This week I'm in Park City to do some skiing with my brother, which is a good time because the Sundance Film Festival, which starts today, keeps a lot of people off the slopes. Yesterday the mountain was all but deserted.
Yesterday had all the markings of a panic selloff, so it's not surprising that the market is up today.
Here are a few charts and some commentary in the meantime, since I'm off for the slopes shortly and it's a beautiful day:
The worst damage is still limited to the energy sector, as crude prices fall into the 20s. As the chart above shows, spreads on energy-related high-yield debt have now reached the levels that marked the utter panic of 2008. Can things get much worse? Doubtful. Outside the energy sector, however, spreads are at levels that we last saw during the PIIGS crisis of late 2011. That's bad, but it's not a crisis, and it suggests that any contagion from the energy sector is still quite limited.
Despite all the turmoil, gold prices remain in a downtrend, as do TIPS prices. Sure, there have been some counter-wiggles, but nothing significant. I note that there are many analysts who look at falling gold prices as symptomatic of tight monetary policy. I disagree. I think gold prices reached exorbitant levels a few years ago on fears that monetary policy was going to seriously debase the value of the dollar (i.e., monetary policy was way too easy). I think gold has been declining since as the market loses its fears of dollar debasement, and as inflation remains low. In a sense, the market over-reacted to what it thought was too-easy monetary policy and now is slowly coming back to more reasonable levels. TIPS prices have tracked gold prices for the same reason: inflation fears have diminished and have been replaced—slowly—by a return of confidence.
Most of the turmoil in the past year has centered around falling energy prices. But take those out, and inflation has been running at 2% per year on average since 2003. Ho-hum, nothing much has changed except that oil has gone from being very expensive to now very cheap.
We've seen this movie before. A big drop in oil prices depresses inflation, but core prices aren't much affected. Once oil prices stop declining, headline inflation returns to the level of ex-energy price inflation.
Both the CPI and the PPI (core versions) are behaving in similar fashion, registering inflation of about 2% per year.