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5 Things To Ponder: Random Musings

Submitted by Lance Roberts via STA Wealth Management,

This weekend's reading list is a bit of a hodge-podge of reads on a variety of different topics. However, before we get into it I wanted to address an interesting statement by the Atlanta Federal Reserve President Dennis Lockhart who Thursday:

"Atlanta Federal Reserve Bank president Dennis Lockhart said on Thursday there was little risk of a misstep that would force the Fed to lower rates once it begins raising them.


The economy is in solid shape to weather the upcoming turn to tightening monetary policy Lockhart, said at an investment education conference in Detroit.


"'Conditions are pretty solid,' said Lockhart, who regards an initial rate hike at the June, July or September Fed meetings as a high probability. 'I take the decision pretty seriously,' Lockhart said. 'Once we start, I want to be able to move deliberately towards higher rates.'"

This is a pretty common meme among the majority of economists as of late, and particularly surprising coming from the Atlanta Fed President considering:

  1.  The U.S. is currently more than 6-years into an economic recovery (long by historic standards), and;
  2.  The Atlanta Fed's own GDPNow forecast is pegging a near 0% growth rate for the first quarter.

But let's take a look at the decline in durable goods orders this week. Paul McCulley, the former legendary economist and fund manager at PIMCO, viewed durable goods a bit differently than the mainstream analysis generally given. He preferred the year-over-year trend of the 3-month moving average of core CAPEX orders as an indicator of broader economic activity over the next few quarters. If you are currently "bullish" on the direction of the US economy, you may want to take a closer look at the chart below.

Secondly, core CAPEX has been negative on a monthly basis for 6-consecutive months. Since 1992, there have only been 5-instances where core CAPEX orders have been negative for 4-or more consecutive months. The first three instances were leading indicators of future recessions. In 2012, there were 6-consecutive months of decline as the economy got very close to a recession but was saved by Central Bank interventions and the warmest winter in 65-year. The latest core CAPEX decline capped a second 6-month period as it appears that Q1 GDP will ring in close to zero.

I am not suggesting that the economy is about to slip into an immediate recession. However, I am suggesting that underlying economic strength in the U.S. is likely much weaker than headline statistics suggest.

Furthermore, as discussed Wednesday, the deterioration in underlying price momentum in the market is also raising other warning flags. To wit:

"...the price of the market currently remains in a positive trend but the underlying momentum and strength measures are showing signs of a negative divergence. This suggests that while market prices are trending higher, the risks of a correction are currently rising as the 'supports' weaken.


The negative divergence of the markets from economic strength and momentum are simply warning signs and do not currently suggest becoming grossly underweight equity exposure. However, warning signs exist for a reason, and much like Wyle E. Coyote chasing the Roadrunner, not paying attention to the signs has tended to have rather severe consequences."

So, with that being said, let's get to our weekend reading list.

1) The Meaning Of Liquidity by Howard Marks via Oaktree Capital

"Sometimes people think of liquidity as the quality of something being readily saleable or marketable. For this, the key question is whether it’s registered, publicly listed and legal for sale to the public. "Marketable securities" are liquid in this sense; you can buy or sell them in the public markets. "Non- marketable" securities include things like private placements and interests in private partnerships, whose salability is restricted and can require the qualification of buyers, documentation, and perhaps a time delay.


But the more important definition of liquidity is this one from Investopedia: 'The degree to which an asset or security can be bought or sold in the market without affecting the asset's price.' (Emphasis added) Thus the key criterion isn’t 'can you sell it?' It’s 'can you sell it at a price equal or close to the last price?' Most liquid assets are registered and/or listed; that can be a necessary but not sufficient condition. For them to be truly liquid in this latter sense, one has to be able to move them promptly and without the imposition of a material discount. "

Read Also: Bond Market Fears Liquidity Crunch Repeat by David Oakely via FT


2) There Is No Bubble In The Bond Market by Brad DeLong

"When we call something a "bubble" we attach a number of meaning-tags to it. Here are three:

  • Bubbles are collective irrationality.
  • Bubbles pop.
  • Owning bubbly assets entails large long- and fat-tailed risks.

Safe bond prices are certainly elevated?—?more than elevated: absurd. The Federal Reserve has squeezed the term premium by shrinking the supply of long-term bonds and put the underlying fundamental future short rate to which the term previous applied on a very low path.


But does holding bonds entail accepting large long- and fat-tailed risks? Only if you must sell your bonds in the future. If you have the option to hold them to maturity, your risks are bounded and very small. What you are complaining about is not risk, but rather lousy expected return. And even if you cannot hold them to maturity, the fact that others can hold them to maturity provides a pool of demand that limits how far bond prices can crash."

Read Also: A Bond Bubble Is Very Different From A Stock Bubble by Cullen Roche via Pragmatic Capitalist

And Read: Student Loan Forgiveness Is A Non-Solution via The Libertennial


3) The Current Boom Will Turn To Bust by Henry Blodget via Business Insider

"Bubbles" are rare, extreme events in which investment activity and valuations temporarily deviate wildly from historical trends — and then crash back down to the trend line in a colossal collapse.


"Booms," meanwhile, are far more common. They also see ever-increasing investment activity and valuations, and they also end in mean-reversion ("busts.") But the magnitude of the dime-a-dozen boom-bust cycle is nothing like the peak and valley that you experience in a bubble."

But Also Read: This Is Nothing Like The Market Back In 2000 by Brett Arends via MarketWatch


4) Gundlach - Don't Bet On Higher Rates by Robert Huebscher via Advisor Perspectives

"Gundlach reiterated his belief that raising rates would be a mistake due to the weak global economy and low inflation. Even if the Fed were to take that step, he said, it would eventually be forced to reverse and lower rates, as several European countries have had to do after attempting premature rate increases.


'I’m afraid that the Fed is intent on being a blockhead and raising interest rates against this backdrop,' he said, 'and further strengthening the dollar, weakening the economy, weakening corporate earnings, and basically having to reverse policy.'


Demographic problems and the growth of the federal deficit will push rates higher, he believes, but that might not occur for another five years. Gundlach also boldly predicted an inglorious fate for Detroit’s automakers."

Read Also: Why Yellen & The Feds Are Bubble Blind by David Stockman via David Stockman's Contra Corner


5) Here's Why We "Appreciate" Home Sales by Lee Adler via Wall Street Examiner

"The problem is that ZIRP suppresses inventory. Owners who would ordinarily cash out at a certain point in their lives, don’t, because the opportunity cost is too high. Their house is worth more to them as an asset, than cash would be, so they hold on to their properties rather than liquidate. As a result, listing inventory stays near record lows. Low inventories mean that prices will continue to “appreciate” even though demand remains modest."

Read Also: The Fed's Artifical Steepening Of The Yield Curve by Jeffrey Snider via Alhambra Partners

Bonus Read: Barclay's Says Oil Bottom Not In

Barclays sees prices bottoming somewhere in the mid-$30s for West Texas Intermediate crude oil and in the low- to mid-$40s for Brent and expects "further widening in oil market contangos as more expensive storage needs to get incentivised." 

Over the last few months, the number of oil rigs in use in the US has collapsed, but Barclays doesn't think that enough production has yet come offline for this to impact production. Barclays writes that:

"The decline in US rig counts has been rapid and substantial (now down by almost 50% from its October 2014 high), but is unlikely to be an accurate signal of future production trends because usually when falling prices force rigs to decline it is those that are least productive that get cut first, while surviving rigs tend to be left on the most productive areas."

Bonus Video: Daniel Kahneman On The Riddle Of Experience And Memory

"Using examples from vacations to colonoscopies, Nobel laureate and founder of behavioral economics Daniel Kahneman reveals how our "experiencing selves" and our "remembering selves" perceive happiness differently. This new insight has profound implications for economics, public policy — and our own self-awareness."

Via Ted Talks

"Man looks in the abyss, there's nothing staring back at him. At that moment, man finds his character. And that is what keeps him out of the abyss." - Lou Mannheim, Wall Street

Have A Great Weekend.