Wednesday, August 14, 2019
Yield Curves and Recessions
The stock market was way down today mainly because of fears generated by the inverted yield curve. Basically, this means that short term interest rates on US treasury securities are higher than long term rates. It's an aberration of the treasury market that happens from time to time. Over the last 50 years, it has happened nine times. That depends somewhat on the definition that gets used; a two day inversion is not the same as a five month inversion. In any event, seven out of the nine yield curve inversions were followed by a recession in 12-18 months. As a result, it is an article of faith among some market strategists and economists that an inverted yield curve means a coming recession. The panic in the market today was basically fear of an impending recession.
The reality, however, is that there is no way to know that a recession is coming. Long term interest rates are being kept down because many safe investments around the world are now paying negative returns. German government bonds, for instance, return a negative half percent on a ten year bond. You buy the bond for 100, but after getting no interest for ten years, you get back 99.5. It is no wonder that European investors, in particular, are moving to treasuries. Getting a return of 1.6% per year is a lot better than buying a German bond which guarantees that you will lose money over the ten years.
Negative rates on government bonds are not something that has been around over the last 50 years. All those other yield curve inversions came when there were no negative rates elsewhere pushing the long term treasury rates down. As a result, the yield curve inversion may not be a sign of recession or even of bad news for the US economy.
The financial media and the mainstream media will make a big deal out of today's decline. It is a big deal; we don't have declines like this very often. Still, we cannot state that we are facing a recession based only upon the inverted yield curve. Indeed, the signs do not point to a recession at the moment. The biggest problem is that media driven hysteria is more of a danger to the economy than almost anything else right now.
The reality, however, is that there is no way to know that a recession is coming. Long term interest rates are being kept down because many safe investments around the world are now paying negative returns. German government bonds, for instance, return a negative half percent on a ten year bond. You buy the bond for 100, but after getting no interest for ten years, you get back 99.5. It is no wonder that European investors, in particular, are moving to treasuries. Getting a return of 1.6% per year is a lot better than buying a German bond which guarantees that you will lose money over the ten years.
Negative rates on government bonds are not something that has been around over the last 50 years. All those other yield curve inversions came when there were no negative rates elsewhere pushing the long term treasury rates down. As a result, the yield curve inversion may not be a sign of recession or even of bad news for the US economy.
The financial media and the mainstream media will make a big deal out of today's decline. It is a big deal; we don't have declines like this very often. Still, we cannot state that we are facing a recession based only upon the inverted yield curve. Indeed, the signs do not point to a recession at the moment. The biggest problem is that media driven hysteria is more of a danger to the economy than almost anything else right now.
News That No One Cares About
I often highlight news stories that don't get covered. Here's one about an upcoming event that no one in their right mind could possibly care about. Tomorrow, Beto O'Rourke is going to deliver his first major policy speech of the 2020 campaign. I'm so excited by this that I can barely stay away.
This address, announced by Beto's campaign, is part of the reboot of that campaign announced a few days ago. It does give rise to some questions though:
1. The guy has been running for president for more than three months. How did he go that long without addressing policy? Is he that vapid? (clearly the answer is yes.)
2. Since the address won't get media coverage, what's the point? At the start of the campaign, Beto was a media darling. He could have delivered policy speeches and gotten coverage. Now, he would be unlikely to get much coverage no matter what he says. America has had enough. They've seen and heard Beto and almost unanimously said "no way!"
It's time for Beto to say "Bye Bye."
This address, announced by Beto's campaign, is part of the reboot of that campaign announced a few days ago. It does give rise to some questions though:
1. The guy has been running for president for more than three months. How did he go that long without addressing policy? Is he that vapid? (clearly the answer is yes.)
2. Since the address won't get media coverage, what's the point? At the start of the campaign, Beto was a media darling. He could have delivered policy speeches and gotten coverage. Now, he would be unlikely to get much coverage no matter what he says. America has had enough. They've seen and heard Beto and almost unanimously said "no way!"
It's time for Beto to say "Bye Bye."
A Big Development in Polling
It's way too early to view the many polls of Democrats regarding their 2020 candidate as indicating any final outcome for the race, but there are still important bits of news that one can glean from these polls. Today, there's a big development that deserves mention. In the latest poll from New Hampshire, Bernie Sanders is leading Old Joe Biden. That's the first poll, either national or state, in which Biden has not been the leader in a long time. Biden is only polling at 15%.
Clearly, this doesn't mean that Biden has lost New Hampshire. It does mean, though, that Democrats in NH are not flocking to support the former VP in his quest for the nomination. Those poor debate performances and the endless gaffes are having an effect. If this effect starts showing up in other polls, we could see Biden's campaign collapse. To a great extent, Biden has done well because he is seen as the inevitable choice best situated to beat the President. Were that inevitability to be shaken, Biden would have to win on his merits. That is very unlikely to happen.
Clearly, this doesn't mean that Biden has lost New Hampshire. It does mean, though, that Democrats in NH are not flocking to support the former VP in his quest for the nomination. Those poor debate performances and the endless gaffes are having an effect. If this effect starts showing up in other polls, we could see Biden's campaign collapse. To a great extent, Biden has done well because he is seen as the inevitable choice best situated to beat the President. Were that inevitability to be shaken, Biden would have to win on his merits. That is very unlikely to happen.
Monday, August 12, 2019
News Nobody Covers
It's worth taking a look at a story from the Middle East that has gotten no mention in the mainstream media. Yesterday, four heavily armed men tried to get through the border barriers between Gaza and Israel. The four men had rocket propelled grenades, machine guns, and bombs that could have been used in major terror attacks inside Israel. All four were members of Hamas. Fortunately, the men were detected by Israeli troops guarding the border. The four made it through the border fence at which point they were seen by the Israelis. They were told to surrender, but they opened fire on Israeli forces. The return fire was intense and all four of the Hamas terrorists were killed. No Israelis were hurt.
The mainstream media don't seem to want to cover an attempt by Hamas to pull off a major terror attack inside Israel. Of course, were they to cover this story, the media would no doubt find a way either to blame President Trump for what happened or else try to explain how four heavily armed men who snuck through the border barrier and opened fire when confronted were actually victims.
The mainstream media don't seem to want to cover an attempt by Hamas to pull off a major terror attack inside Israel. Of course, were they to cover this story, the media would no doubt find a way either to blame President Trump for what happened or else try to explain how four heavily armed men who snuck through the border barrier and opened fire when confronted were actually victims.
A Smart Move In Hong Kong
The protesters in Hong Kong have made a very smart move. After weeks of escalating confrontations with the police, there has been a change of tactics. Today, thousands of protesters went to the Hong Kong airport and filled the place to overflowing. The congestion was so great that flights into and out of the busy airport were canceled. No one was hurt (at least so far). Nothing was destroyed (again, at least so far.) Air travel, however, which is an essential part of commerce in the city, came to a halt. The police cannot just arrest everyone at the airport, though, because there are still a great many passengers at the airport who are totally innocent. The Chinese government may decide to take everyone in anyway, but this will be a major black mark on that government with tens of thousands of foreign travelers. To the extent that there are still those visiting Hong Kong as tourists, this should stop much of the remaining traffic. Even business travelers will reduce their visits or avoid the area completely.
Without a doubt, the Chinese will have some counter-measure in place in the near term. Until then, however, this is a major move by the protesters.
The government of President Xi must be supremely concerned. News of the events in Hong Kong cannot be kept from a large swath of the Chinese people. If the protests were to spread to cities like Shanghai or Beijing, it could threaten the control of the Communist Party. That is unlikely, but it is an existential concern for Xi and his party. It is not a threat that will be taken lightly. For decades, the Chinese have had no freedom but they have gotten rapid economic growth in its place. Now that rapid economic growth has halted and the trade disputes with the USA make a recovery less likely. It's another reason why the Chinese government should want a resolution with the USA sooner rather than leter.
Without a doubt, the Chinese will have some counter-measure in place in the near term. Until then, however, this is a major move by the protesters.
The government of President Xi must be supremely concerned. News of the events in Hong Kong cannot be kept from a large swath of the Chinese people. If the protests were to spread to cities like Shanghai or Beijing, it could threaten the control of the Communist Party. That is unlikely, but it is an existential concern for Xi and his party. It is not a threat that will be taken lightly. For decades, the Chinese have had no freedom but they have gotten rapid economic growth in its place. Now that rapid economic growth has halted and the trade disputes with the USA make a recovery less likely. It's another reason why the Chinese government should want a resolution with the USA sooner rather than leter.
Sunday, August 11, 2019
Oh NO, I Missed It
About five days ago, an event happened which transformed the Democrat's contest for the 2020 nomination. Former senator Mike Gravel of Alaska dropped out of the race. The eighty-six year old Gravel then endorsed that youngster Bernie Sanders.
Just think what this means:
1. Sanders and Biden are now the official geezers in the race. No one running is older. Of course, Biden probably couldn't remember that anyone older was running when Gravel was still in the race.
2. Alaska no longer has a favorite son who could attempt to dominate the crucial Alaska constest. That really puts those delegates up for grabs. Okay, they already were up for grabs, but it's still fun to say this.
3. Gravel's 16 supporters are now left wondering who to back. What a touch decision. Maybe they can back Seth Moulton the congressman from MA. He should drop out soon, so that would give them time to ponder the other candidates.
Gravel is the unlikeliest political candidate I've seen since the old guy who ran for mayor of New York City a few years back on The Rent Is Too Damn High party. I just wonder how this guy was ever elected to the senate, even in Alaska.
Just think what this means:
1. Sanders and Biden are now the official geezers in the race. No one running is older. Of course, Biden probably couldn't remember that anyone older was running when Gravel was still in the race.
2. Alaska no longer has a favorite son who could attempt to dominate the crucial Alaska constest. That really puts those delegates up for grabs. Okay, they already were up for grabs, but it's still fun to say this.
3. Gravel's 16 supporters are now left wondering who to back. What a touch decision. Maybe they can back Seth Moulton the congressman from MA. He should drop out soon, so that would give them time to ponder the other candidates.
Gravel is the unlikeliest political candidate I've seen since the old guy who ran for mayor of New York City a few years back on The Rent Is Too Damn High party. I just wonder how this guy was ever elected to the senate, even in Alaska.
Subscribe to:
Posts (Atom)