Old Age

By Michael Ashton

The Fed has a fantastic record on one point: they are nearly flawless at misdiagnosing a patient who is sickening

In yesterday’s article, I neglected to mention one remark by a former Fed chair that bothered me at the time. However, I didn’t mention it because I thought the reason it bothered me was that it was vacuous – the sort of throw-away line that someone uses to stall while thinking of the real answer to the question. Since then, I’ve realized what specifically annoyed the subconscious me about the remark.

When Bernanke was asked about whether a recession is coming at some point; he glibly replied “Expansions don’t die of old age,” as if that was obvious and the questioner was being a dolt. Like so much of what Bernanke says, this statement is both true, and irrelevant.

Human beings, also, don’t die of old age. There is a cause of death – something causes a person to die; it isn’t that their library card of corporeality became overdue and they expired. The cause may be a heart attack, a slip-and-fall in the bathtub, cancer, pneumonia, complications from surgery, or the flu, but death is the result of a cause. It just happens that as a person gets older, the number of potential causes multiplies (a newborn rarely has a heart attack) and the number of causes that become fatal to an old person, where they would be merely inconvenient to a hale person, increases as well. As we age, parts of our bodies and immune systems weaken – and that’s where death sneaks in.

Think of those weaknesses as…let’s call them imbalances that have accumulated.

The statement that expansions don’t die of old age is literally true. Something causes them to die. It may be monetary error, but as Volcker pointed out last night in answer to a different question, there were recessions long before there was a Federal Reserve. Expansions also can die from a diminution of credit availability, from energy price spikes, from malinvestment, from an overextension of balance sheets that leads to bankruptcies…from a myriad of things that may not kill a young, vibrant expansion.

The parallel is real, and the point is that while this expansion was never very vibrant the current imbalances are legion. The Fed may not see them, or may believe them to be small (like Bernanke’s Fed felt about the housing bubble and Greenspan’s Fed felt about the equity bubble). But the Fed has a fantastic record on one point: they are nearly flawless at misdiagnosing a patient who is sickening.

Eurodollar CoT Throws a Curveball

By Tom McClellan

Eurodollar COT Throws a Curveball

Eurodollar COT leading indication
April 08, 2016

This week I revisit one of my favorite indicators.  But “favorite” does not mean perfect.

In 2010, I figured out that the net position of commercial traders of eurodollar futures gave a great leading indication for what stock prices would do a year later.  Subsequent research showed that this has been going on since around 1997, which is when the eurodollar futures contract really started to come into prominence as a financial product.  The only explanation I have for why it “works” is that somehow the big-money commercial traders of these interest rate futures products somehow are detecting and manifesting future liquidity flows that will affect stock prices a year later.  Beyond that loose explanation, I cannot decipher the nuts and bolts of why this works.

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Mount Easemore

By Michael Ashton

In short, all of these notable central bankers (which is a little like saying “these notable hobos”) seemed to agree that everything is just fine

Thursday evening’s public discussion between Fed Chairman Janet Yellen and former chairmen Volcker, Greenspan, and Bernanke – these last three in order of gravitas and effectiveness and (perhaps not unrelatedly) reverse order of academic accomplishment – was a first. Never before, apparently, have four current and former Fed chairmen appeared on the same stage. This is less amazing than it seems: prior to Alan Greenspan it was the practice of the Federal Reserve to remain out of the limelight.

Honestly, we all probably would have been better off had they stayed there.

Still, it was a fascinating event. The International House, which hosted the event, called it the “Fabulous Four Fed chairs,” but since they did not serve contemporaneously a better image is probably Mount Rushmore…if Mount Rushmore had the faces by Nixon, Hoover, Carter, and Andrew Johnson instead of Washington, Lincoln, Teddy Roosevelt, and Thomas Jefferson.

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Credit Markets Point to Rising Default Rates

By Chris Ciovacco

Yield vs. Safety Of Principal

If an investor was given the opportunity to invest in two nearly identical bonds with one bond paying 2% per year and the other paying 6% per year, logic says most would choose to invest in the higher-yielding bond. In the real world, the bond paying 6% also comes with a higher risk of default. Therefore, when investors start to become more concerned about the economy and rising bond default rates, they tend to gravitate toward lower-yielding and safer bond ETFs, such as IEF, relative to higher yielding alternatives, such as JNK. The chart below shows the performance of JNK relative to IEF. The chart reflects a bias toward return of principal over yield.

credit markets, default rates

Some cracks have started to appear in the credit markets in 2016. From CNBC:

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TIPS and Gold – Cousins, Not Brothers

By Michael Ashton

Gold is closer to “right” here, and breakevens still have quite far to go

A longtime reader (and friend) today forwarded me a chart from a well-known technical analyst showing the recent correlation between TIPS (via the TIP ETF) and gold; the analyst also argued that the rising gold price may be boosting TIPS. I’ve replicated the chart he showed, more or less (source: Bloomberg).


Ordinarily, I would cite the analyst directly, but in this case since I’m essentially calling him out I thought it might be rude to do so! His mistake is a pretty common one, after all. And, in fact, I am going to use it to illustrate an important point about TIPS.

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Erasing Yesterday’s Selloff

By Doug Short

S&P 500 Snapshot: Erasing Yesterday’s Selloff

Our benchmark S&P 500 erased yesterday’s entire -1.01% slump, the worst selloff in 19 sessions, with today’s 1.05% gain. The index, however, is still down 0.30% for the week at the close of the mid-week session. The S&P 500 rallied at the open, gave back some of the gains with the 2 PM ET release of the FOMC’s March minutes but then recovered and resumed its pre-Fed trend. It closed the day fractionally off its 1.08% intraday high shortly before the final bell. The larger influence on today’s equity action was the surge in oil prices in light of the substantial decline in crude inventories. WTI was up over 5% for May futures.

The yield on the 10-year note closed at 1.76%, up three basis points from the previous close.

Here is a snapshot of past five sessions in the S&P 500.

S&P 500

Here is a daily chart of the index. Despite the drama of the FOMCE minutes and surge in crude futures, volume was light. The market’s lull may soon be broken as we shift to Q1 earnings next week.

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Don’t Buy the Greatest Fool Theory

By Jesse Felder

Don’t Buy The Greatest Fools’ Theory Of Investment Value

We are now entering earnings season once again. Pre-announcements have been the second-worst seen over the past decade.

This has analysts lowering estimates. In fact, they’ve been lowered so far quarterly earnings now look to fall all the way back to 2009 levels.

For the trailing twelve months earnings are now back to 2011 levels…

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Slowdown Continues; Lost Time Accumulates

By Jeffrey Snider of Alhambra

The US trade estimates for February suggest only that the global economy remains in this slowdown phase

US trade statistics for February improved in both exports and imports, but there are questions as to the reason for the reverse and whether it is actually meaningful. After abysmal performance in every segment and category in January, there was some give back in February including positive numbers in some places. That suggests that January’s trade activity might have been suppressed (financing issues?) and shifted somewhat into the following month (and then the 29th day may have added something further).

US imports from China, for example, rose 15.8% in February year-over-year after contracting for the four months prior. This variation, with sudden surges out of nowhere spread between very low or contracting months, has been the dominant feature of the past year and a half. Despite what seems like a very good number for February, the 6-month average remains barely positive at +1.1% because that +15.8% only replaces +10.8% from August (the last time there was a similar “good” month) in the moving average. The net result is the usual mainstream proclamations that the corner has been turned while Chinese industry is still stuck between capacity built for sustained +25% to +30% US import growth and the actual import level that remains at or even below zero if highly irregular in achieving it.

ABOOK Apr 2016 ExIm Imports China, us economy

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The Daily Shot

By Daily Shot


Let’s begin with a few developments in Japan.

1. Dollar-yen fell below 111 as the yen continues to strengthen.

Source: barchart

This is in spite of the BoJ suggesting that the central bank could push rates deeper into negative territory.

Source: MarketWatch

2. Here is the Nikkei 225 response to the yen strengthening,

Source: barchart

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