOCKS-STAGFLATION" INDICATOR
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Suppose that the best market-based indicator of global economic growth is the platinum/gold ratio [a], and that the best indicator of inflation expectations is the spread between the 10-year benchmark Treasury note and the current 10-year inflation-indexed note [b]. The [a]/[b] ratio is thus a "Goldilocks/Stagflation" indicator. What does it tell us right now? On the one hand, inflation expectations have increased somewhat in 2007. On the other hand, the global economy is growing strongly (platinum/gold ratio approaching 2).

At 0.81, our "Goldilocks/Stagflation" indicator looks neither too hot nor too cold. Based on past data, it would appear that the S&P500 has further room to run (about 5%) before getting seriously overvalued in terms of this "Goldilocks/Stagflation" indicator.