Thursday, October 8, 2015

Walls of worry update

The market continues to lose some of the fear and uncertainty that stems from the concern that plunging oil prices and a Chinese economic slowdown will prove contagious, bringing the global economy once again to its knees. I've argued for some time that these fears were overdone, since swap spreads have remained very low despite the sharp increase in corporate credit spreads. Very low swap spreads are evidence of abundant liquidity and healthy financial markets. They imply that big financial players (e.g., major banks and large institutional money managers) can trade amongst themselves with little or no fear of counterparty risk. This in turn reflects on the fact that systemic risk in the economy and the financial markets is very low. When financial markets are liquid and systemic risk is low, the global economy has a good chance to work through the dislocations caused by falling commodity prices.

Equities are up not because the market expects the economy to strengthen, but rather because the market is losing its fear of another recession. It was almost two years ago that I argued that avoiding recession is all that matters, and it is still valid today:

Cash and cash equivalents pay either nothing or next to nothing, while alternative investments yield much more. Cash yields are zero because the demand for money is extremely strong, and because risk aversion is very high. The Fed's QE program has been specifically designed to satisfy this extraordinary demand for money. The world eschews much higher-yielding investments in favor of accumulating record levels of cash because market participants are very afraid of an economic downturn that will reward the decision to hold cash.

We are still likely stuck in a disappointingly slow expansion for the foreseeable future. But that's a lot better than falling into another recession. This theme—that the future has turned out better than expected, despite the fact that it's been the weakest recovery ever—has appeared in numerous posts on this blog since 2009, and it's still the best explanation for why risky assets have done well. It's been a reluctant recovery and a risk-averse recovery for years, and it continues to be. When the market is priced to recession and instead we get continued growth, however weak, the prices of risk assets has to rise (i.e., the yield on risk assets has to move closer to the zero yield on cash). I don't see signs that this has gone too far. Indeed, yields on corporate bonds (especially of the high-yield variety) have become much more attractive of late.


Lawyer in NJ said...

I have long said that Republicans should take credit for Obamacare, since the premium support model is one they have advocated since the early 90s. My guess is they ultimately will.

The ACA led to higher employment and wage growth:

Benjamin Cole said...

Lawyer in NJ: the GOP would prefer to support the communist healthcare system known as the VA. Inside the VA, former federal employees receive complete medical care at taxpayer expense, inside federal facilities, staffed by federal employees. The VA is not only a communist healthcare system, it is a distilled communist system.

Yet Congressman Paul Ryan singles out the VA as immune to cuts.

Well like I always say, it's nice to have an ideology and principles, but it's better to be part of the political party.

I am against government regulation, but for single-family detached zoning!

Is there another party I can vote for besides the Donks and the 'Phants?

Johnny Bee Dawg said...

Not sure what the ACA has to do with swap spreads and VIX ratios, but just to refresh Lawyer's memory, no Republican voted for the ACA.

It is not at all a program that Republicans have supported. It's a perverted version of previous plans, which is mainly a massive socialist redistribution scam. Unless reformed further, it will choke off the private sector competition for customers in health care, and dampen innovation. As it weakens the health care marketplace and creates unaffordable costs, it will push larger and larger portions of the population into total government dependency.

It has led to the worst economic recovery in US history. Tens of millions have lost insurance coverage, as premiums skyrocketed beyond all projections, It gave coverage to one group people who don't pay for it themselves, and made it unaffordable for a different group of people who used to pay for it. And Emergency rooms are just as crowded with the uninsured as before. Deductibles have soared so high, that for most in the middle class it doesn't function as insurance at all.

It will add trillions to our debt over the years. Let's see how things go once the subsidies fall away in 2017, when Barack is long gone from the messes He created.

randy said...

The Republicans deserve a good bit of credit for ACA, and much of the other policy outcomes they bemoan. Republicans commonly argue they proposed several constructive alternatives to ACA, but the reality is their own infighting made it impossible to seriously push any alternative. Business as usual. In the Marriage Equality fight, the ugly and clearly no-win battle mostly served to turn the gay community into the fashionable cause of the decade, and escalated in all kinds of spillover silliness - marches for same sex bathrooms and Caitlan Jenner ESPY Courage award? Immigration - demonizing immigrants, the majority here just to do the work we ask them to do. The leading Republican policy approaches are completely unworkable, serve to alienate large numbers from both the party and a path to assimilation. The most likely outcome seems to be turning immigrants and (more importantly their children) into a permanent second class, with greatly reduced chance at upward mobility that would benefit the country. Immigration has historically been seed capital, but we are fixated on burning it. It just might be last years fight anyway as birthrates in Mexico have plunged. The Speaker debacle is pretty funny. In short - the Republicans are good at blaming everyone else when the truth is they've had little constructive to offer in a LONG time. By the way... I've never voted anything but Republican. With the current slate of candidates - I might just not vote at all.

Chris Owen said...

Lawer in NJ cites a fine paper (by gov't employees). However, the Bank of America survey of corporate CFOs reveals the ACA to be the #1 drag on hiring. I think I'll take the word of the job creators.

Hans said...

Thank you Mr Owen, for correcting the incomplete and distorted
post by NINJ.

SouthCouch said...

Thanks for the reference to the BofA survey. In reading the survey (link below), I first note that the majority of CFO respondents are from Smaller businesses, with 61% from companies with 51-500 employees. I assume those CFO's are more likely to be concerned about the cost burden of the ACA, especially if they did not provide health care benefits in the past. So a good group to ask about the ACA.

However, the CFO's do seem conflicted about the impact of ACA costs.

First, 96% of all respondents reported that they provide Health Care as part of a program to hire and retain employees! So which is it, cost burden or competitive advantage?

Second, 79% said they would pass cost increases on to the employees! What burden, and what advantage?

Note that between 96% and 79%, that is a lot of CFO's who seem to have mixed feelings about Health Care costs.

Clicking one more link deeper, I find that this ambiguity might be due to the small size of the impact on labor costs. 58% of CFO's thought that the cost increase would only be 0 - 5%.
Doh, wish I found this earlier. So maybe ACA not seen as big a cost now as it was in the recent past?

The press release contains summaries that may also be helpful:

"...For the first time in seven years, more than half (52 percent) of CFOs report they expect to hire additional full-time employees in 2015; 44 percent have no plans to change the size of their workforce.

CFOs report their companies are investing in retaining and attracting qualified employees by providing benefits, including 96 percent offering healthcare insurance; 92 percent funding retirement programs; and 87 percent offering bonuses or other compensation. More than half also offer wellness programs (63 percent), education funding (54 percent) and flexible work hours (52 percent)..."