The significant improvement in survey measures, such as the ISMs, have led credit reacceleration post US recessions (200
The BondBeat Wednesday, March 22, 2017
See GP disclaimer HERE
In The News …
RTRS: Clearly no time for ECB to stop easy monetary policy: Villeroy RTRS: U.S. and German bond yield gap shrinks on Trumpflation doubts
BBG: The Global Liquidity Party Is Alive and Well, in Charts RTRS: Fannie, Freddie revamp plan unlikely this year, dividends in focus ZH: WTI/RBOB Pump'n'Dump After Surprise Inventory Data BBG: Oil Closes at Lowest Since November as U.S. Supply Seen Rising BBG: A record number of fund managers are saying U.S. equities are overvalued ZH: Investors Admit Stocks Are The Most Overvalued Since 2000, Rush To Buy Them Anyway: BofA Survey
ZH: Muni Massacre - Puerto Rico Bonds Plunge Near Record Lows Biz Insider: There's a big difference between Reaganomics and Trumponomics …We can see the impact of this debt burden in the fiscal spending multiplier. According to an analysis by Lacy Hunt, Ph.D. of Hoisington Investment Management, from 1952 to 1999, $1.70 of government debt spending generated an additional $1 of GDP. From 2000 to 2015, each additional $3.30 of government debt spending generated an additional $1 of GDP. By 2015, it took $5 of government debt spending to generate $1 of GDP. Ah yes, the law of diminishing marginal returns we heard too much about in economics classes. Quick (& clickable) Links:
What Happened Overnight
Bloomy/EconODay Calendar
Wed 3/22/2017 5:29 AM
Items Of Interest GP Documents:
- Econ Indicators - 5yr & Under - Index Spreads -
Daily Pivots (p15 of TECH)
POSITIONS UPDATES
THIS WILL BE LAST TECHS.pdf EMAIL OF THE WEEK DUE TO TRAVEL SCHEDULE (heading TO GIOA conference Thurs/Fri after ‘Thing #1’ performs @ Carnegie Hall this evening with HS band) … Normal email inundation will resume over the weekend and fully normalized by Monday. We WILL remain open and ready to help with any/all trading/hedging/investing needs as usual … Thank you in advance.
Now, as far as the USTs market being bid and FLATTER we can honestly say that it is NOT related to healthcare in the US. Its more a SPECS CUT (10y) SHORTS, INCREASE 2y & catching DOWN from other places. {WEI} shows Japan -2% and ED SHORTS … and more the EZ starting out down a bit less than -1% at the moment. {WB} ALSO shows some catching down where UK, France, Germany and Ita StreetStuffWkly 03.20.17 all down about 5bps. Spain, though, is curr -7bps while Portugal is -8bps … To say too much more would risk being misplaced as insight. Stocks are down and this is dragging yields. That’s IT. BBGs {MLIV } does note, “With stocks sliding and haven assets rallying, it's a great day to be selling bonds. Germany is auctioning 10-year bunds, while the U.K. offers 30-year gilts. The appeal of Germany's February 2027 debt is its cheapness, as measured by Bloomberg's Rates Trader function and affirmed by analysts. That, plus the outperformance of longer-term debt amid prospects of eventual ECB
StreetStuff 03.22.17
Technicals 03.22.17
tightening and benign core inflation. The July 2047 gilts on sale today also offer some value. But with the BOE telegraphing an overshoot of its 2% inflation target this year, some investors may be more cautious about taking this much duration risk on their books.” We anxiously await Mr Markets auction results DECISIONS (630a) and then we look forward TO Mortgage Apps (7a), FHFA Home Prices (9a), Used Home Sales (10a) and EIA data (1030a). There is NO fedspeak scheduled best WE can tell. Have a great start to your humpday!
What’s On OUR Minds We continue to be of the mind that BONDS are not in a bubble. We’ve said as much over past few days. HERE is link thru to what we said/sent YESTERDAY for example. We’’ve reached this conclusion despite the DB research note (from last week) which was written about by Sid (the kid) Verma (@_SidVerma) on BBG yesterday. Rates AFTER Inflation may be REAL bubble. Cycle forward to earlier this morning and Sid (the kid) Verma offered March 22, 2017, 3:07 AM EDT
The Global Liquidity Party Is Alive and Well, in Charts
...It’s not just about the U.S. central bank, though. Ongoing stimulus
programs at the European Central Bank and the Bank of Japan are still driving almost $200 billion of asset purchases a month, according to Deutsche Bank AG estimates.
So the liquidity spigots REMAIN OPEN. If less so HERE, then look elsehwere?? In other words, the CB community has YET to take the punchbowl away … Which leads to another more RECENT -- BONDS IN BEAR MARKET -- missive. This, from Ben Emmons (formerly of PIMCO)
MARCH 21, 2017 5:00 AM EDT
The math behind the bear market in bonds Don't be fooled by the surprising rally in bonds after the Federal Reserve raised interest rates and signaled that at least two more increases are likely to happen before the year is over. The quiet bear market that has been under way since yields bottomed in mid2016 is alive and well. The way to think about this bear market is not in terms of yield levels, which remain relatively low on an absolute basis, but rather in terms of expected returns. It's on that basis that investors face a trifecta of worrisome metrics that should curb gains going forward: rising forward rates, flat yield curves and low term premiums... Fair to say we think THIS representation of a bear case was somewhat better than DBs last week. STILL NOT BUYIN IT THOUGH … To all of these best laid and BEARISH plans for bonds where rate hikes = BEAR, we’’d add and ask one and all to explain 2004 … ? Short positions?? DEMAND for duration while the freely floated STOCK of said duration is by and large held PRISONER by GLOBAL CBs … and oh, yeah, about those GDPNows? We know, we know -- it’s ONLY and always WEATHER … Bonds are NOT in a bubble … but this is NOT to say we’re only and ALWAYS bullish. Have a point and click thru this mornings TECHS.pdf You’ll see a couple of OUR visuals of 10s and we note diverging momentum -- DAILIES suggesting yields are approaching OVERBOUGHT conditions while WEEKLIES just re-crossed bullishly. While more downside pressure in yields exists, the word CAUTION comes to mind. Make as much or as little of it as you’d like … WE will try to look elsewhere for impulse but equities remain the KEY and we GET that. Respect it but also look TO USDJPY (see CSFBs latest on USDJPY THREAT) for example. But you KNOW all that so let us wrap this up by looking at a couple of POSITIVE developments. First, this
(Bloomberg) -- U.S. Architecture Billings Index, a leading indicator of construction activity, was 50.7 in Feb. vs 49.5 a month earlier. • Inquiry index higher at 61.5 from 60.0 • Design contracts index higher at 54.7 from 52.1
• • • •
South 50.5, Midwest 52.4, West 47.5, Northeast 50.0; multi-family residential 49.3, mixed practice 49.2, commercial/industrial 48.9, institutional 51.8 "The sluggish start to the year in architecture firm billings should give way to stronger design activity as the year progresses," said AIA Chief Economist, Kermit Baker A score above 50 indicates an increase in billings, while a reading below 50 indicates a decline Story Link: NSN ON663Y6NKMX1
AND now for some GOOD news, courtesy of Cameron Crise (@5thrule) who is now ALSO over at BBG (writing for blog you’ll find at {MLIV } … Early in the last tightening cycle, Alan Greenspan was famously befuddled by the conundrum that bond yields refused to rise despite increases in the federal funds rate. (Perhaps he should have looked at FX reserve managers.) Recently, market participants have had to deal with their own conundrum: how to reconcile a sharp rise in US economic sentiment with actual activity data that is pretty blah. Not only is the Atlanta Fed's GDPNow metric forecasting soggy Q1 growth of just 0.9%, but commercial bank lending has stalled out -- the three month growth rate of C&I loans recently turned negative for the first time in six years. This latter factor, which we discussed here a few weeks ago in the context of commercial real estate, is particularly worrisome. Credit, after all, greases the wheels of economic growth in the modern economic system. How worried should we be at the disconnect between sentiment and credit/activity?
Not very. Credit growth is not disconnected to sentiment, it just works with a lag. After all, just because you are feeling more upbeat about the business climate today does not mean that you can walk away from the bank with a loan tomorrow. I created a little indicator that looks at the normalized deviation of the ISM and small business survey from their 10-year trend. It turns out that smoothed trends in this indicator predict C&I loan growth with a lead time of a year. According to this metric, we should be close to the nadir of lending growth as last year's pre-electoral caution starts to ebb out of the figures. Over the next year, the outlook for
lending is the brightest since 2004. If that's the case, then the bear argument for bonds is not only intact, it's stronger than ever. Cameron Crise Macro Strategist, New York Have a GREAT start to your HUMPDAY and as always, let us know however we can help… Best, Saul & Steve Items of Interest
EconoDay Economic Calendar AND, ripped from the BBG:
Bloomy’s Fed-speak Calendar March 22, 2017
GPs Key Econ Indicators March 3, 2017-> Our “Economic Graph Package” is used by some of our clients to include in their monthly or quarterly reports. We have most of the major economic indicators included to give an accurate snapshot of the economy. GPs 5yr & Under Summary March 16 2017- > this is our chart package we call the “One to Five Year Daily”. It tracks agency bullet spreads to Treasuries, date to
date, to compute the real maturity spread levels (in basis points) out to five years. We track agency callables against agency bullets and Treasuries. We compare equal maturity dates when tracking these spreads because the effective durations of callables are not stable. So over time we have a consistent methodology that we use to determine “value”. Please give us a call for more in depth explanation. GPs Index Spread Summary March 3, 2017-> We use certain Merrill Lynch indices, which are described at the top of each graph, to try and determine optimal entry and exit points for each sector. Though the indices should have similar durations, they commonly don’t match precisely so we’ve included the green line (which should be read off from the right axis) to allow you to take the curve into account when looking at historical spread relationships. GPs Daily Pivots March 22, 2016 -> the pivot point is essentially a mechanism for analyzing the short-term supply and demand factors affecting the market. It has limited applications for long- term decision making. Professional futures floor traders, also known as locals, are the biggest proponents of the pivot technique. Scalpers, brokers, market makers, and other short-term traders also use the technique, while upstairs or longer-term traders occasionally look at the pivot for ideas of what the floor traders are doing. The pivot point is basically the weighted average price of the previous trading day, calculated as the average of the previous trading day’s high, low, and closing prices. It represents the major point of inflection each day. Unless there has been significant market news between the previous trading day’s close and the current trading day’s opening, locals often try to test the near term support, resistance, and pivot point. For example, many floor traders cover their shorts and go long into the pivot level if the market opens above the pivot point and starts to sell off. Well, it’s once again that time for information OVERLOAD and so we remind you … clicking up the StreetStuffWeekly.pdf will bring you to a few paged SUMMARY – a cliff notes version, if you will – of what some of the brightest minds and best SELLSIDE analysts are saying and thinking. WE have focused mostly on things directly impacting US RATES so you’ll find lots of specifics as well as economics AND EVEN a couple of the more notable equity thoughts. Just because. Here are OUR ‘cliff notes’ of what stood out this weekend and what you’ll find on the PDF WE’VE LINKED TO:
StreetStuffWEEKLY March 20, 2017 (some of) What you’ll find and WHY you’ll wanna point/click By NOW you’ve heard about GSs BALANCE SHEET THOUGHTS (CNBC, “Yellen's exit may prompt the Fed to pare its balance sheet sooner rather than later, Goldman says” HERE) so from the report: …The economic case for relying solely on the funds rate is that this instrument is better understood and that moving away from zero restores conventional easing capacity. The economic case for adding balance sheet normalization is reduced upward pressure on the dollar and arguably a lower risk of asset price bubbles. None of these arguments, on either side, seem particularly powerful at the moment. Standard models suggest that modest balance sheet normalization should not have large FCI effects, the risk of another lower bound event has fallen, inflation is already close to the target, and the evidence for asset price bubbles is currently limited. A more practical case for early balance sheet normalization is based on the upcoming Fed leadership transition. If the new appointments—especially the new Chair—are thought to favor aggressive balance sheet normalization, perhaps even including asset sales,
and if all decisions are left up to the incoming team, financial markets might experience heightened uncertainty during the transition. Our analysis shows that asset sales could have significantly more adverse effects on financial conditions than gradual runoff, and the mere risk of such an outcome might set up another “taper tantrum.” The current FOMC could reduce that uncertainty by establishing an early “baseline” path for very gradual balance sheet rundown. Committee decisions are subject to change, of course, but markets would probably take comfort from the fact that most FOMC members will remain in their positions and that it is harder for the new leadership to radically change a policy that is already in place than to devise a new one. We therefore expect the committee to announce gradual tapering of reinvestments in December 2017, while holding the funds rate unchanged at that meeting. …A major risk to the downside in yields arises from a potential fallback in business and consumer expectations due to legislative delays in fiscal reform, which had energized animal spirits last year. The tax cut package is currently sequenced after the repeal of the ACA. The proposed American Healthcare Act is facing opposition from within the Republican Party especially after the CBO’s assessment (14mm more uninsured in 2018 with the uninsured penalty coming off, and initially higher premiums). Continued political uncertainty has the potential to weigh on business and consumer sentiment. Another risk is hard economic data. The weakness relative to prior expectations on Q1 gdp (with the Atlanta Fed gdpnow measure dropping to 0.9%) might be due to residual q1 seasonality issues, or it may continue into the second quarter, and the disappointment may very well lead to the intermediate sector of the curve moving lower. –Citi US Rates Weekly, Fear the fear …In 2016, corporations and ETFs were the key drivers of positive US equity demand, purchasing almost $800 billion of equities. In contrast, mutual funds, pension funds, households, and foreign investors were net sellers. In 2017, we expect history will repeat itself. Although we lower our corporate demand forecast by $100 billion, to $700 billion, net buybacks will grow by 20% in 2017. ETF equity purchases will equal $200 billion this year while mutual funds, households, and pensions will remain net sellers. Although we forecast rising buybacks, we prefer a strategy of growing dividends. Our dividend growth basket (GSTHDIVG) has outpaced the S&P 500 by 860 bp since July 2016 … Despite rising interest rates and lower bond prices, we expect only limited rotation away from bonds and into equities -GSs Weekly (equity)Kickstart …Coupons: Treasury will announce 2-, 5-, and 7-year notes and a 2-year FRN reopening at 11:00AM on Thursday. We expect that the sizes of the auctions will be unchanged from last month at $26 bln, $34 bln, and $28 bln, respectively, for the nominals and $13 bln for the 2-year FRN reopening. The $101 bln package will raise $18.3 bln cash when it settles on Friday, March 31st. Note that because settlement will take place on Friday, no auctions can take place on Thursday according to Treasury’s recently adopted policy on auction timing. Thus, the package will kick off with the 2-year note auction on Monday. –Jeffries Economic & Bond Market Insight March 17, 2017
StreetStuff March 22, 2017 Barclays: maintains LONG 10s vs GILTS and vs 3s (flattener) Barclays CLIENT SURVEY: Curbed enthusiasm … The latest Barclays survey of 1124 global investors shows that investors continue to focus on political developments. But the optimism with regards to growth and equity performance which followed the US election appears to be subsiding. Barclays on ECB EXIT, “…We have recently upgraded growth to 1.7% for 2017 and 2018, consistent with the ongoing improvement in business confidence. While headline inflation will likely hover around 2% in Q1-Q3, we expect it to fall by Q4 2017 and, on average, remain below 1.5% in 2018. Despite better growth, we forecast the output gap to remain negative in 2018. We therefore don’t foresee sufficient strength in wage dynamics to push core inflation over 1.5% and make it self-sustaining, a precondition for a more hawkish ECB, in our view. More tapering and less negative depo rate in 2018…” CSFBs latest Global Cycle Notes, “Lies Damn Lies, and Surveys … Global growth is humming but should slow modestly in the months ahead, with surveys overstating the case for further acceleration. A downside risk for markets is that falling PMIs, disappointing (but good) data, and further delays in US stimulus cause investors to reassess the prevailing optimistic economic sentiment. Our demand analysis, shown here, suggests that PMIs and global industrial production growth should slow in the months ahead. Our view boils down to
four points. First, already strong global consumption growth is unlikely to get even stronger. Second, global investment is recovering from the energy slump, but commodity prices are still too low for a sharp rebound. Meanwhile, dollar strength is a headwind for investment in some places, especially the US, and a tailwind in other places, such as the euro area and Japan. Third, surveys are unreliable indicators at times of political change. Fourth, Chinese growth momentum is likely to slow in the months ahead.” SocGen continues to ‘still trade the market from the short side” TDs latest Market Musings, “The Market’s First Litmus Test … We take profit on our long 10yr Treasury position at 2.42% (earning $821k in profit) as the acute increase in uncertainty worsens the risk/reward on this position. Furthermore, we expect sellers to return to the market as we head to the lower end of the recent 2.33%-2.64% range.” UBS asks/answers, “Corporate hesitation: Will a lending slowdown impact the economy? … The consensus expects a broad growth reacceleration. Is this at risk? The credit slowdown is unlikely to herald substantial corporate stress ahead. However, there is a material probability that investors are understating the headwinds of policy uncertainty and high leverage. The significant improvement in survey measures, such as the ISMs, have led credit reacceleration post US recessions (2004/2009). They have also been overly optimistic in 2000 and 2015 when leverage was more elevated. If investors do not see an improvement in credit growth near-term, a soft patch in growth is possible as firms are stuck in a wait and see mode amidst heighted uncertainty.”
Technicals March 22, 2017 w/PIVS: 5s vs 1.97; 10s vs 2.44; 30s vs 3.06 Daily Pivots are SUPPORT What you’ll find and WHY you’ll wanna point/click: GP: a look at 10s DAILY w/momentum now nearing OVERBOUGHT (so watch vs 2.32 RESISTANCE …) and WEEKLY where momentum just re-crossed favoring lower yields AllStarCharts: No, This Is Not An 8-Year Bull Market For The S&P500 … …The bottom line is that we’ve had plenty of bear markets since 2009. This is NOT the 9th year of a bull market. So when did it begin you ask? I think there are a few good arguments to make, much better ones than cherry picking this one S&P500 index (and only cash, not futures). One that I like is the breakout in 2013, when prices finally got above the 2000 and 2007 highs. A valid argument can be made that this was the start of a new secular bull market and the end of a 13-year bear market that began after the boom of the late-90s. Here is that chart: BBG: Dollar Weakens as U.S. Real Yield Advantage Shrinks: Chart BMO (on 10s): 10s -- 10s have backed off a key point at the top of a yield channel that exists going back to 2008 that has a floor around 1.35% and a top around 2.639%. On a rally, we see 2.49% as mid-range resistance where 21 and 40-day MA lie. For now, the test of 2.639% suggests that Treasuries could move to lower yields once again and the area is looking more like a double-top for 10-year yields. If broken, next material support lies at 2.80% which is a range top from early 2014. Pushing beyond that puts 3% squarely into view though this point of support is fairly stiff as it’s also the top of a downward-sloping yield channel that has existed since 1989 on monthly charts. We see stiff resistance at 2.32% which is the bottom of the current yield ranges. Daily stochastics are showing oversold conditions for the 10-year but not as strongly as for bonds with curling stochastics suggesting a rally in USTs. Daily RSIs are midrange, showing a more mixed momentum picture. Weekly indicators are similarly bullish but monthly indicators may have some small distance to go before they show oversold conditions. BNP: Warning: FX Squeeze Risk & April/May Corrective Wave 4 … The US10y treasuries primary bullish trend is now over and we think any additional pullback to 125.4 is another sell opportunity. Euro Bund seems likely to follow a similar path with a noticeable downside break of the 2011 bullish
channel bottom line. Lastly, Brent crude oil is still trading at crossroads, testing the critical 2016 uptrend support. CitiFX (in note on HEALTHCARE, this, on 10s): The price action on US 10 year yields is very similar to what we saw from December to February where we correct back down to supports from 2.30%2.31% after making a push higher. In other words, US 10 year yields remain in a range rand if equities continue to sell off, we could see a test of those supports. CSFB: USDJPY is back threatening a top … …Given the strong relationship between USDJPY and 10yr US yields, a top in USDJPY would likely put fresh pressure on 10yr US yields to retest their pivotal resistance (seen further away) at 2.30/29%. As we have highlighted several times this year, a break of this pivotal resistance would in our view act as the catalyst for a potential violent “washout” of shorts, and a rally to 2.16/14%, potentially even 2.00/1.98%. GS: “US10 (2.492) – Sep. uptrend 2.44. Risky < 2.40 … U.S. 10-year yields formed a double top at 2.63-2.64%... View: Wary of a top. Risk heightens below 2.407%. Need above 2.542% to signal potential for a near-term base…” AND ON 2s, “2-year yields formed a key day reversal at the high…Right underneath a long-term target at 1.40%...View: Wary of a top. Risk heightens below 1.2333%; opens an initial target at 1.184%. KIMBLE: US Dollar; Could be in trouble at this level! SocGen Chart Alert: EUR/USD: Now within a hair's breadth of clearing prominent hurdle at 1.0810/60 … In parallel, watch out 199 bp in the 10Y UST-10Y Bund spread. Tightening in the spread has continued after the crucial hurdle of 235 bp was probed last December (please refer to our last Charting Rates - A special focus on Schatz, Bunds and spreads vs USTs ). Of note, 235 bp represents the broad channel upper bound in force since 1992 and the steeper widening channels in place since 2011 and 2008. Recent tightening in the spread has fetched last December/January lows of 199 bp and also the 50% retracement of the last widening leg. A break below would accelerate the tightening towards 190 bp and perhaps even 180 bp, the steep channel lower band and 2011 highs.
MMO for March 20, 2017 The expansion of clearinghouse deposits at the Fed has passed an important milestone over the past month, as two major CCPs have opened separate accounts for customer initial margin at the Federal Reserve Bank of Chicago. Separately, a number of Treasury cash flow developments have surprised us in March, but none so much as the steep plunge in corporate tax payments on March 15.
In The Press NOW:
Updated March 21, 2017 1:23 p.m. ET
Why Trump’s Tax Cut May Be Later, Smaller Than Thought With Republicans’ health-care overhaul threatening to chew up the legislative calendar, their tax-reform plans risk getting pushed back.
Updated March 22, 2017 6:03 a.m. ET
Global Markets Follow U.S. Stocks Lower Stocks in Europe and Asia pulled back after major U.S. indexes posted their steepest decline of the year, as investors re-evaluated their ‘Trump trade’ optimism. Mar 21, 2017 3:04 pm ET
The Level to Watch on the S&P: 2350 Updated March 21, 2017 4:29 p.m. ET
Workers’ Retirement Confidence Still Below Pre-Recession Levels The market is near record highs and the economy has been showing strength, but a survey shows that workers’ confidence in having enough to retire comfortably has stagnated since last year and is far below where it stood before the recession. March 21, 2017 7:00 a.m. ET
Tax Overhaul Threatens Affordable-Housing Deals The possibility of a tax-code overhaul is casting a shadow over the $10 billion affordable-housing industry, which receives tax credits so valuable they often determine whether or not projects get off the ground. Updated March 21, 2017 7:48 a.m. ET
China Has Risky Task in Rebalancing Economy
China faces mounting financial risk even as an innovation drive aimed at rebalancing the economy away from low-value manufacturing falls short, according to a report by the Organization for Economic Cooperation and Development.
Parent of Sears and Kmart Issues Warning as Its Losses Mount By CARLOS TEJADA3:53 AM ET
Sears Holdings Corporation said in its annual report that there were “substantial doubts” it could remain a going concern.
What’s at Stake in a Health Bill That Slashes the Safety Net By EDUARDO PORTER
By reversing the Medicaid expansion and leaving millions unable to pay for coverage, the bill would be a landmark retreat in American social welfare.
How to Make the Most of Your Workday By PHYLLIS KORKKI
Take control of your time at work. We’ll outline productivity techniques that can be adapted to your personality and working style.
Trump tells GOP critics of health-care bill: ‘I’m gonna come after you’ The president stormed Capitol Hill to sell the health-care overhaul, using both charm and admonishment to make his case, reassuring skittish members that they would gain seats in Congress if the bill passed. Rep. Harold Rogers, a supporter of the bill, said of the president's remark: “Oh, he was kidding around. I think.”
Published 12:05 a.m. ET March 21, 2017
Survey: We're stressed by retirement preparations – but doing little to prepare Published 11:17 p.m. ET March 21, 2017
Sears and Kmart owner says 'substantial doubt' it can stay in business
Low rates putting pressure on European banks – French central bank boss
Profitability is now the most important challenge facing the eurozone’s banks, France’s top central banker has said, in an acknowledgement of the pain caused by low interest rates.
UBS to charge private clients for large euro deposits
Swiss bank UBS is set to become the latest bank to start charging wealthy private clients for some euro deposits, in the latest sign of the strain low benchmark interest rates are imposing on the financial services industry.
Beijing takes top place in Fortune Global 500 company headquarters From The Blog-O-Sphere: Here you’ll find postings and research from the likes of Barry Ritholtz’s Big Picture, Pragmatic Capitalism, Kimble Charting and Zero Hedge - along with everything else we stumbled across that WE need to point out …The point of all this is to pass along things that strike us as interesting – even though they may NOT be our very own
03/20/17
Understanding Global Trends in Long-run Real Interest Rates by Kei-Mu Yi and Jing Zhang
The authors explore trends in long-run real interest rates and their underlying factors for the 20 largest economies from the 1950s through the present day. …As we show in a recent paper (Yi and Zhang, 2016), there is no discernible trend in long-run real interest rates1 for the 20 largest economies in the world that spans the entirety of the past 60 years. However, over three subperiods, distinct trends can be observed.2 We see a general decline in global real interest rates from the early 1960s through the mid-1970s, then an upward trend in these rates until the late 1980s, and finally, another downward trend through the present day. Moreover, we observe that long-run averages of real interest rates across countries have converged over the past quarter of a century—a pattern consistent with an increasingly financially integrated world.
…It is difficult to predict what will happen to long-run averages of real interest rates in the United States and abroad. However, we present evidence that growth
in U.S. total factor productivity and growth in the global working-age population (factors affecting MPK) are projected to be lower than they were before. These shifting trends are expected to continue to put downward pressures on long-run real interest rates. …Understanding what’s behind the movements in long-run real interest rates is also important for fiscal policymakers, albeit for somewhat different reasons. Low interest rates are sometimes used as the rationale for expansionary fiscal policy because they lower the costs of servicing government debt used to finance public spending. But evaluating the fiscal implications of low long-run real interest rates requires a careful quantitative assessment of the variety of channels by which these rates can be affected. Such due diligence is likely to help government officials better understand the short- and longer-term ramifications of their fiscal decisions today (which we will elaborate on later).
…Implications for monetary and fiscal policy A prolonged period of low long-run real interest rates has implications for monetary and fiscal policy. With respect to monetary policy, our evidence on long-run real interest rates suggests that at least for the foreseeable future, the likelihood for the United States and other countries to hit the ZLB has increased compared with before the Great Recession and global financial crisis. As we mentioned earlier, avoiding the ZLB is important because when the policy rate is pinned there, monetary authorities may find themselves struggling to provide more accommodation to their economies during episodes of too low inflation and/or too low economic activity. Focusing on the U.S. context for a moment, we note that monetary policymakers here care about the long-run real interest rate because optimal monetary policy involves forecasting an entire time path for the real federal funds rate. (The federal funds rate is the Federal Open Market Committee’s primary policy tool.)27 Setting the optimal amount of policy accommodation requires estimates of the future path of the short-run natural real interest rate.28 Estimating the long-run real interest rate is one way to forecast the future path of the short-run natural real interest rate once the effects of short- and medium-run shocks dissipate. Hence, estimates of the long-run real interest rate serve as a reference point or (time-varying) anchor. …It is important to reiterate that long-run real interest rates are time varying. Estimates of trends in the long-run real rate can shed light on the amount of accommodation available during times of low employment and/or low inflation. These estimates can also cast light on the probability of hitting the ZLB in the long run. These findings can, in turn, help inform discussions about the long-run goals and framework of monetary policy. …Conclusion …Long-run trends in real interest rates and global fixed investment (which we covered in Yi and Zhang, 2016) suggest that forces leading to a weakening in global fixed investment demand are important. Our examination of the determinants of investment demand shows that trends in both long-run MPK and TFP growth track trends in the long-run real interest rate from the 1960s through the mid-1970s, but not again until in recent years. (The United States is an exception to this broad finding in that its long-run real interest rate, MPK, and TFP growth have broadly tracked one another for most of our period of study.)
________________________________________________________________ See GP disclaimer HERE
