Wednesday, November 27, 2013

Systemic risk declines globally

Swap spreads (see a short primer on the subject here) are excellent coincident and leading indicators of financial market and economic health, as well as direct indicators of systemic risk. Swap spreads are now very low and declining in most developed countries. This bodes well for growth in the coming year.

The first of the above charts shows 2-yr swap spreads for the U.S. and the Eurozone. U.S. swap spreads are now about as low as they have ever been, and Eurozone 2-yr swap spreads are at a new post-recession low. The second of the above charts shows 2-yr swap spreads in Japan, which have also fallen to close to their lowest levels ever.

Very low swap spreads are indicative of financial markets that enjoy abundant liquidity conditions thanks to Quantitative Easing measures by the world's major central banks. The global banking system hasn't been this healthy for a long time. With banks on a solid footing and with a virtually unlimited ability to lend (thanks to abundant excess reserves), the only thing standing between today's modest economic growth rates and much faster real growth in the future is more confidence and new incentives to take on risk (e.g., lower tax rates on income and capital that boost the after-tax reward to work and investment).

Meanwhile, the virtual absence of systemic risk makes holding cash—which pays almost nothing— quite unattractive, especially when compared to the much higher yields available on alternative investments.

UPDATE: As the above chart shows, corporate credit spreads are now at post-recession lows. This helps confirm the message of swaps, namely that systemic risk is quite low these days. However, I would note that credit spreads have been quite a bit lower in the past. That suggests that corporate bonds—particularly those with lower credit quality ratings—continue to be attractive relative to Treasuries.


William Baldwin said...

Scott, economist Alan Beaulieu is the darling of the CEO world and most certainly of Vistage, the CEO netwroking group I am in. He projects a very slow 2014 connected to industrial production slowing drastically.Then an up-tick in 14/15. thoughts? Thanks, and have a great holiday!

Scott Grannis said...

I don't see major changes in the near future--growth is likely to be modest as it has been in the past four years: something in the range of 2-2.5%. But the longer-term outlook is more favorable, since we are likely to see some positive fiscal policy shifts (lower taxes, more limited government) in the next year or two.

William McKibbin said...

Now is time to buy dividend and rent earning equities for the long haul -- the persistent economic depression along Main Street USA has created bargains galore -- however, I see essentially no chance of robust growth fort at least 3-5 decades -- expect real home values, real working wages, and the employment to population ratio to steadily decline to the lowest levels ever recorded in the US over the balance of the 21st century -- accredited investors will see their standards of living improve exponentially, while everyone else watches their standard of living decline to global norms -- most Americans should be under cover and preparing for dark times that will last the remainder of their lives -- for most people, the economic and political times that are descending upon the world will be worse than anyone can imagine -- for these reasons, we are in a unique "buy" window of opportunity for anyone with cash -- my advice to Americans is find someplace to hide from the economic horror to come...

William said...

Great news, Scott.
Thank you & Happy Thanksgiving

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

Nice wrap-up. The worst is behind us.

Can we thrive again?

The US fiscal policy is a mess, though as Grannis has pointed out, getting better even with DC neglect and stupidity. The deficit is getting smaller.

Monetary policy remains constrictive, despite what you read. Inflation is dead--that means tight money. The dollar is stable against the euro, and they are so tight they are facing deflation.

The dollar is rising against the yen, a country where they have decided to fight for growth through monetary policy.

That's a bad sign for the USA--the dollar should be flat against the yen if the Fed was also fighting for economic growth.

As Scott Grannis says, same ol', same ol', Weak growth, weak leadership.

Benjamin said...

Nikkei index jumps 1.8% to highest in almost six years

Nikkei 225 index jumped 1.80 per cent to its highest close in almost six years as yen and record finishes on Wall Street helped propel the market.

TOKYO: Tokyo's Nikkei 225 jumped 1.80 per cent to its best close in almost six years Thursday as a weaker yen and record finishes on Wall Street helped propel the benchmark index to new highs.

The Nikkei finished up 277.49 points to 15,727.12, its highest close since mid-December 2007, while the broader Topix index of all first-section shares added 1.12 per cent, or 13.96 points, to 1,261.04.

Maybe QE works, maybe not, Sure seems to.

William McKibbin said...

@Benjamin, the US Fed is not fighting for growth or employment, but rather near zero inflation rates (although the official goal is 2% inflation) -- the purpose of QE was to avert deflation, not to promote either growth or employment -- in fact, the Fed has been successful at managing inflation under Dr Bernanke's leadership -- but make no mistake, neither monetary nor fiscal policy-makers in the US are undertaking actions that will lead to dramatic growth or employment increases -- Scott is correct when he predicts that growth will remain at something between 2 and 2.5 percent -- I would add that inflation has been hovering at similar rates, while the unemployment rate remains relatively high -- all of these outcomes are well within acceptable norms for both monetary and fiscal policy-makers of today's generation of leaders -- for these reasons, there is no reason for unaccredited investors counting on inflation or speculative growth spikes to be hopeful -- what remains is the obvious opportunity to work hard and acquire dividend and rent-earning equities over a lifetime -- perhaps that's how life is supposed to be in the US -- like it or not, that's what the future holds -- in the meantime, watch for real working wages, real home values, and the employment to population ratio to decline steadily over the balance of the 21st century -- for those who accept these realities and set a course that exploits stagnation, the future looks bright indeed -- "gotta wear shades..."

theyenguy said...

Systemic risk has literally gone off the scale.

Fiat money, that is Credit, AGG, and Currencies, DBV, and CEW, died October 23, 2013, with the bond vigilantes calling the Interest Rate on the US Ten Year Note higher from 2.48%, which has destroyed not only US Treasuries, TLT, but also Emerging Market Bonds, EMB.

The death of fiat money has been transferred to a growing number of investment sectors, such as Timber Production, WOOD, Design Build, FLM, Utilities, XLU, Industrial Miners, PICK, and Metal Manufacturers, XME, seen in their combined ongoing chart

And the death of fiat money has been transferred to Nation Investment, EFA, in particular the Emerging Markets, EEM, Emerging Market Financial Institutions, EMFN, Emerging Market Mining, EMMT, and Emerging Market Infrastructure, EMIF; examples being Indonesia, IDX, Thailand, THD, and Philippines, EPHE, and Brazil, EWZ, EWZS, BRAF, BRXX, Chile, ECH, and Peru, EPU, as well as Developed Nations, Australia, EWA, KROO, and New Zealand, ENZL.

Of note, the death of money is causing monetary deflation in the US, as the stock of M2 Money is on the decline from its peak of 10,988 on 10-21-2013 to 10,922 as of 11-22-2013 ....

When the death of fiat money is transmitted to World Stocks, VT, and Global Financial Institutions, IXG, there will be a worldwide credit crisis and financial system breakdown known as Financial Apocalypse, foretold in Bible Prophecy of Revelation 13:3-4, and this will be the genesis event for regional governance and totalitarian collectivism to rule the world in each of the world’s ten regions, and for totalitarian collectivism to occupy in each of mankind’s seven institutions, as foretold in Bible prophecy of Revelation 13:1-4.

Holding cash, which pays almost nothing, has been most unattractive, especially when compared to the much higher yields available on alternative investments, such as Leveraged Buyouts PSP, paying 9.9% Junk Bond, JNK, paying 6.2%, Energy Partnerships, AMJ, paying 4.2%, and Global Telecom, IST, paying 3.8%. Those who have been holdouts in credit instruments, have lost principle, Mortgage Backed Bonds, MBB, have lost 1.8% over the last year.

An inquiring mind asks what constitutes safe money? Are money market funds, safe? Will they be able to maintain their constant $1.00 value, or will they “break the buck”? During QE, business-loan based short term bond funds, such as FLOT, were safe investments, in that they were ever increasing in value; of note, this fiat investment traded sharply lower as world stocks peaked. When the bond vigilantes called the Interest Rate on the US Ten Year Note, ^TNX, higher from 2.48%, on October 23, 2013, on the exhaustion of the world central banks authority, the “money good” attribute of this short term bond funds failed, and serves as ominous warning to those who thing money market funds are safe.

Out of waves of sovereign, banking, and corporate insolvency, a new monster, the beast regime, with feet of a bear, mouth of lion, and camouflage of a leopard, is coming to rule mankind, displacing the banker regime, and it is making its claw-hold in Europe with its paws well secured in the German coalition agreement, which paves the way for social attacks throughout Europe, and its mouth announcing the militarization of German foreign policy and attacks on democratic rights, as Christoph Dreier of WSWS reports German Grand Coalition: A Government Of Social Austerity And Militarism.

William said...

ECRI Weekly Leading Index Edges Up

A measure of future U.S. economic growth rose to a nine-week high while the annualized growth rate also gained, a research group said on Wednesday.

The Economic Cycle Research Institute said its Weekly Leading Index stood at 132.5 in the week ended Nov. 22, up from 132.1 the prior week.

The index's annualized growth rate was 2.7 percent, the highest since mid-October.

William said...


Weekly 11/27/2013

Equity Fund Inflows $12 Bil;

Taxable Bond Fund Inflows $141 Mil

xETFs - Equity Fund Inflows $1.7 Bil;
Taxable Bond Fund Inflows $1.2 Bil

Weekly 11/20/2013

Equity Fund Inflows $4.2 Bil;

Taxable Bond Fund Outflows -$430 Mil

xETFs - Equity Fund Inflows $2.6 Bil;
Taxable Bond Fund Outflows -$79 Mil

Monthly October2013

Equity Fund Inflows $53.6 Bil;

Taxable Bond Fund Outflows -$6.7 Bil

xETFs - Equity Fund Inflows $24 Bil;
Taxable Bond Fund Outflows -$5.7 Bil
November Equity Inflows running about $16 Billion thus far.

Illuninati said...

I read the blogs of several economists on a regular basis. So far, the blog by Scott Grannis has been the most helpful for me in understanding where the United States economy and the World Economy are at the moment. Thank-you Mr. Grannis for an excellent blog.

Scott Grannis said...