Fear subsides, prices rise (9)

Another update to this chart. The VIX index, a proxy for the market's fear (and the related uncertainty over the future direction of equity prices), has declined to a new post-crisis low, but equity prices seem very reluctant to rise. One explanation of this would be that while there is less fear and uncertainty about the direction of the economy, at the same time the consensus view calling for a slow and painful recovery has solidified. A depression has been ruled out, but the recovery doesn't look to be very impressive at all, to judge from the looks of the market. I think Obama's policies have been a significant factor in depressing investor enthusiasm, since they involve massive increases in government spending and thus huge increases in future tax burdens.

So from an investor's standpoint, the key question today is whether we see a very slow and drawn out recovery or something a little better. I'm in the latter camp, because I see improvement across the board in a number of important fundamentals, all of which I have discussed in the past few months:

Swap and credit spreads have declined significantly. Implied volatility in stock and bond options has declined significantly. Commodity prices are up signficantly (e.g., the CRB spot commodity index is up 24% from its December low, crude oil is up 47%, copper is up 88%). Currency growth has all but ceased (implying the end of declining money velocity). Residential construction has bottomed, and housing prices are probably at or near their lows. Weekly unemployment claims are down 23% from their high. Credit card delinquencies are down. ABS and CMBS prices are up. Used car prices are up 16% this year. Shipping rates and volumes are up. Corporate layoffs are way down. Corporate profits (the NIPA version) are still fundamentally healthy. The yield curve is very steep. High yield and emerging market bond prices are way up. Treasury bond yields are way up from their year-end lows. Core inflation measures have not declined meaningfully.

As I see it, the economy is recovering despite the best efforts of Obama and the Democrats to saddle the economy with huge new tax and regulatory burdens. The Fed hasn't helped either, with very erratic monetary policy over the years and now a monstruous increase in the monetary base that goes so far beyond anything we've ever seen that the average person can't possibly understand what is going on.

I've always been willing to give the economy the benefit of the doubt when it comes to recovery; I don't think you can underestimate the ability of this economy to overcome adversity. If it weren't for bad fiscal and monetary policy the economy would be booming by now. Instead it is probably going to grow about 3% a year for the foreseeable future, although that's not enough to make a huge dent in the unemployment rate.

If the current decline in Obama's approval ratings continues, if Obamacare fails to pass before the August Congressional recess (an increasingly likely outcome, thank goodness), and if the cap and trade bill gets postponed to next year, then the outlook could brighten considerably. It pays to be optimistic these days.