It occurred to me recently that Congress may have just reached the same level of delusion under which the US consumer has been operating for the last few years. I hear elected officials in the news telling banks how to lend. They want banks to just start lending out the TARP money, and to lend it out quickly, with no mention of credit quality. It’s almost as if members of Congress don’t realize how this mess happened. In an environment where marginal credits are becoming terrible credits Congress is pushing banks to ignore prudent lending standards, disregard their fiduciary responsibilities to their shareholders, and keep feeding the cycle where you make loans to people that you know can’t pay you back in the hopes that it will all work out somehow. I don’t know that I can find a group of people more out of touch with reality currently than our Congress. I’m going to track down Baghdad Bob, he would be a great spokesperson for them.
We’ve been saying for a while that we expect the 10 year Treasury to remain in a volatile range around 3.70% and that’s what we’ve been seeing. Big swings both ways with a tendency to settle in around 3.70%. This week has been no exception. The 10-year Treasury traded off yesterday despite the fact that Initial Jobless Claims pushed to highs they haven’t seen since 2001. Today the Advance Retail Sales numbers undid much of yesterday’s move in Treasuries. Fed Funds are currently trading at 25 bps.
Fed Funds futures continue to price in a 100% chance of a cut at the December meeting with 74% of the probability placed on a 50 bps level for the overnight rate after the Dec 16 FOMC meeting. Bernanke’s recent comments acknowledge that monetary policy actions thus far have not reduced the strains in the markets. He further stated that central banks will remain coordinated in their monitoring of developments, and are resolved to take additional measures if necessary.
With Advance Retail Sales dropping by the largest amount since the data series was created in 1992 I thought it was an opportune time to take an historical look at some of the recent as well as upcoming economic data. Below you’ll see a graph of Advance Retail Sales going back to the start of the index in 1992. I also plotted the 30, 60, and 120 day moving averages. You’ll notice that the giant drop off on the far right takes us into new territory. The prior low in late 2001 was associated with the last recession dated by the NBER (National Bureau of Economic Research) March 2001 to November 2001.
After I looked at this series I pulled up the economic releases that we have on tap for next week. I took several of those indices and plotted their long term performance versus all recessions since 1960 (as dated by the NBER). Below is the economic data release calendar for next week. I pulled several items from this list and plotted their long term history versus all recessions since 1960 (as dated by the NBER). I think this provides some color as to where this economy is currently. What the charts don’t reflect is that these numbers are developing against a backdrop of a global liquidity crisis.
Initial Jobless claims were released yesterday at 516k versus an expectation of 480k. The graph below indicates that jobless claims are pushing into levels that are historically associated with recession. The red dots indicate recessions and the red circle highlights the most recent reading.
Next week we get a look at Industrial Production which measures real output as a percentage of real output in the base year (2002). The graph below shows the month over month change in Industrial Production. The red dots indicate recessions and you can see that this index is clearly moving into a bad neighborhood. We get our next look at Industrial Production on Monday the 17th.
Below is a graph of the Philadelphia Fed Index. This tracks manufacturing activity in the Philadelphia Federal Reserve district. The next release is on Thursday the 20th. Again the red dots correspond with recessions, the red circle indicates the last reading.
So that’s a quick review of where things are this morning and what we have on tap next week. Spreads on many products continue to be very wide, offering great opportunity to grab some yield before all of the TARP money is deployed. As the TARP plan progresses and banks begin receiving and deploying that capital in leverage programs we expect to see tremendous pressure on spreads.
If you have any questions on this material or if there is anything I can be doing for you just let me know.
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