The big news is still that asset classes that traditionally move inversely are now moving in tandem — stock prices, bond prices, and the gold price. As far as the latter is concerned, have a look at Martin Wolf’s column today on page 11 of the FT — Currency Wars in an Era of Chronically Weak Demand — and also see
are strengthening on the same prospect — the Fed’s strong hint of another
round of quantitative easing (QE). The Fed, after all, would be buying Treasuries
so it is perfectly understandable why they would rally. More money printing
means more U.S. dollar depreciation, which would obliviously be positive for gold
(have a look at Gold Forecast $1,450/oz on page 25 of the FT.
The equity market seems to be the odd man out but we would surmise that it is
rising on hopes that QE2 will be successful yet in stimulating final demand
growth. From our lens, the jury is out on the efficacies of lower interest rates in
an environment of contracting credit, especially considering what little impact
the sharp plunge in yields and radical expansion of the central bank balance
sheet have already exerted. A record low 0.64% yield on the 10-year TIPS
strongly suggests that the bond market is sniffing out a renewed contraction and
the pace of economic activity before too long.
We have long been of the view that the trauma that hit the U.S. household
balance sheet — the largest balance sheet on the planet — has led to a dramatic
shift in consumer attitudes towards spending, credit and homeownership. With
that in mind, it is somewhat comforting to see society moving from denial to
acceptance as it pertains to the secular changes in spending and saving
behaviours that is truly underway. For a real life view of the challenges that lie
ahead have a look at the front page article of the USA Today titledR e c e s s io n ’s
the big news is that of
asset classes that
inversely are now moving
in tandem — stock prices,
bond prices, and the gold
index sagged to 48.5 in
September from 53.2 in
U.S.: the Case-Shiller
Composite-20 index fell
0.1% MoM in July — first
decline in four months and
is likely the re-emergence
of its primary downward
litany of softer regional
It is now so clear that we never did have an organic recovery on our hands.
Growth is vividly slowing down in North America, and deflation, not inflation, is
the primary risk. After all, if disinflation was the primary trend for 30 years
amidst a secular credit expansion, it surely stands to reason that as credit
contracts, and with the underlying inflation below 1% and a huge output gap of
6.5%, deflation is a totally realistic scenario. The bond market is signalling some
deflationary event of great magnitude (could be an unexpected stock market
shock?). Bond yields will follow the 2-year note yield and will completely melt
before this interest rate cycle is complete.
In September, U.S. consumer confidence (according to the Conference Board)
sagged to 48.5 from 53.2 in August — the consensus was expecting 52.0. This
takes us all the way back to February and the fact that it slipped so badly in a
month that saw the equity market surge must be telling us that something,
somewhere else is not going well at all — most likely, in the labour market.
Indeed, the spread between the “jobs hard to get” and “jobs are plentiful”
series, which gapped up to a six-month high of 42.3 from 41.5 in August. This
foreshadows a rise in the unemployment rate, to 9.7% from 9.6% currently.
It is now clear that we never
did have an organic recovery
on our hands in the U.S. —
growth is slowing down and
Putting the headline 48.5 reading into perspective, consumer confidence
averages 72.9 in recessions and 100.2 in expansions. Maybe the National
Bureau of Economic Research jumped the gun. The chart of the “present
situation” does indeed flag no recovery, down nearly two points in September, to
23.1, and in fact, is back to levels prevailing in April 2009 (pre-green shoots!!).
according to the Conference Board Consumer Confidence Survey
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