Friday, June 12, 2009

Swap spreads essentially back to normal

This blog is chock full of posts describing how swap spreads have been excellent leading indicators of economic and financial market conditions. As these charts show, rising swap spreads predicted the onset of the last two recessions, and declining swap spreads predicted the end of these same recessions. We can now say that the chapter is almost closed on the recession which had its roots in the deterioration of the housing market and rising swap spreads in the latter half of 2007. Swap spreads have essentially returned to levels that are considered with "normal" market conditions. We should expect to see continued improvement in the economy and in the financial markets as the year progresses.

I would reiterate what I've said before: the recovery from this crisis began with the big decline in swap spreads that occurred throughout the fourth quarter of last year. Obama's "stimulus" package had nothing to do with it. Only about 5% of those funds have been spent so far, and the bulk of the stimulus spending will happen after the economy is well on its recovery path. We don't need the stimulus and we don't need bigger government.

I think the timing of the recovery was set back by at least several months due to the huge shock to confidence that arose as a result of the mad dash to sign the stimulus bill, followed by Obama's budget plans which revealed an enormous expansion of government. The market was suddenly forced to anticipate an equally large rise in future tax burdens, and capital went into hiding as the market fell in February and early March. Since then Obama's ambitions have been scaled back somewhat, and Congress is beginning to push back on many of his initiatives. Cap and trade seems unlikely to pass this year, and opposition to universal healthcare is mounting rapidly. This has been excellent news for a market shell-shocked by an explosion of anti-market legislation earlier in the year. Let's hope the bad news for Obama continues.

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