ZIRP: Great Depression vs. Great Recession

The following chart compares the 3-month treasury bill yield in the aftermath of the Great Depression to the 3-month treasury bill yield in the aftermath of the Great Recession.


Click to enlarge.

For the record, I am not predicting World War III (nor would I expect it to even remotely solve our long-term ZIRP problem as effectively as World War II did).

I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones. - Albert Einstein

I think you can see why I might be fond of ultra long-term inflation protected treasuries and I-Bonds. You might also understand why I might be somewhat skeptical of rising interest rate theories.

I believe we are trapped in ZIRP much like Japan has been since their housing bubble popped in the early 1990s (which will become all too apparent when the next recession hits, whenever that is).

We might temporarily escape from our padded cell at some point, but we'll never get the straight-jacket off, much less get past the search lights, the dogs, the barbed wire fences, and Janet Yellen, our trusted security guard. That's just asking too much, lol. Sigh.

Gallows humor.

February 11, 2014
Janet Yellen to Emerging Markets: Good Luck

Monetary policy is hard enough without having to worry about the spillover effects to other countries that should take care of themselves.

Contrary to the opinion of those who think the stock market continues to go up easily from here and that vast riches await those willing to swing for the fences at any price, monetary policy is hard. For what it is worth, that's what I'm reading into what she has to say anyway.

This is not investment advice.

Source Data:
St. Louis Fed: 3-Month Treasury Bill: Secondary Market Rate
NBER: US Business Cycle Expansions and Contractions

charts fed chairman housing japan sarcasm stock market treasuries

The Sarcasm Report v.185

Click to enlarge.

The blue line shows the annual average of the St. Louis Fed Financial Stress Index and the Kansas City Financial Stress Index.

The red line shows the negative of the annual average of the real S&P 500 Index (December 2013 dollars).

1. The key to maintaining the stock market's currently lofty level is to keep the financial stress at a near record low. That's right. Keep it there permanently. Just say no to stress.

2. The key to maintaining the financial stress at a near record low is to keep the stock market at its currently lofty level. That's right. Keep it there permanently. Just say no to stress.

What could possibly go wrong with this circular reasoning strategy? As seen in the chart, there hasn't been this little financial stress in the system since the top of the housing bubble in the mid 2000s! Oh, what a carefree time that was!

I am very optimistic about our long-term future!! ZIRP! Employment growth! Real GDP growth! Real median household income growth! Uncharted territory growth! You name it! It's going to be an adventure.

February 11, 2014
ASX bets on derivatives clearing

"We don't even celebrate trillions any more," the Englishman recently elevated to the top job of global clearing house LCH Clearnet, told The Australian on a recent visit to Sydney.

It's not quite so flippant a comment as it might seem. The arcane world of over-the-counter derivatives such as interest rate swaps that Davie inhabits turns over $600 trillion of notional value a year, so a trillion is not far off being a rounding error.

This concludes the sarcasm report.

Source Data:
St. Louis Fed: Custom Chart

charts debt employment fed chairman housing sarcasm sarcasm report stock market treasuries

The Fed's 10-1 Leverage Has Paid Off! (Musical Tribute)

The following chart compares the trillions of dollars the monetary base has grown (in blue) to the trillions of dollars household net worth has grown (in red) since the first quarter of 2009.


Click to enlarge.

Each dollar the Fed spends gets us back ten! Why on earth is the Fed tapering the sure thing? We need even moar leverage! Not less!

Crazy Theory

Let's cash out $10.8 trillion of household net worth (just half of the gain), hand it to the Fed, and let them reinvest it for us! We'll get $108 trillion back! We can then use that money to pay off all our debts and still have plenty left over! Perhaps even enough for every man, woman, and child to retire!

Why hasn't anyone else thought of this? Genius!

December 17-18, 2013
Minutes of the Federal Open Market Committee

Participants were most concerned about the marginal cost of additional asset purchases arising from risks to financial stability, pointing out that a highly accommodative stance of monetary policy could provide an incentive for excessive risk-taking in the financial sector.

Oops. Please disregard my crazy theory above. It would seem that I was offering the very thing the Fed is most worried about. You have to admit that it seemed like a darned good theory on paper though. I just hadn't factored in any unintended consequences. In my defense, it's really easy to do once I went down the "excessive risk-taking" path (gambling $10.8 trillion on a "sure thing" would definitely qualify).

Marrakesh Night Market

The magic lies scattered
On rugs on the ground
Faith is conjured by the night market's sound

See Also:
Sarcasm Disclaimer

Source Data:
St. Louis Fed: Custom Chart

charts debt fed chairman housing musical tribute sarcasm stock market treasuries videos

Linear Trend Failure of the Day

Click to enlarge.

It would seem that banks are not going to be paying people to take out mortgages after all. Who knew?

Strike one more economic tailwind off the list.

Source Data:
St. Louis Fed: Origination Fees and Discount Points for 30-Year Fixed Rate Mortgage

charts debt housing linear trend failure sarcasm

The Future of American Baby Manufacturing (Musical Tribute)

Click to enlarge.

Wikipedia: Optimism

Optimism is a mental attitude or world view that interprets situations and events as being best (optimized), meaning that in some way for factors that may not be fully comprehended, the present moment is in an optimum state. The concept is typically extended to include the attitude of hope for future conditions unfolding as optimal as well.

Hey! Look! A parabola! Woo-hoo!



See Also:
St. Louis Fed: Japan's Working Age Population
Sarcasm Disclaimer

Source Data:
St. Louis Fed: Custom Chart

charts employment housing japan musical tribute sarcasm videos

Housing's Addiction and Recovery (Musical Tribute)

The following chart shows owner occupied housing units.



Jane's Addiction - Mountain Song

Cash in
Cash in now honey
Cash in now
Cash in now baby
Cash in now honey
Cash in Miss Smith
Cash in now baby

Source Data:
St. Louis Fed: Owner Occupied Housing Units

charts housing linear trend failure musical tribute sarcasm videos

You Can't Handle the Truth!

The following chart shows the semiannual average of the 30-year conventional mortgage rate.


Click to enlarge.

I have added an exponential decay trend line in blue and an exponential decay channel in red. To create the top of the channel, I multiplied the interest rate in blue by 1.2 (+20%). To create the bottom of the channel, I multiplied the interest rate in blue by 0.8 (-20%).

Over the long-term, does that look like a rising interest rate environment to you? Is there any indication, any indication at all, that the long-term trend is failing? As of the 2nd half of 2013, we're sitting right on the long-term trend line in blue.

You can't handle the truth! Son, we live in a world that hits housing walls and those housing walls have to be guarded by men with continually falling interest rate policies.

Did you see the stock market turn red?
I did the job.
Did you see the stock market turn red?
You're goddamned right I did!

This is not investment advice.

Source Data:
St. Louis Fed: Custom Chart

charts debt fed chairman housing sarcasm stock market treasuries videos

Building Permit Slowdown for Privately Owned 1-Unit Structures

The first chart shows the annual change in new privately-owned housing units authorized by building permits for 1-unit structures. I'm using quarterly averages to smooth out the noise a bit.


Click to enlarge.

Can't we just blame it the weather and call it good?

The next chart shows just the data for Florida, Nevada, and Arizona (three of the previous housing bubble's largest hotspots).


Click to enlarge.

I guess it all depends on how much annual polar vortex activity there was in Florida, Nevada, and Arizona. As seen in the chart, the growth trend has been decelerating at a consistent pace for a full year. We'll therefore need a whole year's worth of polar vortex activity in three of the warmest states. Totally doable with the right spin!

Further, just look at all that volatility in the data since 2005. I can't even begin to tell you how much that fills me with confidence. Slow and steady is so overrated. Anarchy! Random profits and losses! That's what makes the casino life right for me!

This is not investment advice (especially that part about casino life being right for me).

Source Data:
St. Louis Fed: Building Permits for 1-Unit Structures (National)
St. Louis Fed: Building Permits for 1-Unit Structures (Florida + Nevada + Arizona)

charts housing sarcasm volatility

New Homes vs. Wages (Musical Tribute)

Click to enlarge.



Source Data:
St. Louis Fed: Custom Chart

charts employment housing musical tribute sarcasm videos

The Sarcasm Report v.183

January 22, 2014
Forbes: Protect Yourself From A Treasury Bond Crash

How do you make money from this crash—or at least lessen your losses from it?

January 27, 2014
Wall Street Journal: Treasurys Swing Higher After New-Home Sales Lower

The newly revealed weakness in the nation's housing sector underscored the dependence of the economic recovery on cheaper financing, a key factor that will hold interest rates from racing higher this year.

U.S. Treasurys rallied strongly last week, as a selloff in global equity and currency markets prompted investors to flee risky assets and take shelter in the safe-haven market. Yields on the benchmark 10-year Treasury notes fell to 2.737% at Friday's close, the lowest level in two months.

housing sarcasm sarcasm report stock market treasuries videos

An Alternative Housing Recovery Story

The following chart shows new home sales divided by existing home sales.


Click to enlarge.

1. New home sales create construction jobs.
2. Existing home sales do not create construction jobs.

The next chart shows residential construction employees per capita.


Click to enlarge.

Note the exceptionally weak recovery in residential construction employment.

rearrange the deck chairs on the Titanic

To do something pointless or insignificant that will soon be overtaken by events, or that contributes nothing to the solution of a current problem.

Source Data:
St. Louis Fed: New Home Sales / Existing Home Sales
St. Louis Fed: Residential Construction Employees per Capita

charts employment housing

The Danger Zone (Musical Tribute)

The following chart shows the year over year change in household net worth divided by annualized wages and salaries.


Click to enlarge.

The danger zone represents periods where the change in net worth over a given year actually exceeds all wages and salaries for the year. Here is a comprehensive list of the periods when that has happened.

1. The late 1990s (dotcom prices only go up bubble).
2. The mid 2000s (housing prices only go up bubble).
3. The early 2010s (nothing bad ever happens in ZIRP bubble).



You don't have time to think up there. If you think, you're dead. - Maverick, Top Gun (1986)

As always, this is not investment advice. That said, "Holy @#$%, it's Viper!"

Source Data:
St. Louis Fed: Custom Chart

charts employment fed chairman housing musical tribute sarcasm stock market treasuries videos

2013's Existing Home Sales Exponential Trend Failure

Click to enlarge.

I'm using quarterly averages to eliminate some of the noise.

Source Data:
St. Louis Fed: Existing Home Sales

charts exponential trend failure housing

5% Interest Rates and $500 Gold! Hahaha!

The following chart shows the natural log of the quarterly average of the 10-year treasury yield. When using natural logs, constant exponential growth (or decay) is seen as a straight line.


Click to enlarge.

I have added a parabolic trend channel in red that uses the data points shown in red. I have also added a parabolic trend in blue that uses all of the data points. Note that the correlation of the blue trend line is 0.89.

The long-term trend shows that the 10-year treasury yield has been decaying (not exactly rocket science here). It's not a pure exponential decay though. Since a parabola fits the data extremely well, I think the best way to describe it is as an exponential decay trend that has been accelerating to the downside. In other words, it has been exponentially decaying at a faster and faster rate. Hello Japan?

I know past performance is not necessarily indicative of the future, but where is the actual evidence that we are in a long-term rising interest rate environment? (And not just a short-term cyclical bounce within a declining trend channel?)

You may be wondering why I singled out the 5% interest rate target in the chart (with a natural log of 1.61). Well, wonder no more! It is inspired by the financial "experts" at MSN Money. Long time readers know that I'm not all that bullish on inflation adjusted gold prices at these levels, but I believe that the following article is a study in ridiculousness. I am therefore willing to place a "gold bug" hat on my head, if only for a day. You know, it's just an effort to balance things out a bit.

January 22, 2014
MSN Money: How gold could fall below $500 an ounce

If the 10-year Treasury yield rises to 5 percent, gold will fall to $471 an ounce.

If ifs and buts were candy and nuts then we'd all have a Merry Christmas. What hubris! The price of gold is pegged to 3 digits of "scientific" precision. All you need to know is a future long-term nominal interest rate? Forehead. Desk. Whack. Whack. Whack.

To be sure, a comprehensive model of gold's price needs to include more than just interest rates.

You think? Yeah, inflation might be a good backup plan if nominal interest rates aren't enough I suppose. For example, if inflation is running at 10% and the 10-year treasury yields 5% then I think we can pretty much forget about $500 gold. Call me silly if you must. (This is not a prediction that we will see 10% inflation and 5% interest rates of course. It's just an example.)

But, according to Claude Erb, who conducted these statistical analyses, we should not be too quick to reject his simple "behavioral" model relating gold's price to the 10-Year Treasury yield.

I wish you could have seen how quick I was to reject his simpleminded "behavioral" model. It may have even been a personal best! Unfortunately, I did not have a stopwatch at the time. And even if I had a stopwatch handy, I'm 49 years old and my reflexes aren't what they once were. I'm therefore not entirely sure I could have accurately timed such a short period to 3 digits of "scientific" precision.

In the case of the gold-interest rate correlation over the last decade, Erb told me in an interview, the r-squared is a very high 0.78. ( Click here for a summary of his findings. )

Most correlations on Wall Street don’t come anywhere close to being that high. Indeed, many of the drugs that get FDA approval have lower r-squareds between their use and positive medical outcomes.

Wow! 10 years of cherry picked data offered up a very high 0.78! Color me impressed. Of course, it is based on the premise that my 28 years of cherry picked data (as seen in the chart above) with a much higher 0.89 correlation has to fail spectacularly before his prediction even kicks in. In order to get to 5% interest rates, the natural log needs to rise to 1.61 on my chart. That is well outside the channel and well removed from the blue trend line. It would indeed be a spectacular fail. Could it happen? Of course it will, someday. That someday could be a very, very long time from now though. And in the meantime, who really knows what gold will be doing?

So, in the battle between cherry picked data sets, who are you going to believe? The very highly correlated 10 year model for gold's price that does not concern itself with inflation or the extremely highly correlated 28 year model of long-term interest rates that has a certain Japanese housing bust feel to it?

Put another way, if one assumes that we are in a rising interest rate environment when we very well might not be, then all kinds of crazy predictions are possible. Why stop at 5% interest rates? What will gold's price be if interest rates hit 50%? Better not tell me $47.10 or I will laugh my motherf#$%ing @$$ off! Seriously, lol.

This is not investment advice. I'm simply offering up an alternative theory for where interest rates are headed that matches my own beliefs. It is not proof of anything. If I had a crystal ball that could accurately predict the future, then I certainly wouldn't spend time making charts or offering up gold price predictions with a whopping 3 digits of "scientific" precision. Now would I? No, sir. I'm compelled to heckle instead. It might even be a disease. Please, for the love of all that's holy, someone help me stop! :)

See Also:
The Pulp Fiction of Rising Interest Rates

Source Data:
St. Louis Fed: Custom Chart

charts debt deflation housing inflation japan precious metals sarcasm stagflation treasuries

Mount St. Equity

The following chart shows home equity divided by wages and salaries. I have added an exponential decay trend line in red that uses the data points in red.


Click to enlarge.



Time Magazine: Person of the Year (2009)

Congrats to Ben Bernanke for mopping up after the speculative volcano erupted! Price stability! Maximum employment! The Dual Mandate Man had it all!

Source Data:
St. Louis Fed: Custom Chart

charts employment fed chairman housing sarcasm videos

If Housing Is the Long-Term Driver of This Economy...

Click to enlarge.

...then we are in big trouble.

The blue trend line uses all of the data points.
The red trend line uses just 3 of them.

The optimists would point to the splendid short-term recovery we've had since the Great Recession (2009 to 2013, as seen in the chart). Well, woo frickin' hoo on that one.

Source Data:
St. Louis Fed: Custom Chart

charts employment housing sarcasm

The Good Fed/Bad Fed Routine

The following chart shows the real home equity loans at all commercial banks per civilian employed (December 2013 dollars).


Click to enlarge.

A linear trend failure *and* an exponential trend failure? All in the same chart? I think I just died and went to trend failure heaven!

October 27, 2005
Bernanke: There's No Housing Bubble to Go Bust

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households.

Wikipedia: Good cop/bad cop

The good cop/bad cop routine is a common dramatic technique in cinema and television, where the bad cop often goes beyond the boundary of legal behavior. A common variant to subvert expectations is to seemingly introduce the 'bad cop' first, only to reveal that he's actually the 'good cop' despite his harshness and that the real 'bad cop' is even worse.

If credit is the lifeblood of this economy, then we just need to work through this "soft patch" and all will be well again. Right?

Investopedia: Soft Patch

This term gained popularity when former Federal Reserve Board Chairman Alan Greenspan used it in his review of the overall U.S. economy. Central banks often cut interest rates in an attempt to spur the economy through the soft patch.

Two quick questions and I'll let you go.

1. Where the @#$% is the good Fed?
2. Is it normal for a soft patch to last more than 5 years?

Source Data:
St. Louis Fed: Custom Chart

charts debt employment exponential trend failure fed chairman housing inflation linear trend failure sarcasm treasuries volatility

Real GDP Growth Is Broken (Musical Tribute)

Click to enlarge.

Real GDP growth averaged 3.48% per year from 1947 to 2000.

Starting in 2000, this long-term exponential trend began to fail. First the dotcom bubble popped, then came the housing bust. Let's take a close-up look at the most recent recovery for any signs of hope.


Click to enlarge.

From the bottom of the Great Recession, real GDP growth has averaged just 2.28%. That is an especially pathetic growth rate for at least five reasons.

1. "The worse a situation becomes the less it takes to turn it around, the bigger the upside." - George Soros (I think we can all agree that the situation qualified as much worse. So where is the bigger upside in response?)

2. The growth rate is a full 1.2% lower than the long-term average heading into 2000. This pig desperately needs lipstick in my opinion.

3. We can't blame any recessions for it being this low. There haven't been any recessions since the bottom! This data has been cherry picked to be recession free. Duh! I threw the optimists a bone here and it still came up way short! Seriously.

4. We're currently following the exponential growth trend line with great precision (r-squared = 0.988). The last time it failed, it failed to the downside. Historically speaking, recessions tend to do that. I know. Shocking.

5. How much will the 2.28% average drop once the next recession hits? In other words, what will the true growth rate be over a complete business cycle? 3.48%? I doubt it with every fiber of my being. I'd even be willing to leverage up that fiber with Super Colon Blow!

The January 20th cover of Time Magazine calls Janet Yellen the sixteen trillion dollar woman. That's a pretty amazing title and her picture definitely inspires confidence. She's going to need to work some magic to restore prosperity over the full business cycle though. I therefore offer her a musical tribute to help inspire. The monumental task before her is legendary.

In the dead of night
She'll come and take you away
Searing beams of light and thunder
Over blackened plains
She will find her way

I can't speak for you, but I've got a really good feeling about this. Yes, very positive. Haven't been this optimistic in years. Why you ask? Her picture on the cover of Time is on a pitch black background ("over blackened plains she will find her way"). What could possibly go wrong?

See Also:
Sarcasm Disclaimer

Source Data:
St. Louis Fed: Real GDP

charts debt employment exponential trend failure fed chairman housing musical tribute sarcasm stock market trade deficit videos

The Masquerade (Musical Tribute)

Click to enlarge.

One by one and two by two
Past eight by tens in shattered frames
The players try to leave the room
Frantic puppets on a string
And all the while the music sings
And still sometimes remember
The masquerade's forever

Source Data:
St. Louis Fed: Fed Funds Rate

charts fed chairman housing musical tribute stock market treasuries videos

MZM Interest vs. Disposable Personal Income

The following chart shows the interest earned on MZM money stock divided by disposable personal income.


Click to enlarge.

Unless one counts cost cutting (and therefore weak employment growth) as a long-term growth strategy, we're apparently fresh out of "genius" ideas.

The chart is especially interesting if one considers how much MZM has grown relative to disposable personal income. It's almost like the more MZM we generate, the harder it is to generate interest off of it. Yeah, it's almost exactly like that. Think Japan.

This coincides well with my long standing belief that it will be increasingly difficult to make money off of money. Those anxiously awaiting higher/juicier real yields over the long-term may be in for serious disappointment, much to the ongoing dismay of Brett Arends at the Wall Street Journal. What a trip down memory lane that link is by the way. 2008, what a year!

This is not investment advice.

Source Data:
St. Louis Fed: Custom Chart

charts deflation employment fed chairman housing inflation japan sarcasm stock market treasuries