Friday, January 3, 2020

December 2019 Yield Curve Update

The yield curve continues to press upward from the mid-year lows.  This is mildly bullish, but I would still say that the yield curve is in bearish, inverted territory (below the trendline in the second chart).  We may sit here for a while (several months?), but my guess is, per past patterns, that either 10 year yields will move up above 3%, and the Fed will keep the target rate low, and we might escape a contraction, or 10 year yields will remain close to where they are, and eventually the entire yield curve will move back down toward zero, and we will have some sort of contraction.  I don't think the contraction would be extreme, and it may not even bring much of a decline in equity markets.  The ingredients that made 2008 so disruptive aren't in place today.  The Fed appears to be ready to react to contraction without as much delay as they allowed in 2006-2008.  And, though perma-bears will always be with us, as are the poor (in the long run, maybe they are one and the same!), I don't get the sense that the same suicide cult mentality is so strongly shared as it was in 2008, when Americans would only be satisfied with some sort of financial meltdown.

So, in short, this month doesn't change my posture much.  I think the odds are greater than 50% that future near term yields will be lower than current forward yields, maybe a slight rise in unemployment and decline in equities if the inverted yield curve, as I see it, does signal some coming contraction, and housing that will probably look a lot like 1999-2001, at worst seeing a slight pause in growth.

4 comments:

  1. Interesting post.

    Lately, I have been thinking the world has globalized capital markets, and so we must not only ponder the Fed, but the PBoC, the BoJ, the ECB, and then the BoE and SNB.

    MMT'er Warren Mosler makes an interesting case it was fiscal tightness that contributed to the 2008-9 debacle, and if true, then I guess it is good news that the GOP believes in large federal deficits, and we have some good red ink sketched out in the years ahead.

    The US is doing better economically than Europe with its ECB-ukase austerity provisions, though as usual proving anything by empirical observation is impossible.

    But, given globalized capital markets and the fungibility of money, my guess is that helicopter drops and/or deficit spending are more effective at stimulating economic growth inside a particular nation than monetary policy.

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    Replies
    1. Globalised capital markets, and thus globalised liquidity are an interesting point.

      For a single economy the analysis is relatively straightforward: the central bank prints more money, then nominal GDP goes up. And perhaps even inflation.

      In a global context, that doesn't work, or at least not as simply.

      The US and Switzerland printing more money might have an effect, but Turkey or Argentina (yet alone Venezuela or Zimbabwe) don't seem to be exporting their inflation.

      I suspect, but I am not sure, that in a global setting we need to judge monetary expansion by the real value of the money created. (As a shortcut, I am going to treat eg the USD market value of the money created as the real value.)

      https://fred.stlouisfed.org/series/MANMM101CHM189S shows that the Swiss have created lots of extra money. But the exchange rate held firm. Thus I suspect they created real liquidity.

      For Turkey: Google says that in January 2010 one Lira bought about .69 USD. In January 2020 it buys 0.28 USD. https://fred.stlouisfed.org/series/MYAGM1TRM189N says M1 was about 102 billion Lira in January 2017 and about
      422 billion Lira in June 2017 (the latest they have data for).

      So total M1 in USD went from 70 billion to 118 billion USD.

      Not sure what that says, but I guess the increase when measured at market exchange rates is an upper bound on the inflation exported?

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    2. Matthias:

      You are correct, the Swiss National Bank printed $100,000 in Swiss francs per resident, and nothing happened except they held the line on exchange rates for the Swiss franc.

      This seems to support my view that attempting to stimulate the economy of defined geographic area, such as a nation, through monetary stimulus, or QE anyway, is...well, sketchy at best. The freshly printed Swiss francs entered the global economy who knows where.

      This seems to suggest that fiscal stimulus, that is deficits or helicopter drops, are the best tools to boost a domestic economy, in a globalized world. This is what all the central bankers are saying now anyway.

      Unfortunately, this issue has become politicized. In general, fiscal deficits or money-financed fiscal programs are considered "left-wing" and certainly left-wingers would love to grab control of expanded federal outlays to their benefit.

      I prefer tax cuts on wages, and no additional welfare, or warfare spending.

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