Warning Signs
Yesterday the Philadelphia Federal Reserve reported a supposedly “unexpected” contraction in manufacturing in the region, the first contraction since July 2009. The index fell from 5.1 to -7.7. A drop below zero suggests manufacturing in this region is falling into recession. Every report I’ve read on this discusses what an enormous surprise this decline has been. I feel like we are back in 2007/2008 with everyone talking about what a shock it is to see housing prices decline. A surprise, really!? Warning signs are emerging.
Another area of concern is the central bank’s pledge to keep interest rates extraordinarily low for an “extended period.” My only ray of hope here is the Kansas City Reserve Bank President Thomas Hoenig who has been the lone dissenter on the Fed’s policy-setting panel. I think he put it succinctly by stating that, “The issue is not that we don’t have enough money and liquidity in the system, the issue is, we don’t have enough confidence to lend and borrow.”
The current 10 year rate is 2.58%. Since 1954, the rate has only been lower than this twice, in January 2009 at 2.52% and December of 2008 at 2.42%. Anytime something is at a historical low or a historical high, pay attention! It is likely to change and change dramatically. The only question is when and anyone who claims they can give you a definitive answer on that with a high level of confidence is nuts, (another technical term.)
10 Year Treasury Yield
Data courtesy U.S. Treasury and Robert Shiller.
