Friday, March 9, 2012

Miscellaneous chart updates

As equities continue to "melt up," boosted by continued signs that the economy likely is growing at a 3-4% rate and not at risk of another recession, Treasury yields remain extremely low, priced to a lot of bad news that has yet to materialize. The market's apparent belief that the Fed can keep interest rates at extremely low levels for years to come, despite the fact that the economy is doing Ok, is being challenged. In my view the resolution is going to come sooner or later in the form of sharply higher Treasury yields. Higher Treasury yields at this point would be unmitigated good news for the economy, but of course very bad news for the Treasury market.

The recently-released household balance sheet data for the Q4/11 didn't show much change from previous reports, mainly because the stock market was relatively flat last year. But with stocks up almost 10% so far this year, household financial assets have probably risen by almost $3 trillion, boosting net worth to some $61 trillion, only $4 trillion shy of the 2006 highs.

As of Q3/11, household financial burdens had fallen significantly since their pre-recession highs. This is largely due to deleveraging, rising incomes, and lower borrowing costs. Households have materially improved their financial health, making the economy more resilient to possible future shocks.

The Eurozone crisis is slowly fading away, as reflected in this chart which shows the ratio of the Vix index to the 10-yr Treasury yield. Today's record-setting Greek debt restructuring—which forced bondholders to accept a 70% writedown—was so widely anticipated that markets received the news with total aplomb. I'm reminded of my assertion last summer that the eventual resolution of the Eurozone sovereign debt crisis would end up being a non-event similar to Los Angeles' "Carmageddon."

This chart of the dollar's inflation-adjusted value against other currencies is arguably the best measure of the dollar's relative strength available. As of the end of January, the dollar was only only slightly higher than its all-time lows. Dollar weakness is also reflected in strong gold and commodity prices. A weak dollar may be helping U.S. exports, but it is also contributing to inflation, and it reflects genuine concerns in the market about the long-term outlook for the U.S. economy. If the Fed is at all concerned about the long-term health and purchasing power of the dollar, then today's weak dollar is an indicator that there is essentially no more room for quantitative easing. Moreover, there is no more need for further quantitative easing, given the many signs that the economy is making forward progress.


db said...


Thanks as always for great insight. I recall your post last summer indicating your thoughts on the Euro debt crisis likely being resolved, thanks for that, you helped me weather that timeframe with a very realistic and informed outlook. said...

Mr. Grannis;

You seem to pull these charts of new highs out, on (about) even date with our liquid portfolio hitting new high's.

I have been dribbling equity and bond buys as the market (as you put it) melts higher.

Let me (us) know when you think/advise cashing out of equities. THIS time, I want to raise cash for the next big buying opportunity.

I think it will be one to two years past the LAST Fed rate increase. Which, now, seems to be on the distant horizon.

William said...


About the time you posted your VIX/10 year bond chart near its peak and mentioned that historically such times were excellent entry points for buying equities, someone posted here that they would not invest in equities until the Greek or European debt crisis was resolved.

The S&P 500 is up about 27% from its intraday, extreme low last October. There is a reason for the old adage:

"Buy when there is blood in the streets."

Only a rare individual with a peculiar personality quirk is actually able to do that. Although many dream of making such a decision, the past three years have proven to all how extremely difficult it is to do.

The believe the bear market low was three years ago today, March 9th 2009.

JGW said...

With all the ibanks now revising near-term GDP downwards (MS, GS this week for instance) how will velocity of M2 climb out of the abyss?

marcusbalbus said...

you've been crying wolf for over 15 months about treasuries. darn it, if only the market would listen to you!

McKibbinUSA said...

I am not clear why saving the dollar from itself should be the most important goal of the US economy -- as a business person myself, my goal is to acquire estate-building assets that earn gold-standard dividends and rents -- much of my income already originates from my overseas dealings directly in foreign currencies -- again, what is my incentive to help the Fed make the dollar stronger (?) -- I understand that the Fed is focused like a lazer on it capacity to borrow money globally -- however, what does that have to do with me and my investment endeavors (?) -- I am wondering aloud about why everyone is so concerned about the dollar's health...

William said...

Economic Cycle Research Institute (ECRI) Recession Forecast Update

Lakshman Achuthan spoke with CNNi following February 29th's revision to 2011 Q4 GDP. "US growth has flatlined." US Coincident Index (year over year growth rates of GDP growth, industrial production growth, personal income growth, broad sales growth, jobs growth) is at 21 months low. "Tipping into a recession." Remember jobs growth is a lagging indicator.

Two videos on topic (CNN and CNBC):

John said...


In reference to William's quote of the old adage "Buy when there's blood in the streets":

What effect do you think launching a military attack on Iran would have on the stock markets? Would financial advisors generally view it as a "buying opportunity?"

William said...

"Buying Opportunity"

I realize that John asked Scott this question. I don't think that is a topic that is "knowable". As ALWAYS it would ultimately depend on how much fear - or even panic - is experienced by market participants.

Here is what is knowable: your personal reaction to the market. An excellent indicator of a good buying opportunity is when you personally are fearful - like when you awaken at 4 o'clock in the morning wishing that you had sold 3 - 6 months earlier, feeling like a fool for not having done so and strongly "thinking" that you should sell when the market opens that morning. You then know that you are afraid.

Then you will also know that there is significant fear in the market. Millions of investors will be experiencing similar feelings. Needless to say the news will have been bad for weeks or even months in a correction or more than a year in most bear markets. Why is this so: because human beings like most animals have a strong herd instinct and share similar feelings and reactions.

It is just as difficult for 99% of humans to do the opposite of the herd (like buy when most others are selling) as it is for a white tail deer to resist bolting with its group. When one deer bolts, they all bolt!

The very idea of "going against the crowd" means that in reality you are going against your own emotions - the fear even panic that the crowd and you yourself share! This is why investing is so difficult: because you MUST do the opposite of your own emotions during "buying opportunities". You must learn that the thoughts you think you have at such times ("it would be prudent to sell this morning") are merely a rationalization of your fears.

Warren Buffet in mid October 2008 wrote an op-ed in the Wall Street Journal stating that his personal assets previously were 100% in US Treasuries and now he was almost fulling invested in equities. He went on to say that if the market continued to decline he would soon be 100% in equities.

Here was "the sage of Omaha" -financial adviser par excellence telling the world that October 2008 was a "buying opportunity". Did that make any difference to 99% of investors. Hell No - they continued to panic.

Junkyard_hawg1985 said...


Have you ever plotted the net worth of Americans in inflation adjusted dollars? Chart #2 would look much worse when accounting for inflation. While stocks were flat last year, prices weren't.

Mike Eliason said...

I bet if you flipped the dollar index around and compared it to oil prices there would be a very strong relationship.