Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

Posts Tagged ‘Mauldin’

Japanified World Ahead

Posted by hkarner - 15. April 2019

By John Mauldin

April 12, 2019

Losing Decades
Too Much, Too Fast
A $10 Trillion Federal Reserve Balance Sheet
Mastering Private Markets

Regular readers may have noticed me slowly losing confidence in the economy. Your impression is correct and there’s a good reason for it, as I will explain today. The facts have changed so my conclusions are changing, too.

I still think the economy is okay for now. I still see recession odds rising considerably in 2020. Maybe it will get pushed back another year or two, but at some point this growth phase will end, either in recession or an extended flat period (even flatter than the last decade, which says a lot). And I still think we are headed toward a global credit crisis I’ve dubbed The Great Reset.

What’s evolved is my judgment on the coming slowdown’s severity and duration. I think the rest of the world will enter a period something like Japan endured following 1990, and is still grappling with today. It won’t be the end of the world; Japan is still there, but the little growth it’s had was due mainly to exports. That won’t work when every major economy is in the same position.

Describing this decline as “Japanification” may be unfair to Japan but it’s the best paradigm we have. The good news is it will spread slowly. The bad news is it will end slowly, too. Den Rest des Beitrags lesen »

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Capitalism Gone Wild

Posted by hkarner - 6. April 2019

By John Mauldin

April 5, 2019

Unwise Investment
Zombie Companies
Gummed-Up Economy
Uncreative Destruction
The Drive for Scale
Helicopter Governments

Recession is coming. We can debate the timing, but the economy will turn decisively downward at some point. My own analysis, looking at the data available on April 4, says recession isn’t likely this year but unfortunately looks very probable in 2020.

In addition to when it will happen, there’s also the question of how deep the next recession will be. A shallow downturn wouldn’t be fun, but compared to the last one might feel relatively refreshing.

Alas, I don’t think we will be that lucky. I think the opposite: The next recession will be deeper, longer and far more painful to many more people than your average recession, and could persist as long as the last one. That is because the next recession in all likelihood will be truly global. If you sailed through 2007–2009 without your lifestyle changing, I wouldn’t assume it will happen that way again.

Ironically, but not surprisingly, it will be the response to the last recession that makes the next one so much worse. Part of the reason is that investors once again “learned” that if you simply stay the course, the market will get you back to where you were and more. The massive move into low-fee index investing instead of active management will make the next recession more painful. Den Rest des Beitrags lesen »

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The Fed Is Playing a Dangerous Game

Posted by hkarner - 4. März 2019

By John Mauldin, March 1, 2019

Infested with Crawdads
Not Applauding
Steadily More Dovish
#3 Mandate

In an ideal world, we wouldn’t have to read the Federal Reserve’s rabbit entrails to discern the economy. But Since the Fed exists in the real world, and its decisions matter, we have to pay attention.

Just so new and perhaps even old readers know my views on the Fed: I believe we need it to handle the practical matters of the banking system plus interact with other international central banks (we live in a complicated world) and, in the midst of crisis, act as a lender of last resort and liquidity provider. I agree with Walter Bagehot’s (pronounced badget) very important pronouncement (often called „Bagehot’s Dictum“) that “in times of financial crisis central banks should lend freely to solvent depository institutions, yet only against sound collateral and at interest rates high enough to dissuade those borrowers that are not genuinely in need.” That rule or dictum remains wise. Den Rest des Beitrags lesen »

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Recession: Are We There Yet?

Posted by hkarner - 24. Februar 2019

By John Mauldin

February 22, 2019

Dramatic Weakening
Missing Inversion
No Credit Stress
Not Going Global
The Rest of the Story
“I’m an American!”—Pat Caddell—RIP

An old joke says economists predicted 15 of the last 10 recessions. In other words, they’re frequently wrong and often too pessimistic.

I think it’s not so simple. Every recession prediction is eventually correct; some just get the timing wrong. That’s because, so long as we have a business cycle, a recession is always coming. The only question is when it will strike.

There’s also some dispute about what, exactly, counts as “recession.” The usual definition is two consecutive quarters of falling real GDP. But as I’ve written, GDP itself is a nebulous statistic with substantial margin of error. We can never be quite sure.

My own outlook has been consistent: The current growth phase is getting old and will end as they all do, but we probably have another year or so. That is about as far out as my data reads can actually give us any statistical confidence. Macro events like Federal Reserve error, trade war, ugly Brexit, and others could hasten the decline. But as of now, the US and the developed world seem likely to sustain at least mild growth through 2019. Den Rest des Beitrags lesen »

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Modern Monetary Madness

Posted by hkarner - 18. Februar 2019

By John Mauldin

February 15, 2019

Modern Monetary Madness
Pet Economists
Can This Really Be a Thing?
Sound Bite Economics
Do Deficits Matter?
Strategic Investment and Life Planning

More than 10 years ago some Australian readers begin regaling me with the ideas of economist Bill Mitchell of the University of Newcastle in New South Wales. He was teaching about something he called (and he coined the term) Modern Monetary Theory. I looked into it and fairly quickly dismissed it as silly. Actually printing money as an economic policy? Get serious.

MMT is a revival of an early 1900s idea called chartalism. Now it is influencing the thinking of new socialist-like movements in the US and other places and cited by politicians. MMT is increasingly appearing in mainstream media like this sobering Financial Times article. Since it is increasingly discussed in more public venues, you should know more about it and that will be today’s topic.

Modern Monetary Madness

Essentially, MMT espouses that the public through the government owns the process of money creation, and that in addition to borrowing and taxing, should simply issue currency as payment for its obligations. This is not the sleight-of-hand that quantitative easing was. This is direct monetization in lieu of borrowing. Den Rest des Beitrags lesen »

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Capitalism Without Competition

Posted by hkarner - 12. Februar 2019

By John Mauldin

February 8, 2019

Monopoly Rents
Not Free to Choose
Data Oligopoly

The Soviet Union’s collapse and spread of semi-free markets through Eastern Europe seemingly ended the socialism vs. capitalism argument. Capitalism had won. Collectivist economies everywhere began turning free. Even communist China adopted a form of free market capitalism although, as they say, with “Chinese characteristics.”

The fruits of capitalism: millions of people freed from abject poverty and a few who got rich indeed. Nor is this a recent phenomenon. Capitalism in the last three centuries, with all its faults and problems, with all its contradictions, generated the greatest accumulation of wealth in human history. From a few hundred years ago when the vast majority of the people of the world lived below the poverty line, barely above subsistence levels, today we have less than 10% doing so and that number is shrinking every year.

Yet now, perhaps because this prosperity is so easily taken for granted, some on the left are again embracing socialist ideas and irrationally high tax rates. What drives this thinking? One problem is “capitalism,” in practice, does indeed provide many points for justifiable criticism. It is, to paraphrase Winston Churchill, the worst of all systems, except for everything else. Den Rest des Beitrags lesen »

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How Should We Then Invest?

Posted by hkarner - 27. Januar 2019

January 25, 2019

To be absolutely certain about something, one must know everything or nothing about it.“

—Henry Kissinger, former US Secretary of State

This month I’ve discussed some possible pathways for 2019. But beyond that, for the past year or so, I have been talking about what I think may unfold over the next decade. The term I often use is The Great Reset, but in my mind it’s more than just resetting global debt.

I think a number of equally important trends, all extraordinarily eventful, some amazingly positive and some frustratingly negative, when taken all together (which we’ll have to, like it or not) will produce an era unlike anything previously seen in human history. I call it the Age of Transformation. Den Rest des Beitrags lesen »

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Bull in the China Shop

Posted by hkarner - 20. Januar 2019

By John Mauldin

January 18, 2019

Demand Pulled Forward
Job Jitters
Credit Intensity
Rushing the Process

The production of souls is more important than the production of tanks…. And therefore I raise my glass to you, writers, the engineers of the human soul.

Joseph Stalin, 1932

[Our purpose is] to ensure that literature and art fit well into the whole revolutionary machine as a component part, that they operate as powerful weapons for uniting and educating the people and for attacking and destroying the enemy, and that they help the people fight the enemy with one heart and one mind.

Mao Zedong, 1942

Art and literature is the engineering that molds the human soul; art and literary workers are the engineers of the human soul.

Xi Jinping, 2014

This week’s letter focuses on China’s economy. We’ll look at some numbers showing the challenges China faces, but they don’t explain something important. The way China will meet those challenges is going to be substantially different than we would see in the West. So I want to start with a little context.

When European Central Bank President Mario Draghi promised to solve the financial crisis with “whatever it takes,” central bank policy was his only tool. Xi Jinping has a vastly larger toolbox. It is hard for us in the Western world to understand that. Xi not only has every tool a top-down government can have, he has experts to wield them, all of whom are 100% aligned with his goals. Den Rest des Beitrags lesen »

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The Misunderstood Flattening Yield Curve

Posted by hkarner - 17. Dezember 2018

By John Mauldin

December 14, 2018

What we see now is really more of a flattened yield curve, with a smaller but still positive spread between short-term and long-term interest rates. That’s not normal, but it’s also not a recession guarantee. However, when we combine this with assorted other events, it adds to the concerns.

I’ve been writing in this letter about negative yield curve since 2000, when the inverted yield curve said there was a recession in our future and I called a bear market in equities. Ditto for 2006, though that time the yield curve inverted long before the stock market turned. Today, we’ll look at what the yield curve is really telling us.

Now let’s dive into the Great Flattening Yield Curve and what it really means.

Breathless Reporting

In July 2017 I wrote a letter called Happiness Is a Normal Yield Curve and now it seems like about 10 years ago. The Fed was still in tightening mode at that point and short-term rates were rising faster than long-term rates, producing a flatter but not inverted yield curve.

(Quick explanation for the uninitiated: The yield curve is simply a graph showing current interest rates for various maturity periods, with rates on the vertical axis and time on the horizontal. Normally it slopes upward from left to right. All the discussion and drama are about the angle of that line.)

Here is the latest view, via GuruFocus.

The light gray line is the yield curve two years ago, the medium gray is one year ago, and the blue is now. You can see the curve went from very steep to much less so in this period. That is what we mean by “flattening.” It isn’t fully flat yet, but is moving in that direction.

Notice also in the blue line, the area between 3Y and 5Y actually angles slightly downward. That is the “inversion” the media is reporting so breathlessly. It is really more of a bump, if that. As I write, the 3Y is actually 2.84% and the 5Y is 2.83%. So the mainstream media, business media, and writers are getting all breathless about 0.01% on just one part of the curve. Which is kind of, sort of important to watch but it doesn’t really mean anything in terms of the economy, at least yet.

That said, it is still remarkable that 1-year Treasury and 5-year Treasury securities, and everything in between, all have almost exactly the same yields. You don’t see any such plateau in the 2016 or 2017 curves.

For the record, here’s a chart of interest rates for the last two weeks directly from the US Treasury. What you can notice is the fact that short-term rates are rising and long-term rates are falling. This is what you would see ahead of a full inversion but the process can go on for a long time.


Source: US Treasury

Yields are supposed to reflect risk, and risk grows with time. The chance something bad will happen in the next five years is higher than the chance something equally bad will happen in the next year. Lenders, i.e. bond investors, should demand a higher yield as compensation for that higher risk. Presently they aren’t.

I show all this to clarify a point the media is obscuring: The full yield curve is not inverted. Only a small part of it is inverted, which is unusual but no reason to panic. It is nowhere near the kind of inversion that might signal recession. And even if it were, it wouldn’t mean recession is right around the corner.

An Inverted Yield Curve Is Just a Fever

I’ve been using an analogy in my speeches recently that has received excellent feedback, so I want to share it with you. Many media sources and writers seem to indicate that an inverted yield curve causes recession. That is simply not true.

Think of an inverted yield curve as a fever. When your body gets a fever, the fever is not the cause of the sickness. It just says something’s wrong with your body. You have the flu, appendicitis, or some other ailment. The fever indicates you are sick but not necessarily what the sickness is. And typically, the higher the fever the more serious the condition.

It is the same with the yield curve. The more inverted the yield curve is and the longer it stays that way, the more confident we are that something is economically wrong that may show up as a recession sometime in the future. More on that timing below.

Early Predictor

In a true inversion we would see the entire curve angled down from left to right. That last happened in 2005. Were we in recession then? No, not at all. The economy was booming. In fact, the yield curve stayed inverted until mid-2007. Some of us saw cracks forming in the economy, and said so at the time. But the actual recession would not begin until December 2007.

That’s a longstanding pattern. The inverted yield curve has been a pretty reliable recession indicator but it shows up far in advance—months or even more than a year. We might better think of it as signaling the cycle’s “blowout” stage. People see the inversion, observe nothing bad happening, then throw caution to the wind.

Another way to illustrate this is with a yield spread, i.e., a long-term yield minus a short-term yield. You can graph the difference and it goes below zero when the short-term yield is higher, meaning an inversion exists between those two points on the yield curve. This chart shows the spread between 10-year and one-year Treasury yields.


Source: GuruFocus

The gray vertical bars are recessions. You can see how the spread dropped below the 0% line right before each one, and is now close to that point again. But notice also how long it stayed inverted before the last recession, and how far in advance. The 10Y-1Y spread dropped below zero in January 2006, came back above for a little bit, stayed there and was moving higher when the recession finally began. The same happened in 2000. In fact, by the time actual recession arrives the yield curve can resume a normal pattern.

Here’s a slightly different chart from FRED (the St. Louis Federal Reserve all things economic database), using the 10Y-2Y yields. This is the “tens and twos” spread traders usually watch.


Source: FRED

We again see the same pattern. You can vary the parameters but the broad principle holds pretty well. Yield curve inversions precede recessions by anywhere from a few months up to two years.

Recession Probability

This awareness that an inverted yield curve signals recession isn’t new, nor did it appear from thin air. My first economic mentor, Dr. Gary North, was teaching me about inverted yield curves in the early 1980s. To my knowledge, there was no real research, just anecdotal observational analysis, but it still held. Then my friend and economist Campbell Harvey, now at Duke University, first proved its forecasting accuracy in his 1986 University of Chicago doctoral dissertation. Others quickly confirmed and expanded on his conclusions.

In 1996, New York Fed economists Arturo Estrella and Frederic S. Mishkin authored a paper comparing the yield curve to 19 other indicators and, importantly, finding a connection between the yield spread and recession probability.

To summarize, Estrella and Mishkin found the yield curve is most predictive of recession a year or so ahead of time. In fact, they concluded an inverted yield curve was the only useful predictor of recessions. Examining all the data from 1960-1995, they calculated the probability a recession would occur four quarters ahead, based on the spread between three-month and 10-year Treasury securities. They summarized it in this table.


Source: New York Federal Reserve Bank

Again, the yield curve is inverted when the spread is negative. Estrella and Mishkin found recession probability begins rising as the spread drops toward and then below zero. But notice how long it takes. Even when the curve mildly inverts with the spread at -0.17%, the odds of a recession in the next year are still only 30%.

But from a practical standpoint, by the time their model shows a 30 or 40% probability of recession, there has always been a recession following that point.

Your next question, of course, is where are we now. The 3M/10Y spread is about 0.48%. The table suggests this is consistent with about a 15% recession probability four quarters from now. Not so bad, if you are a bull. It means odds are good we’ll get through 2019 without recession. Maybe longer, if the Fed pauses tightening next year and long-term yields stay where they are.

We are not out of the woods, though. We may just be entering them. Here is the 3M/10Y spread, the one Estrella and Mishkin used in their study, since the last recession ended.


Source: FRED

The spread peaked almost coincident with the last recession’s end (the gray area at left) and has been dropping ever since. The ride down was smoother since mid-2017. Another two years like the last two will put the spread around -1.0%, meaning a recession is likely in 2020. The decline could also steepen and bring recession sooner.

After they wrote this paper, Mishkin went on to be a Fed Governor from 2006-2008 and is now at Columbia University. Estrella is still at the New York Fed and has been keeping these numbers updated. Here’s his latest chart showing recession probability.


Source: New York Fed

As you see in the lower right of the chart, recession probability has been rising and is now around 15%, consistent with their earlier work. It is not rising as quickly as it did ahead of the last recession.

A little history: In September 2000 the yield curve was seriously inverting. I called Estrella to talk about the importance of the curve. I wrote then:

First, he told me he had done another study in 1998 comparing even more predictors. The latest study involved 30 potential predictors of a recession. The conclusion of that study was that the 90-day average of the yield curve was still the most reliable predictor of the 30 they studied, so score one for taking this current situation more seriously.

But he would not go so far as to say that he personally saw a recession coming. I would like to consign that reluctance to the fact that he was still at the Fed.

In 2006, I called another Fed researcher and asked about recession probability. Again, there was great reluctance to actually predict a recession. This Federal Reserve economist actually went so far as to say (I swear, the person really said this): “There are reasons to believe it may be different this time.”

Later in 2006, I was on my friend Larry Kudlow’s CNBC show with Nouriel Roubini and John Rutledge. Larry and John were both adamant the bull market was in no way over and no recession was on the horizon. Nouriel and I saw it different. Oddly, we were all correct.

How can that be, you ask? A bear market began about six months after the show and recession six months later. But the stock market rose almost 20% after that show as well, so if you had exited the stock market, you would’ve missed a 20% rise (but still avoided a 50% bear market).

Sidebar: That has now happened to me twice. I’ve called recessions early and missed some opportunities. That is one of the reasons that I now use money managers with quantitative timing models. At the beginning of 2017, the four managers I use were heavily invested in equities. This year they have slowly moved into cash and are now as a group holding a significant portion (over 70%) of cash and cash equivalents. But then again, their models could become bullish. I have come to the point that I simply trust their models. For me, it feels a lot better than trying to make a prediction based upon my own analysis.

I haven’t found a way to predict the future accurately, and certainly not with anything close to precision timing. And so while I can watch the yield curve and begin to get an idea of when there might be a recession in our future, applying that in a portfolio is difficult at best.

A Little Time

So pulling all this together, the flattening yield curve is a fair bit away from signaling a recession in the next year. That could change but it’s where we are now. But it is certainly something to watch.

On the other hand, history never repeats itself quite so perfectly. Other things are different—all the European Threats I described last week, or the prospect of wider trade war as President Trump tries to make China change its ways.

I would not conclude from the yield curve that recession is either imminent or impossible. It says what I already knew: A recession will strike at some point, but we probably have a little time. I suggest using that time to prepare. As I’ve been saying for the last few months, you should prepare to exit positions that may become illiquid, think of ways to hedge, and generally get ready for a volatile 2019. Think of cash as an option on the future.

The high-yield bond market is also illustrative. Here is a chart from a webinar I just did with Steve Blumenthal.


Source: CMG Capital Management (Click to enlarge chart)

Steve has been timing high-yield bond markets since 1992. I was actually timing high-yield bond markets for clients in the early 2000s when Steve and I met and I realized his system was better than mine. He’s had three incredible runs since then in which he exited high-yield bonds and then his quantitative system said to get back in. He will tell you that he was extremely nervous every time but he did what the model told him to do.

Extraordinary gains followed because as rates fell the bonds delivered both high yields and capital gains. Steve feels a similar opportunity is coming. But you’ll need some cash to participate when that time arrives.

I think we’ll see a host of opportunities at the bottom of the next recession. Seizing them will take an iron stomach, but it’s at the bottom of the markets, when everybody else is panicking, that you find real life-changing opportunities. While cash may seem unattractive today, it is really an option on future opportunities

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European Threats

Posted by hkarner - 10. Dezember 2018

December 7, 2018

Someone asked recently how many times I had “crossed the pond” to Europe. I really don’t know. Certainly dozens of times. It’s been several times a year for as long as I remember.

That makes me an extremely unusual American. Most of us never visit Europe, except maybe for a rare dream vacation. And that’s okay because our own country is wonderful and has a lifetime of sights to see. But it does affect our perspective on the world. Many of us don’t fully grasp how important Europe is to the US and global economy.

We may soon get a lesson on that. I’ve talked about Italy’s ongoing debt crisis, which is not improving, but Europe has other problems, too. Worse, events are coalescing such that several potential crises—all major on their own—could strike at the same time, and not too long from now. As I’ve been saying for about three years, there is no reason for the US to have a recession on its own. I think events elsewhere will push us into it, and Europe is a really big current risk. I know from my visits to Europe and discussions with friends there, they see all sorts of problems with Trump and particularly his tariffs.

However, another concern is that the various actors in Europe are not playing nice with each other. I tell my European friends the same forces that yielded Trump are coming to a European country near them. In some places, they already have. Den Rest des Beitrags lesen »

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