Friday, October 4, 2013

Who needs government statistics?

So the federal government is shut down and the market is deprived of some key statistics, most notably the payroll employment report that we ordinarily would have gotten this morning. Is this a cause for concern? Not really, since there are lots of numbers out there that continue to come in on a daily basis from the market. These numbers are even better than government stats, since they are very timely, they aren't subject to seasonal adjustment, they will never be revised after the fact, and they reflect the cumulative knowledge and wisdom of hundreds of millions of investors and business executives all over the world. The message they send, at least as I see it, is that nothing much has changed of late, and the economy most likely continues to plod along at a disappointing slow rate. Nevertheless, the economy apparently is continuing to grow and improve, despite all the policy obstacles thrown in its way.

Here are just a few, in random order. All come from market-based indicators that are real-time as of today:

Corporate credit spreads reflect the market's perception of the default risk of the average business. Credit spreads today are about as low as they have been post-recession. The market, in other words, sees little reason to worry about default risk these days, and there is no sign of any deterioration of late.

2-yr swap spreads are excellent leading and coincident indicators of systemic risk in the economy. These spreads today are about as low as they have ever been. The market, in other words, does not detect anything bad going on. It would be highly unusual for the economy to deteriorate with swap spreads being this low. They tell us that financial markets are very liquid and transparent these days, and that is one very good reason to think that the economy is in decent shape and not suffering from any underlying deterioration.

The Baltic Dry Index is a measure of the shipping costs of bulk commodities. The index was quite low for most of 2012 and until this summer. But starting last June it began to pick up. It is now up 156% from the end of May. This likely reflects improving conditions in the Eurozone and Asian economies. At the very least it all but rules out any emerging weakness in the global economy. It's much more likely that the global economy is strengthening on the margin, given the rather impressive strength in this index of late.

The chart above shows the real yield on 5-yr TIPS over the past year. Yields have dropped about 50 bps in the past month, probably because the Fed failed to "taper" its quantitative easing program, and that in turn has caused the market to adjust downwards somewhat its expectations of future rate hikes. But yields are still up an impressive 120 bps from their lows of last April. I would argue that this is good evidence that the market believes that economic fundamentals have firmed.

C&I Loan growth (bank lending to small and medium-sized businesses) has slowed of late, but outstanding loans are still up some 30% in the past 3 years. This is good evidence of increased confidence on the part of both banks and businesses.

Commodity prices have been going sideways for the past several years, and remain at levels that are significantly higher than they were at the end of 2001. There doesn't appear to be any emerging weakness (or unusual strength) here.

The Vix index today is 17, and that's up quite a bit from the 12 it registered just two months ago. But as the chart above shows, that hardly moves the needle from a long-term historical perspective. The market is a little more worried right now (understandably, given what is going on in Washington these days), but the level of uncertainty is still relatively low. Whatever problems we are likely to face, as a result of the government shutdown and the upcoming debt ceiling negotiations, are, in the market's best judgment, probably minor.

The stock market still appears to be in an uptrend, but not in a bubble, as it was in the late 1990s and early 2000s.

Given all this, I think it's reasonable to conclude that despite the current lack of government-provided statistics, the economy continues to grow at a modest pace.


William said...

Scott wrote: "...reflect the cumulative knowledge and wisdom of hundreds of millions of investors..."

I have a book recommendation which gives proof to this statement in spades and whose major investment points echos Scott's comments.

Wealth, War & Wisdom by Barton Biggs is a study of World War II, the financial markets and wealth preservation in the major combatant countries of that war. For 30 years, Biggs was in charge of both research and investment strategy for Morgan Stanley and moved their clients into international markets and helped pioneer emerging market investing.

Key points: Biggs agrues that stock market participants as a group in the US, England, Germany and Japan were more astute at recognizing the major turning points of the war than politicians, journalists or even experiences military men. For example, the British market bottomed for all time in the summer of 1940 just before the Battle of Britain. Stock prices peaked in Berlin just as the German armies came within miles of Moscow in early December 1941. And the New York Stock Exchange understood better than "the experts" the importance of the U.S. Navy's partially lucky victory at Midway and bottomed then in May 1942.

Biggs uses the conclusions of Surowiecki's "The Wisdom of Crowds" - informed groups are more exact in their predictive powers than individual expert analysis - to examine the war through an investor's lens. "There's real evidence that informed, motivated crowds acting individually on a cumulative basis make wise decisions - whether guessing the weight of a hog, the stock market, or for that matter election results," he said. But "it has to be an informed crowd," said Biggs, and even better, a crowd financially motivated to be correct.

The second take away is one in which I believe that Scott would wholeheartedly concur: referring to a chart of the US market "...stocks proved that the bottom of a bear market by definition has to be the point of maximum bearishness, and from that point, the news doesn't actually have to be good , it just has to be less bad than what has already been discounted in prices."

Brief review: Biggs was long a World War II history buff and does an excellent job of succinctly describing the key events leading up to and during that war. He also provides fascinating details which capture the character and management styles of the leaders of both sides including quotes and revealing (sometimes witty) quotes about them from others.

In addition, he provides an analysis of how various investment asset classes performed during those apocalyptic times, including the aftermath of WW II with appropriate charts. said...
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McKibbinUSA said...

Steve, thanks for the summary -- I'll be reading the book right away...

Benjamin Cole said...

The Economists' commodity price index is down about 15 percent from a year ago...would be nice to some commodities indices ex-corn, oil, and gold, since those commodities often dance to special tunes, such as OPEC production or the USA ethanol program.

Copper down since Feb. 2011...

The fact remains, no sign of inflation, the PCE headed to sub-1 percent range.

The Fed is below its target rate of inflation...

Global economy mushy....

You wonder what global central banks want...prosperity does not seem to be in the playbill...with the exception of the People's Bank of China, ironically bough....

theyenguy said...

The stock market is in a terrific bubble.

The world as of October 4, 2013, stands at Peak Prosperity, Peak Democratic Nation Sovereignty, and Peak Seigniorage, that is at Peak Moneyness, as is seen in the chart of World Stocks, VT, relative to Aggregate Credit, AGG, that is VT:AGG.

Fiat money died Friday September 20, 2013, with World Stocks, VT, Major World Currencies, DBV, and Emerging Market Currencies, CEW, trading lower, as Jesus Christ is operating in dispensation, as presented by the Apostle Paul in Ephesians 1:10, that is in administrative oversight of all things economic and political, and has pivoted the world out of liberalism and into authoritarianism, and as such the stock market has turned from bull to bear; those ETF sectors which rallied over the last year and countries which rallied from late June 2013 to late September, 2013, seen in this Finviz Screener, will be trading lower from the Tuesday October 1, 2013 rally, on competitive currency devaluation and on the exhaustion of the world central banks’ monetary authority as investors come to greater realization that the US Fed’s monetary policies have crossed the Rubicon of sound monetary policy, and have made “money good” investments bad.

While Resorts and Casinos, BJK, International Telecom, IST, IPOs, FPX, Small Cap Energy, PSCE, and Energy Production, XOP, traded to a new rally high, monetization of debt, has finally turned money good investments bad. Investments in Risk Assets, such as Small Cap Value Socks, RZV, has ended, as confirmed the Market Off ETN, OFF, and Volatility, XVZ, trading higher this month of October 2013. The interventionist policies of the world central banks no longer provide investment stimulus in Global Industrial Producers, FXR, as leaders such LPL, IP, WHR, MHK, PHG, ERIC, VPRT, ABB, ENR, ITW, ROK, MMM, FLS, SNA, LECO, SI, GM, GE, and BA, are trading lower. Jesus Christ acting in the Economy of God, Ephesians, 1:10, has ended the Fed; He did what Ron Paul could not do.

Debt deflation, specifically competitive currency devaluation, has commenced, terminating Nation Investment, EFA, and Small Cap Nation Investment, IFSM, and Emerging Market Investment, EEM, and liberalism’s fiat wealth, VT.

The modern money system is broken and bust; the age of speculative leveraged investment, is done, over, and finished. Liberalism’s democratic fiat money and banking system is being replaced by Authoritarianism's diktat money and regional governance and totalitarian collectivism system.

The decline in the price of Gold, $GOLD, since late August 2013, is a buying opportunity, as the Gold ETF, GLD, is in an Elliott Wave 3 Up, from its early July 2013 bottom of 117.5, as is seen its Weekly Finviz Chart. The Elliott Wave 3 Ups, are the most dramatic of all economic waves, and create the bulk of wealth gains, of all of the ascending five waves.

On Thursday, October 3, 2013, Spot Gold, $GOLD, closed at $1,316, with support lower at $1,300 and $1,275, and $1,250. The chart of the Gold ETF, GLD, rose slightly, to the edge of a massive consolidation triangle, to close at 127, from which it will either break out, or break lower to 125, 122 or 120. Either way, it is wise to Dollar Cost Average, an investment in the purchase of gold bullion, as in the age of authoritarianism, the possession of gold and diktat, will be the two forms of sovereign and sustainable wealth.. said...

Jan Hatzius, Goldman Sachs Chief Economist had this to say about the recent government shutdown as it relates to published economic statistics:

Here's Why We're Better Off Without The Jobs Report