I’ll warn you right off the bat, I have been waiting to write this piece for the past few days. You see, it’s a gold post, and as much as I try to take a bigger picture view, the trader-in-me still hates writing a bullish piece just as the market is about to have a minor correction. So I often get cute and wait for a dip before I publish.
I usually post these the day of CPI but I was traveling and didn’t get to do so. These were my tweets in the immediate aftermath of the CPI report.
About 15 minutes to CPI. Today’s stream-of-consciousness will be a little more relaxed since I’m at a conference in Florida at the moment!
As for the number today, here are some thoughts.
We’ve recently begun to see some reduction in pressure from truckload rates upstream. Not down, but rising more slowly. Bottlenecks in overland are easing somewhat. Higher prices are still passing through but less alarm about it.
Housing price increases have also been slowing. Again, we’re talking second-derivative stuff; they aren’t falling nationwide. Rents are loosely related to prices, so I don’t think we’ll see much downward pressure there yet, but it’s a meme at the moment.
Note: This is not market analysis. This is a person writing words and inserting some funny pictures. It is a product of said person’s view of psychology and the modern market.
First off, my honest self-evaluation: I would be pleased to see the US stock market to go down again, not because I am positioned for it (I am not, yet, other than through fairly non-dramatic risk management like portfolio balancing, profit taking and keeping high cash levels as appropriate) but because I feel like the bull was cooked up by an evil man named Ben Bernanke.
When I write “the bull” I am not talking about the post-Christmas Eve rally. That had to happen and at the time I was buying the spiking fear and panic. I am talking about the post-2008 bull market.
Although younger readers might not believe it, there was a time when Janus Henderson’s Bill Gross was the biggest bond trader in the world. In fact, there was even a book which proclaimed him the original “Bond King”.
Last week, in part I of this essay, we discussed why a central planner cannot know the right interest rate. Central planner’s macroeconomic aggregate measures like GDP are blind to the problem of capital consumption, including especially capital consumption caused by the central plan itself. GDP has an intrinsic bias towards consumption, and makes no distinction between consumption of the yield on capital, and consumption of the capital per se. Between selling the golden egg, and cooking the goose that lays golden eggs.
One could quibble with this and say that, well, really, the central planners should use a different metric. This is not satisfying. It demands the retort, “if there is a better metric than GDP, then why aren’t they using it now?” GDP is, itself, supposed to be that better metric! Nominal GDP targeting is the darling central plan proposal of the Right, supposedly better than consumer price index and unemployment (as Modern Monetary Theory is the darling of the Left).
[This blog post is an excerpt from a commentary posted at TSI about three weeks ago]
TARGET2 is the system set up in the euro-zone to clear inter-bank payments. The Bundesbank (Germany’s central bank) describes it as a payment system that enables the speedy and final settlement of national and cross-border payments. The problem is that often there is no “final settlement” under TARGET2. Instead, credits and debits can build up indefinitely.
To understand the issue it first must be understood that although the 19 countries that comprise the euro-zone use a common currency, the euro-zone isn’t really a unified monetary system. It is more like 19 separate monetary systems, each of which is overseen by a National Central Bank (NCB). These NCBs are, in turn, overseen and coordinated by the ECB. TARGET2 is the means by which money is transferred quickly and efficiently between these 19 separate monetary systems. The transfer may well be quick and efficient, but, as noted above, it often doesn’t result in final settlement.
We’ve enjoyed years of “recovery” since the Great Financial Crisis by literally papering over our problems with newly-printed money, instead of addressing their root causes.
For example, The Federal Reserve dropped their benchmark target rate to 25 basis points in December 2008 just after President Obama was elected to his first term as President, and began their asset purchases (QE) in September 2008. The Fed raised their target rate only once during Obama’s eight years as President (December 2015) and only stated shrinking its balance sheet in earnest in 2018 (while Trump was President).
February 8 – Bloomberg (Brian Chappatta): “Bond traders are dusting off their tried and true post-crisis playbook after the Federal Reserve’s pivot last month. What they don’t realize is that the game has most likely changed. In an unabashed reach for yield, investors suddenly can’t get enough of the riskiest debt, with the Bloomberg Barclays U.S. Corporate High Yield Bond Index posting a staggering 5.25% total return in the first five weeks of 2019, led by those securities rated in the CCC tier. In the largest CCC borrowing since September, Clear Channel Outdoor Holdings Inc. received orders this week of more than $5 billion for a $2.2 billion deal, allowing it to price its debt to yield 9.25%, compared with whisper talk of about 10%.”
A Friday headline from a separate Bloomberg article: “Corporate Bonds on Fire as Dovish Fed Soothes Investors,” with the opening sentence: “Fear is turning to exuberance in credit markets.” According to Lipper, corporate investment-grade funds enjoyed inflows of $2.668 billion last week, with high-yield funds receiving $3.859 billion. Bloomberg headline: “High-Yield Bond Funds See Biggest Inflow Since July 2016.” This follows the biggest high-yield inflows ($3.28bn) since December 2016 from two weeks ago.