Thursday, January 21, 2016

Chart updates

This week I'm in Park City to do some skiing with my brother, which is a good time because the Sundance Film Festival, which starts today, keeps a lot of people off the slopes. Yesterday the mountain was all but deserted.

Yesterday had all the markings of a panic selloff, so it's not surprising that the market is up today. 

Here are a few charts and some commentary in the meantime, since I'm off for the slopes shortly and it's a beautiful day:

The worst damage is still limited to the energy sector, as crude prices fall into the 20s. As the chart above shows, spreads on energy-related high-yield debt have now reached the levels that marked the utter panic of 2008. Can things get much worse? Doubtful. Outside the energy sector, however, spreads are at levels that we last saw during the PIIGS crisis of late 2011. That's bad, but it's not a crisis, and it suggests that any contagion from the energy sector is still quite limited.

Despite all the turmoil, gold prices remain in a downtrend, as do TIPS prices. Sure, there have been some counter-wiggles, but nothing significant. I note that there are many analysts who look at falling gold prices as symptomatic of tight monetary policy. I disagree. I think gold prices reached exorbitant levels a few years ago on fears that monetary policy was going to seriously debase the value of the dollar (i.e., monetary policy was way too easy). I think gold has been declining since as the market loses its fears of dollar debasement, and as inflation remains low. In a sense, the market over-reacted to what it thought was too-easy monetary policy and now is slowly coming back to more reasonable levels. TIPS prices have tracked gold prices for the same reason: inflation fears have diminished and have been replaced—slowly—by a return of confidence.

Most of the turmoil in the past year has centered around falling energy prices. But take those out, and inflation has been running at 2% per year on average since 2003. Ho-hum, nothing much has changed except that oil has gone from being very expensive to now very cheap.

We've seen this movie before. A big drop in oil prices depresses inflation, but core prices aren't much affected. Once oil prices stop declining, headline inflation returns to the level of ex-energy price inflation.

Both the CPI and the PPI (core versions) are behaving in similar fashion, registering inflation of about 2% per year.


Frozen in the North said...

Really like your discussion on gold prices. I think (although empirical proof would be nice) that your argument holds water. As the naysayers realise that inflation remains subdue then gold price have no where to go but down to a more reasonable equilibrium.

I just hope that your argument is true


marcusbalbus said...

stay on the slopes and off the blog misleading people about risk.

McKibbinUSA said...

I guess everything is back to normal now that oil has recovered to $30 -- everyone should resume buying manufacturing stocks -- the economic recovery in the US is back on!

Robert said...

Do you think today's Philly survey data of new orders index at minus 1.4 (improving) is actually very good news, as in overrating the risk of a recession? And how many rate hikes do you expect from here on?

Scott Grannis said...

marcusbalbus: why don't you enlighten us with your own blog?

Benjamin Cole said...

There has been, and is, a lot of central bank buying of gold, as well as Asian jewelry demand. Could be the central banks artificially bid up price of gold.

Of course, central banks can buy gold for a long time, decades and generations. They print money, after all.

At this point, the world gold price appears artificial and unconnected to the policies of the Fed.

The Fed continues to badly undershoot its 2% PCE target...the market expects 1% PCE inflation for 5 to 10 years...


Michael McGaughy / 麥德安 said...

Another good post. I enjoy and look forward to these. I don't agree with everything, but really like the fact that you point out things that others are not. Enjoy the slopes! You can catch the good Sundance selections on DVD.

Johnny Bee Dawg said...

During the 550 point puke-out Wednesday, former leaders blasted higher. Then new sell signals dried up to nothing yesterday as oil and retailers and airlines all rallied at the same time. First time that's happened in weeks. Recovery continues: 10% of non-energy S&P 500 has reported, with revenues up 5%. My indicators washed out Wednesday to lowest ever except 2008. So this will be my third day in a row of buying stocks. My cash position is plummeting.

Thank you, Scott for keeping the fear and systemic indicators updated with commentary! Extremely helpful info for those who want to make money. I think a marcus ballbust blog would be high-larious.

McKibbinUSA said...

Watch for Wall Street banks to extend hundreds of billions in bridge financing to the tracking industry, which will then be packaged into credit default swaps that the Fed will acquire -- Congress will begin debating an embargo of foreign oil this spring to save the tracking industry from cheap imports.

McKibbinUSA said...

tracking = fracking