Tuesday, June 23, 2009

Very steep Treasury curve (2)

As this chart shows, the Treasury yield curve is extremely steep. Steep curves are almost always a sign of easy money, and they traditionally signal recovery or the onset of recovery. That the curve today is so steep, at a time when short-term rates are at generational lows, the dollar is generally weak, gold is over $900/oz., credit and swap spreads are narrowing and commodity prices are rising across the board, is a clear sign that the Fed should be thinking very seriously about tightening monetary policy. If they don't then inflation pressures are going to be rising.

This sounds like heresy, I know, since economic pessimism is still in abundant supply these days. No one believes the green shoots, no one believes the banks are lending, many argue that the money supply hasn't increased enough, the unemployment rate is still rising, etc. But the things I mention above (e.g., the slope of the yield curve, gold, the value of the dollar, commodity prices, swap spreads) are good leading indicators of what is going to show up in the economy and the headlines in the months to come. If the Fed wants to do a good job they need to be forward-looking, not driving by looking in the rear-view mirror.


Public Library said...

You are asking the Fed to drive, I hate to say herein lies the problem. They led the country into this and you are asking them to lead us out.

The "Great Moderation" may have been no more than a lucky fluke which means the next several decades could be very erratic and volatile especially considering how many "tools" governments are employing to "manage" the system.

Scott Grannis said...

I can ask all day, but that doesn't mean they will listen. They failed to do the responsible thing quite a few times in the past 10 years.

alstry said...

From the WSJ:

CAMBRIDGE, Mass -- Harvard
University, its endowment battered by the recession, said it will lay off 275 employees and reduce or change work hours for about 40 more.

The layoffs, which won't involve any professors, will affect less than 2% of Harvard's 16,000 faculty and staff.

THIS IS HARVARD....a decent PRIVATE university with a strong endowment.

If my Alstrynomic calculations are correct....we should see about 750,000 to 1,000,000 workers released from Colleges and Universities ALONE.....and an additional 2-3 million federal, state and local government employees released in the next 18 months.

This alone should take reported unemployment to well over 12%.....but we all know that unemployployment is really well over 15% today.

Public Library said...

Not all Universities have or rely on big endowments to satisfy their obligations. And not all endowments were hammered like Harvard. I would call that "iffy-nomics"

bitbucket255 said...

Obviously the next economy is going to be a lot different than the RE bubble driven one this decade so far. Writers in the fishwrappers and business tabloids are making the usual noises about consumer behavior, the "green economy", purported stimulus spending etc.

But given the sea state visible ahead, in terms of big picture stuff like energy and other commodity prices, interest rates, inflation projections etc, what is going to be new or improved lets say 5 years out?

Scott Grannis said...

As much as I dislike current fiscal and monetary policy, I don't think you should underestimate the ability of this economy to surprise on the upside. 5 years is a long time; lots of things could happen.

alstry said...


I love your optimism.....but here is a bit of reality:

The city of Sacramento has cut off talks with the fire union - and as many as 68 firefighters will lose their jobs next week as a result.


ONE CITY......68 Firefighters!!!!!!

To help balance its budget, California has reduced the state tax credit for dependents.

The change will increase a family's California taxes for 2009 by about $210 per dependent compared with 2008.

A family with one dependent that normally gets a state-tax refund will get back $210 less when they file their 2009 return next year. A family that normally owes money will have to pay $210 more. Multiply that by two or more dependents, and it really adds up.

This may come as a shock to parents who have been too busy shuttling between soccer games and viola lessons to keep up with the state's budget fiasco. The Franchise Tax Board is trying to get the word out, so families can prepare.


Hmmmmmmmmm. Prepare. That is Alstry's line.

I am not sure what it will take to convince some of you there is no money.......and if Benny B keeps printing....not only will there be no money.....but whatever money you thought existed will be worthless.

Mark A. Sadowski said...

Why are you focussing on the 2 year. That's not a short term yield. Since the 10th the ten year yield has fallen from 3.98 to 3.65, and 3 month has risen from 0.18 to 0.20. On the contrary the yield curve is flattening not getting steeper.

Scott Grannis said...

The 2-year Treasury is very sensitive to the market's perception of the future course of Fed policy. If the Fed tells the world tomorrow that they are going to start tightening soon, the 2-year yield would skyrocket. The 2-yr is the market's best guess as to the average funds rate over the next 2 years. So it not only picks up Fed moves, but magnifies them. So it has plenty of value. The 10-year, however, is mainly driven by the market's perception of future inflation.

Of course I know that curve has flattened a little recently. But that's a wiggle on the big trend, which shows in the chart. I would also reiterate from a previous post that the most impressive thing about the current steepening is that it hasn't been led by Fed ease, but rather by bond yields moving higher.

alstry said...

Any bets UNEMPLOYMENT hits 30% in the next 18 months.

Anyone? Anyone? Bueller?

Mark A. Sadowski said...

OK but even then what this is suggesting is that the market expectations of inflation are falling right now. Furthermore 2 year yields have dropped as well from 1.42 on the 8th to 1.14. Based on what your're telling me expectations concerning the federal funds rate in the next two years are falling. I still don't take this as a sign of optimism.

alstry said...

If few have a job....it doesn't matter how low the mortgage rates go....as demonstrated in Detroit and $6000 avg home prices.

This announced earlier today:

GM to cut 4,000 more white-collar jobs by year end.

Scott Grannis said...

Mark: inflation expectations as reflected in the TIPS/Treasury spread are rising. The 2-yr yield is volatile at times, but the basic trend is relatively flat. It can move up if the market gets more confident about growth. That was the case a little while ago, now growth expectations have cooled. Reading the market tea leaves is an art, not a science, in any event.

Scott Grannis said...

alstry: if you just want to focus on all the bad news that is not going to get you anywhere. You have to look carefully to see where change is occurring on the margin. Or perhaps you should just stick with your alstryonomics blog and become famous if your pessimism proves exceptionally accurate.

__ said...

Scott, policymakers seem to be of a different opinion, cf. Alan Blinder's recent op-ed in the WSJ or Rommer's recent "article" (read: op-ed) in last week's Economist. And then there was this story: "Obama says second fiscal stimulus not needed *yet*" (my emphasis). Source: http://www.reuters.com/article/politicsNews/idUSTRE55M5EV20090623?feedType=RSS&feedName=politicsNews&rpc=22&sp=true

Regards, MW

alstry said...


I am just trying to find some good news outside the inaccurate government news...

For example this morning:

NEW YORK (MarketWatch) -- Supervalu Inc.said Wednesday that earnings for the first quarter would be substantially below "First Call consensus earnings for the quarter." Analysts polled by FactSet Research estimated, on average, earnings of 65 cents a share for the grocer. Chief Executive Craig Herkert stated, "Consumers have become more value focused and cautious in their spending which has pressured sales and margins greater than anticipated. We currently estimate our identical store sales will be approximately negative 3%."

AS YOU KNOW....supervalu is a national grocer with a strong footprint. Groceries are the last area a consumer cuts back and sales are supported by tens of billions of food stamps handed out each year.

As an attorney, I simply analyze the facts, NOT the government or the markets interpretation of the facts. Mine are revised far less frequently.

Bob said...

Mr. alstry continues to inform us that he is an attorney, as if this is supposed to give him superlative knowledge. Admittedly it requires a certain amount of intelligence to become a lawyer, but I fail to see where that credential makes him an economist. Although he cites true and meaningfull examples, they are for the most part, specific details made to explain universal arguments. Logic 101 says this is a no no. The information that Scott provides is universal in nature, and although he could be proved to be wrong, so far he appears to be fairly accurate. Mr. alstry's data is anecdotal for the most part. Why does Mr. alstry ignore Scott's data to only focus on his?

The laying off, let's call it downsizing, of bloated governmental agencies even though painful for those involved and in the short term, would ultimately be of a benefit to a capatalistic society. We do want a capatalistic society don't we?

Finally, I find the ourtrageous sums of money hoarded by universities in endowments to be antithetical to the purpose of education. It is not the purpose of an educational institution to become wealthier, but to use the wealth that it is given to advance education. Before they start laying people off they should be dipping into those reserves knowing that contributions from current and future alumni and institutions will refill their coffers.

__ said...

We do want a capatalistic society don't we?

Some of us do! But, "Only 53% of American adults believe capitalism is better than socialism."

Continued here (depressing):

alstry said...


Any idiot can breeze through law school.....I did and graduated toward the top of my class. So anyone who views themselves in a postive light due to a law degree, simply laugh in their face.

As far as an economics background, I have an economics degree but find it generally uselessless when it comes to analyzing business as economics is more of a social dicipline and not practical.

Alstrynomics was created to fuse real world business data with a general macro perspective. Once your sample size gets big enough, it has statisical relavence.

The TRUTH thrives with scrutiny.....that is why Scott should love having me around.....unless he doubts his perspective.

How confident do you think I am....Alstrynomics is ALL ABOUT being right....economics is about telling you what you want to hear.

My guess is Scott is very nervous about his perspective.....the only people who get nervous are those that are not confident.

Scott Grannis said...

MW: Policymakers are indeed confused as you point out. The WSJ had an excellent op-ed yesterday about how Bernanke was completely wrong about the inflation threat in late 2003. Blinder has never impressed me at all. Romer has done some good stuff but now appears to have lost some objectivity given her political surroundings.

No one in the Obama camp thinks about incentives. They all believe that government smart guys and spending programs can fix anything. They all ignore the power of the market, which, if properly harnessed, would solve a myriad of problems with ease.

Public Library said...

If a tree falls in the forest with nobody around, does it make a sound?

Alstry, it is ok to offer facts, figures and opinions, but your belligerence is off-putting. I suppose the next step after you are “right” is to say, “I told you so”. This is immature behavior. You may want to take an emotional intelligence course; it seems your rational brain lacks proper control over the emotional side. I mean that in the best possible light.

I do not necessarily agree with Scott’s optimism but I try to carefully write and reread my posts before participating in this blog. Have the common decency to do the same.

Having cleared that up, lol, Scott charge off rates are reaching all time highs and you have continually stressed that the debt burden of Americans (aka consumers) is not that high and or manageable. How do you reconcile these finding with your belief in the ability of America to service its debts?


"This pace of rising charge-offs is unprecedented as year-over-year changes continue to surpass the magnitude of either increases or decreases experienced during any previous period,"

alstry said...


We all have different styles....I think Scott is a very intelligent blogger.....far more intelligent than I.

Apprciate the differences....as far as I told you so....NEVER....simply providing adaquate warning for The GREATEST worldwide depression in human history.....

no thanks will ever be requested when I am proven right.

__ said...

Scott --- yes, that op-ed was very good. If "inflation" means inflation ex-FE and your policy-making purview is national, Bernanke's stance makes more sense. Dick Alford has some interesting comments on that latter point here: http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=283.

Re: Blinder --- I don't like him, but as he's a former Fed vice Chairman, I tend to read his op-eds (and books).

Regards, MW.

__ said...

@ Mark A. Sadowski --- given the 2y basically trades flat to a Fed Funds strip of the same maturity, it makes perfect sense to look at it as a barometer of Fed expectations. If 2y is too long for you, well, look at Fed Funds futures on CBOT!

Public Library said...

MW. That was a good read and fairly straightforward.

No easy solutions and a government/populace not willing to take the medicine to purge the system of its ills.

Scott thinks we can grow our way out of this and balance will be restored but the imbalances are on such a large scale and not wholly dependent on the US that there comes a time when uncoordinated CB intervention (especially of the wrong kind) will not be enough.

Mark A. Sadowski said...

Bernanke might not only have made a wrong call on deflation in 2003 but he also made a wrong call on recession in 2006-2007. Inverted yield curves are a good indicator of trouble ahead. He and the FOMC evidently ignored it. The buzz I'm hearing is that he will be replaced with President of the San Francisco Federal Reserve Bank Janet L. Yellen in January.

I'm not really worried about future fed funds rates. They will be zero well into next year by my analysis. The bottom line is the yield curve is only as steep as it is because we're at the zero lower bound in short term interest rates. The steepness of the curve is consequently meaningless.

Scott Grannis said...

Mark: Janet Yellen would not be a good pick in my view. Neither would Larry Summers.