yesterday's $36 billion U.S. 5-year Treasury auction closed at 1.374%, as low as the 5-yr yield has been since the early '60s, with the exception of December 2006 at 1.358%; today's 7-year auction also drew a record-low yield, of 1.989%
data today:
initial jobless claims better, down to 473k, from upwardly-revised 504k; 4-wk M.A. at 487k
14.4% of mortgages are delinquent or in foreclosure in Q2, down from 14.7% in Q1
and we had one more regional Fed survey come out today: the KC Fed manuf survey was at 0 for August, down from 14 in July;
these regional manufacturing surveys give us a good idea of what to expect for the ISM next week; the Empire was the first to come out, on Aug 16th, and it was up slightly from 5 in July to 7 in August; Richmond Fed fell to 11 from 16; Philly Fed fell to -7.7 from 5; KC fell today; Dallas Fed will be on Monday and Chicage Fed manufacturing index on Tuesday, then the ISM will come out on Wed.; as per Bill at Calculated Risk, based on the #s that have come out, we can expect the ISM to have slipped again, but to remain above 50
also tomorrow, start of Jackson Hole; Ben will give his outlook; do you think he will refer to inflation expecations as well-anchored? despite, via TIPs, evidence to the contrary?
I've been saying for awhile that those who say the U.S. today is not like Japan was are right; the similarities are similar (huge burst asset bubble, too much debt, zombie banks, ineffective policy efforts), but the differences actually make the U.S. worse, not better, off (no savings, so U.S. savings rates having to go up, unlike down in Japan, which cushioned the blow to aggregate demand; unemployment twice what it was in Japan)
Albert Edwards agrees: the U.S. is "much, much worse than Japan a decade ago"
also:
There is still too much hope about. Until the mantra changes from "equities for the long term" to "Bonds at any price", we will not have completed our Ice Age journey.... the Japanese template of supposedly "expensive" bonds outperforming supposedly "cheap" equities; this will feel nothing like a flesh wound…
as per a posting at zerohedge, BofA Merrill Lynch asks is the U.S. becoming Japan:
Ethan Harris says there is just a 35% chance of QE2 and 20% chance of sustained deflation, largely because the Fed reacted so much faster than the BoJ did (policy paralysis in Japan)
but also because, apparently, there are no zombie banks in the U.S. (disputable) and that there is no "acceptance of zero growth" in the U.S. as there was in Japan (perhaps the Japanese only "accepted" it once they realized they couldn't do anything more to engineer stronger growth --- and, as Richard Koo says, Japan was fortunate to do as much as they did which prevented an outcome far worse)
not sure whether Michael Hartnett's contrast of much higher unemployment in the U.S. relative to Japan is a positive contrast, or negative one; otherwise, the similarities he presents vis-a-vis Japan: (interest rates low but not working; asset price performance is deflationary; debt, deleveraging, deflation), like those of Harris (popping of massive asset bubble; impaired banking system; near-zero inflation; large external shock; premature fiscal tightening), seem more compelling (negative) than the (positive) contrasts (Hartnett: non-financial debt-to-GDP did not grow as much in U.S. as in Japan; policy responses (QE & capital injections) were quicker; creative destruction, i.e. high unemployment; Harris: cultural adversion to radical steps, along with the distinctions mentioned above, response time, zombie banks and acceptance of zero growth in Japan)
so how Harris comes up with those odds is beyond me
meanwhile, BoA's Jeffrey Rosenberg says "the backdrop of both cash on balance sheet and credit market availability means that unlike in Japan, the ability to finance growth on corporate balance sheets does not stand as an impediment to any recovery" --- okay, but (a) perhaps that cash is defensive in nature as companies get funding not because they need to or have plans to invest it in productive capacity, but while they can; and (b) though the corporate sector has lots of cash, its a result of lots of debt issuance, and while that is good in the sense that corporates having extended maturities of its debt leaves it less vulnerable to a seize-up in the credit markets --- it means they also has lots of debt, and remain highly leveraged; and (c) even if they do have cash to deploy, with excess capacity and stagnant demand, why should they put it to work in risky projects (and M&A does not stimulate sustainable economic growth)
what BoA/ML fails to mention, but David Rosenberg does not, is that Japan had a high savings rate at the start of the crisis, in contrast to the U.S., cushioning the blow as the savings rate fell over time (whereas in the U.S. it is going up); Japan's lost decade was cushioned by a global economic boom which supported its export sector; and the U.S. has a much larger output gap to deal with
okay, credit where credit is due:
an analyst/strategist, who has made some very good calls in the past, advocating getting into stocks in early 2009 and advocating raising some cash in April of this year, was out yesterday with a bold call: to go max equities, min bonds, anticipating the S&P to be up about 50% over the next 2 years; will he continue his good run?
his forecast is predicated on a soft landing, accompanied by P/E multiple expansion
he cites 5 "good" reasons to believe in the soft landing thesis (with my comments in parentheses): a positively-sloped yield curve (with the Fed at 0, the yield curve can't be anything but positively-sloped, so to suggest that every time the Fed is at 0 is bullish for the economy avoids the reasons WHY the Fed still remains at 0); increasing M&A activity is indicative of corporate and bank confidence (the fact that corporations are using their cash for M&A rather than for investment in productive capacity in the economy doesn't strike me as indicative of confidence in the economy or in a rebound in aggregate demand); dividends are being hiked, which would not be the case if corporations feared a hard landing (as per last point, corporations have leveraged up, opportunistically taking on debt while the getting's good, and are sitting on a lot of cash with, apparently, little productive purpose, so paying out more in dividends is a shareholder-friendly way of doing something with cash that would otherwise sit idle); firings and thus jobless claims have been increasing just modestly (perhaps firings aren't rising more now because firings were so high in the depths of the crisis that companies have cut to the bone already; the fact that there's no more fat to slice off seems small consolation to me when unemployment is already just under 10%); his fifth point is his prediction of a decline in the savings rate, which would be supportive of consumer spending (if true; it hasn't happened yet, as consumer credit has been in a steady decline since July 2008; and personal savings, which averaged $250 billion from 1994 through 2006, are at their highest level in a year, and have been trending up for each of the last 3 years; as they say, show me the money)
quite frankly, given the success of his earlier calls, I was hoping for some more robust analysis that that; for example, I'd rather pin my economic expectations on what yield changes tell me (T10 down 150bp since April), rather than the fact that the curve (necessarily) remains positive; and I'd rather premise my forecast on what the Philly Fed A-D-S, ECRI WLI, Consumer Metrics Institute Growth Index, jobless claims and the housing markets are telling me as leading indicators (or, on what John Husman looks at: widening credit spreads, combined with moderate yield curve, combined with falling stock prices, combined with ISM PMI below 54), rather than on his five indicators
He also notes that stocks are trading at 11.5 x forward earnings --- which sure DOES sound cheap --- but analyst earnings estimates are notoriously REactive to the trends in the economy, as opposed to being predictive so I take no solace whatsoever from low forward P/Es (note previous article which noted that based on forward P/E's stocks ALWAYs look cheap!)
as per the following chart from Doug Short, either the bond market has accurately foreshadowed a wobbly autumn stock market; or, if stocks don't sell off, then bonds have come too far and will sell-off; some are betting on the latter; and, yes, the bond market may have come too far too fast and give some back; but nothing I've heard comes close to trumping the things I've been looking at, so I continue to bet on the former
in fact, if anyone expects the S&P to hit 1575 (up 50% from today's 1050) in the next two years, I'd be game to bet on which happens first in the next two years, S&P at 1575 or S&P below 800
So, how about market sentiment? Where are we now?
As per the Financial Philosopher:
The Hope of early 2009 was followed a few months later by Relief that extended and even touched on some Optimism into early 2010. Now that monetary policy and fiscal stimulus appear to be running out of steam, it seems we have stepped backward in sentiment: Optimism and Relief appear to be dissipating, which brings us back to Hope. Hope is not a prudent planThe elusive Canadian housing bubble. Alexandre Pestov, via zerohedge.
other fare:
The Coming Famine. book excerpt by Julian Cribb in the NYT.Lo que separa la civilización de la anarquía son solo siete comidas.
(Civilization and anarchy are only seven meals apart.)—Spanish proverb
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