Petrodollar Flows Have Cover To Move
ICYMI: bond yields are crazy low. “The yield on the German 10-year government bonds fell to a record low of 0.44% while Japan hit a new nadir of 0.285% and the UK reached 1.584%…The U.S. 10-year was trading at 1.98% on Tuesday morning…’The current level of yields reflects a confluence of global factors that include relatively low growth, very benign inflation and a relatively high existing debt burden in most of the developed world.’” Fly, fly, fly. Meanwhile, petrodollars are a new risk for markets: “for years, energy windfalls were large enough to give major oil producing nations surplus cash. Exporters accumulated foreign exchange reserves and put money into [sovereign wealth funds] which aimed at stabilising economies, paying pensions or just earning a return on investments…But the direction of cashflow has changed…Saudi Arabia, the largest exporter (but not the largest SWF), has already announced it will draw on reserves to fund a big budget deficit…Most analysts think that a good chunk of the money was parked in government and corporate debt, so sales would be a drag on bond prices. This might not show up clearly in a market as large and liquid as U.S. Treasuries, especially when global investors are suffering from a bout of risk aversion.” Meanwhile, commercial inventories of crude oil and refined products increased in December (alt), “a bad sign for those banking on an oil-price rebound.” “U.S. commercial inventories of oil have risen in December in only two years: in 2014 and the financial crisis year of 2008.” Just because its fun: U.S. commercial inventories are now high enough to cover 279 days of net imports from anyone not named Canada or Mexico. Also, have you noticed that King Abdullah is giving speeches from a hospital bed?
The Great, Peculiar Recession
The San Francisco Fed says “a prominent feature of the Great Recession and subsequent recovery has been the unusual behavior of wages…During the recession, wage growth slowed much less than expected in response to the sharp increase in unemployment. And so far in the recovery, wage growth has remained slow, despite substantial declines in the unemployment rate.” They conclude that “the rigidity of wages in a number of sectors has shaped the dynamics of unemployment and wage growth and is likely to continue to do so until labor markets have fully returned to normal.” Couple takeaways: (1) If the link between wage growth and unemployment is “broken”, then perhaps we won’t see any real inflation even as the unemployment rate continues to fall, which means (2) We can keep rates lower for longer, as we wait for the labor market to get really truly healthy. Meanwhile, the Cleveland Fed says “Small firms — led by new small firms — have posted the highest net job creation rates going back to the 1970s. Coming out of the most recent recession, however, job creation by small businesses has lagged, and the new business formation rate continues to fall.” Furthermore, “the volume of small loans, those under $1 million, dropped significantly between 2008 and 2012, and has barely recovered.”
Mercedes on the other hand…