Change is in the winds of markets now, and as we move from the extended recovery from the Great Recession to something else it is hell to sort through new data and opinion.

The web has made infinite the supply of commentary, and one effect is the need for commenters to attract attention. In financial markets, click bait comes in two forms often simultaneously: sales pitches, and/or exaggeration of commonplace or random events into asteroids about to wipe out whole continents.

So, one asteroid at a time...

Interest rates are rising. Duh. Dilly-dilly. The increase matters only if it is big, or catches a lot of people leaning the wrong way. The yield on the 10-year T-note has broken out of a comfortably narrow 2017 range, four days out of five last year between 2.25% and 2.40%. Mortgages spent the year within one-eighth of one percent above or below 4.00%.

10s have now broken above 2.50% and there is no “support” whatever above 2.60%. If 10s break above there, we’ll test 3.00%, mortgages at risk to rise a little above 4.50%. That rise would be worrisome if you forgot to refinance, or if housing were in a stage of over-building. Not. Not neither, no how.

Long-term rates depend on inflation much more than upon the Fed. If sustained inflation suddenly perks above 2% and forces the hands of markets, then recession risk. However, the forces which have defied global central banks and held inflation low -- frackers and IT -- are as strong as ever. 

Global business is good, thank you. There are all kinds of things which may hurt global trade: Brexit, war in the Middle East or Korea, export predation by Germany and China, a protectionist spasm by the US -- a long list of genuine risks. However, the world seems more and more able to focus on the benefits of commerce over foot-shooting.

The business cycle isn’t cycling. The world is moving faster, but not our thinking. Serious people still mention the “slow recovery from the financial crisis.” By now, ten years later, consider that crisis a distraction from other, larger, and longer forces: the completely unprecedented reaction time of global business, the fungibility of global labor, and instantaneous discoverability of prices destroying pricing power. 

The business cycle used to involve recovery leading to overheating and exposure of overconfidence. Hyman Minsky gave us the thought that prolonged good times create proportionate blind and lazy overextension until a “Minsky moment,” when all delusions fall away and into a liquidation spiral.

Credit is central to that cycle, and we do not have any meaningful overextension of credit today. Thank the financial crisis for that: credit restrictions are so broad, well-tended, and reasonable that it could be another generation before we lose our credit marbles again. Properly tight credit is the single most-protective element in the economy.

The exception, of course is the global over-borrowing by national governments. Hope like hell that I’m right here, that a new recession is far off and likely shallow, because we may be losing the ability to borrow and spend our way out of the next recession. However, even that caution may not apply, thanks to the central banks’ new magic trick, stuffing trillions of dollars of sovereign bonds into the top hat, beside the rabbit.

The stock market is trading in straight-up fashion which has ended badly on every previous occasion. Does that mean this time? I have no idea. I do have one parochial hope, that for the first time an episode of rising rates will kneecap stocks before the usual victim: me. That is, housing.

The tax bill will have some consequences. And probably already has. One old Wall Street parable: “Buy the rumor, sell the fact.” 

Bill Dudley, retiring prez of the NYFed did his job. The overriding task of the NYFed is to discover Wall Street misbehavior and stop it before the thieves in pinstripes can do damage. Well done, sir -- quietly, too. In sharp contrast to predecessor Tim Geithner, from whom The Street removed shirt, shoes, and undies without his notice or protest.

Yesterday, the completely apolitical Dudley accused the tax bill of enhancing our two most-dangerous risks: in the near term the bill has elevated the risk of overheating, and in the long term damaged US fiscal soundness. True, but he estimated that GDP growth might be elevated by 0.3% -- an accounting error -- and our fiscal behavior has been so stupid that the loss of a few more IQ points won’t matter.

This New Year Prediction Confirmed: Two whole weeks ago I thought the actions of the ECB and BOJ would be crucial. Sure enough, the Germans this week pushed for an end to stimulus (and they desperately want a German to succeed Draghi), and the BOJ trimmed its bond-buying. Central to the recent rise in US 10s has been the far larger percentage jump in German 10s, from 0.31% to 0.51%, and Japan’s to a one-year high -- still a negligible 0.09%, but up. 

Neither zone can survive a big increase for long. However the effect on US markets is to suspend hope for more ECB/BOJ stimulus pulling down on US yields.

If they’re not going down, they’re going up.

US 10-year T-note TWO years back, showing the void of trading between 2.60% and 3.00%. The Battle of Two-Sixty is big, and the one at 3.00% will be yuger:


The two-year T-note (chart also TWO years back) has priced-in the Fed’s hike from 1.50% to 1.75% coming in March, and 50-50 another one in summer. Got to love non-ambiguous charts:


A tale of two charts, and politics... The NFIB has for 45 years surveyed its small business members, and the overall chart of optimism has been an excellent economic indicator. Until now. The membership is strongly right-side, and its economist Dunkelberg even more so. The chart went nuts after the election last year, and departed the actual small business fundamentals which show in the second chart. It is painfully reassuring that small business is weakening -- if the economy sags back from a still-theoretical election and tax-bill boost, that will take heat off the Fed, and we’ll see it first in the 2-year T-note:


Rates Increase Due to Growth Expectations from Tax Cuts

Mortgage interest rates increased slightly this past week on expectations that tax cuts will increase wages and consumer spending potentially leading to higher inflation.  The December Consumer Price Index (CPI) was up 0.1%, as expected, and up 2.1% year over year.  December Core CPI, excluding the food and energy components, was up 0.3% and year over year it was up 1.8%.  The December Producer Price Index (PPI), a measure of wholesale prices, was down 0.1% but up 2.6% year over year.  December Core PPI was also down 0.1% but up 2.3% year over year.  December Import Prices were up 3.0% year over year and Export prices were up 2.6% year over year.  November Consumer Credit was also up substantially.  The general belief is that GDP will increase by 3.0% in 2018.  With the recent increase in rates, the 10 Year Treasury Note auction this past week was the strongest since June of 2016 and the 30 Year Treasury Bond auction was the strongest since December of 2014.


The Dow Jones Industrial Average is currently at 25,771, up almost 500 points on the week.  The crude oil spot price is currently at $63.54 per barrel, up over $2 per barrel on the week.  The Dollar weakened versus the Euro and Yen on the week.


Next week look toward Tuesday’s Empire State Manufacturing Survey, Wednesday’s Industrial Production and Housing Market Index, Thursday’s Housing Starts, Jobless Claims, and Philadelphia Fed Business Outlook Survey, and Friday’s Consumer Sentiment Index as potential market moving events.  U.S. markets are closed on Monday for Martin Luther King Jr. Day.

Rates Increase Slightly on Mixed Data

Mortgage interest rates increased slightly this past week as economic data was mixed.  Economic data stronger than expected included the December ISM Manufacturing Index, November Construction Spending, December Auto and Truck Sales, December ADP Private Jobs, the December PMI Services Sector Index, and November Factory Orders.  Economic data weaker than expected included weekly jobless claims, December Non-Farm Payrolls and Private Jobs, the November Trade Deficit, and the December ISM Services Sector Index.  The Unemployment Rate was 4.1% as expected.  Average Hourly Earnings increased 0.3% in December and 2.5% year over year as expected.  The temporary spending measure expires on January 19.  President Trump would like to increase spending for infrastructure projects.  It appears that the Fed is still on track to increase the Fed Funds rate two or three times this year.

The Dow Jones Industrial Average is currently at 25,163, up over 400 points on the week.  The crude oil spot price is currently at $61.26 per barrel, up $1 per barrel on the week.  The Dollar weakened versus the Euro and strengthened versus the Yen on the week.

Next week look toward Monday’s Consumer Credit, Wednesday’s Wholesale Trade, Thursday’s Jobless Claims and Producer Price Index (PPI), and Friday’s Consumer Price Index (CPI), Retail Sales, and Business Inventories as potential market moving events.


Markets have given in to modest complacency. I doubt we’ll be badly punished, at least in credit markets and interest rates (stocks... dunno), but the what-me-worry picture follows. Together with a little New Year debunking of jive from salesmen.

Today we got the monthly payroll report, and a market-wide sigh of relief that “only” 148,000 new jobs were created. Slowing from then 180,000-range takes heat off of the Fed, which would like to see job growth fall to about 100,000 monthly, the theoretical growth rate of the work force. These payroll numbers are prone to large error and revision, so be careful deconstructing, BUT the report said that retail jobs contracted by 21,000 in December.

Each of these reports is seasonally adjusted, and every December adjustment assumes large temporary retail hiring for the holidays. However, Jeff Bezos and pals are gradually destroying retail as we have known it. If traditional holiday hiring fell off last month (guaranteed), then the seasonal adjustment is overdone, job growth better than it seems. That thought is supported by wild strength in the two ISM purchasing managers’ December surveys, manufacturing to a rarely so hot 59.7, and the service sector 55.9.

Unemployment remained at 4.1% but is meaningless, useless as an indicator of future inflation because none of us understand today’s workforce-elasticity. However, wages are trickling upward from the low-2% range to high 2%. Nevertheless, long-term rates stayed under control, mortgages just above 4.00%, the 10-year T-note just below 2.50%.

Debunking is not seasonally adjusted. It’s necessary at all times of year, and especially so during this time of rapid change. Change reduces our ability to understand what is happening to us, and we respond by trying either to hammer new data into obsolete equations, or to take wild swings at megatrends. Adding to the fun: most financial market information comes to us through sales organizations, which long ago learned that frightened consumers are pigeons. Scare them and they’ll flock into your net.

The weak dollar is a current favorite. Do not pay any attention to the dollar -- someday, maybe, but give it a couple of decades. Currencies have values only in relation to each other. China’s yuan is pegged to the dollar and thus can neither weaken nor strengthen. The euro has risen in value versus the dollar from $1.05 to $1.20 because European collapse is less likely for now, and because of Germany’s mania for net exports. In the ten years prior to 2010 and possible collapse, the euro traded near $1.50. Who is weak? The yen has upside-down value, yen/dollar as opposed to dollars/euro. It’s at 113/buck today, and hasn’t done anything for years -- and is so rigged both by the BoJ and markets that its movements have little to do with economic change.

In the short run (years), currencies respond to interest-rate differentials, primarily diverging plans of central banks. In the long run, trade balances matter, as do rates of economic growth. So, why not watch rates and economies instead of antique, gold-standard bragging rights? Because it’s fun to scare people.

American Drowning In Debt is a highlight everywhere. Ray Dalio, brilliant portfolio manager and billionaire (I am neither) and self-acclaimed management genius told the WSJ this week that we’re all going to die from combined public and private debt equal to 325% of our GDP. Somebody somewhere in suspenders and a $300 necktie says the same thing every day.

But, where is this debt? 325% of US GDP is $65 trillion. The NY Fed tracks household debt, which is growing about as fast as GDP, total $13 trillion. The essential component is mortgages, just this year aggregate balances rising above the 2007 level. The Treasury owes about $15 trillion (net of inter-governmental swaps). Throw in all corporate and municipal debt and you’re just over two times GDP.

We also have some assets. The Fed’s quarterly Z.1 reports household and non-profit organizations’ (B.101) total assets at a hair over one-hundred and twelve trillion dollars (net worth just under $100 trillion), and the same category for non-financial business (B.103), $43 trillion, net worth $23 trillion.

Which leaves “financial business.” Do we care... should we care the amount borrowed against portfolios of Treasurys, so long as a healthy excess of value over debt? Or stocks (margin debt limited to 50%)? Or in a post-bubble era, the Fed on watch with pitchforks and torches for any debt abuse?

The debt-mongers also offer horrifying effects of the Fed’s balance sheet contraction. The money supply will shrink! Nevermind that both the assets and “money” were held inert in mayonnaise jars under the Fed’s porch. Fannie and Freddie got into trouble by retaining together $1.7 trillion in MBS and mortgages and financing the portfolio with short-term loans. The two outfits since 2008 have bled off $1.3 trillion! That’s 15% of all mortgages outstanding shifted out into private markets and without a ripple in the mortgage water. Same so far for the Fed’s unwinding.

Last on debt: the rate of growth in bank credit in 2017 fell in half or more, to perhaps 3% annualized. Nobody knows why, although business self-funding via enormous profits is a good thought.

There’s plenty to worry about out there. But, repeating last week’s advice, do watch the stock market. It will keep your mind off politics.


The 10-year T-note shows every sign of heading upward:


The 2-year T-note is ballooning upward, testing the upper limit of the Fed’s atmosphere in months ahead:


Household debt is not a concern. Period. The only two sectors of growth are student loans and autos, both inevitably beginning to slow now:


It’s time again to put on the fortune-teller costume (for the elderly, think Johnny Carson’s Carnac the Magnificent) and to hope that no one will remember these predictions.

May as well get on with the confession from last year, too. Then, the absolute lead-pipe cinch forecast: a 2017 fight between Trump and rate-hiking Janet Yellen.

Nope. He fought with everyone else on Earth, but not Janet.

(Sidebar for non-Okie city folk: a cinch is the belt that holds a saddle on a horse. Horses are not stupid, and know to distend their bellies to prevent tight cinching. A loose cinch can result in a humiliated cowboy. Thus the tightest-possible cinch is knotted lead pipe.)

This year’s sure thing (brace yourself): few of the forecasts you’ll hear at this New Year will matter. Very few. Just as last year we are likely to wander forward en masse: get up, go to work/school, make a buck, look after family.

Herewith the list of things which do and don’t matter:

The doesn’t-matter list-topper: politics. As much fun or agony as it may be, if politics in 2017 had no effect on markets, then politics won’t matter in 2018, either. From Tuesday forward, especially in Congress the November election will grow in importance every day. By spring the election will blot out the sun on Capitol Hill, and by summer... an election nearby acts on Congress like curare: your mind still works, but you can’t move, speak, or even wink. And no matter the outcome, what’s-his-name will still be in office.

Does matter: foreign central banks. If the global recovery emboldens Germany to force the European Central Bank to stop its bond-buying, or the Bank of Japan lets long-term rates to float above zero in yet another suicide attempt, then US long-term rates can go haywire along with other unintended consequences galore.

Ignore the Fed and its rate-nibbling. Also ignore the numbing attention paid to the narrowing spread between short-term rates and long-term ones. By 2019 these subjects may matter, but in the near term are self-correcting. If inflation says low and GDP calms to two-percent-something, as is likely, the Fed will back off it’s three-hike path. If wages and inflation do begin to grow toward the Fed’s 2% target, then the Fed will follow through with its hikes -- but markets will see that as appropriate pre-empting. Mortgage rates may at last rise to something shattering like 4.50%.

Do watch the stock market. You won’t learn anything useful about the economy (unless stocks crater), but it will keep your mind off politics.

Save yourself from the endless discussion about the tax bill. No matter what happens in next year’s election, or Mueller does to what’s-his-name, so long as Republicans control the White House the tax bill will remain law. Three years anyway. The bill will annoy more people every day as CPAs advise contents and consequences, but the economic effect is likely to be nil, and already built in to stock prices. Colorado is a low-tax state but we do have a state income tax, applied to Federal reported incomes. Our Department of Revenue forecasts an increase in personal tax payments as much as $310 million, only a 4.3% tax hike (a little more than our revenue from sales taxes on dope), but there will not be any consumer stimulus from this anti-cut. Nor from the corporate giveaway.

Set aside geopolitical worries. Yeah, I know that Europeans thought the same thing twice in the bloody 20th, that connections and commerce had made war impossible. But nukes really have reduced the risk of big war. Pax Nuclearis. When Xi Jinping says “War must not be allowed on the Korean peninsula,” take him at his word. Yes, the world will be more unstable as relative US power declines, and we pull back from 70-year-old commitments, but that’s not all bad. Responsibility for one’s own affairs clarifies the mind.

Do pay attention to the IT-remaking of global commerce, and the speed of the re-making far beyond the ability of our institutions and citizens to respond. Not the boogeymen, automation and AI. Nor the sillies, like crypto-currencies. Nor the dreams, like quickly replacing 263 million US registered passenger vehicles with electrics or automated ones. The important parts are the general and recurrent disruption of everyday working life, social interaction, and information.

IT stands for information technology. With thanks to Niall Ferguson’s posting this week... after the beginnings of the alphabet more than 5,000 years ago, the earliest revolution in information was the printing press, in 1439. Then it took 400 years until the next step, Mr. Morse and his telegraph. Then only 40 years to Mr. Bell, and another 23 to Mr. Marconi and his “wireless.” Radios became common in homes in another 20 years -- music, news, comedy, and propaganda, the “big lie” discovered. The highly distinctive, resonant and compelling voices of FDR, Mr. Churchill, and Mr. Hitler on radios had a lot to do with 20th Century events. Television followed common radio by 25 years. Today we are only 25 years with e-mail addresses, ten with smart phones, and today each day eight billion YouTube videos, four billion Google searches, and two billion Facebook users. We have no idea what we are doing, what we have done, let alone where we are going.

Above all think about the fantastic, high-speed change in American society partly driven by IT and partly by global commerce: the evacuation of the countryside, those who can headed fast for opportunity in cities. And the simultaneous stoppage of movement to anywhere by those left behind. Our Civil War, the opening of the West, the two World Wars and prosperity migration afterwards were great American unifiers, a true melding of culture via constant re-mixing and strangers becoming friends.

Isolate any species and get rapid differentiation. Isolate any group of homo sap and in just a few generations its culture will little resemble the source culture, and will be hostile to it. In the last twenty years we have self-isolated by information, residence, and opportunity as never before in our history.


The US 10-year T-note, looking back at 2017. Everyone expects an increase in their yields, and unanimity sometimes is correct. The ascending bottoms in trading since September are enough to make anyone nervous:


The 2-year T-note is unambiguous. The Fed is going up:


The Atlanta Fed’s last snapshot of Q4 GDP shows a little cooling, a good thing for everyone:


The ECRI confirms the cooling:

Rates Increase on Tax Cuts

Mortgage interest rates increased this past week as Congress passed tax cuts with hopes for higher wages and GDP growth.  Economic data was mostly stronger than expected.  Economic data stronger than expected included the December NAHB Housing Market Index, November Housing Starts and Building Permits, the Q3 Current Account Deficit, November Existing Home Sales, the December Philadelphia Fed Business Index, the October FHFA Home Price Index, November Leading Economic Indicators, November Personal Spending, and November New Home Sales.  Existing Home Sales reached their best level since 2006.  For the first time in 11 years, more than half of those surveyed rated the economy as good or excellent.  Economic data weaker than expected included weekly jobless claims, the final look at Q3 GDP, November Durable Goods Orders, November Personal Income, and the University of Michigan Consumer Sentiment Index.  Q3 GDP was up 3.2%.

The Dow Jones Industrial Average is currently at 24,734, up about 80 points on the week.  The crude oil spot price is currently at $58.22 per barrel, up about $1 per barrel on the week.  The Dollar weakened versus the Euro and strengthened versus the Yen on the week.

Next week look toward Wednesday’s Case-Shiller Home Price Index, Consumer Confidence, and Pending Home Sales Index, Thursday’s International Trade and Jobless Claims, and Friday’s Chicago Purchasing Managers Index as potential market moving events.  Markets are closed on Monday for Christmas.