Relevant and even prescient commentary on news, politics and the economy.


I have been monitoring  the close relationship between bond yields and monetary velocity ( personal income/zero maturity money) for years without coming to strong conclusion about what to make of it.  In particular, it displays the long term secular rise and fall of bond yields before and after 1980..


I do not know of any other economic variable that parallels bond yields so tightly for such a long period.  OK, first question.  Which way does the causal relationship work?  Is it rates driving velocity or velocity driving yields?  Or is it some other variable driving both?  I use to think velocity was a function of real interest rates.  At least that was consistent with the monetarist school of economic thought, especially in explaining the 1930s depression.  But now we are back to negative real interest rates and it does not yet  appear to impact this relationship.  If we are at a long term secular bottom in yields I would expect to see monetary velocity start to rise. But it has not happened yet. But now that we are back to uncharted waters, I would be interested in hearing what others have to say about velocity and bond yield



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Fauci: No scientific evidence the coronavirus was made in a Chinese lab

National Geographic published this.  This seems to be an unusual topic for that publication and I wonder why Fauci selected  it.

Fauci: No scientific evidence the coronavirus was made in a Chinese lab

The rest is copied exactly from National Geographic

Fauci, the director of the U.S. National Institute of Allergy and Infectious Diseases, shot down the discussion that has been raging among politicians and pundits, calling it “a circular argument” in a conversation Monday with National Geographic.

“If you look at the evolution of the virus in bats and what’s out there now, [the scientific evidence] is very, very strongly leaning toward this could not have been artificially or deliberately manipulated … Everything about the stepwise evolution over time strongly indicates that [this virus] evolved in nature and then jumped species,” Fauci says. Based on the scientific evidence, he also doesn’t entertain an alternate theory—that someone found the coronavirus in the wild, brought it to a lab, and then it accidentally escaped.

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Daily Cases: Coronavirus:New York vs. Rest of US

It looks like many states are preparing to end stay at home quarantine.

If you look at the numerous charts around on the number of new  coronavirus-19 cases reported each day it looks encouraging.  They show a peaking and a very slow decline or at best a  plateau.

However, this plateau is the product of two very different curves for New York city and the rest of the country.  It is New York city falling and the rest of the country rising significantly.

Don’t Be Fooled by America’s Flattening Curve

Don’t Be Fooled by America’s Flattening Curve, NYT, Nathaniel Lash, May 6, 2020

This looks very much like the various state governments could be lifting the quarantine just as they experience a surge in new cases.

For example, in Texas the 7 day moving average of the daily reported  Coronavirus  cases has just exceeded 1,000 for the first time.


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Starve the Beast

It should be worth noting that the federal deficit under Trump is already at 5% of GDP even before the Coronavirus stimulus begins.

Figure 1

Interestingly, if you look at the long term record the only policy or strategy that fits the data is the Republican policy of starve the beast. That policy is to enlarge the  federal deficit so much when they control the purse strings that democrats will be unable to enact policies increasing spending that benefits the lower and middle classes.  That is why you repeatedly see a pattern of republicans presidents leaving office with a much larger deficit than they inherited while democratic presidents reduce the deficit..  With US savings rates so low this forces the US to borrow abroad to finance the savings-investment gap. We lucked out that in the 1980s OPEC and Japan had  savings surpluses that they used to finance the US deficits.  Under Bush it was the Chinese that had a savings surplus to invest in the US.  But OPEC and Japan no longer have surpluses to finance the US deficit and the Chinese have started to draw down their savings as they shift to consumption led growth.  Because the Japanese and Chinese had large surpluses to invest the  long feared crowding out worked through the dollar and large trade deficit rather than higher interest rates and weakness in the credit sensitive economic sectors. The hollowing out of US manufacturing was a direct consequence of the republican tax cuts.

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Oil prices are collapsing as West Texas intermediate is now trading at just over $11/bbl

Oil prices move to the point where the marginal supply is profitable or unprofitable. In today’s world the marginal oil supply is US fracked oil. But the economics of fracked oil differs from traditional oil in that the current cost of production is very high as compared to most traditional sources where current costs are relative insignificant and the bulk of the cost is sunk or fixed costs.  Even if the prices make production unprofitable, it still minimizes losses to continue producing as long as you are covering your variable costs. That use to describe most US oil production.  But now the variable cost of fracked oil is very high and the oil companies will not continue to drill fracked oil at these low prices.

It appears that Russia and Saudi Arabia are acting together to drive the price of oil below the level where fracked oil would be profitable.  Historically, low oil prices were very much a favorable development for the US economy.  But that is no longer true and at current prices the US will suffer deep drops in oil production and a major widening of the US trade deficit.

It is going to be interesting to see how Trump reacts to two of his best buddies severely harming the US oil business and economy.

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S&P 500 PE

As of the market close on 11 March 2020 the S&P 500 PE had fallen to 18.2. This makes the market cheap in my valuation model as it has fallen below my fair value band.

Moreover, with interest rates still falling to new record lows the fair value band is also rising.  In the chart the fair value band is based on February data while the last PE observation is based on the 11 March 2020 close. But with yields approaching the zero lower band it becomes questionable whether or not even lower rates can generate a significant rebound in the market PE and the market.  On the other hand the PE has room to move significantly higher just by rebounding to the top, or above, the existing  fair value band.

On Wall Street the consensus still is forecasting a significant rebound in 2020 earnings.  But if the Coronavirus  does have a significant economic impact, 2020 earnings are more likely to fall rather than rise.  That appears to be what this market correction is starting to discount even though company managements are not yet revising their guidance.  Consequently, bottoms up analysts are also probably still too optimistic.  With the market now cheap, it has room for falling earnings to drive the PE on trailing earnings back up to within or above the fair value band.  Thus, we could see the market having a very muted reaction to further easing by the Fed but rebound nicely when company managements and analysts cut their 2020 earnings estimates.

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Personal report from Italy

My brother lives in Lucca, Italy ( near Florence) and sent the following report.

We’re not quite at the “Bring Our Your Dead” stage. Schools & museums are closed, flights are being canceled, but all in all life in Lucca is quiet & normal.  Many shops are closed for their usual breaks this time of year. There are virtually no tourists, but this is the slow season. Nancy just spent the weekend in Florence and found it to be delightfully empty.
Tuscany is not in the area where travel is being restricted—as yet. Bars and restaurants are open for the most part, but are told to keep one meter of space between customers.
The authorities are being quite active to do what they can. One reason that Italy has reported so many cases is they they have tested so many more people than the US, for example.
To add to the chaotic nature of all this, today there were riots in 27 prisons throughout Italy after the bosses cut off family visits


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The Stock Market in Presidential Terms

Before the recent swoon stock market market performance under Trump had been quite favorable. The market gain since his inauguration (100) had been (144) similar to those under Clinton (141) and Obama (150). At this point Ike actually had the best return ( 170) but Ike and Truman are not included  in the chart because it is too cluttered already.

After the recent market drop he is now more or less in the middle of the pact for recent presidents  — even with JFK-LBJ and behind most democrats and ahead of most republicans.

But if he wants a strong market-economy going into the election it is easy to see why he strongly favors the 50 basis point cut by the Fed. The market doesn’t seem quite sure what to make of the Fed’s actions, first rallying strongly and then turning negative.  It still does not have a handle om what economic impact to expect from the coronavirus. Maybe the Fed fears a bigger impact than markets were already discounting. Or, maybe the Fed is just taking out insurance in the face of extreme uncertainty.

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Long Bond Yields vs The Long Wave

Different  bloggers  have been posting their favorite charts of 2019 this January.  So I decided to post my favorite chart of the past 20, or more, “years of the long bond yield versus the long run trend.”  Bond yields are now below their long run trend and may be at or near a secular bottom.  Of course no one rings a bell at the turning point so we probably will only identify the bottom long  after it actually occurs.

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In October the real trade deficit fell to $79,133 (million 2012 $) from the third quarter average of $84,713 (million 2012 $), a 6.6% improvement. This implies that the fourth quarter is starting with trade making a significant large boost to fourth quarter real GDP growth. Remember, the trade balance is the difference between two very large numbers so a small change in either exports or imports can generate a large change in the balance.  The year over year percent change in exports is down -0.6% and imports have fallen -4.1%.  But since the December, 2018 peak, the real trade balance has contracted -13.2%.

When you look at the details of US real trade, the changes in trade stem largely from oil and consumer goods. Other trade categories,  like food, industrial materials, capital goods  are each showing relatively small changes that are largely offsetting each other. For the most part both imports and exports of other goods have been stagnant for the past year.  The drop in auto and consumer goods imports reflects several points.

The new world of the US being an open economy after the leap  .  .  .


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