Friday, January 20, 2012

Panic is slowly fading.



The first chart above is a closeup look at the Vix/10-yr ratio, and the second chart shows the longer-term picture of the same. The market is still nervous (the Vix is still substantially above where it would be in normal times) and holds out little hope for a healthy economy (the 10-yr yield is still at levels that were associated with the Depression), but those sentiments are slowly giving way to the fact that the financial fundamentals in Europe are improving and there are quite a few indicators that show the U.S. economy is improving as well.

The Vix/10-yr ratio was priced to a global catastrophe at its peak in early October, and markets are breathing a tentative sigh of relief that so far nothing all that bad has happened. This year is off to a good start, if only because it's not proving to be as terrible as expected.

7 comments:

scottmba09 said...

Is it time to take down the stormy banner?

Dr William J McKibbin said...

The artificially induced "recovery" at the "Federal layer" of the US macroeconomy is the misguided brainchild of US monetary policy -- however, Main Street USA has yet to feel any reversal of fortune in what is clearly a Main Street economic depression evidenced by declining and/or flat real wages, home values, and employment opportunities along Main Street -- the "recovery" across the "Federal layer" of the economy is therefore a limited economic success for monetary policy, while the economic depression being experienced along Main Street USA is testament of the fiscal-policy failure in Congress -- no one is minding fiscal policy in America at this point while monetary actions have overrun Congress and the administration -- the "recovery" across the "Federal layer" of the economy has only highlighted the abandonment of Main Street USA by the Federal government and its various monetary and fiscal-policy regimes -- yes, I would not be surprised to see record profits reported in 2012 by the nation's largest "too big to fail" firms even while declines in real working wages, home values, and employment opportunties extend the Main Street depression still raging across America -- the isolation and alienation of Main Street USA is quickly transforming from an economic to a political issue in the 2012 elections that could thwart Republican efforts to retake the White House and Congress -- that's sad because creating a Main Street recovery is fiscally cheap compared to creating a Federal recovery -- sadly, increasing numbers of Americans are feeling isolated and disenfranchised by their party affiliations with both the Republican and Democratic parties -- in my opinion, an economic "recovery" that occurs only along the "Federal layer" of the macroeconomy will not be sufficient to cause independent voters to vote Republican -- herein lies the political vice economic challenge in 2012, at least in my opinion -- we will all watch and learn...

PS: Scott, you could help me join in your optimism by reporting in more detail the demonstable improvements in real working wages, home values, and working class job opportunties in America -- your reporting on private job gains has been helpful and instructive for me (though I am still suspicious given the decline in the US employment to population ratio) -- when are we going to see a robust recovery in home values and real working wages in America (?) -- I ask because these are the only factors that will matter in the 2012 elections, at least in my opinion -- if fiscal conservatism is to retake control of the White House and Congress, then clear evidence (or at least a believable hope) of a Main Street recovery is essential in the near-term...

PPS: I enjoy reading Scott's blog on a daily basis -- regards to Scott and his many readers and fans -- Scott's work is a useful and persuasive contribution to the economic (and hopefully the political) debate that is just get underway ahead of the 2012 elections.

PPPS: For anyone wondering, I am a fiscal conservative and social liberal, otherwise known as a Libertarian -- regards...

Dr William J McKibbin said...

PPPPS: My poltical expose above does not change my stance as an ardent investment realist who only cares about what is and how to make money based on what is -- I do not anticipate the market -- I invest into the market -- and every market (inflation, deflation, stagflation, or otherwise) is just another money making opportunity for me personally as in investor...

John said...

Dr.:
I think your "epistle" is pretty much spot on. The libertarian thing , though, unless defined in some kind of respectable framework, seems crazy to me. All laws: civil and criminal codes, are government mandates. Doing away with them would turn us into something akin to Somalia.

Jim said...
This comment has been removed by the author.
Jim said...

There is a big furniture seller out here in Southern California with record sales. Problem is they take payment in 2013. I wonder how many of those type of businesses are flourishing with false profits.

I am on the ground floor and business is not getting better. I talk to many different companies and owners, and no one is seeing any lift.

Regarding the VIX, it seems like the calm before the tornado. A Greek default will start cracking the frail structure of Europe and UK.

Benjamin said...

Allan Meltzer, the extremely conservative GOP economist, now advocates an aggressive and bullish monetary policy.

“Repeatedly, the message has been to reduce tax rates permanently… A permanent tax cut was supposed to do what previous fiscal efforts had failed to do — generate sustained expansion of the American economy.

No one should doubt that an expansion is desirable for US… and the rest of the world…The US government has watched the economy stagnate much too long. A policy change is long overdue.

The problem with the advice (about fiscal easing) is that few would, and none should, believe that the US can reduce tax rates permanently. US has run big budget deficits for the past five years and accumulated a large debt that must be serviced at considerably higher interest rates in the future … And the US must soon start to finance large prospective deficits for old age pensions and health care. There is no way to finance these current and future liabilities that will not involve higher future tax rates…

It is wrong when somebody tells the American to maintain the value of the dollar…The fluctuating rate system should work both ways. Strong economies appreciate; weak economies depreciate.

What is the alternative? Deregulation is desirable, but it will do its work slowly. If temporary tax cuts are saved, not spent, and permanent tax cuts are impossible, the US choice is between devaluation and renewed deflation. The deflationary solution runs grave risks. Asset prices would continue to fall. Investors anticipating further asset price declines would have every reason to hold cash and wait for better prices. The fragile banking system would face larger losses as asset prices fell.

Monetary expansion and devaluation is a much better solution. An announcement by the Federal Reserve and the government that the aim of policy is to prevent deflation and restore growth by providing enough money to raise asset prices would change beliefs and anticipations. Rising asset prices, including land and property prices, would revive markets for these assets once the public became convinced that the policy would be sustained.

The volume of “bad loans” at US banks is not a fixed sum. Rising asset prices would change some loans from bad to good, thereby improving the position of the banking system. Faster money growth would add to the banks’ ability to make new loans, encouraging business expansion.

This program can work only if the exchange rate is allowed to depreciate. Five years of lowering interest rates has shown that there is no way to maintain the exchange rate and generate monetary expansion…

…Some will see devaluation as an attempt by the US to expand through exporting. This is a half-truth. Devaluation will initially increase US exports and reduce imports. As the economy recovers, incomes will rise. Rising incomes are the surest way of generating imports of raw materials and sub-assemblies from US trading partners.

Let money growth increase until asset prices start to rise.”

Actually, he wrote that about Japan in 1999. Kind of spooky, no?

I suspect Meltzer, Taylor, Bernanke will all go for monetary stimulus--as soon as Obama is out of office. I wish we could go now with monetary stimulus and also have a new President.