Friday, January 30, 2015
Capital Markets Update
By Louis S. Barnes Friday, January 30, 2015
Mortgage interest rates improved this past week on the Fed’s FOMC announcement which indicated that the Fed would be patient with any rate increase. The Fed will take into account labor conditions, inflation and inflation expectations, and global economic developments. With the global economy slowing, the Fed rate increase may be farther off than expected. Economic data was mixed. Economic data stronger than expected included January Consumer Confidence, December New Home Sales, weekly jobless claims, the Q4 Employment Cost Index, and the Chicago Purchasing Managers Index. Economic data weaker than expected included December Durable Goods Orders, NAR Pending Home Sales, and the first look at Q4 GDP. The Treasury auctioned $90 billion in 2 Year Notes, 5 Year Notes, and 7 Year Notes which were met with reasonably strong demand. In Europe, consumer prices fell 0.6% from January 2014, the largest drop since July 2009. In Greece’s elections, the Syriza Party won. This was a rejection of EU austerity measures which calls into question whether Greece will stay in the EU.
The Dow Jones Industrial Average is currently at 17,284, down almost 400 points on the week. The crude oil spot price is currently at $45.16 per barrel, down slightly on the week. The Dollar weakened versus the Euro and Yen on the week.
Next week look toward Monday’s Personal Income and Outlays and ISM Manufacturing Index, Wednesday’s ISM Services Sector Index, Thursday’s International Trade and Jobless Claims, and Friday’s employment report for January as potential market moving events.
Mortgage interest rates improved this past week on the Fed’s FOMC announcement which indicated that the Fed would be patient with any rate increase. The Fed will take into account labor conditions, inflation and inflation expectations, and global economic developments. With the global economy slowing, the Fed rate increase may be farther off than expected. Economic data was mixed. Economic data stronger than expected included January Consumer Confidence, December New Home Sales, weekly jobless claims, the Q4 Employment Cost Index, and the Chicago Purchasing Managers Index. Economic data weaker than expected included December Durable Goods Orders, NAR Pending Home Sales, and the first look at Q4 GDP. The Treasury auctioned $90 billion in 2 Year Notes, 5 Year Notes, and 7 Year Notes which were met with reasonably strong demand. In Europe, consumer prices fell 0.6% from January 2014, the largest drop since July 2009. In Greece’s elections, the Syriza Party won. This was a rejection of EU austerity measures which calls into question whether Greece will stay in the EU.
The Dow Jones Industrial Average is currently at 17,284, down almost 400 points on the week. The crude oil spot price is currently at $45.16 per barrel, down slightly on the week. The Dollar weakened versus the Euro and Yen on the week.
Next week look toward Monday’s Personal Income and Outlays and ISM Manufacturing Index, Wednesday’s ISM Services Sector Index, Thursday’s International Trade and Jobless Claims, and Friday’s employment report for January as potential market moving events.
Friday, January 23, 2015
Capital Markets Update
By Louis S. Barnes Friday, January 23, 2015
A wild story still unfolding, most of it overseas. The result here at home: mortgage rates near 3.75% and the lows of the year — and the tilt in chart-pattern witch-doctoring to lower yet. Rates will rise only on substantial good news, somewhere.
The only domestic economic data of note: starts of new homes and sales of existing ones are flat. It is the dead of winter, after all, but mortgage rates are within an inch of the 70-year low. Rising rates was the leading (false) explanation for flat sales last year; now it is the absence of for-sale inventory. If we have demand but poor inventory, we would build, and we’re not. Save deconstruction of housing reality for another day.
There is some upward pressure on rates from the new wave of refis, which feel to markets like net-new sales of MBS. Previous owners of MBS based on 4.50%-plus mortgages do not necessarily leap to buy ones paying most of one percent less. However, what else can they buy? And that mechanism is in play all over the world.
Doug Behnfield of UBS, a fine bond-investment manager, dredged up this old New York trading term: the “Gazinta.” A colleague or client proposes selling a position, and old-timers reply, “Yeah, what’s ya Gazinta?” Translation: Gazinta is the Brooklyn-mangled shorthand for “go-in-to.” You can sell, but unless you want to sit in cash, what will you buy? Selling is always easier than investing.
The US 10-year Treasury trades 1.81% this morning, a fundamentally ridiculous Gazinta with the Fed intending to raise its rate by summer. However, German 10s trade 0.321%, and Japan’s 0.238% — and both the yen and the euro are crashing versus the dollar, which makes rich the dollar-equivalent of our ridiculous Treasurys.
The bond-market Gazinta is driven by that currency Gazinta (patience, please — there is and end to this). The ECB yesterday announced its long-awaited QE. It will fund the purchase of 60 billion euros’ worth of euro-zone securities each month way into 2016. The “funding” will be provided to individual nation central banks pro rata to GDP, which means Germany, needing no help at all will get the same pro rata share as Italy, near its black hole. As public policy goes, pathetic.
QE1 here, announced November 2008 was nothing short of miraculous. Its focus was MBS, whose yields had risen from a normal 1.80% over Treasurys to double that, and QE1 righted a panicked and wrecked market, helping housing to bottom. QE2 18 months later pushed down long-term rates. QE3 in 2012… the Fed knew in months was a diminishing return, ineffective, and backed out of it as fast as dignity would allow.
The ECB’s QE will be less effective than QE3 here, possibly undetectable. The primary problem: euro-zone rates are already essentially at zero. Out to five years, many sovereign bonds there trade at below-zero yield. Thus the ECB will pour out a trillion euro cash in exchange for a trillion in cash.
Another ECB QE problem: few bonds to buy. US bank assets are only about 75% of GDP, and the rest of our immense credit supply is securitized — MBS about $7 trillion by themselves. Europe (like Japan) is bank-centric. French bank assets are four times its GDP. European MBS markets are trivial.
The end of the Gazinta chain: the primary effect of ECB policy is to drive down the euro. A lower euro will make euro exports more competitive, and make imports more expensive, which should generate euro inflation. However, unlikely to work because the world is in a full-scale currency war, beggar-ALL-thy-neighbors. Last week the Swiss were forced to drop a euro peg, let the SFr rise and accept the economic damage.
This week both Denmark and Canada were forced to act. Denmark desperately and foolishly trying to hold the kroner down to the level of the falling euro, cut its overnight cost of money to minus .35%. Canada is hurt by oil, and cut its overnight rate from 1.00% to .75%.
Two near-term mysteries: when will China have to drop its dollar-peg, to stay competitive with Japan and Europe? And when will the US feel the effect of everybody devaluing versus the dollar? Meanwhile, US mortgages are the Gazinta!
A wild story still unfolding, most of it overseas. The result here at home: mortgage rates near 3.75% and the lows of the year — and the tilt in chart-pattern witch-doctoring to lower yet. Rates will rise only on substantial good news, somewhere.
The only domestic economic data of note: starts of new homes and sales of existing ones are flat. It is the dead of winter, after all, but mortgage rates are within an inch of the 70-year low. Rising rates was the leading (false) explanation for flat sales last year; now it is the absence of for-sale inventory. If we have demand but poor inventory, we would build, and we’re not. Save deconstruction of housing reality for another day.
There is some upward pressure on rates from the new wave of refis, which feel to markets like net-new sales of MBS. Previous owners of MBS based on 4.50%-plus mortgages do not necessarily leap to buy ones paying most of one percent less. However, what else can they buy? And that mechanism is in play all over the world.
Doug Behnfield of UBS, a fine bond-investment manager, dredged up this old New York trading term: the “Gazinta.” A colleague or client proposes selling a position, and old-timers reply, “Yeah, what’s ya Gazinta?” Translation: Gazinta is the Brooklyn-mangled shorthand for “go-in-to.” You can sell, but unless you want to sit in cash, what will you buy? Selling is always easier than investing.
The US 10-year Treasury trades 1.81% this morning, a fundamentally ridiculous Gazinta with the Fed intending to raise its rate by summer. However, German 10s trade 0.321%, and Japan’s 0.238% — and both the yen and the euro are crashing versus the dollar, which makes rich the dollar-equivalent of our ridiculous Treasurys.
The bond-market Gazinta is driven by that currency Gazinta (patience, please — there is and end to this). The ECB yesterday announced its long-awaited QE. It will fund the purchase of 60 billion euros’ worth of euro-zone securities each month way into 2016. The “funding” will be provided to individual nation central banks pro rata to GDP, which means Germany, needing no help at all will get the same pro rata share as Italy, near its black hole. As public policy goes, pathetic.
QE1 here, announced November 2008 was nothing short of miraculous. Its focus was MBS, whose yields had risen from a normal 1.80% over Treasurys to double that, and QE1 righted a panicked and wrecked market, helping housing to bottom. QE2 18 months later pushed down long-term rates. QE3 in 2012… the Fed knew in months was a diminishing return, ineffective, and backed out of it as fast as dignity would allow.
The ECB’s QE will be less effective than QE3 here, possibly undetectable. The primary problem: euro-zone rates are already essentially at zero. Out to five years, many sovereign bonds there trade at below-zero yield. Thus the ECB will pour out a trillion euro cash in exchange for a trillion in cash.
Another ECB QE problem: few bonds to buy. US bank assets are only about 75% of GDP, and the rest of our immense credit supply is securitized — MBS about $7 trillion by themselves. Europe (like Japan) is bank-centric. French bank assets are four times its GDP. European MBS markets are trivial.
The end of the Gazinta chain: the primary effect of ECB policy is to drive down the euro. A lower euro will make euro exports more competitive, and make imports more expensive, which should generate euro inflation. However, unlikely to work because the world is in a full-scale currency war, beggar-ALL-thy-neighbors. Last week the Swiss were forced to drop a euro peg, let the SFr rise and accept the economic damage.
This week both Denmark and Canada were forced to act. Denmark desperately and foolishly trying to hold the kroner down to the level of the falling euro, cut its overnight cost of money to minus .35%. Canada is hurt by oil, and cut its overnight rate from 1.00% to .75%.
Two near-term mysteries: when will China have to drop its dollar-peg, to stay competitive with Japan and Europe? And when will the US feel the effect of everybody devaluing versus the dollar? Meanwhile, US mortgages are the Gazinta!
Friday, January 16, 2015
Capital Markets Update
By Louis S. Barnes Friday, January 16, 2015
A policy change by the Swiss National Bank has addled markets and governments worldwide. How to explain that your lower mortgage rate is courtesy of the Gnomes of Zurich? The 10-year T-note has bottomed at 1.72%, down more than a half-percent since Christmas, but has decoupled from mortgages which stopped falling near 3.75%, jumbos rising a hair. Panicked global cash runs more to Treasurys than MBS.
Before the Swiss discussion, other data: December retail sales fell .9%, even ex-gasoline off .3%. December CPI fell .4% because of oil, but core CPI ex-oil and food in December was unchanged and worrisome. The Fed continues to thump the rate-hike tub, but if US core inflation continues to fall from target the Fed will have some explaining to do. The threat of a US rate hike is adding to instability everywhere else.
The Swiss. 8 million hard-working and disciplined budget-balancers, 72% of GDP last year from exports. Their reward for model behavior? We will ruin them unless they drop this class-grind behavior and become irresponsible like the rest of us.
In 1972, as a 23-year-old manager of a US importer of Swiss watches, every day I punched $0.2604 as the value of the Swiss franc (SFr), where it had been since WW II. Our business and the Swiss exporters’ to us were based on $0.2604. Late in 1972 the dollar suddenly crashed from its unsustainable post-war height, inflation rising here, and the SFr jumped over $0.40 — which made Swiss watches too expensive to buy.
Long since… the euro failed years ago, member economies sinking. Nevertheless the euro remained strong, $1.40 or more, held up by German hard-money history and ever-lower inflation. In the perverse world of deflation, your economy is in trouble but others want to hold your money. But the SFr rose even faster, and so in 2011 to protect Swiss exports to Europe the Swiss National Bank (SNB) promised to hold its currency no stronger than 1.2 SFr per euro. Then, six months ago the ECB entered its last ditch by trying to cut the value of the euro to help euro-zone exports.
To weaken a currency intentionally requires printing it and spending the new SFr to buy other currencies. In three years the SNB had printed and spent SFrs almost equal to its GDP. Unsustainable. (BTW: Russia is the opposite, defending its currency by spending its hoard of foreign currencies to buy rubles.) Thursday morning the SNB announced it would stop trying to hold the SFr down versus the crashing euro: on Tuesday one SFr bought .85 euro; today, one for one.
On Tuesday the SFr traded $0.98, four times its post-war dollar value. Discipline will do that. Today: $1.19. A Swiss vacationing in Paris feels rich, but goes home to a failing business. Excessive discipline, ultimate safe-haven status, and repeatedly the Swiss have waked up as King Midas, rich beyond avarice but starving.
Switzerland is 1% of global GDP. So, what’s the big deal? A very big deal indeed: the world depends on continuing rescue by central banks. The US is the only major one which can dream of coming up from zero percent, but still very stimulative. If the SNB’s word is not good, subject to change without notice, what is the word of the others worth? THAT’s what hit markets yesterday.
Next up, the ECB on the 22nd is supposed to embrace QE. Markets are trading as though any cash eruption from the ECB will wash right through Europe to safe places, pushing sovereign yields lower, lower, then below zero. The SNB also cut its overnight rate minimum to negative 1.25%. The Swiss 10-year yield is 0.033%, all shorter maturities negative. The German 5-year is now negative 0.053%.
In deflation, my return despite negative interest is payback of principal worth more than I invested to buy the bond in the first place. On the other side, loans appear cheap to borrowers, rates ridiculous, but principal must be paid back in money more expensive than borrowed. Central bank rate cuts can no longer stimulate borrowing. So try to cut your currency to help your exports, but that forces others to do the same.
Be damned glad we are here in the US, our economy flexible enough to avoid deflation but our rates the beneficiary of panic by others.
A policy change by the Swiss National Bank has addled markets and governments worldwide. How to explain that your lower mortgage rate is courtesy of the Gnomes of Zurich? The 10-year T-note has bottomed at 1.72%, down more than a half-percent since Christmas, but has decoupled from mortgages which stopped falling near 3.75%, jumbos rising a hair. Panicked global cash runs more to Treasurys than MBS.
Before the Swiss discussion, other data: December retail sales fell .9%, even ex-gasoline off .3%. December CPI fell .4% because of oil, but core CPI ex-oil and food in December was unchanged and worrisome. The Fed continues to thump the rate-hike tub, but if US core inflation continues to fall from target the Fed will have some explaining to do. The threat of a US rate hike is adding to instability everywhere else.
The Swiss. 8 million hard-working and disciplined budget-balancers, 72% of GDP last year from exports. Their reward for model behavior? We will ruin them unless they drop this class-grind behavior and become irresponsible like the rest of us.
In 1972, as a 23-year-old manager of a US importer of Swiss watches, every day I punched $0.2604 as the value of the Swiss franc (SFr), where it had been since WW II. Our business and the Swiss exporters’ to us were based on $0.2604. Late in 1972 the dollar suddenly crashed from its unsustainable post-war height, inflation rising here, and the SFr jumped over $0.40 — which made Swiss watches too expensive to buy.
Long since… the euro failed years ago, member economies sinking. Nevertheless the euro remained strong, $1.40 or more, held up by German hard-money history and ever-lower inflation. In the perverse world of deflation, your economy is in trouble but others want to hold your money. But the SFr rose even faster, and so in 2011 to protect Swiss exports to Europe the Swiss National Bank (SNB) promised to hold its currency no stronger than 1.2 SFr per euro. Then, six months ago the ECB entered its last ditch by trying to cut the value of the euro to help euro-zone exports.
To weaken a currency intentionally requires printing it and spending the new SFr to buy other currencies. In three years the SNB had printed and spent SFrs almost equal to its GDP. Unsustainable. (BTW: Russia is the opposite, defending its currency by spending its hoard of foreign currencies to buy rubles.) Thursday morning the SNB announced it would stop trying to hold the SFr down versus the crashing euro: on Tuesday one SFr bought .85 euro; today, one for one.
On Tuesday the SFr traded $0.98, four times its post-war dollar value. Discipline will do that. Today: $1.19. A Swiss vacationing in Paris feels rich, but goes home to a failing business. Excessive discipline, ultimate safe-haven status, and repeatedly the Swiss have waked up as King Midas, rich beyond avarice but starving.
Switzerland is 1% of global GDP. So, what’s the big deal? A very big deal indeed: the world depends on continuing rescue by central banks. The US is the only major one which can dream of coming up from zero percent, but still very stimulative. If the SNB’s word is not good, subject to change without notice, what is the word of the others worth? THAT’s what hit markets yesterday.
Next up, the ECB on the 22nd is supposed to embrace QE. Markets are trading as though any cash eruption from the ECB will wash right through Europe to safe places, pushing sovereign yields lower, lower, then below zero. The SNB also cut its overnight rate minimum to negative 1.25%. The Swiss 10-year yield is 0.033%, all shorter maturities negative. The German 5-year is now negative 0.053%.
In deflation, my return despite negative interest is payback of principal worth more than I invested to buy the bond in the first place. On the other side, loans appear cheap to borrowers, rates ridiculous, but principal must be paid back in money more expensive than borrowed. Central bank rate cuts can no longer stimulate borrowing. So try to cut your currency to help your exports, but that forces others to do the same.
Be damned glad we are here in the US, our economy flexible enough to avoid deflation but our rates the beneficiary of panic by others.
Friday, January 9, 2015
Capital Markets Update
By Louis S. Barnes Friday, January 9, 2015
Mortgage interest rates improved this past week as oil prices continue to fall sparking increased deflation concerns. In Europe, consumer prices fell 0.2% year over year in December. This was the first year over year decrease in consumer prices since October of 2009. It’s expected that the European Central Bank will announce quantitative easing at its January 22nd meeting to hopefully ward off deflation and stimulate the economy. Economic data in the U.S. was mixed. Economic data stronger than expected included the December ADP Private Jobs Report, December Non-Farm Payrolls, December Private Jobs, and the December Unemployment Rate. The unemployment rate fell to 5.6% but the Labor Participation Rate is still low at 62.7%. Economic data weaker than expected included November Factory Orders, the December ISM Services Sector Index, weekly jobless claims, December Consumer Credit, and December Average Hourly Earnings. Average Hourly Earnings fell 0.2% in December and were up only 1.7% year over year. The fall in hourly earnings puts a damper on the employment report today and may cause the Fed to further delay any rate increase.
The Dow Jones Industrial Average is currently at 17,785, down about 50 points on the week. The crude oil spot price is currently at $47.59 per barrel, down over $5 per barrel on the week.
The Dollar strengthened versus the Euro and weakened versus the Yen on the week.
Next week look toward Wednesday’s Retail Sales, Thursday’s Jobless Claims, Producer Price Index (PPI), and Philadelphia Fed Survey, and Friday’s Consumer Price Index (CPI) and Industrial Production as potential market moving events.
Mortgage interest rates improved this past week as oil prices continue to fall sparking increased deflation concerns. In Europe, consumer prices fell 0.2% year over year in December. This was the first year over year decrease in consumer prices since October of 2009. It’s expected that the European Central Bank will announce quantitative easing at its January 22nd meeting to hopefully ward off deflation and stimulate the economy. Economic data in the U.S. was mixed. Economic data stronger than expected included the December ADP Private Jobs Report, December Non-Farm Payrolls, December Private Jobs, and the December Unemployment Rate. The unemployment rate fell to 5.6% but the Labor Participation Rate is still low at 62.7%. Economic data weaker than expected included November Factory Orders, the December ISM Services Sector Index, weekly jobless claims, December Consumer Credit, and December Average Hourly Earnings. Average Hourly Earnings fell 0.2% in December and were up only 1.7% year over year. The fall in hourly earnings puts a damper on the employment report today and may cause the Fed to further delay any rate increase.
The Dow Jones Industrial Average is currently at 17,785, down about 50 points on the week. The crude oil spot price is currently at $47.59 per barrel, down over $5 per barrel on the week.
The Dollar strengthened versus the Euro and weakened versus the Yen on the week.
Next week look toward Wednesday’s Retail Sales, Thursday’s Jobless Claims, Producer Price Index (PPI), and Philadelphia Fed Survey, and Friday’s Consumer Price Index (CPI) and Industrial Production as potential market moving events.
Friday, January 2, 2015
Capital Markets Update
By Louis S. Barnes Friday, January 2, 2015
Each look outward into a new year in this space begins with Peter Drucker’s dictum: “Nobody can predict the future. The idea is to have a firm grasp of the present.”
2015 is the least predictable year ahead in my memory. Humility whispers: unpredictability may mean anything from exciting to a snooze.
The outlook breaks cleanly into two pieces: global components relatively predictable and those not. “Relatively” is not just a hedge. Try to think of the future as an opening cone of probability: some aspects of future events lie within narrow cones, others immeasurably wide. Narrow: the Colorado Rockies may not finish last again, but they’re not going to the world series. Wide: a quarterback will be taken first in next year’s NFL draft. How will he do next fall? Half of QBs taken #1 are complete busts.
The narrow-cone list for 2015 begins with our government, which is unlikely to do anything affecting the economy. Not even the Fed. It will almost certainly raise the overnight cost of money, but at a pace and to an extent designed to follow the economy, not to lead it; to reduce stimulus, not to end it.
Europe is narrow-cone. So long as it stays on the euro it cannot recover, ECB QE or no. Japan won’t change much: not recovering, deferring ultimate default on government debt, most of the pain internal. Extended weakness and deflation in those two places, more than one-third of the global economy, will continue to exert powerful downward force on inflation and interest rates everywhere.
The US economy… the whole shebang is likely to grow closer to 3% next year than 2.5%, much higher or lower not likely. Manufacturing will continue to do well, US wages more competitive now, energy cheaper here than for any competitor. Housing will stay thin, this recovery the first in 80 years in which housing will trail and be dependent on jobs and incomes instead of the other way around.
The wide-cone list… begin with the obvious. Stocks. Nobody has any idea, or should. Do something sensible: check in five or ten years.
The most important wide-cone variable, maybe more so than all the others put together: US incomes. Every traditional indicator says the job market is so tight that incomes should be rising fast. They’re not, but they might. If incomes begin to rise rapidly, that would change the Fed’s calculus, maybe behind the inflation curve.
The opposite is more likely. The volume of global trade and intensity of competition are both without precedent. US employment could plateau, wage growth barely matching inflation whenever businesses hit their global limits to pay up in the US, no matter how tight traditional measures of the domestic labor market.
The most unpredictable situation, no weight of probability at all… no matter how expert an analysis of Russia’s condition and options today — and I hate to use technical terms of psychology — Vladimir Putin is nuts. A uniquely Russian fruitcake. Entitled and simultaneously contemptuous and envious of the outside world, with all of the Czars’ and Stalin’s ambitions and mendacity but none of Stalin’s competence and caution. A cornered Vladimir is no doubt dangerous, but Russia’s inherent weakness will tend to make it a noisy sideshow.
Churchill referred to Russia in 1939 as “A riddle, wrapped in a mystery, inside an enigma.” Today that is China, a collective without a constitution but not the gangster-state that is Russia, its self-government processes incomprehensible to Westerners. China has embarked on an absolutely necessary economic transformation which in the near term requires a slowdown, but in the long run will help the world. China will gradually slow its investment-led overproduction mania, diminishing the damage it has done to external wages and aid to commodity producers, but gradually join the world economy as a consumer and bi-lateral trade partner.
China is a perfect conclusion to thinking about 2015. It is in economic transition, but despite risks is stable, and so big that it’s unlikely to lurch far in a single year.
Just like the world.
Each look outward into a new year in this space begins with Peter Drucker’s dictum: “Nobody can predict the future. The idea is to have a firm grasp of the present.”
2015 is the least predictable year ahead in my memory. Humility whispers: unpredictability may mean anything from exciting to a snooze.
The outlook breaks cleanly into two pieces: global components relatively predictable and those not. “Relatively” is not just a hedge. Try to think of the future as an opening cone of probability: some aspects of future events lie within narrow cones, others immeasurably wide. Narrow: the Colorado Rockies may not finish last again, but they’re not going to the world series. Wide: a quarterback will be taken first in next year’s NFL draft. How will he do next fall? Half of QBs taken #1 are complete busts.
The narrow-cone list for 2015 begins with our government, which is unlikely to do anything affecting the economy. Not even the Fed. It will almost certainly raise the overnight cost of money, but at a pace and to an extent designed to follow the economy, not to lead it; to reduce stimulus, not to end it.
Europe is narrow-cone. So long as it stays on the euro it cannot recover, ECB QE or no. Japan won’t change much: not recovering, deferring ultimate default on government debt, most of the pain internal. Extended weakness and deflation in those two places, more than one-third of the global economy, will continue to exert powerful downward force on inflation and interest rates everywhere.
The US economy… the whole shebang is likely to grow closer to 3% next year than 2.5%, much higher or lower not likely. Manufacturing will continue to do well, US wages more competitive now, energy cheaper here than for any competitor. Housing will stay thin, this recovery the first in 80 years in which housing will trail and be dependent on jobs and incomes instead of the other way around.
The wide-cone list… begin with the obvious. Stocks. Nobody has any idea, or should. Do something sensible: check in five or ten years.
The most important wide-cone variable, maybe more so than all the others put together: US incomes. Every traditional indicator says the job market is so tight that incomes should be rising fast. They’re not, but they might. If incomes begin to rise rapidly, that would change the Fed’s calculus, maybe behind the inflation curve.
The opposite is more likely. The volume of global trade and intensity of competition are both without precedent. US employment could plateau, wage growth barely matching inflation whenever businesses hit their global limits to pay up in the US, no matter how tight traditional measures of the domestic labor market.
The most unpredictable situation, no weight of probability at all… no matter how expert an analysis of Russia’s condition and options today — and I hate to use technical terms of psychology — Vladimir Putin is nuts. A uniquely Russian fruitcake. Entitled and simultaneously contemptuous and envious of the outside world, with all of the Czars’ and Stalin’s ambitions and mendacity but none of Stalin’s competence and caution. A cornered Vladimir is no doubt dangerous, but Russia’s inherent weakness will tend to make it a noisy sideshow.
Churchill referred to Russia in 1939 as “A riddle, wrapped in a mystery, inside an enigma.” Today that is China, a collective without a constitution but not the gangster-state that is Russia, its self-government processes incomprehensible to Westerners. China has embarked on an absolutely necessary economic transformation which in the near term requires a slowdown, but in the long run will help the world. China will gradually slow its investment-led overproduction mania, diminishing the damage it has done to external wages and aid to commodity producers, but gradually join the world economy as a consumer and bi-lateral trade partner.
China is a perfect conclusion to thinking about 2015. It is in economic transition, but despite risks is stable, and so big that it’s unlikely to lurch far in a single year.
Just like the world.
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