Some Long-Term Perspective On Treasury Yields

Doug Short is the vice president of research at Advisor Perspectives.

Note from dshort: The October rally in equities (the S&P 500 is up 8.23%) has been matched by the selloff in the 10-year note. The yield closed the week at 2.26, up 54 basis points from its all-time closing low of 1.72 on September 22.

Let's have a look at a long-term perspective on Treasury yields. The chart below shows the 10-Year Constant Maturity yield since 1962 along with the Federal Funds Rate (FFR) and inflation. The range has been astonishing. The stagflation that set in after the 1973 Oil Embargo was finally ended after Paul Volcker raised the FFR to 20.06%.

Now let's overlay the S&P 500 to see historical pattern of equities versus treasuries. This is a nominal chart, which significantly distorted the real value of both yields and equity prices.

Here's the same chart with the S&P 500 adjusted for inflation and the annualized inflation rate subtracted from the yields. The impact of stagflation becomes much clearer. We can better understand the severity of the decline in equities from the mid-1960s to the bottom in 1982. And we can also see why high yields can be deceptive in periods of double-digit inflation.

The most interesting series in the charts is the FFR red line. We can see how the Fed has used rate to control inflation, accelerate growth and, when needed, apply the brakes. Unfortunately, the FFR has been virtually zero since December 2008, so it is no longer available as a tool to stimulate the economy. Incidentally, I annotated the top chart with the tenures of the last three Fed chairmen so we can see who was managing the various FFR cycles since the summer of 1979.

The next chart is based on daily data and adds some additional Treasuries for a close look at yields since 2007.

I update the long-term charts each weekend and the last chart more frequently, depending on yield volatility.

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RICHARD KOO: Even Talking About Long-Term Deficit Reduction Is Indecent And Irresponsible

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In his latest note, Nomura economist Richard Koo gives decent marks to Obama's jobs plan, but says it's ultimately kind of small, and that when the Tea Party is done hacking it up, it will only be left with fairly ineffective tax cuts.

Given that Koo is such an advocate of fiscal stimulus during a balance sheet recession, this is hardly surprising.

More interesting is where he takes issue with the faction of the pro-stimulus camp, who still ultimately argue that over the long-term we need deficit reduction.

Says Koo:

Arguing need for longer-term fiscal consolidation is irresponsible
The insistence that fiscal consolidation is necessary in the longer term is like the doctor who, faced with a patient who has just been admitted to the intensive care ward, repeatedly questions the patient about his ability to afford the treatment. This is both lacking in decency and irresponsible.

If the patient loses heart after learning the cost of the treatment, he may end up spending even longer in the hospital, leading to a larger final bill. Completely ignoring the policy duration effect of fiscal policy and constantly insisting on longer-term fiscal consolidation was what prolonged Japan’s recession.
For instance, it was because Japan’s policymakers refused to give up the medium-term fiscal consolidation target of achieving a primary fiscal balance by 2011 that the government stumbled from fiscal stimulus to fiscal retrenchment and back again and, ultimately, was unable to meet its fiscal targets even once in the last 20 years.

That is why Japan’s recession lasted as long as it did and why the nation’s debt has risen to some 200% of GDP.

Awesome, fresh analysis.

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A Look At The Long-Term Power Of Momentum Investing

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In a post yesterday, I criticized sloppy analysis which tried to make overly broad statements based on long-term stock data.

Here’s a good example of how long-term data ought to be used.

The chart below shows the historical performance of stocks ranked by momentum decline (meaning 10% slices).

I took the numbers from Ken French’s data library.

The reason why this is a more sound method is that we’re using long-term data to isolate one particular aspect of stock performance.

It turns out that stocks that are in motion have a very long record of continuing to stay in motion. Just to be clear, momentum is defined by performance over the 11-month period starting 12 months ago and ending one month ago. The month directly prior to each period is excluded. At the end of the month, the whole thing is repeated.

 The deciles are perfectly ranked by momentum. The portfolio with the highest momentum did the best. The second-best came in second and so on, all the way down to the worst momentum which came in last.

This post originally appeared at Crossing Wall Street.

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4 Fascinating Charts On Long-Term Unemployment

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It's hard to imagine a more pressing concern for the economy than long-term unemployment.

The prospect that some people could be permanently cast out of the workforce (due to skill rot) is terrifying. It also raises major social cohesion worries.

In a note on the subject, Wells Fargo's John E. Silvia presents a few long-term unemployment charts that we haven't seen before, but which add some depth to the standard coterie of charts that you see

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