TIPS yields continue to move higher

 

It is not just nominal yields that are moving higher. Real yields have also been on a steep ascent, with levels at the highest in ten years. In fact, to get to these real yields, investors will have to look at data prior to the GFC. We are in a strong situation where real yields are telling investors that we have tight monetary conditions, yet inflation and nominal yields suggest that concerns about inflation are real. This places the Fed in a difficult policy environment and clearly is a reason for FOMC voting disagreement. 

Yen intervention can buy time not a solution

Always bet against intervention if there is no change in policy. Now, this does not mean you should fight a central bank in the short-term. It does mean that intervention has to continue if it is to work. Central banks are much savvier with their intervention. It will occur when there is limited liquidity. It may come through markets not expected, like EUR/JPY instead of USD/JPY. It will be followed by rhetoric to reinforce resolve. It will occur through selected banks to ensure not all are harmed. 

It can buy time but it cannot buy a solution.

AI investment follows other boom and bust cycles

Booms or bubbles are often associated with excessive investments. The euphoria associated with a new technology or meme leads to significant money flows. But there is a marginal return on the capital that falls as more investment dollars flow into the theme. The excess investment leads to a large capital stock in the new technology that may have significant positives for an economy, yet that does not make it a good investment, especially for those that come late to the investment cycle. Is new money late to the cycle? There is not a definitive answer, yet it is clear that all of the capital chasing returns will not be rewarded and likely will be a bust. 

Canals, railroads, new tech in the 20s, and the dotcom boom all saw significant capital investment, yet for many the rewards were limited.

 

Consumer sentiment not supporting market sentiment

 

University of Michigan Consumer Sentiment is now at the lowest level in 40 years. I could go back further. It is the lowest level ever recorded, as listed in the FRED database. Worse than the Volcker recession and the double-digit recession. Sentiment has fallen since the pandemic. The consumer confidence survey data, which goes back even further to 1959, shows the same pattern. There is a confidence problem in the US. 

The Conference Board numbers are better, yet the overall direction is the same. So, even if you choose the best survey, there is still a problem. This will carry over to economic behavior, yet it is not clear when or how, but the general trend is negative. Who or what is going to provide a jolt to sentiment? It does not seem to be on the horizon, and because of that, it is hard to see strong economic growth over the next year.