18 Apr FIRST QUARTER GROWTH IS NOW PROJECTED TO BE IN THE MID TWO PERCENT RANGE
Five weeks ago the recessionary narrative was at the point of being hyperbolic. A major issue at hand was the data at that time did not fully support this theme. Five weeks later little attention has been focused upon concrete data that is suggesting a first quarter growth rate anywhere between 2.1% and 2.9%. The Atlanta Fed is now projecting a 2.4% 1Q growth rate vs. 0.2% five weeks ago.
I reiterate my long standing view economic growth will continue to surprise on the upside and the greatest risk is that this growth again challenges monetary policy assumptions.
Many times I have discussed the lack of liquidity in the bond market. FINRA—the primary regulatory body—stated that volume in the corporate bond market is about double than it was in 2003 but the amount of outstanding corporate debt has tripled. The vast majority of the years since 2003, interest rates were falling or at multigenerational lows.
The NY Fed stated primary dealers’ holding of corporate bonds has plunged to around $10 billion today from more than $200 billion in 2007. Historically money center banks bought bonds, held in their inventories to resell at a later date. Many times the banks were a buyer of last resort hence enable to profit from market inefficiencies brought upon by fear or shock.
The vast majority of trading today is done by directly matching up buyers and sellers. This works great until the expected environment changes.
Anyone can sell you a bond but will happen when the customer wants to sell the bond and there are no ready buyers? To write the obvious, prices fall.
I believe interest rates are the greatest determinate to equity valuations. Equity valuations—as defined by the popular indices which are dominated by the mega sized technology companies—are greatly over extended. Bloomberg reports the ratio of the NASDAQ 100 to the S & P 500 has only been higher one time history…the tail end of the dot.com bubble of 2000.
Profit margins which are near a record are perhaps at an inflection point, are poised to turn lower because of increased labor and input costs amplified by potentially higher interest rates because of the massive amount of debt that must be refinanced over the next three years.
Historically the next crisis is partially the result of actions taken to avert a similar crisis of yesteryear. I believe the next crisis will be a liquidity crisis, the result of regulatory fiat, one that challenges equity and fixed income valuations.
Is this a radical view? No, it is the view of several iconic Wall Street firms and is partially that of the US Treasury. Hopefully there will be changes in the mechanics of fixed income trading before such a crisis unfolds, a crisis perhaps the result of greater than expected economic growth.
Last night the foreign markets were mixed. London was down 0.10%, Paris up 0.26% and Frankfurt up 0.50%. China was down 0.40%, Japan down 0.84% and Hang Sang down 0.54%.
The Dow should open mixed ahead of a three day weekend. The 10-year is up 9/32 to yield 2.57%.