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Credit News by Lou Barnes – October 14, 2016

| Friday, October 14th, 2016 | Comments Off on Credit News by Lou Barnes – October 14, 2016

Long-term rates stayed in their new range this week, only about 0.20% above the July-September one. New economic data do not show acceleration in the US economy, not in any element. Maybe slowing, but certainly not accelerating.

Nevertheless, more rate-hike smoke is drifting near the Fed.

Remember on pool day at elementary school following schoolmates up the ladder to the high board, the first in front of you disappearing over the end, usually the class daredevils? And then your turn, walking out onto the plank and looking down? The sudden visceral desire to drop to your knees and crawl back to the ladder?

Several years later, climbing the north face of Quandary Peak on a lark, hung over from the campsite party, climbing un-roped and wandering on un-marked route came the sudden thought… what are we doing up here, wherever we are? Better to down-climb, always more dangerous than even ill-advised ascent? Or press on?

Central bankers all over the world are re-deploying, all except our Fed still confronted with weak economies beyond self-sustenance. They have no choice but to proceed with extreme measures, although forced to switch to new ones.

Here, the US economy is okay, and some old-reliable signs flash signals that extreme ease is overdone. Hence a crisis of confidence among lesser Fedders. Eek! Retreat in whatever direction we came from. Raise rates because… because.

At a Boston conference today, Boston Fed prez Rosengren and Chair Yellen spoke, Rosengren for frightened kids everywhere. He’s discovered bubbling in commercial real estate. Debt in that market in the last year has grown by 3.8%. No debt, no bubble. He finds “puzzles” in a very low rate of inflation, very low interest rates, slow growth, and low unemployment, and concludes that the Fed should raise the cost of money. Okay, man — panic will take you wherever it will, but don’t call it reason.

Chair Yellen delivered a masterpiece. The first section is a well-nigh tongue in cheek discussion of circularity in supply versus demand, neither today behaving as used to. The second section in her understated way demolished those who think they understand what is happening:

“The influence of labor market conditions on inflation in recent years seems to be weaker than had been commonly thought prior to the financial crisis. Although inflation fell during the recession, the decline was quite modest given how high unemployment rose; likewise, wages and prices rose comparatively little as the labor market gradually recovered. Whether this reduction in sensitivity was somehow caused by the recession or instead pre-dated it and was merely revealed under extreme conditions is unclear. Either way, the underlying cause is unknown.”

The standard position of the Chair is to indicate understanding of the economy, but complexity beyond anyone but the Chair and hence no point in further explanation. This rhetorical approach has been politically protective of the Fed, and also — all Yellen predecessors have been guys — ego-protective. Leave it to the first female chair, her physical stature as anti-imposing as Yoda: when we don’t know, say that we don’t know. And when we don’t, it’s also a silly damned idea to panic in any direction.

Then this compact thought: “One additional area where more study is needed –the effects of changes in U.S. monetary policy on financial and economic conditions in the rest of the world and the ways in which those foreign effects can feed back to influence conditions here at home.” The outside world is in unprecedented trouble. If we don’t know the result of our actions, then be reluctant to act.

Other than the clutch of regional-Fed presidents arguing for higher rates, the leading voices in favor are investment managers. How to justify my 1% annual fee when bonds pay 2%? And when I’ve been wrong to avoid stocks? Blame the Fed. Rates should be higher! The Fed has manipulated up stocks, rates down, and hurt savers.

Quite true, but wrong. It’s the job of any central bank to manipulate asset values. And not one recession or slow patch anywhere ever was fixed by higher interest rates.


10-year T-note in the last year. So long as it holds below 1.90%, nothing has changed:


The 2-year T-note is the best Fed predictor, and has obviously channeled Yellen. 2s are reasonably ready for a .25% hike in December, followed by nothing:


The NFIB small-business survey… off-peak and stalled:


Today’s retail sales report for September looks just like the long-term chart. Up 0.6% in September, but August revised down 0.3%, if anything, sagging:


The Atlanta Fed GDP tracker is flashing a warning, its current value for the 3rd quarter is just half the estimate of 90 days ago. US GDP in all of 2016 may grow less than 1.5%:


Global trade is the indicator which bond markets are really watching. The chart below is for export-heavy Singapore, exports in a 4.1% free-fall in the last quarter. I don’t have a good chart for China, but its exports dropped 2.8% in August alone, year-over-year down 10%; and imports year-over-year fell 1.9% — the August figure so poor that it reversed an import gain in the prior eleven months:


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