Happiness Is a Normal Yield Curve

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John Mauldin
Happiness Is a Normal Yield Curve
Can the U.S. Economy Recapture Its Past Growth?
Wall Street's Best Minds
Bill Gross Frets About a Fragile Economy
The famed fund manager warns Fed that it won’t take a large rise in short-term rates to trigger a recession.
By William H. Gross
The next day Howard Stern had characteristically railed that the antidote was obvious. It was the same for all fat people: “Don’t eat,” he howled. As if the ump hadn’t known. The fact was he couldn’t stop. He loved the taste of food – every sugary, starchy, carbohydrated morsel. The first bite was an ecstasy, as was the last, and everything in between.
Franz Kafka wove a tale 100 years earlier that was a mirror image of McSherry’s tragedy. His “A Hunger Artist” described a professional faster – a sideshow freak in 19th century Europe who attracted attention and spare coins by withering away inside a wooden cage. The gapers marveled at his shriveled skeleton – stuck their hands through the bars to nudge his bony ribs – and awed at his resolve to starve himself to the precipice of self-extinction. “I always wanted you to admire my fasting,” said the hunger artist, “but you shouldn’t have. (The fact is) I have to fast, I can’t help it. I couldn’t find the food I liked. If I had found it, believe me, I would have made no fuss and stuffed myself like you or anyone else.”
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Their stories, though, are really not about food, but life itself – what compels us to do what we do, what forces us to act or not act, what makes us who we are. Is personal behavior, though, really beyond our control? Shakespeare would retort that the fault lies not in our stars, but in ourselves, and I applaud that – strong-willed 175-pound guy that I am. But, on the other hand, who are we other than a morphous, gelatinous blob of moving flesh and bone that’s been molded primarily without our input, first by genes, and then by environment into the living person we know as ourselves? Are we all just walking Cuisinarts, or better yet, mobile computers with consciousness?
A TIME Magazine cover story once asked, “Can machines think?” and if they can, it might well have asked the corollary, “Are people machines?” The fact is that sophisticated modern machines can do just about anything a human being can do. TIME suggested that the difference between “us” and “them” was a human being’s consciousness. We are “aware” whereas they are not. But even if that is true, to me it’s not enough.
Who wants to be a machine that simply knows it’s a machine? Who wants to walk the Earth as a preprogrammed robot with no input as to his or her final fate? To my mind, free will is the key to our unique position among life’s animals. Without it, this business of living is reduced to a meaningless game. Unless the John McSherrys of the world can stop eating and the hunger artists can start, we might as well just turn out the lights.
Monetary policy in the post-Lehman era has resembled the gluttony of long departed umpire John McSherry – they can’t seem to stop buying bonds, although as compulsive eaters and drinkers frequently promise, sobriety is just around the corner. To date, since the start of global Quantitative Easing, over $15 trillion of sovereign debt and equities now overstuff central bank balance sheets in a desperate effort to keep global economies afloat. At the same time, over $5 trillion of investment grade bonds trade at negative interest rates in what can only be called an unsuccessful effort to renormalize real and nominal GDP growth rates.
The adherence of Yellen, Bernanke, Draghi, and Kuroda, among others, to standard historical models such as the Taylor Rule and the Phillips curve has distorted capitalism as we once knew it, with unknown consequences lurking in the shadows of future years.
Similarly, private economists adhere to historical models, which attempt to “prove” that recessions are the result of negative yield curves. Over the past 25 years, the three U.S. recessions in 1991, 2000, and 2007-2009 coincided nicely with a flat yield curve between three-month Treasury Bills and 10-year Treasuries.
Since the current spread of 80 basis points is far from the “triggering” spread of 0, economists and some Fed officials as well, believe a recession can be nowhere in sight.
Perhaps. But the reliance on historical models in an era of extraordinary monetary policy should suggest caution. Logically, (a concept seemingly foreign to central bank staffs) in a domestic and global economy that is increasingly higher and higher levered, the cost of short term finance should not have to rise to the level of a 10-year Treasury note to produce recession. Most destructive leverage – as witnessed with the pre-Lehman subprime mortgages – occurs at the short end of the yield curve as the cost of monthly interest payments increase significantly to debt holders. While governments and the U.S. Treasury can afford the additional expense, levered corporations and individuals in many cases cannot. Such was the case during each of the three last recessions . But since the Great Recession, more highly levered corporations, and in many cases, indebted individuals with floating rate student loans now exceeding $1 trillion, cannot cover the increased expense, resulting in reduced investment, consumption and ultimate default.
Commonsensically, a more highly levered economy is more growth sensitive to using short term interest rates and a flat yield curve, which historically has coincided with the onset of a recession.
Just as logically, there should be some “proportionality” to yield curve tightening. While today’s yield curve would require only an 85 basis increase in three-month Treasuries to “flatten” the yield curve, an 85 basis point increase in today’s interest rate world would represent a near doubling of the cost of short term finance. The same increase prior to the 1991, 2000 and 2007-2009 recessions would have produced only a 10-20% rise in short rates. The relative “proportionality” in today’s near zero interest rate environment therefore, argues for much less of an increase in short rates and ergo – a much steeper and therefore “less flat” curve to signal the beginning of a possible economic reversal.
How flat? I don’t know – but at least my analysis shows me that the current curve has flattened by nearly 300 basis points since the peak of Fed easing in 2011/2012. Today’s highly levered domestic and global economies which have “feasted” on the easy monetary policies of recent years can likely not stand anywhere close to the flat yield curves witnessed in prior decades.
Central bankers and indeed investors should view additional tightening and “normalizing” of short term rates with caution.
Gross manages the Janus Henderson Global Unconstrained Bond fund (JUCTX).
Make Way For Uncle Buck
By: Gary Tanashian
I hate to be a party pooper, but in seeing all kinds of commodities and anti-USD items ramping up now and seeing this picture of USD making a new low, post Fed, I am brought toward the point of having to admit I was wrong on USD. I am toward that point but ever plucky, am not at that point! Not on FOMC hype and algos’ and robots’ reactions. I am still holding the euro short.
What’s more, I am actually feeling more bullish on the dollar as I think about it. The sentiment profile was stacked against Uncle Buck [contrary bullish] before today and I am wondering about exclamation points and the like. As in, could this week mark a low?
Anyway, just letting you know the captain is continuing to go down with his USD ship until it takes on a critical mass of water. There was an article at MarketWatch today citing a strategist at PIMCO talking about why the Trump admin is bad for USD and therefore, bearish. A well placed contrary indicator? They don’t all work, but I want to let it breathe a bit more and see.Another point from the update is that the stock market is unlikely to benefit from a firming US dollar.
A final note on USD. We have shown that a strong dollar has been a negative for the stock market, on a delayed time frame (strong USD in 2014 leads a market correction in 2015) and that the market’s post-Trump rally has gone hand in hand with USD’s bear phase. If the buck breaks, I’d expect continued mini-mania in stocks. If it reverses, I think some pressure would be brought to bear.Here is the chart that proves my point. The impulsive rise in USD (the breakout to which we caught in real time in mid-2014) stopped the stock market’s momentum and then in 2015 brought on the first real correction since 2011. Going the other way, the chart makes it patently obvious that a declining US dollar – ostensibly on Trump fiscal policy projections – has gone hand-in-hand with the post-election rally.
How the Elites Betrayed Working-Class America
by Bill Bonner
Win-win deals get people more of what they want. Win-lose deals – usually imposed by government – bring them less. The few (the insiders) use government to exploit the many (the rest of us).
Win-lose deals also depress economic progress for everybody. Partly, this happens for an obvious reason.
Dropping the atom bomb on Hiroshima was a technical milestone, but not the kind of progress we’re talking about. Progress only makes sense if it means that people are able to get more of what they want.
By definition, when a person is forced into a bad deal, he gets less of what he wants.
Progress is also a learning process. You try something. You see what works and what doesn’t.
As people experiment in this way, they learn… and the economy accumulates knowledge and wealth.
They learn to get to work in the morning, for example… to say please and thank you… to save their money… and to invest it wisely.
Win-lose deals interrupt the learning process. That’s why welfare programs fail: People get money without learning.
Temptation to Cheat
That is the real reason the Soviet Union failed, too.
Consumers were forced to buy whatever shoddy products were made available to them; producers had no way to learn how to make good ones.
Toward the end, products available for purchase in the Soviet Union were worth less than the raw materials and labor that went into them.
What do you need for win-win deals?
Three things:
1) People must be free to make choices with their time and money.
2) They must have money they can trust.
3) They must trust each other to respect their rights and property.
These things don’t happen smoothly and without interruption.
Progress is cyclical. Win-win deals add wealth and move society forward. But they depend on trust.
And as trust increases, so does the temptation to cheat. When everyone leaves his liquor cabinet open, for example, who can resist having a drink?
Then trust declines. Barriers go up. Costs increase. Win-win gives way to win-lose. Progress goes into reverse.
Money You Could Trust
The invention of real money – based on gold – gave a boost to win-win deals… and to progress.
Why?
It was money you could trust.
If you are paid a gold coin for a day’s labor, you don’t have to trust the person who pays you.
You don’t have to wonder if he has the money in his account to cover his check… or what will happen to his money in the future.
You don’t have to trust him; you put your trust in gold. This allows you to do transactions more freely – and speeds up economic progress.
Gold-backed dollars were trustworthy for nearly 200 years (setting aside Lincoln’s phony “greenbacks”).
People became so confident in the integrity of the dollar that they hardly noticed when the gold backing was removed (on March 19, 1968, when President Johnson signed a bill eliminating the “gold cover” for Federal Reserve notes).
But that’s the way it works: The more trusting people become, the easier it is to rip them off.
Set Up by the Elite
Of course, as trust expands and win-win deals proliferate, some people gain more than others.
The typical Chinese day laborer makes six times as much today as he did in 1999. The typical American day laborer has gained little.
And job competition from overseas made him feel like a loser. Now he wants walls – to keep out foreigners and foreign-made products. He wants win-lose deals that guarantee to make him a winner again.
He has no idea that he was set up by his own elite.
Former Fed chiefs Ben Bernanke and Alan Greenspan got their pictures on the cover of Time magazine. Most people think they are heroes, not rascals. Most people think they saved the economy from another Great Depression by dropping interest rates and injecting it with trillions of dollars in quantitative easing (QE) money.
Most people – even the POTUS – believe we need more fake money to “prime the pump” and get the economy rolling again.
Almost no one realizes it, but it was these stimulating, pump-priming, new credit-based dollars that fueled the trends that ruined America’s working-class wage earner.
Overseas, his competitors used cheap credit to gain market share and take away his job. At home, the elite imposed their crony boondoggles… their regulations… and their win-lose deals – all financed with fake money.
The average American’s medical care now costs him more than seven times more than it did in 1980.
His household debt rose nearly 12 times since 1980.
Subtle “Bezzle”
He blamed the Chinese, the Mexicans, the liberals… the media… and the government.
He wanted change.
But who would have guessed that he had been ripped off by his own untrustworthy money?
After you account for inflation, the American worker has not had a significant raise in 40 years – almost since the new money system was put into place after 1971.
But the rich – as measured by the inflation-adjusted Dow – are 10 times richer.
Who would have imagined that after 3,000 years, the elite would have come up with money that betrayed his trust… a “bezzle” so subtle that he didn’t even notice?