Jumat, 04 Oktober 2013

Who needs government statistics?

So the federal government is shut down and the market is deprived of some key statistics, most notably the payroll employment report that we ordinarily would have gotten this morning. Is this a cause for concern? Not really, since there are lots of numbers out there that continue to come in on a daily basis from the market. These numbers are even better than government stats, since they are very timely, they aren't subject to seasonal adjustment, they will never be revised after the fact, and they reflect the cumulative knowledge and wisdom of hundreds of millions of investors and business executives all over the world. The message they send, at least as I see it, is that nothing much has changed of late, and the economy most likely continues to plod along at a disappointing slow rate. Nevertheless, the economy apparently is continuing to grow and improve, despite all the policy obstacles thrown in its way.

Here are just a few, in random order. All come from market-based indicators that are real-time as of today:

Corporate credit spreads reflect the market's perception of the default risk of the average business. Credit spreads today are about as low as they have been post-recession. The market, in other words, sees little reason to worry about default risk these days, and there is no sign of any deterioration of late.

2-yr swap spreads are excellent leading and coincident indicators of systemic risk in the economy. These spreads today are about as low as they have ever been. The market, in other words, does not detect anything bad going on. It would be highly unusual for the economy to deteriorate with swap spreads being this low. They tell us that financial markets are very liquid and transparent these days, and that is one very good reason to think that the economy is in decent shape and not suffering from any underlying deterioration.

The Baltic Dry Index is a measure of the shipping costs of bulk commodities. The index was quite low for most of 2012 and until this summer. But starting last June it began to pick up. It is now up 156% from the end of May. This likely reflects improving conditions in the Eurozone and Asian economies. At the very least it all but rules out any emerging weakness in the global economy. It's much more likely that the global economy is strengthening on the margin, given the rather impressive strength in this index of late.

The chart above shows the real yield on 5-yr TIPS over the past year. Yields have dropped about 50 bps in the past month, probably because the Fed failed to "taper" its quantitative easing program, and that in turn has caused the market to adjust downwards somewhat its expectations of future rate hikes. But yields are still up an impressive 120 bps from their lows of last April. I would argue that this is good evidence that the market believes that economic fundamentals have firmed.

C&I Loan growth (bank lending to small and medium-sized businesses) has slowed of late, but outstanding loans are still up some 30% in the past 3 years. This is good evidence of increased confidence on the part of both banks and businesses.

Commodity prices have been going sideways for the past several years, and remain at levels that are significantly higher than they were at the end of 2001. There doesn't appear to be any emerging weakness (or unusual strength) here.

The Vix index today is 17, and that's up quite a bit from the 12 it registered just two months ago. But as the chart above shows, that hardly moves the needle from a long-term historical perspective. The market is a little more worried right now (understandably, given what is going on in Washington these days), but the level of uncertainty is still relatively low. Whatever problems we are likely to face, as a result of the government shutdown and the upcoming debt ceiling negotiations, are, in the market's best judgment, probably minor.

The stock market still appears to be in an uptrend, but not in a bubble, as it was in the late 1990s and early 2000s.

Given all this, I think it's reasonable to conclude that despite the current lack of government-provided statistics, the economy continues to grow at a modest pace.

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