Like the Case-Shiller house price index, this measure of recession is lagged. So, it tells us good news … from April 2020 PRIOR to President Biden and the Pelosi/Schumer “Stimulypto” Congress.
So, if there is a link between economic recessions and Federal Reserve monetary policy, why is The Fed continuing its unusual “magic money” policies?
Stated differently, why is the Biden Administration engaged in massive Covid-related spending if the Covid recession ended in April 2020? And why is The Federal Reserve sticking to its unprecedented zero-interest rate policies?
Inflation keeps rising and wage earners continue to suffer.
Today’s inflation print shows headline CPI YoY at 5.4% and core CPI YoY are 4.5%, the highest since 1991.
The problem is that real average hourly earnings printed at -1.7% YoY.
0.9% June inflation x 12 months = 10.8% Run Rate Inflation.
If we look at REAL house prices (FHFA HPI Purchase Only YoY – Headline CPI YoY) and REAL US average hourly earnings YoY, we can see a real problem created by excessive Fed money printing and Federal government spending. It is the proverbial “Devil In Disguise.”
Then we have the CPI Owners Equivalent Rent of Residences YoY printing at 2.3%. This compares with home prices growing at 15.7% YoY.
(Bloomberg) — For years, David Horowitz at Agilon Capital was a rare breed in the bond market: a quant in a notoriously old-school business where prices were a call rather than a click away.
Sixteen months of the pandemic is changing all that.
The work-from-home era is fueling a surge in electronic bond trading that gives the likes of Horowitz conviction a long-augured quant revolution is finally ready to sweep the debt world.
Long credit positions held by quants have doubled since 2018 according to Man Group data, outpacing the 20% growth for other asset managers as systematic players seize on the rapid market modernization — like they did in stocks years ago.
“Credit is going through a similar evolution,” said Horowitz, who led the pioneering systematic credit team at BlackRock Inc. before starting his own$290 million fund. “As we become more electronified we should expect the same sorts of forces to come into play.”
Quants have been saying that for years of course, only to have their math-based models frustrated by the cumbersome and complex debt world. The difference now is that they may have a market liquid and transparent enough to accommodate their constant churn.
Electronic venues like MarketAxess and TradeWeb accounted for 37% of investment-grade and 26% of high-yield trading in May, 8 percentage points higher than the year before, Coalition Greenwich data show.
That sets up a virtuous circle, where banks roll out more algorithms to price more bonds. Throw in a year of record flows into credit exchange-traded funds, and a broad swath of securities is becoming easier to trade — vital for a cohort which typically holds hundreds of positions and trades more often than an average fund.
“It’s helped answer the question of ‘will we be able to trade this tomorrow?’” said Paul Kamenski, co-head of credit at the quant firm Man Numeric.
Liquidity in the bond market has long been fragmented by its very nature — companies generally issue multiple bonds. That means quants might see their models spit out a dream portfolio but have to adjust it based on what can actually be traded, Kamenski said.
“We had to try to do things that were less natural in quant strategies,” such as trading in larger sizes or catering to dealer inventories, he said. “It’s still hard today, but it’s become more manageable.”
That doesn’t necessarily mean the whole market is suddenly highly liquid — gripes about how hard it is to offload large blocks are everywhere.
But it’s become easier to move smaller sizes and figure out where each bond is trading, which helps detect signals and cut transaction costs, Horowitz said.
Over at banks’ trading desks, Asita Anche at Barclays Plc has seen a jump in algo usage, especially to execute small trades. But she stresses that humans are still essential in fixed income since liquidity is more fragmented than in equities and it’s harder to manage risk.
“The future is not algos taking flows away from humans,” said the head of systematic market making and data science. “It’s humans enhanced by algos and automation.”
With that in mind, Anche is building algos and data analytics for voice traders, and even a recommendation engine akin to Netflix’s that finds similar securities to what a client wants to trade.
Bond quants remain a tiny minority — those long positions total around $23 billion, Man Group says, versus $537 billion for other managers. And the systematic bunch operates a range of strategies, from equity-style factors like value or momentum to arbitrage or trades based on moves in an issuer’s stock.
That all makes performance hard to judge and data is scarce. A Premialab index of systematic credit strategies built by investment banks lost 5% over the past three years of rising markets and gained nearly 3% in 2021. Among global bond mutual funds, quants trailed other investors on a three-year horizon, eVestment data show.
Nonetheless, the rise of electronic trading in equities minted billions for quants and reordered the market. Many bond players are predicting a similar trajectory for their asset class, with the bonus pitch that the kind of crowding that has undermined stock strategies is a long way off.
“I’ve been doing this for 20-odd years and for most of that, doing this type of systematic credit — people wouldn’t even know what I’m talking about,” said Horowitz at Agilon. “Credit is still very much in its early innings.”
With massive Federal spending, Federal debt issuance is going to continue to explode. As will agency MBS.
Ever since 2008 and the dramatically increased presence of The Federal Reserve in markets, and particularly since the March 2020 Covid outbreak, we have seen record increases YoY in corporate debt, US public debt (aka, Treasury debt) and agency mortgage-backed securities.
Corporate debt issuance was negligible since the housing bubble years of 2002-2007, but has been relatively constant since Q4 2007 and surged to over 10% in Q2 2020.
With continued zero interest rate policies from The Fed, debt issuance will continue at break-neck speeds. It is only logical that bond quant strategies and electronic credit trading grow.
Speaking of corporate bonds, here is a graph of US corporate bond yields against modified duration.
And here is US corporate bond yield against duration sorted by bond coupon.
(Bloomberg) — Jeremy Grantham said the U.S. stock market is in a bubble and investing in it is “simply playing with fire.”
“I have been completely amazed,” the veteran bearish investor said in an interview Wednesday on CNBC. “It is a rally without precedent — the fastest in this time ever and the only one in the history books that takes place against a background of undeniable economic problems.”
Individual investors jumping into the market now should sell U.S. stocks, buy emerging market equities and “throw the key away” for a few years, he said, adding “this is becoming the fourth real McCoy bubble of my career.
The S&P 500 index has jumped almost 40% from its March 23 low even as the coronavirus pandemic has damaged almost every sector of the economy and put millions of people out of work.
And the S&P 500 index has soared since The Fed’s epic intervention in 2008 and then again in March 2020.
And then we have Larry Summers (former Chief Economist of the World Bank, US Treasury Secretary, former director of the National Economic Council for President Obama and former president of Harvard University) saying “This is scary. Rising house prices in most people’s common sense of the world represents inflation.”
Yes Larry, I agree with you. The house price graph looks eerily similar to the S&P 500 index graph.
Here is a nice Q2 summary of asset price changes for Q2 from GoldSilver.com.
For all the talk of The Fed raising rates and cutting monetary stimulus, here is a disturbing chart showing U-3 unemployment rate against the CBO’s short-term natural rate of unemployment. If The Fed is chasing lower unemployment rates, they might be around longer than many anticipate (especially if there is a Covid Delta shutdown).
The inflation numbers will be released on Monday. Knock on wood.
With The Federal Reserve’s prodigious asset purchases and rate suppression (not to mention Biden’s record spending), inflation is a concern. But now there is another problem on the horizon … deflation.
If we look at commercial and industrial lending at commercial banks divided by bank deposits, we see the ratio is the lowest since the 1970s.
How about loan and leases at commercial banks divided by deposits? Also the lowest since the 1970s.
Why is this possibly deflationary? Because commercial banks are the primary transmission mechanism for Fed policy, this bodes ill unless the economy roars back from government Covid shutdowns.
M2 Money Velocity (GDP/M2) is the lowest in history, so it had better be an epic rebound from Covid!
Yesterday’s GDP report was great with real GDP growing at a 6.4% annualized pace.
To get 6.4% annualized GDP growth, The Federal Reserve had to print a massive amount of money. Even with a great GDP report (preliminary), M1 money velocity is at a historic low. In other words, the US economy got relatively little for all the money it is printing.
Things improved if we look at the broader definition of money, M2. Again, despite the excellent real GDP report, M2 velocity for Q1 actually declined since The Fed went ballistic printing money. Again, the bang for the buck, so to speak, is near the historic low.
Today’s release of personal income and spending shows that personal consumption expenditure (PCE) rose 28.5% YoY in April. Zowie!!
And the PCE PRICE index grew at 3.58% YoY, the highest since 2008.
The good news is that The Fed is slowing its M2 growth rate YoY. We shall see if Q2 GDP growth slows as well.
Then we have this chart showing the massive expansion of The Fed’s balance sheet and the near-zero Fed Funds effective rate. Fuel for the Veloci(ty)raptors! We will discuss the relationship between bank reserves and money supply when summer class begins on June 21st.
Another troubling chart is average hourly earnings of all employees, year-over-year. That is 0.3% in April and is not a great signal for Q2 GDP.
Then we have CPI growth (aka, inflation) growing at 4.2% YoY, the highest since 2008 and The Great Recession.
We shall see if President Biden’s $6 trillion budget 1) gets through Congress and 2) whether the money passes through to workers.
Lastly, I want to reiterate the decline in purchasing power of the consumer dollar since the creation of The Federal Reserve in December 1913 when the dollar had a base index of $994.2. The index is now at $37.4. That is a 96% loss of consumer purchasing power since The Fed’s creation.
Yes, The Fed’s veloci(ty)raptors are hard at work destroying the US Dollar.
Thanks to The Fed’s massive money printing to counter the Covid outbreak we see core inflation at 3%. Ordinarily, this would result in The Fed Board of Governors (BOG) to raise their Fed Funds Target rate and reduce their asset purchases of Treasuries and Agency mortgage-backed securities (MBS).
But The Fed claims that inflation is “transitory” and isn’t raising rates. Rather, The Fed Funds Target Rate remains at 0.25% while The Fed’s Balance Sheet and M2 Money Stock are at historic highs. Notice that following the financial crisis and housing bubble that help create The Great Recession of 2007-2009 The Fed kept is foot on the monetary accelerator, slowed it down briefly under Yellen, then slammed down on the pedal under Powell (as a result of Covid outbreak in March 2020). Despite the economy growing after 2009, The Fed shifted its focus to asset bubble creation. This implies that the economy never really improved under President Obama. Yellen started easing off the pedal when Trump was elected (see portion of the chart where the target rate is rising and the balance sheet is declining). Again, that stopped with Covid in March 2020.
With the economy growing at 6.4% QoQ and U-3 unemployment down to 6.2%, it seems a logical time to cool off the economy. But as comedian John Belushi would say, “But nooooo!”
As an example of mission creep is The Taylor Rule. If we use the Rudebusch Model, The Fed should be raising its target rate to 4.79% compared to the current target rate of 0.25%.
While one may quibble with the estimation of the Taylor Rule, we can all agree that home prices, commodity prices, S&P500 reported earnings, etc. are skyrocketing.
Here is an open letter from Alexander William Salter, Ph.D. of Texas Tech (a George Mason PhD in economics!) talking about The Fed’s mission creep.
The Fed sold a record $756 billion in Treasury securities this morning in exchange for cash via overnight “reverse repos.” This was up by a stunning 45% from yesterday’s operations of $521 billion. There were 68 counterparties involved. Yesterday’s overnight reverse repos had matured and unwound this morning, to be more than replaced by today’s Fed Flood. The result? The Fed’s balance sheet tops $8 trillion!