Tuesday, June 22, 2010

Further evidence the Euro scare is passing

This chart of 3-mo. T-bill yields is further evidence (in addition to the decline in swap spreads, credit spreads, and the Vix index) that the mini-panic over Eurozone debt defaults is passing. Such was the panic a week ago that investors were willing to sacrifice almost all yield in order to enjoy the safety of T-bills. Rising T-bill yields today are equivalent to the market breathing a huge sigh of relief.

As this chart of 10-yr Treasury yields shows, however, the market is still very concerned about the future of the U.S. economy. Investors are willing to accept 3.2% yields on 10-yr Treasuries only because they have a very dim view of the economy's ability to grow, and because they remain concerned about the threat of deflation. So between the two charts we see that while the market is no longer absolutely terrified of another financial meltdown, it is far from being optimistic about the future. Reading the bond market tea leaves is how I come to believe that valuations in the equity market remain relatively depressed.


septizoniom said...

how can you be so confident it was just a "scare"? at some point, do you ever question your militant optimism?

Benjamin Cole said...

I suspect even lower yields are in the future---too much capital looking for a home, not enough places to invest.
And while very low yields seem odd now, until the 1970s low yields were the norm.
The Fed may in fact be following a too-tight monetary policy, which paradoxically causes low interest rates. Why? No threat of inflation, yet no great equity opportunities in a sluggish economy.

Public Library said...

It seems like on the margin, things are heading in a negative direction.

Housing is rolling over.

US equities sold off and are flat for the year.

Gold is hitting fresh highs.

Unemployment is stuck in a holding pattern. While declining rates of job losses were good, elevated unemployment overtime is bad.

Eurzone CDS and 10YR spread to bunds are much wider on the year.

The inventory stimulus is waning.

The clunkers and other clunker-like programs are waning.

The Chinese equity index is in bear market territory.

US Local and State economies are about to hit the wall.

Taxes are going up, not down.

狂猪 said...

Let' not forget the TED spread!


I think right now is the best investment environment.

- Equity are relatively cheap
- there are no excesses to collapse because the world has already collapsed
- the monetary policies are the wind on investors' back
- the world is in a positive feedback loop.

I know this is going sound a bit over the top, my bet is really a simple bet that humanity will ultimately triumphs over great adversity. Yes, there is volatility but I am patient.

Benjamin Cole said...

BTW-Cover WSJ today, China eclipses USA to become world's largest manufacturer. And is pulling away....

Thus, if you want to talk about commodities, you have to include China in the conversation, and more and more every year.

If you think higher commodities prices necessarily reflect Fed action, you might be reading false signals....

John said...


By pegging their currency to the US dollar China has largely adopted our monetary policy. Thus a loose fed is stimulative to China.

I agree China must be considered when evaluating commodity prices. As you point out China is a major consumer.

John said...


All your points are valid. However I would point out the following:

1. Housing may or may not be 'rolling over'. Despite the media hype that existing home sales were 'unexpectedly' down in May, I can hardly believe their adverb is appropriate. I do not know of anyone who did not expect sales from May to be pulled into April due to the expiration of the tax credit. Lets wait a quarter for more data before we declare the housing double dip. I'm not saying it won't. Just that maybe its premature to declare it a fact.

2. I would submit that US equities being flat for the year is quite a feat given how much energy has been expended by the bears over the immenent Euro implosion, sovereign debt default inevitibilities, global economic double dip scenarios, Chinese bond sales of all western debt securities, etc, NONE of which, by the way, have happened. The markets are up over 50% over the last 15 months. Bull markets frequently take time off. Perhaps this is such a time.

3. Gold is benefiting from the fear of (see #2 above). Also, fear of future inflation. So, there are many gold investors that see the opposite of your view.

4. Elevated unemployment over time is indeed bad. Yet temporary employment trends are favorable. This indicator bodes well for future permanent employment improvement. Lets all hope it again is so.

5. Eurozone spreads are wider on the year....but are they not narrower since mid May? And is that not more 'on the margin'?

6. Waning inventory stimulus is indeed a concern. However one could also say sales are increasing (we DO have increasing GDP, no?) so perhaps inventories are not expanding beyond reasonable sales horizons, which WOULD REALLY be a concern.

7. Clunker programs are waning...didn't like 'em to start with. Good riddance. It won't sink the economy...not even close.

8. Chinese equities had a huge run and are having their correction. I'll leave it to others to say if its truly a bear market. However China's economy is growing rapidly as is most of Asia. I do not know of any forcasts of imminent recession there. Do you?

9. US local and state economies are about to 'hit the wall'. ALL OF THEM? I suspect not. Many have deep troubles. However they do have options and many wealthy investors seeking shelter from our President's looming tax increases. Also, GDP is increasing. So maybe most muddle through?

10. "taxes going up not down". So does this mean you believe taxes going down is a good thing? PUBLIC!! I am SHOCKED....SHOCKED you could believe such! SAY IT AIN'T SO!!

All in good fun, my friend. Feel free to unload on me.

septizoniom said...

another stem-winder from john.

John said...

And another one liner from Septi.

Benjamin Cole said...

I don't follow. China's money supply is up 20-25 percent in last year, while MZM is down not up.

Public Library said...


You obviously do not understand my position in the slightest.

I am for limited government, low single rate taxes, and the unwinding of the Federal Reserves black box.

You don't call -20% in the Shanghai index a bear market? You sound like the government. Just change the definition when necessary.

We will not grow ourselves out of the debt spiral. In fact, the debt situation is worse today than it was in 2008/09. Sovereigns have loaded up on more, even as the private sector unwinds.

Bernanke is a flawed historian as much as Greenspan was a flawed productivity and self regulatory hero.

Scott is a perma-bull. When the market is down 25% he will sing the same tune and find the silver lining.

The silver lining is calling it what it is and taking the medicine to shortens the duration of the pain.

Sadly, we are headed in the opposite direction. More punch bowl parties at the expense of current and future generations.

John said...


Scott can articulate this better than me but my understanding is that when two different currencies are pegged to float together vs other currencies the monetary policies need to be aligned or the peg is put at risk over time.

I might be in error here since I am drawing on my amatuer economic logic. Perhaps Scott will feel inclined to weigh in.

John said...


Please accept my apology for my mistaken assumptions regarding your beliefs.

Although I may have implied it I did not say Chinese equity markets were not in a bear market. I said I would leave the definition to others. If you say it is, fine. It is what it is.

As always, you make fair points. I am with you on limited government and low taxes. I, too am looking forward the Fed's unwinding. I also share your concern over the world's debt burdens. We part ways over the inevitable economic cataclysm you seem to foresee.

Scott is an optimist, as am I. He backs up his opinions with logical analysis. If he is a perma bull then perhaps he is also a perma optimist. There are worse things to be. At the moment fear is high and optimists are not popular. For me it is an indication he is more right than wrong. In my experience there is far more danger in the markets when optimists are everywhere and the bears are shoved aside into the shadows. These days, on CNBC I see bears shouting down anyone who dares have an optimistic opinion. Bulls are the ones being shoved aside.

Maybe this time IS different. Maybe the problems weighing on investors' minds are indeed catastrophic and the huge crowds piled into deposit accounts and short term treasury securities earning virtually nothing will be rewarded with a crumbling global economy. Maybe Warren Buffet is wrong to own Goldman Sachs, Burlington Northern, Wells Fargo, American Express, Coca Cola, and the other great businesses. Maybe you are right and this time is different.

Public Library said...


Optimism is great and good for the mind, body, and soul. However, too much of anything makes you an attic.

My observations put the market 50/50 bull vs bear. I don't think the climate is as one sided as this blog makes it out to be.

Benjamin Cole said...


I like your last comments about being optimistic. Now is the time.

When the bands are playing in the street, sell.

When gloom is the constant companion, buy.

BTW: I am reading "Panic" at SG's suggestion. A book report is pending.

acrossthecurve said...


maybe you should look at corporate vs treasury spreads. Corporate debt is the cheapest its been to treasuries in nearly 2yrs.
There is plenty of yield out there.

Frozen in the North said...

Ok the chorus gets lounder. Greek CDS are at 775 bps this AM, up 95 bps overnight. So, no the crisis is far from over. BTW look on our own shores and see what is happening in the CP market -- can you smell the fear, or at least the liquidity crunch.

Far from over, the dance has just started. Deleveraging is the name of the game, and it last between 5-10 years (Japan is going on its 23 anniversary)

zumbador said...

Mr. Grannis,
I ran across this report, "The New Mix: Realigning the Sources of US Economic Growth" published by Alliance Bernstein for June 2010. I would be interested in any comments you and/or your readers might be willing to share in regard to the report.
The report can be easily found on the Alliance Bernstein website and I have provided a link below that I believe you would need to copy and paste to a browser that should bring the report up for reading.


Thank you and your readers for any comments you and they wish to share.

Scott Grannis said...

Frozen: Greece probably will default or restructure, but that doesn't make this a crisis. The crisis would be if this caused a cascade of defaults in Europe that then ended up paralyzing the global banking system. I don't see that happening.

Scott Grannis said...

zumbador: Thanks for bringing this to my attention. I've know the author, Joe Carson, for a long time but it's been awhile since I've seen any of his pieces. While I don't always agree with the way he looks at things (he is a bit of a Keynesian), he has done some very good work in the past and has never worried about bucking the consensus, which is something I do like very much. His point here is that exports are going to be the driver of growth, and I think that makes a lot of sense. Emerging markets are doing very well and I see no reason why they can't be the principle drivers of growth in developed economies.

From a macro view, this is almost inevitable. To the extent the world now lends us less money than before (when everyone was buying our securitized mortgages), the world must buy more of our goods and services.