The market has now delivered 100 basis points of easing in the ten-year Treasury window since the end of last October. On the 30-year bond, you would have made a 20% profit if you both it last October and sold it today, compared to a 3.5% profit on the S&P Composite over the same period. That is a major, major sentiment shift. That means that a number of people short debt with riskier operations than the S&P Composite are about to face margin calls and rollover difficulties. We will shortly see how solvent the market judges them.
Meanwhile, There was essentially no news about real GDP last week: The Federal Reserve Bank of New York nowcast stands at 1.8% for 2019:Q3.
- The Federal Reserve has, largely through jawboning, eased policy substantially over the past six months. But the trade wars Trump is waging is a major source of uncertainty, and a possible recession risk.
- U.S. potential economic growth continues to be a hair above 2%/year.
- The manufacturing sector is weak, but it is no longer large enough for mild weakness in manufacturing to send the economy into recession.
- There are still no signs the U.S. has entered that phase of the recovery in which inflation is accelerating, or of any need for interest rate normalization: secular stagnation continues to reign.
- The Trump-McConnell-Ryan tax cut has been a complete failure at boosting the American economy through increased investment in America, but it has been a success in making the rich richer and thus America more unequal, and it delivered a short-term demand-side Keynesian fiscal stimulus to growth that has now ebbed.
- Those who beat the drum for it owe us an explanation for why they got it wrong. They have not provided one: shame on them.
A change from one month ago: The market continues to lower interest rates at the long end of the yield curve.
A change from three months ago: A no-deal Brexit is now not just a possibility, but more likely than not.
A change from six months ago: The Federal Reserve has—behind the curve—become convinced that it raised interest rates too much in 2018, and is now likely to cut them.
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