Quarterly Chartbook September 30, 2009 Which way is up?
Which way is up? Given the huge amount of Fiscal and Monetary stimulus, it is not surprising that the market has gotten up off the mat. Which way is up? Housing prices? Stock Prices? GDP? What is the trajectory of growth? How will we measure it? What is success?
One way higher, stronger growth outside of the USA Notice the massive spike in volatility (to unprecedented levels) beginning last September. This is far more significant that the previous near-term highs associated with Bear Stearns in March of 2008.
Risk appetite has returned to the markets
What a difference a year makes! Before Lehman Bros. Bankruptcy Now 9/12/2008 9/30/2009 Difference 30 yr Conventional Fixed Rate Mortgage 5.93 5.04-15.01% Baltic Dry 4800 2220-53.75% Copper 3209 6195.09 93.05% Credit Spread 1.61 1.13-29.81% Dow Jones Industrials 11421 9712-14.96% Gold 750.25 1009 34.49% Jobless Claims 496000 551000 11.09% Oil 101.18 70.13-30.69% S&P 500 1251.7 1057-15.55% TED Spread 135.365 17.93-86.75% VIX 25.66 25.61-0.19%
S & P 500 I get tired just looking at this chart. We are been through a great deal in the last year, but now we are back from the brink
Where are we now? The market seems to be fixed on what I call Five big fears. China stops buying US Treasury Bonds Hyper-Inflation Interest rates skyrocket Stagflation (low growth, inflation higher than growth) The possibility of a lost decade in the USA, like Japan Let s take a look at each.
Happy Birthday, Communist China! Hope you got some bonds for your birthday! The Empire State Building lit up in Red and Yellow is a sure sign that China has some control of our checkbook, but we are the only country in the word that can absorb their massive current account surpluses. When we traveled to China last year, we brought the China/Bond question up time and again. The Chinese have a saying, you don t saw off the branch that you are sitting on.
Hyper-Inflation? Nyet! 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Maturity adjusted Inflation (L Scale) 10 yr Change in Expectations (R Scale) Market Anticipated Inflation 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% -10.00% -20.00% -30.00% -40.00% -50.00% -60.00% -70.00% -80.00% -90.00% -100.00% -110.00% Inflation expectations are tracking along at +1.79%, well below the long term average of 3%
Skyrocketing Rates? Hardly! The tend line in long term interest rates (the 10 year US Treasury) is still soundly down. Mortgage rates are under 5%. Again, this is not a problem until it becomes a problem.
Stagflation? Only if the Fed kept printing money, which they have not.
Lost Decade? Yes, perhaps the last 10 years. Five Year Average S&P 500 Returns 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% -10.00% Jul-30 Jul-32 Jul-34 Jul-36 Jul-38 Jul-40 Jul-42 Jul-44 Jul-46 Jul-48 Jul-50 Jul-52 Jul-54 Jul-56 Jul-58 Jul-60 Jul-62 Jul-64 Jul-66 Jul-68 Jul-70 Jul-72 Jul-74 Jul-76 Jul-78 Jul-80 Jul-82 Jul-84 Jul-86 Jul-88 Jul-90 Jul-92 Jul-94 Jul-96 Jul-98 Jul-00 Jul-02 Jul-04 Jul-06 Jul-08-20.00% -30.00%
What we expect
Leading indicators 80.00% 60.00% 13 Week 52 Week 3 Year Economic Momentum 40.00% 20.00% 0.00% -20.00% -40.00% -60.00% Signs of growth are returning, the question is how much for how long?
Retail sales Retail Sales as a % of Personal Income 40.00% 39.00% 38.00% 37.00% 36.00% 35.00% 34.00% 33.00% 32.00% 31.00% As consumers have dug in, retail sales as a % of income has fallen a great deal. This is the source of the rise in the savings rate. The level of decline is too severe to hold for the long term.
The yield curve and bank re-liquification The yield curve is sharply upwardly sloped from the 2 yr to the 7 yr. This will help banks earn their way out of the crisis - borrow cheap short term and lend for a spread longer term. Note how flat the curve is from 10 yr to 30 yr.
The Outlook Watching and waiting for the world premier of the new normal. The fears are widely advertised. One path higher is lower relative consumption from the USA and growth for the rest of the world, which may result in slower, albeit more durable growth. In sum, the recession is over, it is the nature and course of the expansion that are still in doubt.