Three Charts to Challenge 2015 Investment Strategies

The rather amusing and broadly cited economic fact is that US growth has become more robust and we should only expect a “tailwind” from lower gas prices that will put more dollars in the US consumers’ pockets.  I will not pontificate on how indications of job growth are impossible to explain, but instead point to three market facts that everyone seems to ignore.

1) Breakeven inflation rates have fallen dramatically since midsummer.  Economists still expect US inflation to come in near 2% in the coming years, but the market has quickly repriced and suggested that the 2 year inflation (deflationary) rate will be .45%!

2) US Interest Rates actually look attractive versus global alternatives.  Despite the Economists’ beliefs that the US 10 year will hit over 3% by the end of 2015, the market forward rate says that the 10 year will not reach 3% in 10 years!  More importantly, every German is thinking that US Bonds look incredibly attractive compared to their own securities:

3) Despite equity markets being extremely happy, the US High Yield market has been slaughtered over the last few months.  I guess you just need to believe that all fixed income markets are wrong and equities are right:

I believe the most realistic explanation is that US markets broadly believe that the Federal Reserve is planning on tightening when the economy will not be able to take the stress.  It is also telling you that the rising dollar and falling crude (commodity prices) point towards the US importing deflationary conditions from struggling economies around the world.  Welcome back volatility.

Comments

[AdvancingTime]

The American and world economy is in uncharted water and weird crosscurrents are clouding our economic future. Last quarter America's GDP came in at a strong 3.5% but the fact that a 10% jump in federal spending, mostly on Pentagon hardware bolstered growth and was very much behind the numbers.

This "pre-election" spending was the biggest increase in federal spending since 2009 when the Obama administration put in place a huge economic stimulus package. Mix in an upbeat November number concerning job creation, falling oil prices and ever higher stock market prices and new record highs and many people have the impression we are on a roll. The article below delves into some of the many crosscurrents at work that could bring the economy to an abrupt halt.

http://brucewilds.blogspot.com/2014/12/crosscurrents-cloud-future-economic.html

[realWhiteNight123129]

In 1981, people expected the inflation for the next 20 years to be sky high and interest rates as well.

The US is bust, interest rates should be at 10% minimum. They will get there. They migth do a Japan first. 

[Comte d'herblay]

In volatility, the more the better, is great profit.

In stability not so much.

Jack! be nimble.....

[hedgiex]

Yes. I'm with you