When your glass is half-empty .....

Tuesday 1st November 2016

  

When your glass is half-empty .....

ref:- "The Market Sends a Miserable Message: More Inflation, Weak Growth", The Wall Street Journal

A downbeat assessment of how things stand by James Mackintosh of the WSJ, who is unlikely to be accused of looking at the world through rose-tinted spectacles ..... here he takes the two big market moves in October, which in different circumstances might be construed as healthy signals, and draws some pretty pessimistic conclusions.

A big sell-off in bond markets (with yields sharply higher) and a strong US dollar could be taken as two prime indications that the US economy is going well. At the beginning of the year the expectations were for solid US growth of about 2.5% leading to higher rates and bond yields and a stronger dollar. As it happened, a pretty turgid global economic performance undermined those expectations and yields and the dollar both moved sharply lower. Could it be that the reversal of those more recent moves reflects a belated return to a healthy US environment?

Not according to Mr Mackintosh, who suggests that the markets are pointing to a future of higher inflation but only weak growth. That's a combination that is bad for consumers (higher prices), bad for companies (stagnant growth) and bad for investors as prices of both bonds and equities suffer.

The markets are telling us quite clearly about a rise in inflation expectations, with the average rate over the next 10 years priced at 1.74% (highest level of the year so far) after starting 2016 at 1.55%. The 5yr / 5yr forward rate, which effectively strips out distorting short-term moves such as oil-price swings, is also at a high for the year of 1.84% (after being at 1.4% in February and again as recently as June).

Growth expectations are not so easy to read, but one measure is the yield on TIPS  --  Treasury Inflation Protected Securities. A stronger economy should mean that demand for money outstrips price rises, pushing up yields. But the real 10yr yield is little higher now than the rate it reached in the post-Brexit crash: TIPS offer 0.12% (your return above inflation), after starting the year at 0.72%. Forecasts for weaker growth tally with what's being said by economists. Consensus Economics point out that their surveys show that growth expectations now sit at 1.5% for 2016 and 2.2% for 2017  --  down from 2.5% and 2.4% respectively at the start of the year.

Mr Mackintosh has more to say on the theme, parts of it more convincing than others, but does concede that there are some extraordinary factors exerting an undue influence (not least the US presidential election) and that the current situation is not as bad as one alternative we were worrying about not long ago ...... deflation. Not all would be as pessimistic as he, but just to leave us in no doubt as to where he stands he leaves us with a double-whammy of a thought:

"There's bad news either way: The obvious investments offer miserable rewards. Treasurys (sic) offer the best protection against deflation, but the 10yr still yields just 1.84%. TIPS offer the best protection against inflation, and yield only 0.12% Making money in a low-growth world is hard".