Millennial Macro

Last month's post,  Are the signals that usually precede cyclical downturns present today? , pointed out how the current financial environment is not (yet) reminiscent of prior cyclical economic tops that ushered in major corrections in risk assets.  Despite the ongoing correction/volatility in global equity and commodity markets, the yield curve is still positive and above the January 2018 lows, the 10-year treasury yield remains in an uptrend (a sign of improving growth and inflation expectations), high yield credit spreads are still very low and have yet to widen materially, longer term moving average trends in equities still remain favorable, aggregate economic data suggests that the current upswing in NGDP remains intact. With all that said, it is certainly possible that in hindsight the February risk-off move could eventually be understood as the beginning of a major economic and financial market correction rather than normal volatility in an ongoing uptrend....

The purpose of this post is to understand the conditions that led up to the two most recent major cyclical economic and financial market tops in order to determine whether or not they are present today.  However, what the following does not seek to do is provide a short-term macro market outlook.  Nor does it attempt to predict the trajectory of the ongoing recovery from the Global Recession.  The goal is to simply determine whether or not today's macro environment is similar to that of the prior two cyclical turning points. Most importantly, this analysis is not a substitute for sound risk management.

Depending on the state of the economy, tax cuts that further concentrate income and wealth by primarily benefiting the affluent could either promote or inhibit an increase in economic activity. To determine which path is most likely to transpire, one would need to understand the answers to the following three questions. 1.  Is desired investment greater than actual investment?  In other words, is a lack of funding specifically preventing the private sector on aggregate from boosting capital expenditure to their desired levels? 2.  Will tax cuts for the (super) wealthy be funded via higher taxes or spending cuts that predominately fall on the middle class and poor or will they be funded by greater treasury issuance? 3.  Will monetary policy seek to offset the effects of fiscal expansion?  How would financial markets react in response to the Fed?

The treasury yield curve continues to flatten as long-term yields lag the rise in short-term rates.  

Given the cryptocurrency mania, it felt necessary to express a few thoughts on the matter.  The following uses the article,  Will cryptocurrencies trash cash? 'Fedcoin' could do it , as means to explore the topic. 

S low and steady (muddle through) economic activity Real GDP and nominal GDP respectively increased by 2.08% (YOY) and 3.71% (YOY) in Q2 2017.  Both of these figures have averaged a little over this since Q1 2010.

Given enough time has a past since the BOJ really began to push the envelop in terms of unorthodox aggressive monetary experimentation, the following post uses Bernanke's recent speech ( Some reflections on Japanese monetary policy ) as a jumping off point to review developments in Japan.  Seeing as Japan could be a precursor for what may be yet to come in the rest of the developed world that still struggles with subpar growth, low interest rates, and a lack of inflation, the BOJ's monetary evolution bears watching.