Wednesday, May 25, 2016

Risk aversion is still the order of the day

The S&P 500 is only 2% away from making a new, all-time high, and its PE ratio today of 19.3 (according to Bloomberg) is about 15% above its 55-yr average. The Fed has been taking extraordinary measures to ensure that the economy has plenty of liquidity, and has targeted extremely low short-term interest rates for over 7 years. Taking these facts into consideration, you could be forgiven for thinking that super-easy monetary policy and low interest rates have created another bubble in the price of risk assets.

There is no shortage of pundits, economists, and investors who are worried that the Fed has blown an asset-price bubble that is ready to pop. I'm among the minority who have been arguing—for many years—that this is the wrong way to look at things. I don't see the Fed as the aggressor; I think the Fed is more a follower. The Fed hasn't driven yields to absurdly low levels, the Fed has merely responded to a market that has been deeply risk averse and generally pessimistic.

The Fed has been doing what it should: in the presence of a huge demand for money and safe assets, the Fed must take extraordinary measures to increase the supply of money and safe assets. Quantitative Easing was not money printing. It was the Fed's way of turning risky notes and bonds into safe assets (i.e., bank reserves, which are functionally equivalent to T-bills, the gold standard of risk-free assets). The demand for money and safe assets has been unprecedented, and the Fed's response has been commensurate. I explained this in greater detail here.

Evidence of risk aversion (another way of describing the market's huge demand for money and safe assets) is everywhere. Investors all over the globe are willing to pay extremely high prices for risk-free assets, while at the same time shunning much higher yields on risk assets. Moreover, it's not unreasonable for there to be so much risk aversion: economic growth has been miserably slow just about everywhere, and volatility has at times been intense. Most people are still terrified of another Great Recession and/or Global Financial Market Crash. Once burned, twice shy, as the saying goes.

Here are a bunch of charts, in no particular order, which help prove my points:

Households have reacted to the Great Recession by cleaning up their balance sheets. As the chart above shows, financial obligations as a % of disposable income are now at multi-decade lows. Households have almost never been so prudent in managing their finances. Nobody wants to get caught with too much debt when/if the next financial crisis rolls around.

Leverage was all the rage in the 2000s, as home prices escalated and mortgages became easier to find and abuse. But the housing market collapse taught us all a valuable and time-honored lesson: prices can't go up forever, even if money is almost free. As a result, the average person is far less leveraged today than he or she was a decade ago, as the chart above shows.

You know things are getting shaky when delinquency rates on loans start rising, because that is evidence that borrowers are getting stretched. Today that's not the case at all. In fact, as the chart above shows, delinquency rates on consumer loans and credit cards have never been lower. People have learned the hard way that leverage doesn't always pay.

People have also learned that credit card debt is a killer. As the chart above shows, outstanding credit card debt today is still far less than it was in 2008, and as a % of disposable income, credit card debt has collapsed, and hasn't risen at all for the past several years.

The chart above is the quintessential measure of the demand for money. It shows the ratio of M2 (currency, checking accounts, CDs,consumer savings deposits and retail money market funds, all very liquid and spendable forms of money) to nominal GDP. The ratio has never been higher, and it has been rising by leaps and bounds for the past 15 years. This tells us that people want to hold an ever-increasing amount of their annual income in the form of money and money equivalents. Bank savings deposits, for example, have risen from $4 trillion in late 2008 to $8.4 trillion today (a 110% increase); over the same period, personal income has risen by a mere 27%. People have been actively socking away money like squirrels before the winter arrives. Virtually the entire avalanche of new bank savings deposits has been used by banks to buy notes and bonds which in turn they sold to the Fed in exchange for bank reserves. The banking system, in other words, invested their huge deposit inflows in the safest thing they could find: T-bill equivalents (aka bank reserves). Bank credit is growing at a 7-8% rate, but that is only a very small fraction of what it could be, given the huge amount of excess reserves that banks hold. Banks are behaving just like people who are very risk averse.

The chart above compares the price of gold to the price of 5-yr TIPS (using the inverse of their real yield as a proxy for their price). These are two classic safe assets: gold has been the safe haven asset par excellence for all of history, and 5-yr TIPS are the only way an investor can lock in a guaranteed real rate of interest on an asset that is itself risk-free. Although the prices of gold and TIPS have fallen over the past several years (they peaked around the time of the PIIGS crisis in the Eurozone), they are still quite elevated from an historical perspective. In constant dollar terms, gold prices have averaged $500-600 over the past century, while real yields on 5-yr TIPS have averaged 1.3% since their inception in 1997. Investors are still willing to pay a hefty premium for the safety these two assets afford. 

U.S. Treasury notes and bonds are universally considered to be the safest of all notes and bonds, given the guarantee of the U.S. government. 10-yr Treasury yields, shown in the chart above, today are a mere 1.87%, which is only inches higher than the all-time low of 1.4% registered about four years ago. That's another way of saying that the price of these bonds is very close to an all-time high. People all over the world are willing to pay top dollar for the safety of these bonds relative to other bonds. The PE ratio of the 10-yr Treasury today is about 53: to get a dollar's worth of yield on a 10-yr Treasury you have to pay $53. Compare that to the PE ratio on the average large cap stock today, which is just over 19, and you get a vivid feel for just how risk averse this market is.

But hold on, you say; isn't it the case that the Fed has artificially depressed the yield on Treasuries by buying trillions worth of them? Not necessarily, and most likely not. As the chart above shows, the Fed today holds the same percentage of outstanding Treasuries as it did prior to the 2008 financial crisis. And there's little or no correlation between changes in the Fed's relative holdings and the yield on those same Treasuries. For example, look at how the Fed's holdings soared in 2012-2014, at the same time that yields soared. You would have thought that huge Fed purchases would have pushed up Treasury prices and depressed Treasury yields, but just the opposite occurred. I explained this in greater detail here.

My point here is that the Fed cannot distort the yield on notes and bonds. The Fed can exert strong influence on short-term rates, but not on 5- and 10-yr rates. Besides, we have the TIPS market that helps discipline yields. In the chart above, I show the nominal yield on Treasuries and the real yield on their corresponding TIPS (Treasury Inflation-Protected Securities), and the difference, which is the market's implied inflation expectation. We know the Fed has purchased trillions of Treasuries, but they've only purchased about $60 billion of TIPS since 2008 (the Fed held 8.5% of outstanding TIPS as of March 2016). If nominal yields were artificially low because of huge Fed purchases, then the expected inflation rate should have been artificially low as well, but it is today very much in line with current inflation and forward-looking inflation expectations. 

In fact, the best measure of bond yields (i.e., their real yields) is the place to start your analysis of the bond market. As the chart above shows, there is a strong tendency for the real yield on 5-yr TIPS to track the real growth rate of the economy. That's not unusual at all. Think of the real yield on 5-yr TIPS as the risk-free expected real yield. It should be lower that the expected real return on riskier assets, just as the yield on T-bills should be lower than the expected nominal yield on riskier assets.  (This is straight out of modern finance theory.) You shouldn't be able to lock in a real rate of return that is higher than the expected real rate of return on risky assets; you should almost lways have to pay a premium for the risk-free nature of TIPS. 5-yr TIPS today have a slightly negative real yield, and that implies that the market expects that average real returns on other assets (for which real growth expectations are a good proxy) should be somewhat higher, and indeed they are, but not by much. As the chart above shows, 5-yr TIPS real yields today suggest that the market expects real GDP growth to be about 1-2% per year for the foreseeable future. That's a pretty pessimistic outlook. Real yields are low because nobody's taking the risks that are necessary to generate stronger growth; corporate profits are at near-record levels relative to GDP, but corporate investment is miserably weak. Weak growth implies low real and nominal yields on Treasuries, as long as inflation expectations remain anchored, as they still are.

Risk aversion can be found in the corporate bond market as well. As the chart above shows, credit spreads today are much lower than they were during prior panics, but they are still elevated relative to where they have traded during periods of relative calm.

As the chart above shows, fear has been a huge factor in the stock market for the past several years. I use the ratio of the Vix Index (the implied volatility of equity options, a good measure of fear and uncertainty) to the 10-yr Treasury yield (a good measure of the market's expectations for economic growth, as discussed above) as a measure of how worried and pessimistic the market is. Bouts of nerves and pessimism have driven the market lower repeatedly. Prices have recovered in the past few months as fears of deflation and fears of a China collapsed have receded. But the Vix/10-yr ratio is still elevated, thanks mainly to very low Treasury yields.

Yesterday brought the welcome news of a surge in new home sales in April, as shown in the chart above. There are still bright spots out there, thank goodness.

But as the chart above shows, the housing market is still pretty depressed from an historical perspective, even 10 years after its prior peak. Starts today are only about half what they have been during prior periods of good times.

When markets are risk-averse, as they still are today, investors enjoy a cushion of sorts against bad news, because the existence of risk aversion equates to bad news being priced in.


Benjamin Cole said...

Excellent post.
As Scott Grannis points out new housing construction has been restricted for years. This applies especially on the West Coast.

Property zoning is the main culprit in this horrible set of circumstances for middle-class America.

It would be nice to see the coastal cities of the American West Coast totally eliminate property zoning. A development boom would follow that would last for decades.

Anonymous said...

can the insurers, pension funds, etc. survive in this low rate environment?

Benjamin Cole said...


Ask them in Japan. They have had low rates for a generation now.

Aside: Has the Fed had a "super-easy monetary policy"?

This reminds me of a St. Louis Rams coach who, when asked why the team scored less points than nearly any other NFL team. waved a thick playbook at the reporter. "You see this playbook? Lots of aggressive plays in there, designed to produce a lot of touchdowns."

Yes, the Fed has been "super-easy," but we see inflation and interest stay on the long-term secular declining paths. Real economic growth is dull at best. The Fed has an aggressive playbook, however.

The Fed has playing on its own 2-yard line since 2007, and its best offensive weapon is the punt.

Well, the Rams are headed back to Los Angeles, although they really left Orange County, lo those many moons ago, as Scott Grannis probably recalls.

The Rams---similar to when they left--- again have a coach who favors the running game, and who has piled up many losing seasons, sequentially. The Rams and the Fed: two of a kind?

Let's hope for better!

PS The Rams have Jared Goff. So maybe there is hope. The Fed?

chichina said...
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Danp said...

i always respect your data driven posts. but you miss the elephant in the room, which is the increase of government debt since the financial crisis. we went from what, 10 trillion to 18 trillion, since o took office. and what about europe and china. perhaps the consumer has unloaded some debt since the peak of the housing bubble. but at the expense of the fed's balance sheet. the problem is that nobody knows when the next crisis will happen. if you read the 'big short' the writing was on the wall in 2005 but the stock market didn't bottom until march of 2009.

and stockman would claim the s and p earnings multiple is closer to 23, not 19.

Frozen in the North said...


Excellent post, data driven which I always like, I was also very interested in your analysis that the Feds are followers and leaders -- which makes a lot of sense. The data is fascinating by what it doesn't address; tightening credit standards applied by the banks that has slowed new home construction (plus less face it the massive overbuild of the 2000/2008 period.

The overall impression is that America's economic players (corporation and its citizens) have taken a very risk averse position for the past few years -- corporations have been pilling on debt (with share buybacks -- which could explain a little the high multiples) and seem unable to find attractive investment opportunities. Americans in General have taken a view that no jobs are safe. Did you see the report that showed that there were 20% fewer people employed on Wall Street today than 5 years ago... Even high paying jobs are being "off-shored" (really algos are taking over especially in the bond side (-33% employment)).

Americans have become deeply unsecured as technology is changing every pre-conceived notion.

As an example I now have a software that does 95% of my expense accounts automatically -- plane tickets, Uber, hotel bills (that were emailed) and it can even reconcile my Amex automatically -- it also automatically applies corporate policy to the expense report -- I just free-up a full day a week from my administrative assistant (and we've cut 7 jobs out of 'accounting" for expense reconciliation). No wonder Americans are worried about their jobs, you never know from where the blow will come!

Look at the high end auto industry. Tesla essentially killed it over the past few months. Auto-drive, ludicrous speed... that makes a joke of virtually all petrolheads, seriously why would you buy a BMW or a Merc, when the Tesla is clearly a superior product. I think there are maybe one or two supercars in the world (Bugatti/Atom) that are faster than a Tesla. These are fundamental changes and people and corporations are worried!

Anyway, great post

Scott Grannis said...

Dan, re debt: I highly recommend you read this post of mine on the subject:

"In short, much of the disruption that can be expected from debt problems has already happened."

Scott Grannis said...

Frozen: I would argue that "tightened lending standards" falls into the category of increased regulatory burdens, which I've been noting for years is one of the reasons we've had sub-par economic growth. It's also symptomatic of risk aversion of course, on the part of politicians and the general electorate.

I think you're right to argue that fear of new technology is contributing to risk aversion.

Scott Grannis said...

steve, re low rates: I would guess that most insurers have adopted to low rates of return, because it's a matter of survival. However, we are now learning that an increasing number of public pension funds have experienced a decline in their funded status because of overly optimistic return assumptions. Why? Because they can always turn to the taxpayer to pay for their mistakes. Whether taxpayers will comply is the real question.

In any event, the problem with low future returns is concentrated in the bond market, and few pension funds or insurers restrict their investments to bonds; the great majority have "balanced" portfolios with the majority invested in equities. Equities have delivered generous returns until a year or so ago, and could deliver generous returns going forward, especially if fiscal policies improve. The ones that could suffer the most in the future are those with a majority of their assets invested in high quality bonds, where interest rates are extremely low. But of course their "suffering" would be more in the nature of a failure to earn higher rates of return as interest rates rise, rather than a loss of principal.

Frozen in the North said...


Nor sure the FDIC and others are forcing tighter lending standards don't forget that the banks got scared shitless in 2008 when they realized that no one was paying attention to credit standards. Also, capital markets buyers have become more difficult because of 2008 -- where you could argue there were no lending standards (and if there were, they were not applied).

Borrowers take the view that banks will screw them not out os spite but because they are careless. My daughter just bought a house in NYC; its not cheap, she has a 55% mortgage -- but the lender must have asked the same documents 10 times -- one email complained that the delay was caused by her asking too high a borrowing percentage... yeah she (it was a she) didn't bother reading the file or read her emails for that matter. So imagine when there are real problems... banks are careless, its a fact of life, as a borrower you need to take that into consideration.

Scott Grannis said...

Dodd-Frank has made life miserable for the banking industry in general.

Andrew said...

Regarding funding of pension plans, I recently received an interesting notice from my pension plan. Basically, because of the Highway and Transportation Funding Act of 2014 and the Bipartisan Budget Act of 2015, the plan can now use a 25-year average of interest rates when determining funding target attainment. In the recent past, they were required to use the most recent 2 year average.

What this does is dramatically reduce the funding required to meet the "legal requirements". Of course, it's basically just smoke and mirrors. However, now instead of being 71.7% funded, the plan can claim 89% funding and greatly reduce required contributions. This is not just for my company but all across the country. It's a private plan, but I can imagine that similar rules are being adopted with public plans. Of, and it's also a great way to improve profitability.

Scott Grannis said...

Re pension funding. The 10-yr Treasury yield plus some spread such as a single-A corporate spread (e.g., 50-100 bps), is commonly used to calculate a pension's funded status. The average of the 10-yr over the past two years is 2.11%, whereas the average over the past 25 years is 4.56%. As you note, that is a significant difference. Your plan is now assuming bond returns of at least 4.56% per year, instead of 2.11%. It's possible that the yield on 10-yr Treasuries could rise over the next 5-10 years to 4.55% or more, but along the way, bond returns are going to be very low because rising interest rates will depress the value of all bonds. So the chances are that this maneuver will result in the plan failing to deliver on its promises.

Of course it's also possible that yields could fail to rise much if at all, and that would be very painful.

The higher projected funded status today is likely a product of smoke and mirrors. The sponsoring company can save on its pension contributions for now, but that only postpones the eventual cost of required contributions.

The real driver of long-term returns, however, will be the return on equities. That has averaged about 8-9% per year over multi-decadal periods.

Thinking Hard said...

I prefer to view QE (as a policy) as a method of capping a rise in yield in the face of increased debt levels. The U.S. government increased deficit spending and overall federal debt levels with falling yields on U.S. treasuries. How? A major buyer since 2008 has been the Fed.

Also, how did the Fed issue reserves to the primary dealers? Where did these reserves come from? The description of "printing" to the general population may very well differ from the description in high level economic circles. I agree "printing" did not directly occur but to the layman that is how issuing reserves is viewed.

Side note...U.S. industrial production has contracted for 8 months in a row. Any time since 1920 it has contracted for more than 6 months the U.S. is in recession. 100% of the time. I know oil has rebounded 90% since the February lows, but will we see the first false positive in this signal? Please see

The Fed has already tightened significantly when factoring in QE. Most pundits only look at the FFR but this is a false narrative as the monetary policy has fundamentally changed beginning in 2008 with the Emergency Economic Stabilization Act and the payment of interest on reserves. Raise those rates! Haha not needed because we are already tight and the world is still tightening for us to some degree.

Johnny Bee Dawg said...

Cant agree with this post more!

Paragraphs 2, 3 and 4 should just stay on the Home Page forever....or at least be posted on every refrigerator in the country so America has to see it every time a beer is fetched. And include the paragraph explaining that the Fed didn't artificially depress interest rates with QE purchases. And the part about the Fed NOT being able to control bonds and notes. EXCELLENT commentary. Full of investing truths.

The Fed follows markets instead of controlling them. Historically, T-Bill yields in the market start rising 6 months or so BEFORE the Fed hikes rates, not the other way around.

Our 13 week T-bill yield abruptly began shooting higher during the last week of Oct 2015 after staying dormant for 8 years. Its gone from 3 basis points then, to 30 now. The market is finally believing the Fed jawboning. (I only wish the Fed Governors had a more consistent and clear message to deliver over the past few months! Contradicting each other is not helpful.) The December hike was way too early for markets to deal with, and it showed. Now it appears markets have pushed up short rates long enough to take the blow.

Stocks and long bonds both know a rate hike is coming, and both seem braced for it. Neither are collapsing.

Ive been puzzled by all the people on TV saying that Financials should rally from a rate hike. It seems to me the curve would flatten, and that just doesn't seem all that great for banking. What am I missing??

Johnny Bee Dawg said...

Look at an intraday chart of the USD today. That abrupt surge up to highest levels since March was the moment Janey Yellen pretty much said there would be a rate hike in the next couple of months.

What's gonna happen to gold and oil? Will there be similar headwinds to multinationals like last year, or will this move be muted??

Benjamin Cole said...

A rate hike now strikes me as injudicious and risky. The last time the Fed preemptively moved to fight inflation was...2008.

Why raise rates? Name one industry straining to meet demand. Actually, are there industries that are not glutted?


Anonymous said...

consider the negative effect of millions of ordinary people not having sufficient interest income to buy stuff, can that be quantified? can zero or negative rates be a negative reinforcing loop for both low inflation AND a massive consumer block which has no interest income to spend?

McKibbinUSA said...
This comment has been removed by the author.
Hans said...

"Also, how did the Fed issue reserves to the primary dealers? Where did these reserves come from? The description of "printing" to the general population may very well differ from the description in high level economic circles. "

Thinking, yes indeed where did all the money go to non-bank institutions? Did the
FRS create new reserves for them in some special form?

And what about all of this printing that the Gosbank Bank did with
their QEs and other funding programs?

"At the end of August-2008, which was just prior to the start of the Fed’s first QE program, total Bank Credit was around $9T (9 trillion dollars). At the end of January this year it was around $11T. This means that the commercial banks have collectively created a maximum of 2 trillion new dollars since August-2008. They might have created significantly less than 2 trillion new dollars, but they have not created significantly more than that.

Let’s now consider what happened to US True Money Supply (TMS) over the same period, noting first that TMS is the sum of physical currency in circulation, demand deposits at private depository institutions and savings deposits at private depository institutions. TMS only counts money within the economy. It does not count bank reserves.

From the end of August-2008 through to the end of January-2015, TMS increased by $5.1T. Since we know that commercial banks created a maximum of $2T over this period, we know that at least $3.1T came from somewhere other than the commercial banking system. And since we also know that new US dollars can only be created by the commercial banks and the Fed, we therefore know that the Fed’s QE must have directly created a minimum of 3.1 trillion new dollars."

I believe Mr Grannis has discounted this article but I forgot

It does make the same argument that thinking does, as only two entities
can print money, banks and the FRS.

"Fed didn't artificially depress interest rates with QE purchases."

JBD. then who did and by what action? Furthermore, if the Fed
did not artificially depress interest rates with their QEs then
what did?

Why are mortgage rates at historical lows?

Btw, as Ben Jamin has pointed out - all for not.

Hans said...


"The Fed is poised to take huge capital losses

But it gets worse. The Fed is taking capital losses on its $4.3 trillion bond portfolio, and those losses will eventually accelerate. When the bonds that the Fed holds mature, it realizes losses because it paid above-market prices for most of them to begin with.

The Fed is currently keeping its balance sheet the same size, purchasing new bonds when old ones mature. Should it decide to sell bonds, it would realize huge losses over a short space of time and would likely go into debt with the U.S. Treasury. According to Hall and Reis, it would take the Fed 6 to 10 years to work off the debt and get back in the green.

Bottom line: No matter how you slice it, the Fed payments to Uncle Sam will not only drop off a cliff someday, they could also go negative. That means, the taxpayers would be indirectly on the hook for Federal Reserve operating losses."

Bow Wow, bow wow, I have been suggesting this for some time now, however,
there are others whom have said quite to the contrary. There is nothing
magical about the FRS and they know little more sense than the guy whom picks up
your garbage; with the latter having a better business plan and actually
performing a service.

Well, at least this is one question I will no longer have to axe and
wait for replies which never came, with the exception for Mr Grannis.

Hans said...

Why the FRS is obsolete and no longer needed.

Hans said...

Hear is the FRS ending the chart report of excess reserves
and replacing it with (H.3) which is less than transparent. Last year
it report this chart was 2013.

Yes, years of data now lost, especially for those unfamiliar with it. This is
deception at its best, IMHO.

Hans said...

Business loans defaults are reaching new highs.

Hans said...

Why did the moron(s) at the FRS choose $400.00 for a minimum
in savings for emergencies? That would not even pay for
dinner for four at New Yorky finest eatery!!!

Anyways, this link is utterly shocking at the financial affairs
of too many Americans!

The more households join this unwanted club, the greater potential
for another American Revolution!! The angry is mounting. Watch out
all of you GUs.

philadiaries said...

scott- I've been following your research going back to your days at wamco, thanks for all of the good intel over the years. I hear your argument that the consumer is in good shape and being careful with their balance sheet, which is good. What if those numbers are skewed by the amount of cash and lack of debt by the wealthy individuals in this country(top 10% of the population controls are large portion of the wealth and assets)? Seems like 80% of this country is holding on by a thread, and they're getting crushed by higher healthcare costs, and possibly higher fuel costs. At the same time, the wealthy are feeling the pain of technology disruption, higher wages, and higher regs on their business and industries. I know technology has always destroyed and created new jobs, but right now it seems like its approaching a tipping point where the effects could be a negative on the overall economy. So I think the savings rate is high, and the leverage is low because the wealthy are worried about tomorrow, and are too afraid to hire and spend money on capex or buy lots of stuff, the rest of the country is getting squeezed, and therefore, things might not be as good as they seem. Thoughts?

McKibbinUSA said...

While the news at the "too big to fail" level of our economy may look bright, the news along Main Street USA is gloomy as evidenced by long-term declines in real working wages, real home values, and the employment to population ratio (none of which have yet recovered to pre-2008 levels). As a result, the "too big to fail" establishment folks have created an emerging conflict with the Main Street anti-establishment crowd who are in parade with Donald Trump on the Republican side, and Bernie Sanders on the Democratic side. How the conflict between the "too big to fail" economy and the Main Street economy might unfold is a scary unknown. My guess is the establishment (from both parties) will win the battle resulting in the complete collapse of the Main Street USA economy. By collapse, I mean riots, crime, hunger, disease, shortages of everything, and deaths on a massive scale. I am shocked that so many Americans believe that the "Hunger Games" economic model is what is best for our nation at large. However, the battle between the Federalists (i.e., the city people in Hunger Games) and Main Street (as in the Districts in Hunger Games) is about to unfold. Personally, I am terrified that so many in America are so optimistic for out nation's economic future. I fear for my property, the lives of my neighbors, and the future of our union for all of this reasons. Thus, I refuse to subscribe to false optimisms with so much at risk for us all.

Scott Grannis said...

philadiaries: Ever since early 2009 I've been calling for a sub-par recovery, and that's what we've seen. I've called it a miserably weak recovery, I've noted how personal income is trillions less than it could have been had this been a normal recovery, and I've noted how upset people are and why:

We both agree that there are problems out there and that people are worried and that investment is weak. This is why it's been a miserable recovery. I don't think anything has gotten much worse or much better of late. It's "steady and slow as she goes." Nobody is calling this a great economy. But I would reiterate what I've said just about every year since 2009: it's a miserably slow recovery, but it's still a recovery, and things have turned out somewhat better than the gloomy expectations called for.

Scott Grannis said...

Hans, re business loans "reaching new highs:" This is misleading. To begin with, the chart you link to shows the nominal level of delinquencies on C&I Loans; over time, nominal values are very likely to rise and to hit new highs repeatedly. A better analysis would look at the ratio of delinquencies to total loans:

Over the past 30 years, C&I Loan delinquency rates have averaged 2.8%. As of last March the rate was 1.5% It's true that delinquency rates spike prior to and during recessions, but the current "spike" has seen delinquency rates rise from an all-time low of 0.7% in 2014. The recent rise could be a harbinger recession, but from an historical viewpoint it is still exceptionally low.

Benjamin Cole said...

PCE April just in at 1.6% YoY.

The Fed is under-shooting its stated inflation target, which is not supposed to be a ceiling but an average. The target is 2% on the PCE.

So...let's raise rates.

Side note: Japan today has virtually no unemployment and no inflation, and this situation has persisted for years. Why is the Fed so afraid of putting Americans to work?

Scott Grannis said...

Benjamin, re central banks' ability to stimulate economies and put people to work: I suggest you read Howard Marks' recent memo that explains in pretty simple terms why monetary policy cannot create growth (among other very good points he makes about why most politicians' promises are absurd):