Wednesday, April 20, 2016

Pessimism recedes

Not much has changed in the past few months since I posted A review of key charts: no recession, no deflation, lots of pessimism, except that things have played out more or less as expected. As I observed last week, there have been some encouraging developments that have thrown cold water on fears that China would collapse and oil prices would go to zero. Here are just three of the more important charts that are worth updating:

Commodity prices continue to rebound from their lows of several months ago. Oil prices are up much more than 50%, and as the chart above shows, industrial metals prices are up over 25% in just the past 3 months. At the very least this rules out the threat of a global economic collapse; more importantly, it hints strongly that economies around the world are beginning to improve on the margin. Later this month we'll hear that first quarter growth was miserably slow, but that's definitely old news at this point. What matters is what's happening now.

Credit spreads continue to fall, thanks to rising commodity prices. And of course 2-yr swap spreads, my favorite leading indicator of economic and financial market health, continue to be very low and thus very encouraging.

Equities continue to rally as fears are gradually allayed. I can't say the market is optimistic, however, since 10-yr Treasury yields continue to be extremely low (~1.8%). There's still a lot of pessimism priced into Treasury bonds these days, and PE ratios are only moderately above average, despite the fact that corporate profits are very strong relative to GDP.

What's driving the market higher is not optimism but receding pessimism.


Frozen in the North said...


I know you want to sound positive here, but you've got to try harder man! You are "this close" to sounding like a bear! We need your optimism, jobless claims just dropped to their lowest level since 1973. Granted, with America's population, even taking into account the changing demographics it would seem that the real jobless level is much higher than the statistics are showing. Nevertheless, numbers are good, commodities are all up (maybe time to look at Canadian assets -- the country is one large commodity play).

My instinct is that the jury is still out on China, the amount of credit created in the last quarter (somewhere near $1 trillion) seems to be a desperate attempt at boosting the economy, and the ECB continued effort to buy everything that moves...anyway we are confusing me (Mr Bear) to you, my favorite perma-optimist (who are read every day...)

Benjamin Cole said...

It does seem suddenly markets improved.

Japanese government bonds hitting record low yields. An investor will pay the Japanese government for the privilege of owning a 10-year bond!

This is a nation with a huge national debt and running a large QE program.

Are we one recession away from being the next Japan?

marcusbalbus said...

i demand more QE

William McKibbin said...
This comment has been removed by the author.
William McKibbin said...

Think walls, tariffs, and the end of trade deficits, and the inability of government to borrow -- ending imports of energy, consumer electronics, automobiles, and workers means vastly expanded opportunities to create all of those things here in America -- prices will rise sharply as foreign made goods disappear -- but the ongoing economic depression will finally be reversed -- for the first time in many decades, the supply-siders will have their day -- yes, much disruption will occur in the coming decade as a result -- but our nation's long-term future will be assured -- domestic manufacturing and energy production will thrive -- workers will be in short-supply so wages will rise sharply -- the big losers will be the military-industrial complex, the medical establishment, Wall Street, and those reliant on the government for anything -- the big winners will be found along Main Street USA!

William McKibbin said...

PS: Currently, nothing sold in Walmart is manufactured in America except food -- that will change...

Benjamin Cole said...

William McKibben:

Some forgotten history: President Reagan was the greatest trade protectionist of the post-world War II era.

Will Trump do a Reagan and erect protectionist trade barriers? Reagan also cheapened he dollar at the Plaza Accords in 1985.

Times have changed, but maybe so. In many regards Trump is a Reagan-lite.

Hans said...

"I know you want to sound positive here, but you've got to try harder man! You are "this close" to sounding like a bear! We need your optimism, jobless claims just dropped to their lowest level since 1973."

What is really needed is the truth, wherever it lies. Examine the U-6 and the unenjoyment
rate approaches nearly 10%.

Ask the jobless and those on EBT cards, whether a record low in the jobless claims
will provide a boost of optimism?

I for one appreciate Mr Grannis' fair and balance reporting and not demigoding the

Johnny Bee Dawg said...

U-6 has plummeted from over 17%, moving in the right direction.
Its back down to the levels of the mid 1990s and early 2000s.

Imagine what it could be if we stopped paying able-bodied people to not work, and made taxes favorable enough to encourage skilled idle workers back into employment.

I bet that at least a third of that U-6 number is made up of people who don't NEED to get a paycheck from a job.

Hans said...

Professor Jacobs, a reasonable man and a staff member at the University of Minnesota.

He often makes appearance on local media regarding political and economic matters,
with a pragmatic approach to issues. (he is no radical in any sense of the word)

Hear, are his thoughts on the FRB and as well as that of the co-author; whom
have written a new book regarding the direction of the US Central Bank.

Not only do they control both short and long-term interest rates but
the healthy and welfare of the US dollar.

Benjamin Cole said...


If you look at the direction of inflation since 1981, do you really think the Fed has been too loose?

We are now seeing inflation rates of one-third to one-half that we had under President Ronald Reagan, regarded in many circles as the man who slayed inflation---well along with Chairman Volcker.

The credo that monetary policy always and everywhere should be tighter is a strong one, but is it the correct one?

Johnny Bee Dawg said...

Not sure what that professor means when he talks about the Fed's "Constitutional responsibility". The Fed has never been permitted by the US Constitution. They exist to serve and protect the banking system. They are owned by the banks.

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

Not seasonally adjusted Seasonally adjusted
2015 Feb.
2016 Mar.
2016 Mar.
2015 Nov.
2015 Dec.
2015 Jan.
2016 Feb.
2016 Mar.
U-1 Persons unemployed 15 weeks or longer, as a percent of the civilian labor force
2.6 2.2 2.3 2.4 2.1 2.1 2.0 2.1 2.1
U-2 Job losers and persons who completed temporary jobs, as a percent of the civilian labor force
2.9 2.7 2.6 2.7 2.5 2.4 2.3 2.4 2.4
U-3 Total unemployed, as a percent of the civilian labor force (official unemployment rate)
5.6 5.2 5.1 5.5 5.0 5.0 4.9 4.9 5.0
U-4 Total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers
6.0 5.6 5.5 5.9 5.4 5.4 5.3 5.3 5.3
U-5 Total unemployed, plus discouraged workers, plus all other persons marginally attached to the labor force, as a percent of the civilian labor force plus all persons marginally attached to the labor force
6.8 6.3 6.1 6.7 6.1 6.1 6.2 6.0 6.0
U-6 Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force
11.0 10.1 9.9 10.9 9.9 9.9 9.9 9.7 9.8
NOTE: Persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not currently looking for work. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule. Updated population controls are introduced annually with the release of January data.

Wow, a smorgasbord of unemployment numbers!!

Let's add - U-7. Marginal persons whom would labor but decide not to
because of comfortable welfare payments & either are full or part time
employed in the shadow economy. (uncontrolled & unregulated marketplace)

Ben Jamin, inflation is certainly under control. How much I credit the FRB
or the market place I do not know. I strongly suspect that inflation in the
70's and 80's, was mostly the responsibility of governmental units.

This is certainly the case in both Argentina and The People's Democratic Republic
of Chavez.

The only legitimate purpose of any central bank, should be to add or withdraw liquidity.

Volcker, did slayed inflation, unfortunately it also kilt the economy.

Erne Lewis said...

Please consider the following taken from Richard Rahn's column yesterday.

Would you like for the bank to give you a check each month for your mortgage interest payment rather than you paying the bank interest? As mad as that question seems, the fact is that some homeowners in Denmark are now receiving checks each month because their mortgages have negative (below zero) interest rates. Negative, zero or very low interest rates encourage people to buy much more expensive homes than they normally would, which is to their benefit until interest rates rise. Despite stagnant economies many European cities are experiencing a rapid rise in home prices largely because of low interest rate policies.
I like your posts as I think you know but I do wish you would speak to the probability of a global meltdown as a result of central bank policies.

Johnny Bee Dawg said...

Not sure what that professor means when he talks about the Fed's "Constitutional responsibility". The Fed has never been permitted by the US Constitution. They exist to serve and protect the banking system. They are owned by the banks.

Hans said...

JBG, good fine! I think the professor was overstating
either the role of CONgress or the 16th Amendment.

In any event, the FRB was the creation (mostly support by Demcos)
of the legislature and not the US Constitution.

I am not sure, however, where the Reserve Act gave the Central Bank the
authority to bailout private business. (non banking firms)

This is of course, for many of us, an unwanted power grab by this
governmental unit.

The BOJ now owns 1/3 of all government paper and 1/2 of all ETF
stock funds. It's US cousin also has a massive interest in
government paper as well.

Not since February the 23rd, has the DOW declined by 1%; almost nine weeks!

The Chicken Reserve saw it's own shadow that day and ran back to it's

April 27, 2016
Richard Fisher: Fed Has Markets on Ritalin; Correction Coming. Suck It Up & Deal with It
Notice: We detected you might have an ad blocker running in your browser. If you experience any issues with the video player, try turning off the ad blocker and reloading the page.

"RICK SANTELLI: I don't think that central banks have adjusted very well to the hiccup of globalization. You know, we have a world that has excess capacity and the central banks keep throwing them lifelines, whether it's in the form of manipulated FX, rates that are probably too low, purchases of paper to keep sovereigns looking healthy, and of course all their holdings whether it's our central bank or others.

So in the end, how are we going to delever? How are we going to clear out the excess capacity? How are we going to see goods prices move up, which the Fed and central banks want, when the very nature of what they're doing prevents that healing?

RICHARD FISHER: That's a great question because monetary policy worldwide, including here in the United States, is leading a distortion in the way monies are distributed and asset allocation, inflating the price of securities or anything that trades, including commercial real estate.

And then you are very hesitant to try to take that away for fear of volatility or for fear of a downside slope which could affect the economy. I've said this over and over again, Rick--the Fed has the markets on Ritalin, trying to keep the mood very smooth, keep volatility down as much as possible. As soon as they hint they might remove that, then they create the problems that they're afraid of. So they've boxed themselves into a corner and the real art will be to see how they manipulate or maneuver to get out of that. it's not clear how it's going to be done, but i think it should be done and the sooner they begin to act, the better."

The influence of the FRB is unparalleled in modern history. All security markets
have been brought under their control and direction by their policies and actions.

They are economic 5th columnists. They would have made excellent First Officers
on the HMS Titanic.

Sad to say, but there is an iceberg ahead which will have a very imminence impact,
changing the course of events.

Hans said...

JBD " They exist to serve and protect the banking system. They are owned by the banks"

Now, just axe AIG if and how they got one of the biggest bailouts
in history.

"It puts the government in control of a private insurer -- a historic development, particularly considering that AIG isn't directly regulated by the federal government. The Fed took the highly unusual step using legal authority granted in the Federal Reserve Act, which allows it to lend to nonbanks under "unusual and exigent" circumstances, something it invoked when Bear Stearns Cos. was rescued in March."

The power of the FRB grows with each crisis, until one day it just become
The Reserve of Last Resorts. We can and will monetize any and all debt because
at the Fed we have no regret.

Money - money, we don't no stinken money.

Johnny Bee Dawg said...

The late historian Antony Sutton (formerly a fellow at Stanford's Hoover Institute) wrote a short book entitled, The Federal Reserve Conspiracy, which details the hour by hour events that led up to the passage of the Federal Reserve Act in '33. That rigged vote puts the ObamaCare passage to shame. More socialist chicanery.

Free PDF version here:

Johnny Bee Dawg said...

Corrected link:

Hans said...

JBD, thank for the link! More reading to do.

Hans said...

JBD, this is from page nine from your PDF.

"Hamilton's proposal (for a central bank) was referred to a Senate Committee. But this
Committee included Philip Schyler (Hamilton's father-in-law) and all
its members shared Hamilton's political views. In brief, the Committee
was stacked.
President Washington then referred the bill to Thomas Jefferson
(Secretary of State) and Edmund Randolph (Attorney General). Both
found it to be unconstitutional. Jefferson's opinion on the
unconstitutionality of the bank included the following powerful
I consider the foundation of the Constitution as laid on this
ground; That "all powers not delegated to the United States by the
Constitution nor prohibited by it to the states, are reserved to the
states, or to the people.""

Is it possible that this was the content of the professor's statement.

Hans said...

JBD, from Madison through PresidentGeneral Jackson, they
argue that the US Constitution neither expresses nor implies
the formation of a Central bank and that its powers are best
deferred to that of the states.

The fear and rightfully so, is that this entity,
through the use of debt and money would expanded it's power and
unwanted political influence.

This, IMHO, has certainly borne fruit.

The opposition was lead by Hamilton and his supporters. Not surprising,
as Hamilton was a strong proponent of power devolving to a Central government.

Considering its two principal assets, money and debt, an alliance with
the Central government should not surprise even the most illiterate of us.
These monetary monarchs have become willing allies to advance and support
a Central government through their "chartered" monopoly.

Today's power of Central Banks - is immense and disconcerting. They have come
out of obscurity and have reached the public stage, with no oversight and
little fear of criticism.

The FRB is a power onto itself. Its internal mechanism is opaque by design,
to the exclusion of the industry and governmental units it serves.