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The circle in the lower right hand corner of this chart is small, but it's very big news. Yields on 3-mo. T-bills are rising: after hugging zero since late November through mid-January, yields are now up to 0.31%. That's still incredibly low of course, but the upward trend in the past week is unmistakable. As an astute reader pointed out the other day, Libor yields have also drifted up, but not by as much—with the result that the TED spread is now down to 91 bps, its lowest level since last June. Treasury bond yields bottomed on Dec. 30th, and are now up 80-100 bps and rising, and the Treasury yield curve is steeper. All of these are signs that animal spirits are stirring.
Tuesday, February 3, 2009
The crisis is passing (6)
The circle in the lower right hand corner of this chart is small, but it's very big news. Yields on 3-mo. T-bills are rising: after hugging zero since late November through mid-January, yields are now up to 0.31%. That's still incredibly low of course, but the upward trend in the past week is unmistakable. As an astute reader pointed out the other day, Libor yields have also drifted up, but not by as much—with the result that the TED spread is now down to 91 bps, its lowest level since last June. Treasury bond yields bottomed on Dec. 30th, and are now up 80-100 bps and rising, and the Treasury yield curve is steeper. All of these are signs that animal spirits are stirring.
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11 comments:
Scott,
Great blog. How do we determine if rising rates in t bills etc..are early evidence of future economic stabilizing/recovery as opposed to the dreaded "buyers strike" suggested by those concerned that investors are running away from u.s. gov't debt?
Also, based on your years of experience and probably knowing the analysis/players in this camp, what do you make of the Great Depression II camp(like Roubini, and Eric Splott in today's bloomberg.com).
Sorry, I meant Eric Sprott, not Splott.
M: my first answer is that if there were a "buyer's strike" I would expect to see Treasury yields FAR higher than they are today. They are still extraordinarily low, which means that demand for the stuff is extraordinarily strong. And if investors were running away from Treasury debt I would expect to see the dollar collapsing, but it's not--it's trading near the midpoint of hits historical range. I would also expect to see credit spreads extremely narrow or even negative (i.e., the world would be thinking that a high quality corporate bond was safer than a Treasury), but they are still extremely wide.
Over the years I have had some great calls, but too often the euphoria of getting the call right has blinded me to important changes going on in the market. I think there is a tendency for forecasters who get things right to overstay their welcome, to miss the signs that things are changing.
All of the Depression forecasters keep talking about the things that worked for them early last year, and none of them (at least that I have seen) address the issues I have been highlighting, such as a huge tightening of spreads, big declines in swap spreads and volatility, rising bill yields, explosive money supply growth, and the huge increase in housing affordability that comes as prices fall and mortgage rates fall. They fail to realize that big changes in relative prices end up sparking big changes in incentives, and that in turn causes investors to behave differently towards taking risk. All important change happens at the margin, and this economy is very dynamic. This recession will be over when animal spirits and confidence return, and we're seeing early signs of just that.
I would add that, as I pointed out a few months ago, the markets have been priced to a deep Depression. To forecast a Depression is simply to reiterate what the market already knows. You can't act on a Depression forecast. To bet against the market you have to believe we will have either a Super-Duper Triple Depression or something that is not a Depression. I find the latter much easier to contemplate.
Thanks Scott. You are very kind and helpful, and your input is greatly appreciated. Your work/mind/insights truly make a difference to me (and others).
The Depression II advocates remind me that Boone Pickens, Matt Simmons, Goldman Sachs, and the many commodity hedge funds were all convinced (and convinced the public) that oil was on a clear, sustainable path to $200 and higher. Whey they were right for a while, it was hard to not be persuaded by their arguments. The same applies today, but it is highly depended on changing facts, as you suggest. Many thanks.
I would like to see why you think the market is priced for some kind of "super depression," Scott.
The basic metrics don't support that view as far as I can see, and Hussman's price to peak earnings metric is not nearly as low as it was in 1932.
Hussman agrees that valuations are now "reasonable" and should provide decent ten year gains, but it doesn't look like the market is priced for an extraordinary depression.
But here's one good piece of news today: any further drop in automobile production can't hurt us much!
The problem with all the improvements so far seen is that these are occuring with massive and unprecedented government market intervention.
All that new money is a huge negative, not a positive. Like Hayek and others have said, if you create demand for goods using any kind of temporary expedient the economic activity engendered will fail as soon as that temporary source of funding stops -- or maybe even as soon as the growth rate slows. This is why we have our current problems.
Tom Burger
Great discussion guys. Scott is dead on that that many forecasters overstay their welcome. I might add that I lump Eric Sprott into a special category - a money man who expounds on physical things, i.e. commodities. I have written about (although I am not going to pimp my blog here) how one should be very wary when money men start pontificating about natural resources, particularly when they are claiming permanent scarcity.
We made 3 big mistakes which created the Great Depresion. Today we clearly did not repeat 1 of those mistakes (monetary policy), and the 2 others (New Deal, higher taxes) are still pending. So, I'd say the die is not yet cast on Depression II. It is looking like Obama, while not weak, is losing some relative strength. From strength he could have easily forced through those 2 additional blunders. We'll see but he could be weakening to the point where he can't do the damage that markets fear.
Tom: my rationale for saying that a mega depression is priced in is contained in a post last Nov. 16th:
http://scottgrannis.blogspot.com/2008/11/is-this-end-of-world-or-opportunity-of.html
All the money the Fed has pumped in has so far been in response to a huge increase in money demand, so it doesn't necessarily equate to a future disaster, assuming they can pull the money back out. I'm not saying this is all dandy, but I think you're too quick to conclude that we have another big problem looming. I have strong doubts about the Fed's ability to reverse course in a timely fashion, nevertheless. So I seem some higher inflation ahead, and I think that will slow the recovery materially. At this point, anything better than a depression is much more than the market expects, and so would be a positive.
Donny: I agree with you, and that's what I've been hoping for (i.e., that Obama wouldn't be able to do all the things he promised/threatened to do).
On the same theme (roubini et al), there is an interesting article in the London Times (here is the link -
http://business.timesonline.co.uk/tol/business/columnists/article5636248.ece )
which also questions the pessimism of these mavens - although it finishes with an angle I am still trying to get my head around - here is the relevant paragraph:
"Ultimately, of course, such a tightening of bank liquidity requirements would be equivalent to an indirect tax on bank profits, but that is an objection that somehow doesn't seem very potent today. At Davos last week I put this argument to three Nobel laureate economists who happened to be in a room at the same time. They looked at each other in bafflement and then responded in unison: “That's a good point.”
Why, then, I wondered, had no professional economist ever mentioned such an obvious idea?"
Thoughts, Scott...?
mmf: I read the article and I tried hard, but I just couldn't understand what he was talking about.
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