As of July 1st, the GDPNow Forecast for Q2 ticked up to 2.2% from the previous estimate of 2.1%. This update reflects data from today’s construction spending release and the ISM Manufacturing Report.
I was ready to buy another round of 30Y Treasurys on Friday, but my yield target was 3.30% (25 bps over my last purchase), and we only got to 3.25%. I was also confused by the strange lack of safety trade before the weekend. It's called complacency, as everyone seems to think the central banks will be able to bail everyone out of trouble, no matter what. That strategy of course works...until it doesn't.
I’ve been in and out of 30Y Treasurys three times in the past five years, and to echo stu’s point regarding yields, each of those mini-cycles had lower highs and lower lows (the recent high was around 3.96% in December of 2013, and the low was 2.25% in late January of this year). I think we’ll be stuck in a range of around 2.0-4.0% for another decade (or more), while experiencing a lot of volatility along the way.
Extreme indebtedness in the US has resulted in average real GDP growth of only 1.8% annually since the year 2000, the year our combined debt (public and private) surpassed 275%, a significant threshold that’s been widely discussed in academic papers. For the 100 years prior to 2000, real GDP growth in the US averaged around 3.6% annually. For the record, our combined debt is currently around 340% of GDP, compared with 440% in the Euro currency zone, and 655% in Japan. This debt overhang is sucking oxygen out of global growth, which will likely doom us to many more years of low growth, low credit demand, and low interest rates. We’ve yet to see the secular low in bond yields…
It wouldn’t surprise me to see rates go up another 50-60 basis points for this particular cycle. But with an economy averaging sub-2% real GDP growth (as we’ve averaged for the past 15 years), it’s not sustainable. It will be a buying opportunity, and I’ll be buying on every 25 bps rise.
As of June 25th, the GDPNow forecast for Q2 was bumped up to 2.1%. There are only 5 updates left (all in the month of July) for the current quarter. Street consensus remains around the 2.7-2.8% level for this quarter.
"Ah...Star Wars! Nothing but Star Wars! Gimme those Star Wars...don't let them end! Ah...Star Wars! If they should bar wars.. please let these Star Wars stay-ay!..."
Oh, I’ll never trust the Fed. By the way, I ran across an article from 2010 at CNN’s website with the following headline: “Economists: Fed won’t raise rates until 2012”. Think about that. The whole thing is such a farce, you have to laugh…
What data are you looking at? Durable Goods were down 1.8% in May, down 5% YoY; durable goods ex transports and core capex are both down YoY for 4 months in a row, flashing recessionary red. And US Manufacturing PMI slipped to 53.4, the weakest factory output number in a year and a half (since October 2013). Read the words from the Markit report: “The survey results will add to further worries about the damaging impact of the strong dollar, and encourage the Fed to be cautious in terms of the timing the first interest rate hike. While a September rise still looks likely, given the ongoing strength of the service sector, any further deterioration in the data are likely to push the first hike into next year.”
Wait, last week you told us the Fed lies and will never raise rates. This week you're back to trusting them? :)
Since you've been negative regarding Walgreens management for years, I assume you see these changes as a net positive for the company going forward?
I remember seeing an interview with Lacy Hunt back in the fall, when one of the talking heads asked him when exactly the Fed would raise rates in 2015. He was dismissive, saying, “They’re not going to raise rates next year.” I remember thinking, hmm, that’s kind of a bold prediction. Fast forward to yesterday, where we get the following note from Goldman’s Jan Hatzius, pushing his prediction of the first rate hike from September to December:
"…in large part this reflects the fact that seven FOMC participants are now projecting zero or one rate hike this year, a group that we believe includes Fed Chair Janet Yellen. We had viewed a clear signal for a September hike at the June meeting as close to a necessary condition for the FOMC to actually hike in September, but the committee did not lay that groundwork today."
And this is what the always witty Zero Hedge has to say about December:
“December? We give Goldman 3 months, or some time in September, when the Fed realizes the US economy will be covered in 6-12 inches of GDP crushing snow deep in the winter and as a result the rate hike will be delayed once again to some time in 2016.... And so on. And so on….”
Meanwhile, all the other financial “journalists” at Janet Yellen’s press conference yesterday asked only softball questions about the economy. The WSJ reporter, Pedro da Costa, who dared pose tough questions to the high priestess at the last FOMC presser (regarding the investigation into the 2012 leak), was not given a press pass for yesterday’s meeting. It’s called “access journalism”, and the other reporters are scared that they too will lose their access to sources at the Fed if they rock the boat. Cowards.
Jeff Gundlach has mentioned several times lately that the long bond wants the Fed to raise short-term rates, in order to reduce inflation expectations. The bond market is starting to think the Fed's easy money policy is going to result in inflation, thus long-term rates are creeping up. If the Fed had actually raised rates at this meeting, long-term rates would have likely declined.
As of June 16th, the GDPNow forecast for Q2 remained unchanged at 1.9%. While Monday’s industrial production release bumped the nowcast up to 2.0%, yesterday’s disappointing housing starts data moved it back to 1.9%.
I used to get angry and frustrated by the Fed, but now I just try to profit from their fecklessness. Take a look at how the Fed’s 2015 GDP forecast has changed just over the past six months (and this has happened every single year for the past five years, as they are habitually over-optimistic):
Dec. 2014 meeting: 2.6 – 3.0%
March 2015 meeting: 2.3 – 2.7%
June 2015 meeting: 1.80 – 2.0%
Someone reading my posts here for the past year would have had a better handle on 2015 GDP than listening to the Fed! How can the Fed be so wrong, every single year, regarding something so fundamental?
By the way, does anyone think any of the “journalists” at the Yellen press conference will have the guts to quiz her about the investigation regarding the possible illegal leaks in 2012?
So we’re responding to spam threads now? Anyway, the housing data was actually mixed. Housing starts (a far more significant metric than permits) actually plunged 11% MoM. Housing permits (which may or may not lead to starts) spiked 11.8%, led by a 166% increase in permits in the northeast. No other region reported anything remotely close to the increase in the northeast, so why do you suppose that was? Maybe because developers in New York City were rushing to take advantage of a tax break there that expired June 15th. I’m a commercial real estate guy – you have to look at these numbers a little more critically when you see something that unusual…
Anticipating that a Fed rate hike cycle will push the economy into a recessionary tailspin, Bank of America Merrill Lynch warned in a note this morning of the risks of QE4:
“While most are focused on the risks around a withdrawal of liquidity, we believe the biggest hit to confidence could be the opposite: if another round of US QE is necessary to prop up the economy. While the market could have a knee-jerk rally on an indication of forthcoming stimulus, we think this would likely be short-lived and could end in the red. QE fatigue is already evident: each subsequent round of QE has seen diminishing risk rallies. Another round of QE would imply that $4.5tn was not enough. And it would also likely have a very negative read-through for QE programs currently underway in Europe and Japan.”
When even the bankers start to worry about the effects of quantitative easing, you know we have a problem, lol...
It's hard for me to imagine the Fed saying anything remotely controversial tomorrow, with global markets on pins and needles regarding the situation in Greece. My guess is that they'll just resort to the old "baffle them with #$%$, and we'll all be left scratching our heads trying to figure out what they're talking about.
The judge ruled that AIG would have gone bankrupt and the stockholders would have been wiped out without the government bailout, so the shareholders essentially suffered no damages. Since he ruled that the government bailout was illegeal, however, perhaps AIG short sellers will have a legitimate claim for damages.
Last month’s retail sales numbers were up mainly because gas prices rose (and auto dealers continued to extend subprime loans to non-creditworthy borrowers, an unsustainable business model in the long run).
So let's take a look under the hood and see what else we find…
1) Q1 GDP contracted at a negative 0.7% rate, while the Atlanta Fed’s GDPNow forecast for Q2 is currently only 1.9%;
2) The labor participation rate, at 62.9%, is still hovering at 37-year lows;
3) As of March, we had over 45 million participants in the SNAPS program (modern-day food stamps);
4) US Industrial production has missed expectations for 4 of the last 5 months (not seen outside of a recession);
5) Business inventories-to-sales ratios remain in a flashing red recessionary environment;
6) YoY wholesale sales are in negative territory (also a recessionary warning);
7) We’ve seen negative YoY inflation prints for the past 4 months (the CRB commodity index is down 3.5% year to date, and down almost 30% YoY);
8) Since the Great Recession, capex spending has grown at almost half the rate of every other post-war recovery; and
9) Most of the “awesome” jobs growth we see each month is in the low-paying service sector (or part-time jobs), while we’re in the process of losing over 250,000 high-paying jobs in the energy sector (many of which are not counted in the official jobs data because the vast majority of those workers are classified as “independent contractors”); meanwhile, wage growth has been stagnant for years…
Welcome to the recovery!