by ilene - December 21st, 2010 3:15 pm
There are few indicators more prescient than the yield
The current curve, however, is quite steep and tends to be consistent with a Federal Reserve that is attempting to stimulate the economy (something they also have a tendency of overshooting). Based on past readings the Cleveland Fed says the current environment is consistent with 1% growth in real GDP:
“Projecting forward using past values of the spread and GDP growth suggests that real GDP will grow at about a 1.0 percent rate over the next year, the same projection as in October and September. Although the time horizons do not match exactly, this comes in on the more pessimistic side of other forecasts, although, like them, it does show moderate growth for the year.”
But meager growth is better than no growth. At current levels the probability of recession is virtually 0%. Unfortunately, low growth means this is going to continue feeling like a recession for a large portion of the country. And in a balance sheet recession the usual Fed toolbox of altering interest rates is unlikely to have the usual stimulative impact.
by ilene - August 14th, 2010 6:53 pm
Courtesy of Mish
In the wake of anemic retail sales in July, treasuries could have been expected to rally and they did.
Yield Curve as of 2008-08-13
Curve Watchers Anonymous notes that the biggest treasury gains (drops in yield), occurred on the longest durations. This is a normal yield curve reaction.
This is in contrast to the pattern we have been seeing for weeks, with the middle of the curve reacting the strongest.
Here is a chart over time from Front Running the Fed – Who Knew?
Once again the 7-year treasury is in the sweet spot.
click on chart for sharper image
Yield Curve May 2009 Thru Present
click on chart for sharper image
The 30-year long bond has finally broken through that shelf at the 4% mark. There is plenty of room for further rallies is the economic data remains weak. There is no reason to expect anything other than weakness, thus no reason to be short treasuries here.
Albert Edwards Explains How The Leading Indicator Is Already Back Into Recession Territory And Why The Japan “Ice Age” Is Coming
by ilene - August 8th, 2010 6:54 pm
Albert Edwards Explains How The Leading Indicator Is Already Back Into Recession Territory And Why The Japan "Ice Age" Is Coming
Courtesy of Tyler Durden
Albert Edwards reverts to his favorite economic concept, the "Ice Age" in his latest commentary piece, presenting another piece in the puzzle of similarities between the Japanese experience and that which the US is currently going through. A.E. boldly goes where Goldman only recently has dared to tread, by claiming that he expects negative GDP – not in 2011, but by the end of this year. After all, if one looks beneath the headlines of even the current data set, it is not only the ECRI, but the US Coference Board’s Leading Index, Albert explains, that confirms that we are already in a recesion.
If one takes out the benefit of the steep yield curve as an input to the Leading Indicator metric, and a curve inversion physically impossible due to ZIRP and the zero bound already reaching out as far out as the 2 Year point (it appears the 2 Year may break below 0.5% this week), the result indicates that the US economy is already firmly in recession territory. Edwards explains further: "one of the key components for Conference Board leading indicator is the shape of the yield curve (10y-Fed Funds). This has been regularly adding 0.3-0.4% per month to the overall indicator, which is now falling mom! The simple fact is that with Fed Funds at zero, it is totally ridiculous to suggest there is any information content in the steep yield curve, which will now never predict a recession. Without this yield curve nonsense this key lead indicator is already predicting a recession."
All too obvious double dip aside, Edwards focuses on the disconnect between bonds and stocks, and synthesizes it as follows: "investors are finally accepting that what is going on in the West is indeed very similar to Japan a decade ago. For years my attempts to draw this parallel have been met with hoots of derision but finally the penny is dropping." The primary disconnect in asset classes as the Ice Age unravels, for those familiar with Edwards work, is the increasing shift away from stocks and into bonds, probably best summarized by the chart below comparing global bond and equity yields – note the increasing decoupling. This is prefaced as follows:…
by ilene - July 21st, 2010 5:32 pm
Courtesy of Mish
Be prepared for Quantitative Easing Round 2 (QE2) and/or other misguided Fed policy decisions because Bernanke Says Fed Ready to Take Action.
Treasuries rose, pushing two-year yields to the fourth record low in five days, as Federal Reserve Chairman Ben S. Bernanke said the economic outlook is “unusually uncertain” and policy makers are prepared “to take further policy actions as needed.”
Ten-year note yields touched a three-week low as Bernanke said central bankers are ready to act to aid growth even as they prepare to eventually raise interest rates from almost zero and shrink a record balance sheet.
“An unusual outlook may call for unusual measures, and that means the Fed may take more action as needed, which would lead to lower rates,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas, one of the 18 primary dealers that trade with the central bank.
The Fed chief didn’t elaborate on steps the Fed might take as he affirmed the Fed’s policy of keeping rates low for an “extended period.” Economic data over the past month that were weaker than analysts projected have prompted investor speculation the Fed may increase monetary stimulus in a bid to keep the economy growing and reduce a jobless rate from close to a 26-year high.
“Bernanke acknowledged that things weren’t very strong economically and left action on the table without going into details, and that’s sending investors from stocks into bonds,” said James Combias, New York-based head of Treasury trading at primary dealer Mizuho Financial Group Inc.
Monetary Policy Report to the Congress July 2010
Inquiring minds are slogging through the 56 page Monetary Policy Report to the Congress July 2010. Here are a few key snips.
Summary of Economic Projections
Participants generally made modest downward revisions to their projections for real GDP growth for the years 2010 to 2012, as well as modest upward revisions to their projections for the unemployment rate for the same period.
Participants also revised down a little their projections for inflation over the forecast period. Several participants noted that these revisions were largely the result of the incoming economic data and the anticipated effects of developments abroad on U.S. financial markets and the economy. Overall, participants continued to expect the pace of the economic recovery to
by ilene - July 21st, 2010 5:27 pm
To summarize and save you time, Jr. Deputy Accountant writes:
I won’t call Bernanke a one trick pony since he’s got more tricks than a Hollywood madam but I will say this: the man is nothing if not consistent.
Federal Reserve Chairman Ben Bernanke told Congress Wednesday the economic outlook remains "unusually uncertain," and the central bank is ready to take new steps to keep the recovery alive if the economy worsens.
Testifying before the Senate Banking Committee, Bernanke also said record low interest rates are still needed to bolster the U.S. economy. He repeated a pledge to keep them there for an "extended period."
Whatever it takes!
Full text of Bernanke’s semi-annual monetary policy check-in with Congress may be found via the Board of Governors.
by ilene - July 20th, 2010 4:49 am
Courtesy of Mish
Inquiring minds have been watching the ECRI’s weekly leading index plunge nonstop since October of 2009. Moreover the WLI has been in negative territory for 6 consecutive weeks.
click on chart for sharper image
Is that a recession call by the ECRI?
Absolutely not, at least as of June 14, according to Lakshman Achuthan managing director of ECRI who blasted the Wall Street Journal for misleading reporting.
The Business Insider discusses the situation in Why Last Week’s Collapsing ECRI Leading Indicator WASN’T A Recession Signal.
Following the Business Insider link back one step takes us to Jeff Miller’s "A Dash of Insight" Weighing the Week Ahead: Negativity Prevails where I see that I was cited along with the Wall Street Journal, Zero Hedge, the Pragmatic Capitalist, and the Financial Times for incorrect intrepretation of the WLI.
Miller quoting a comment in response to the Wall Street Journal article writes…
Meanwhile, in the comments there was a stern rebuke. Lakshman Achuthan wrote:
While we certainly appreciate the attention given to our Weekly Leading Index, I’d like to clarify a few points raised in the article. First, according to the Economist magazine, “the ECRI” has not ever given false alarms on a recession forecast. http://www.businesscycle.com/about/testimonials/
The purported false alarms from “the ECRI” mentioned in this article come from a mistaken and simplistic view that negative growth in ECRI’s Weekly Leading Index (WLI) is tantamount to a recession forecast. In fact, since 1983, cyclical downturns have taken WLI growth under the zero line a dozen times, but recessions have followed on only three of those occasions – times when ECRI actually made a recession forecast.
Since ECRI itself has never used WLI growth going negative as a recession signal, it is important that such “false alarms” are attributed not to ECRI or even to the WLI, but to what is a mistaken interpretation of the WLI.
In fact, at the very least, ECRI itself would need to see a “pronounced, pervasive and persistent” decline in the level of the WLI (not merely negative readings in its growth rate) following a “pronounced, pervasive and persistent” decline in ECRI’s U.S. Long Leading Index (not discussed in the article), before it makes a recession call.
by ilene - July 13th, 2010 10:41 am
Courtesy of Mish
Paul Krugman is worried we are Trending Toward Deflation.
Inflation has been falling, but how close are we to deflation? I found myself wondering that after observing John Makin’s combusting coiffure, his prediction that we might see deflation this year.
Here’s the thing: the usual way inflation is measured is by looking at the change from a year earlier. But if inflation is trending lower, that’s a lagging indicator — if prices have been falling for the past few months, but were rising before that, inflation over the past year will still be positive. On the other hand, monthly data are noisy. So what to do?
Well, a crude approach would be simply to fit a trend line through those noisy monthly numbers. Here’s what happens when you do this for the Cleveland Fed’s median consumer price inflation number. On the vertical axis is the monthly inflation at an annual rate, on the horizontal axis months with Jan. 2008=0:
What I take from this is that deflation isn’t some distant possibility — it’s already here by some measures, not far off by others. And of course there isn’t some magic boundary effect when you cross zero; falling inflation is raising real interest rates and making debt problems worse as we speak.
There is a second chart and further discussion in Krugman’s article.
The Rising Threat of Deflation
The article Krugman referred to is The Rising Threat of Deflation. Here are a few snips highlighting Makin’s and Krugman’s concern over prices.
U.S. year-over-year core inflation has dropped to 0.9 percent—its lowest level in forty-four years. The six-month annualized core consumer price index inflation level has dropped even closer to zero, at 0.4 percent. Europe’s year-over-year core inflation rate has fallen to 0.8 percent—the lowest level ever reported in the series that began in 1991. Heavily indebted Spain’s year-over-year core inflation rate is down to 0.1 percent. Ireland’s deflation rate is 2.7 percent. As commodity prices slip, inflation will become deflation globally in short order.
Meanwhile in Japan, while analysts were touting Japan’s first-quarter real growth rate of 5 percent, few bothered to notice that over the past year Japan’s gross domestic product (GDP) deflator had fallen 2.8 percent, reflecting an accelerating pace of deflation in a country where the price level has been falling
by ilene - July 7th, 2010 3:19 am
Courtesy of The Pragmatic Capitalist
Much has been made about the recent action in the bond market. Yields have fallen to unheard of levels. The inflationistas and curve steepener traders are bewildered. It’s clear that bond investors are expecting very low inflation in the coming decade, but some fear it is portending far worse. Famed bond guru Bill Gross is worried about the action in the bond markets – so much so that he says the current environment is pricing in a depression. The Cleveland Fed recently released a note on the predictive nature of the yield curve. Their conclusions – a slowdown is on the horizon, but no double dip will follow:
“Since last month, the three-month rate has dropped to 0.09 percent (for the week ending June 18) from May’s 0.17, and this also comes in below April’s 0.16 percent. The ten-year rate dropped to 3.26 percent from May’s 3.33 percent, also down from April’s 3.85 percent. The slope increased a mere 1 basis point to 317 basis points, up from May’s 316 basis points, but still below April’s 369 basis points.”
“Projecting forward using past values of the spread and GDP growth suggests that real GDP will grow at about a 1.00 percent rate over the next year, just up from May’s prediction of 0.98 percent. Although the time horizons do not match exactly, this comes in on the more pessimistic side of other forecasts, although, like them, it does show moderate growth for the year.”
“the expected chance of the economy being in a
recessionnext June rises to 12.4 percent, up from May’s 9.9 percent and April’s 7.1 percent, despite the slight rise in the spread. Recent data has shifted the predicted value upward, though it still remains low.”
So, very slow growth, but no double dip. Of course, this is all assuming the recession actually ended which I think is absolute nonsense. This is and remains a consumer driven balance sheet recession. The reason policymakers have failed to solve the problems on Main Street is because they have failed to properly diagnose this as a problem rooted on Main Street.
by ilene - June 28th, 2010 3:41 pm
Courtesy of The Pragmatic Capitalist
John Hussman is officially sounding the double dip siren. He issued a similar call in November of 2007:
Based on evidence that has always and only been observed during or immediately prior to U.S. recessions, the U.S. economy appears headed into a second leg of an unusually challenging downturn.
A few weeks ago, I noted that our recession warning composite was on the brink of a signal that has always and only occurred during or immediately prior to U.S. recessions, the last signal being the warning I reported in the November 12, 2007 weekly comment Expecting A Recession. While the set of criteria I noted then would still require a decline in the ISM Purchasing Managers Index to 54 or less to complete a recession warning, what prompts my immediate concern is that the growth rate of the ECRI Weekly Leading Index has now declined to -6.9%. The WLI growth rate has historically demonstrated a strong correlation with the ISM Purchasing Managers Index, with the correlation being highest at a lead time of 13 weeks.
Taking the growth rate of the WLI as a single indicator, the only instance when a level of -6.9% was not associated with an actual recession was a single observation in 1988. But as I’ve long noted, recession evidence is best taken as a syndrome of multiple conditions, including the behavior of the yield curve, credit spreads, stock prices, and employment growth. Given that the WLI growth rate leads the PMI by about 13 weeks, I substituted the WLI growth rate for the PMI criterion in condition 4 of our recession warning composite. As you can see, the results are nearly identical, and not surprisingly, are slightly more timely than using the PMI. The blue line indicates recession warning signals from the composite of indicators, while the red blocks indicate official U.S. recessions as identified by the National Bureau of Economic Research.
Read the full article here.
Source: Hussman Funds
by ilene - June 22nd, 2010 5:18 pm
Courtesy of Mish
Economist Dave Rosenberg warns investors to Get a Grip on Reality.
Double-dip risks in the U.S. have risen substantially in the past two months. While the “back end” of the economy is still performing well, as we saw in the May industrial production report, this lags the cycle. The “front end” leads the cycle and by that we mean the key guts of final sales — the consumer and housing.
We have already endured two soft retail sales reports in a row and now the weekly chain-store data for June are pointing to sub-par activity. The housing sector is going back into the tank – there is no question about it. Bank credit is back in freefall. The recovery in consumer sentiment leaves it at levels that in the past were consistent with outright recessions. Last year’s improvement in initial jobless claims not only stalled out completely, but at over 470k is consistent with stagnant to negative jobs growth. And exports, which had been a lynchpin in the past year, will feel the double-whammy from the strength in the U.S. dollar and the spreading problems overseas.
Spanish banks cannot get funding and another Chinese bank regulator has warned in the past 24 hours of the growing risks from the country’s credit excesses. A disorderly unwinding of China’s credit and property bubble may well be the principal global macro risk for the remainder of the year. Indeed, perhaps the equity market finally realized yesterday that allowing China more control to defuse an internal property and credit bubble may well be a classic case of “be careful of what you wish for.”
The Bond Cycle and Deflation
I was at an event recently where I was able to see two legends among others – Louise Yamada and Gary Shilling. Louise made the point that while secular phases in the stock market generally last between 12 and 16 years, interest rate cycles tend to be much longer – anywhere from 22 to 37 years; and she has a chart back to 1790 to prove the point! So while all we ever hear is that this secular bull market in bonds is getting long in the tooth, having started in late 1981, it may not yet be over. After all, the deleveraging part of this cycle