The long, Easter-Passover-Equinox weekend really began on Thursday with another half-asleep but goofy day in stocks, the Dow up 254. In the previous six days the Dow moved 255 points, 9, 345, 669, 424, and 725. Volatility is so high that up or down doesn’t matter.
On this holiday, whether you are moved by spiritual or astronomic/seasonal events, take a little time to reflect, first upon interest rates, then go big: think about civilization. :-)
In the bond market, and I suspect at the Fed there is nothing going on but reflection. A trader might say (cleaned up): “Does ANYBODY know what is happening?”
The Fed raised the overnight cost of money last week by .25% to 1.75% and said it would hike at least twice more this year and probably three times next year. Then the yield on 10-year T-notes went down. After repeated tries over two months to break 3.00% going up, 10s settled this week at 2.74%, barely a half-percent above the Fed-sensitive 2-year T-note at 2.27%. That closing spread is one of the very best signals of an overdone Fed and a slowing economy ahead.
Alternate explanation: global pension and life insurance funds see an irresistible buy in the US 10-year yielding close to 3.00% for the first time in five years. The only government bonds issued in any magnitude and with credit comparable to ours are German 10s paying 0.498%, and Japanese paying 0.042%. Buy American!
Can the economy be slowing, with all of the tax and budget stimulus? The Fed’s recent estimate of the bang for each buck of stimulus in 2018 is forty cents, and in 2019, twenty cents. The rest is just running a hose into already rich pockets, without economic effect.
From there, telescope your weekend reflection away from markets and all the way out to civilization. In a globalizing world we still celebrate these ancient holidays, Easter for two thousand years, Passover 1,300 years farther back, and the equinox... who knows when the first of us arranged stones to mark the seasons of the sun. And we are unchanged since.
Civilization requires organized cooperation, which means government -- good or bad, durable or fragile, pleasant to some and resented by others. Mired as the US seems to be in discord, look outside, all around. Perhaps the biggest complication in civilization is culture, which is both extremely resistant to change and yet changes. In political culture, every nation tends to get the government it wants (or deserves), democracy or not.
Xi Jinping is now widely described as an “autocrat.” No, he is not. China open-ended his term limit after 30 years of ineffective General Secretaries, whose five-plus-five-year terms resulted in pointless bureaucratic struggles for succession and deepening economic risk. Debt-heavy and unproductive state industries with tremendous political power have increasingly threatened the entrepreneurial success of the rest of that economy.
China’s 5,000-year risk has been centrifugal, bloody disorder. China’s collective leadership has given maximum power to Xi because it will be required to hold the place together, and for China’s next steps. Signals: his succession rivals have not been purged. Xi shows neither self-admiration nor hereditary ambition. His daughter, Mingze went to Harvard (under pseudonym), and she and his famous wife keep the lowest possible profiles.
China’s business is business. After 500 years of foreign invasion and humiliation, it is very determined, the whole organized and focused on economic success and power -- and notably disinterested in military adventures.
Angela Merkel is at the end of her fruitless try for one-Europe on German terms, but Germany itself is a unified economic machine with a huge trade surplus, and a budget surplus. Emmanuel Macron is giving France its best dose of economic salts in the history of the 5th Republic (1958). The left is in the streets of course, but the majority is with super-competent Macron. Theresa May, undermined from all sides appears to be turning Brexit into a success with far less pain than even its supporters imagined. Separate culture, separate from Europe.
Japan is a special case so strange to outsiders, in a terrible demographic hole but a fiercely competitive economy. South Korea despite northern risks, Taiwan despite China’s ambition to absorb a runaway province -- these places will be our economic competitors no matter what, their cultures intent on economic success.
Look around anywhere else, and the will of the people prevails, no matter how odd.
Not even Putin is a true tyrant. He and his cronies have majority support. Any Russian living during the Czars or Soviets would instantly recognize Russia today -- a cruel strongman at the top, a rotten nobility dedicated to stealing from each other, a peasantry content to live under predestined brutality, all held together by secret police.
Eastern Europe’s rejection of Western-style one-Europe and liberal democracy -- that’s neither “populism” nor creeping autocracy, it is who they have always been. A majority of Turkey supports Erdogan’s reversion to Ottoman illnesses, Turkey’s secular 20th Century the aberration. Even Castro’s heirs to Cuba enjoy popular support. Maduro’s Venezuela and Kim’s Korea are our few modern tyrannies. Others hang in the balance of cultural imperative versus modern economic demands: India, Pakistan, Saudi Arabia, Iran, and much of South Asia, Central and South America, and Africa.
So, apply the same tests of history and progress to us, and where are we this holiday? Take heart! Our last 18 years of bad leadership have been the aberration. Twenty years ago we had a budget surplus, the Fed discussing how to invest excess tax revenue after we had paid off the national debt. No kidding.
As everywhere else it’s convenient here to blame leadership or political opponents for an unpleasant interval. The US is unique in the world for its system of laws and yet chaotic freedoms, and our ability to find economic success while the federal government is tangled in its underwear. However, given the rise of China and determination of other competitors we may not for much longer get away with our preference for political mud-wrestling.
Our political divide has widened, election results oscillating across the divide. But there’s a good chance that we’re growing tired of ourselves. If we are open to the idea, leaders will begin to speak of the things we can agree on instead of feeding division. It’s all up to us, of course. We said to ourselves at the outset, “From Many, One” and have lost the thought periodically, but always re-taken that vow. We have not changed.
The US 10-year T-note in the last five years. To stall just below that gorgeous double-top in 2013... confounding:
The 10-year in just the last week fell of the sled, but without any news as cause:
The Fed-signaling 2-year in the last year has no slide at all, but has paused despite “everyone knows” more hikes are coming:
The Atlanta Fed’s GDP tracker has rebounded from a slide below 2% for Q1 2018, but the gain is due to inventories accumulating -- actually a sign of slowing ahead:
The always reliable ECRI is steady in a moderate spot: