Sunday, July 22

Market gloominess indicator up again

For some time I have been tracking the cumulative inversion in 3, 5 and 10 year bond yields as a general indicator of gloominess in the market's assessment of our future economic performance. The latest read from this indicator is at a new post GFC high.

But let's put this latest spike into context of the readings prior to the GFC.

If you take the long view, there is a whole host of issues to think about. For starters, how long can the Euro-zone keep kicking the can down the road before grasping the Spanish and Italian nettles? Has China hit structural growth constraints (noting there is a host of possible constraints to consider: capital, labour, an ageing population, world demand for its exports, internal inflation, pollution, etc.)? For how long can markets forgive the US sovereign debt (and can the US' gridlocked political system ever address the problem)? Will global household deleveraging lock in a low-growth global future for decades to come? Is a long-run return to global inflation/stagflation inevitable given the many rounds of QE? What if monetary policy stops working? Locally, what does it mean for our economy now that we may have passed peak terms of trade (after an amazing 2001-2010 ride compared with the 1960-2000 period)?

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