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Peakish Growth? The 10Y Yield Decline Is More Signal Than Noise

Peakish Growth? The 10Y Yield Decline Is More Signal Than Noise

Authored by Samuel Rines, Chief Economist at Avalon Advsiors,

“For a climber,…

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This article was originally published by Zero Hedge
Peakish Growth? The 10Y Yield Decline Is More Signal Than Noise

Authored by Samuel Rines, Chief Economist at Avalon Advsiors,

“For a climber, saying that you are stopping by Everest is like saying that you are stopping by to see God.”

- Roland Smith, Peak

  • The pace of GDP growth is likely to peak in Q2. That makes sense given the amount fiscal stimulus in the first few months.

  • But it is the pace of deceleration that matters more, and that remains an open question.

  • This is interest because the pace will affect inflation, yields, and the Fed.

  • At the moment, it looks “peakish” from GDP expectations to Fed hike timing to CPI forecasts.

Lots of Lines… But Useful

It is a messy chart. But it communicates the point of growth being peakish for the moment and the deceleration in the future. For the second quarter, the growth expectations may be a touch high given the lagging labor market recovery (more on that topic below). That should spill into the third quarter as individuals return to work.

But the story is really about the fourth quarter and the beginning of 2022. Those estimates remain well above the longer term “potential growth” of the U.S. That is somewhere around 2.25%. This summer will continue to see eye-popping GDP and growth statistics as the economy reopens. But the question is what happens after that.

Lots of Churn

There has been a tremendous amount of commentary and headlines surrounding the JOLTS report with much of the focus on the number of job openings soaring. But what might be more important for understanding the labor market dynamics at work here is how many people are quitting their jobs. There is an incredible amount of churn in the U.S. labor force. That 3.1% quit rate represents just under 4 million people.

One side-effect of rising wages is to incentivize job switching. It may turn out that the wage gains were largely captured by quitters and switchers - not necessarily those coming back to the workforce. The churn helps explain the lack of an uptick in labor force participation while hires have moved above pre-covid levels.
How does this tie into the narrative around GDP? With this type of dynamism and job openings, it increases the likelihood of exceedingly strong growth this summer.The question of the pace of deceleration becomes a fourth quarter and 2022 question.

CPI Should Normalize

Then there is inflation.

The above chart is similar to the GDP chart only the retreat toward normality is quicker. Again, all of this makes sense. Inflation pressures are expected to be transitory. But the question is - again - the rapidity of the retreat. After all, the “base effects” that are helping make inflation look horrid today will be completely the opposite in 2022. Simply, the deceleration of inflation could be one of the more surprising features of late 2021 and 2022.

All in 2023

Why is any of the above important? All of the above complicates the Fed’s decision-making. Not to mention, the dynamics of the deceleration will also affect yields - particularly longer duration. For the moment, markets believe 2023 is the year of the hike. Expectations for 2021 and 2022 have receded. Maybe it was all the “talking about talking about taper” talk that moved expectations for a hike higher. Oddly, taper talk (and eventual tapering) would have the effect of pushing down growth and inflation expectations. And therefore yields.

And that is the odd part of all of the above. GDP is going to decelerate with inflation (probably) following suit to even greater extent. All of this while the Fed is talking about talking about tapering their asset purchases. Maybe the decline in the 10-year yield is more signal than noise. With seemingly everything looking peakish, it is worth contemplating what the otherside might look like.

*  *  *

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Tyler Durden Fri, 06/11/2021 - 13:40


Messages from the 21Q2 GDP Advance Release: No Economy Is an Island

With apologies to John Donne. Jim provided some key points in his Thursday post regarding the 21Q2 advance figures.  Here are my additional takeaways:…

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With apologies to John Donne.

Jim provided some key points in his Thursday post regarding the 21Q2 advance figures.  Here are my additional takeaways: (1) the Administration’s forecast locked down in February looks prescient; (2) Final sales were higher than GDP, (3) exports have not buttressed growth, partly because of slow rest-of-world growth, (4) price growth is a rising share of nominal GDP growth.

Growth Disappointment (Relative to June…)

First, the GDP release in context of forecasts.

Figure 1: GDP as reported on 7/29 in 2021Q2 advance release (black), Administration FY22 forecast (blue triangle), CBO June forecast (red line), FT-IGM (light green triangle),  IMF July WEO (green x), potential GDP as estimated by CBO in July 2021 (thick dark gray line)Dates indicated denote when the forecasts were “locked down”. Source: BEA 2021Q2 advance release, OMB FY’22 Budget, WSJ July survey, and FT-IGM survey (June), CBO (February, July), IMF WEO (July), and author’s calculations.

There was an annual revision which pushed down slightly reported GDP. However, the forecasted GDP levels shown (which are imputed assuming latest available GDP levels at the time of forecast — the forecasts are reported in growth rates) reflect the earlier optimism. The Administration’s FY2022 Budget forecasts stand out as prescient in this regard.

One shouldn’t forget that relative to last year, outcomes are better than expected (W. Edelberg).

Aggregate Demand vs. GDP

Second, final sales — that is GDP minus decumulation in inventories — differs measurably from the highlighted GDP number. Final sales are higher, reflecting aggregate demand outstripping production.

Figure 2: GDP (blue) and final sales (red), both in billions Ch.2012$ SAAR. NBER defined recession dates shaded gray. Source: BEA, 2021Q2 advance release.

This shows up in 2021H1 final sales growth outstripping GDP growth.

Figure 3: Quarter-on-quarter growth rates for GDP (blue) and final sales (red), in billions Ch.2012$ SAAR. NBER defined recession dates shaded gray. Source: BEA, 2021Q2 advance release.

In normal times, we would think of an equilibrating mechanism where (with supply passively adjusting to demand) inventories were rebuilt. Given these times, rebuilding (to an unknown-to-us optimal inventory-to-sales level) will take an unknown amount of time. Partly it depends on our ability to source from overseas.

The International Dimension

Imports have not recovered to the extent one might have expected in a normal recession. In addition to impediments left over from the Trump Administration, there are transport and supply constraints.

Figure 4: US Imports of goods (blue, left log scale), and US Final sales (red, right log scale), both in bn.Ch.2012$, SAAR. NBER defined recession dates shaded gray. Source: BEA, 2021Q2 advance release, NBER. 

While capital goods have recovered at a faster pace, and now constitute a higher share of final sales than pre-pandemic, it’s not clear that given the reallocation of demand composition, this is “enough”.

One point highlighted by Jim’s growth accounting is the small share of US GDP growth accounted by exports. This outcome is shown in a different way in Figure 5.

Figure 5: US Exports of goods and services, in bn.Ch.2012$, SAAR (blue, left log scale), and Rest-of-World trade weighted GDP, 2005=100 (red, right log scale), and extrapolated RoW GDP (red square, right log scale). 2021Q4 observation extrapolated using IMF WEO July update implied RoW Q4/A4 growth rate applied to 2020Q4 RoW GDP. NBER defined recession dates shaded gray. Source: BEA, 2021Q2 advance release, Dallas Fed DGEI, NBER, and author’s calculations. 

The stall in 2021H1 export growth is clearly linked to the slowdown in RoW slowdown in Q1. We don’t have a reading on Q2 RoW growth, but I used the IMF’s July WEO forecast to impute the end-2021 level; despite the IMF’s markdown of particularly emerging market economy , RoW output is forecasted to be higher. That might provide additional support to aggregate demand going forward – although actual outcome will depend on the resolution of supply constraints.

One point that I want emphasize comes from the IMF WEO’s update, wherein emerging market growth has been marked down (due in large part to the Delta variant’s spread and resulting impairment of economic activity). That means that US policymakers can just blithely ignore developments in the rest-of-the-world. Our fortunes are tied up with the fortunes of those in the emerging market economies (perhaps as much as those who continue to refuse both to get vaccinated without specific medical grounds, and to undertake social distancing measures).

A Decomposition of Nominal GDP

The extent that supply constraints weighed on 2021Q2 is shown in Figure 6.

Figure 6: Quarter-on-quarter growth rate in nominal GDP (black line), in real GDP (blue area), and in price deflator (brown area), all SAAR. Growth rates calculated using log differences. NBER defined recession dates shaded gray.  Source: BEA, 2021Q2 advance release, NBER, and author’s calculations.

Whether these price pressures persist depends on the extent of supply bottlenecks, the extent of elevated aggregate demand, and expectations of inflation (which work their way into pricing decisions, and into wage pressures). Yesterday’s personal income and outlays release  suggested lower-than-anticipated and upward pressure on the PCE deflator, while (declining) employment compensation growth below consensus indicates that higher inflation hasn’t yet fed into substantial accelerating wage growth (see Jason Furman for more). For me, I see the Q2 share of price level growth to nominal GDP growth as a transient high.

I include the latest available market and survey based indicators in the wake of the GDP, personal income and outlays, and employment cost releases.

Figure 7: Five year inflation breakeven calculated as five year Treasury yield minus five year TIPS yield (blue, left scale), five year breakeven adjusted by inflation risk premium and liquidity premium per DKW (red, left scale), 5 year TIPS yields (teal, right scale), all in %. Source: Fed via FRED, Treasury, KWW following D’amico, Kim and Wei (DKW) accessed 7/7, author’s calculations.

The five year breakeven has barely budged in the way of these releases, and remains at 2.56%. If the estimated inflation and liquidity risk premia gaps have remained constant since 6/30, then anticipated average inflation over the next 5 years is still in the range of 1.8%.

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How Science Becomes Religion

How Science Becomes Religion

Authored by Sheldon Richman via The Libertarian Insititute, 

The popular slogan today is "Believe in science."…

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How Science Becomes Religion

Authored by Sheldon Richman via The Libertarian Insititute, 

The popular slogan today is "Believe in science." It’s often used as a weapon against people who reject not science in principle but rather one or another prominent scientific proposition, whether it be about the COVID-19 vaccine, climate change, nutrition (low-fat versus low-carb eating), to mention a few. My purpose here is not to defend or deny any particular scientific position but to question the model of science that the loudest self-declared believers in science seem to work from. Their model makes science seem almost identical to what they mean by, and attack as, religion. If that’s the case, we ought not to listen to them when they lecture the rest of us about heeding science.

The clearest problem with the admonition to "believe in science" is that it is of no help whatsoever when well-credentialed scientists–that is, bona fide experts–are found on both (or all) sides of a given empirical question. Dominant parts of the intelligentsia may prefer we not know this, but dissenting experts exist on many scientific questions that some blithely pronounce as "settled" by a "consensus," that is, beyond debate. This is true regarding the precise nature and likely consequences of climate change and aspects of the coronavirus and its vaccine. Without real evidence, credentialed mavericks are often maligned as having been corrupted by industry, with the tacit faith that scientists who voice the established position are pure and incorruptible. It’s as though the quest for government money could not in themselves bias scientific research. Moreover, no one, not even scientists, are immune from group-think and confirmation bias.

So the "believe the science" chorus gives the credentialed mavericks no notice unless it’s to defame them. Apparently, under the believers' model of science, truth comes down from a secular Mount Sinai (Mount Science?) thanks to a set of anointed scientists, and those declarations are not to be questioned. The dissenters can be ignored because they are outside the elect. How did the elect achieve its exalted station? Often, but not always, it was through the political process: for example, appointment to a government agency or the awarding of prestigious grants. It may be that a scientist simply has won the adoration of the progressive intelligentsia because his or her views align easily with a particular policy agenda.

But that’s not science; it’s religion, or at least it’s the stereotype of religion that the "science believers" oppose in the name of enlightenment. What it yields is dogma and, in effect, accusations of heresy.

In real science no elect and no Mount Science exists. Real science is a rough-and-tumble process of hypothesizing, public testing, attempted replication, theory formation, dissent and rebuttal, refutation (perhaps), revision (perhaps), and confirmation (perhaps). It’s an unending process, as it obviously must be. Who knows what’s around the next corner? No empirical question can be declared settled by consensus once and for all, even if with time a theory has withstood enough competent challenges to warrant a high degree of confidence. (In a world of scarce resources, including time, not all questions can be pursued, so choices must be made.) The institutional power to declare matters settled by consensus opens the door to all kinds of mischief that violate the spirit of science and potentially harm the public financially and otherwise.

The weird thing is that "believers in science" sometimes show that they understand science correctly. Some celebrity atheists, for example, use a correct model of science when they insist to religious people that we can never achieve "absolute truth," by which they mean infallibility is beyond reach. But they soon forget this principle when it comes to their pet scientific propositions. Then suddenly they sound like the people they were attacking in the previous hour.

Another problem with the dogmatic "believers in science" is that they assume that proper government policy, which is a normative matter, flows seamlessly from "the science," which is a positive matter. If one knows the science, then one knows what everyone ought to do–or so the scientific dogmatists think. It’s as though scientists were uniquely qualified by virtue of their expertise to prescribe the best public-policy response.

But that is utterly false. Public policy is about moral judgment, trade-offs, and the justifiable use of coercion. Natural scientists are neither uniquely knowledgeable about those matters nor uniquely capable of making the right decisions for everyone. When medical scientists advised a lockdown of economic activity because of the pandemic, they were not speaking as scientists but as moralists (in scientists’ clothing). What are their special qualifications for that role? How could those scientists possibly have taken into account all of the serious consequences of a lockdown–psychological, domestic, social, economic, etc.–for the diverse individual human beings who would be subject to the policy? What qualifies natural scientists to decide that people who need screening for cancer or heart disease must wait indefinitely while people with an officially designated disease need not? (Politicians issue the formal prohibitions, but their scientific advisers provide apparent credibility.)

Here’s the relevant distinction: while we ought to favor science, we ought to reject scientism, the mistaken belief that the only questions worth asking are those amenable to the methods of the natural sciences and therefore all questions must either be recast appropriately or dismissed as gibberish. F. A. Hayek, in The Counter-Revolution of Science, defined scientism as the "slavish imitation of the method and language of Science."

I like how the philosopher Gilbert Ryle put it in The Concept of Mind: "Physicists may one day have found the answers to all physical questions, but not all questions are physical questions. The laws they have found and will find may, in one sense of the metaphorical verb, govern everything that happens, but they do not ordain everything that happens. Indeed they do not ordain anything that happens. Laws of nature are not fiats."

"How should we live?" is not one of those questions which natural scientists are specially qualified to answer, but it is certainly worth asking. Likewise, "What risks should you or I take or avoid?" There is a world of difference between a medical expert’s saying, "Vaccine X is generally safe and effective" and "Vaccination should be mandatory." (One of the great critics of scientism was Thomas Szasz, M.D., who devoted his life to battling the medical profession’s, and especially psychiatry’s, crusade to recast moral issues as medical issues and thereby control people in the name of disinterested science.)

Most people are unqualified to judge most scientific conclusions, but they are qualified to live their lives reasonably. I’m highly confident the earth is a sphere and that a water molecule is two parts hydrogen and one part oxygen. But I do not know how to confirm those propositions. So we all need to rely on scientific and medical authorities–not in the sense of power but in the sense of expertise and reputation. (Even authorities in one area rely on authorities in others.)

But we must also remember that those authorities’ empirical claims are defeasible; that is, they are in principle open to rebuttal and perhaps refutation, that is, the scientific process. Aside from the indispensable and self-validating axioms of logic, all claims are open in this sense. That process is what gets us to the truth. As John Stuart Mill pointed out in On Liberty, even a dissenter who holds a demonstrably wrong view on a question might know something important on that very question that has been overlooked. To our peril do we shut people up or shout them down as heretics. That’s dogma, not science.

Tyler Durden Sat, 07/31/2021 - 13:00
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Precious Metals

Constant Inflation Doubletalk from Fed Erodes Confidence

The summer doldrums in precious metals markets have tested the patience of bulls. The silver market has been hit especially hard…

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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

The summer doldrums in precious metals markets have tested the patience of bulls. The silver market has been hit especially hard in recent weeks, but price stayed above the $24 level and avoided dipping to new lows for the year.

Nervous and frustrated investors who bailed out this summer may have made a huge mistake. Gold and silver markets appear to now be catching a break on the upside.

On Thursday, gold gained 2% to record its best close since mid-June. As of this Friday recording, the monetary metal trades at $1,830 an ounce and is up 1.1% for the week.

Turning to silver, prices are advancing by 1.4% this week to check in at $25.62 per ounce. Platinum, which was basically flat through Thursday, now shows a weekly loss of 1.8% to trade at $1,056. And finally, palladium is drifting slightly lower by 0.9% to come in at $2,682 per ounce.

Metals markets stand to benefit from renewed weakness in the dollar.

Since late May, U.S. dollar strength versus foreign currencies had put downward pressure on hard assets. The U.S. Dollar Index rallied from about 89.50 to just over 93 before momentum waned in recent days.

The Index failed to make a new high for the year on its summer rally, setting the stage for a potential bearish reversal. That reversal appears to have taken place this week, with the Dollar Index breaking down below 92 yesterday.

Currency traders were unimpressed by the Federal Reserve’s latest policy briefing. On Wednesday, the Fed announced it would leave its benchmark Funds rate unchanged and continue its $120 billion in monthly asset purchases.

No tapering was on the table, though there was some taper talk. It amounted to vague indications of future tightening after the U.S. economy attains "substantial further progress."

Fed Chairman Jerome Powell tried to quell inflation concerns. He reverted again to his “transitory” claims, but in remarks to the media he seemed confused about what his own definition of transitory inflation means.

Jerome Powell: The increases will happen. We're not saying they will reverse. That's not what transitory means. It means that the increases in prices will happen. So, there will be inflation, but that the process of inflation will stop, so that there won't be ...

When we think of inflation, we really think of inflation going up year, upon year, upon year, upon year. That's inflation. When you have inflation for 12 months, or whatever it might be, I'm just taking an example, I'm not making an estimate, then you have a price increase but you don't have an inflation process. And so, part of that just is that if it doesn't affect longer term inflation expectations, then it's very likely not to affect the process of inflation going forward.

So, what I mean by transitory is just something that doesn't leave a permanent mark on the inflation process. Again, I don't mean that producers are going to take those price increases back; that's not the idea. It's just that they won't go on indefinitely. We have two mandates, maximum employment and price stability. Price stability for us means inflation average of 2% over time. And so, we've got to be very careful about that, but I think it's a good point that it's a term, what it really means is "temporary." But then you've got to understand that it doesn't mean that the increases will be taken back. Some of them will be, but that's not really what it means.

Well, anyone wants to make sense out of all that would need a degree in Fedspeak. We are supposed to believe that stable prices actually means prices rising at a 2% average rate – except when the Fed wants inflation to run higher. But when it does, it’s only transitory – except when it affects the inflation process, which happens when long-term inflation expectations rise, which the Fed says won’t happen but at the same time doesn’t really know what will happen in the future.

Maybe what the Fed says matters less than what economic realities say. Investors would be better served focusing on fundamentals than trying to decipher central bankers’ forecasts.

Unfortunately, investors can’t ignore the Fed entirely. Since its monetary policy decisions can and do drive financial markets, it is necessary to pay attention to what the Fed is actually doing.

Right now it is still stimulating rather than fighting inflation, still holding interest rates artificially low, and still offloading negative real yields upon savers and investors.

That puts both the bond and stock markets in precarious positions. If inflation expectations were to shift to rising prices being a long-term rather than a transitory problem, a dramatic downside readjustment in interest-rate sensitive financial assets would commence.

There would also likely be a dramatic upside revaluation of hard assets including precious metals.

Whether investor psychology shifts suddenly or gradually toward an inflation-protection mindset remains to be seen. Metals markets tend to move slowly at the beginning of bull markets, then rapidly and even violently toward the end.

Market timing is an impossible task given the unpredictable nature of people and circumstances. What is possible is to capitalize on opportunities when markets are over-pricing financial assets and under-pricing hard assets.

The opportunity exists now, but it won’t last forever. There may even come a day when the opposite is true – hard assets are overpriced with inflation expectations running way ahead of actual inflation realities and financial assets offering tremendous value as a result.

Yes, that could happen. It did in the early 1980s.

But the early 2020s look more like the start of a new inflationary cycle rather than the unwinding of one.

Well, that will do it for this week. Be sure to check back next week for our next Weekly Market Wrap Podcast. Until then this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a weekend everybody.


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