I want to discuss some matters using links to charts. Sometimes showing trends on a five-year basis is helpful, because the computer’s smoothing dispenses with some of the short-term data (“noise) to reveal larger trends better. First, the U.S. 10-year Treasury has already mapped out a low below last year’s panic low– but now there is no panic, based on a VIX under 25 (where 30 is a minimum number that indicates even short-term panic). LINK
The causes of this are widespread, are global in nature, and in aggregate are so widespread internationally and over many classes of debt instruments that the idea that quantitative easing, which ended a long time ago, could be the cause of this strikes me as far-fetched. While I am not a deflationist, I argued in January 2009 that the U.S. was going Japanese financially. Here’s the link to the relevant post, which to save you the click-through, is titled Land of the Setting Sun and begins unequivocally: “We are Japan”.
The U.S. has managed both to sustain ZIRP and have a downtrend in longer-term interest rates despite a positive rate of price inflation. Quite something to behold… To be discussed another time in more detail.
Next, the S&P 500 continues to show a loss of upward momentum. It has been in the process of “rolling over” even since the 2009 rally faltered in the spring of 2010, leading to the failure of the Obama admin’s “Recovery summer” initiative. LINK
A recovery back to the 50 day simple moving average is the usual response to this sort of setback, given that the 150 day and 200 day moving averages are moving up. That, for example, was the pattern in 2007-8, 2010 and 2011.
Next, China and Europe multi-year charts. Europe is in aggregate China’s largest customer, and given its accelerating economic contraction, China as a supplier gets hit harder than Europe. This comes on top of China’s property bust. Here are links to a major Chinese stock market index, then Hong Kong, then Europe. LINK, LINK, LINK. These will show as 6M charts. Click on 5 year or your desired time frames. I like 5 year looks here to capture the pre-financial crisis period. You can see that they all look like the S&P chart (“SPY”) but worse. Does this “worseness” reflect that the businesses listed on these exchanges are inferior? Do they instead reflect a lesser degree of new money creation uncollaterized by other assets (as the European “LTRO” has been)? Dunno.
Gold is of course up against all stock markets I know of in that time frame, as are silver and oil.
However, gold is now priced well above platinum, an anomaly that suggests to me that platinum is probably the better buy– and my trader’s guess (highly inexpert) is that platinum is unattractive in the short run. My interpretation is that traders and investors are pricing in continued global industrial difficulties with more money-printing pending, and so they are bidding up gold but not platinum. Thus gold may already be pricing a lot of intervention in, and perhaps if actual price deflation sets in as in 2009, gold could tumble from here. A decline in the price of gold from top to bottom that comes close to 2008′s 30% peak-trough drop in gold would not surprise me (meaning to below $1400/ounce), nor would much higher all-time highs in later years than last year’s highs. So all I’ve really said here is that I have no idea about gold. LOL, sometimes one simply lacks an opinion.
Now that record low interest rates in longer and longer maturities have spread to Germany, the U.K and the U.S. along with Japan (and Brazil LOL), a form of the financial ”Ice Age” that various economic theorists have foreseen has started to occur. It is here.
Why has this occurred, and what comes next?
The first response to the first question that occurs to me is that too much capital went to unproductive pursuits. When real savings are well used, they generate so much new economic opportunity that there is great competition for said savings, leading to high interest rates and a high rate of economic growth: the famous win-win scenario. Investors win, businesspeople win, and society wins big. Now, capital owners just don’t see good investment opportunities, so in the aggregate they put it in a form of suspended animation, or a deep freeze, to wait for better times. Thus these owners of capital accept a low bid from governments and banks for their capital, which is the same as saying that they accept low interest rates. (This of course pleases the borrowers.)
The response to the second question is that when governments are “forced” to intervene to “save” banks, that brings the governments away from their core competencies. No doubt they mean well, but how great are they at doing the jobs that the “free market” should have done well on its own?
We all can answer that question as we see it. My general sense is that with the Congressional Budget Office now opining that the 2013 scheduled tax increases will lead to a recession if implemented, the odds are that one way or another many of them will not be implemented. One would think that if that’s the case, interest rates should rise to attract more lenders.
The way it’s been working for a while is just the opposite. Thus it wouldn’t surprise me one bit to see even lower, and potentially much lower, U.S. interest rates as this year moves along, as the financial markets accommodate Uncle Sam’s borrowing.
Just as happened in… Japan.