The VIX Index is a good proxy for the market's level of fear and uncertainty, and the 10-yr Treasury yields is a good barometer of the market's expectation for future economic growth. The VIX is elevated today, at just over 20, while the 10-yr Treasury yield is extremely depressed, at 1.7%. As the ratio of the two, shown in the chart above, moves up, the market is become more nervous and unsure about how weak the economy is going to be in the years to come. The outlook today isn't as bad as at over times of crisis (e.g., the three eurozone sovereign debt crises, and the Lehman Bros. collapse), but it ranks pretty high compared to other crises in the past. There's little doubt that the market is very troubled and not at all confident that the economy is going to be growing much in the future.
After six years of a disastrous housing market, which saw average prices for homes fall by one-third in nominal terms, and over 40% in real terms, the evidence of a bottom is accumulating. According to the Radar Logic measure, prices are up over 8% in the year ending last October.
New home sales are up 38% from last year's all-time low. They are still very depressed, but there is some very important improvement occurring on the margin. Lots of potential for growth going forward.
Bad weather impacted last week's tally of unemployment claims, but the four-week moving average is unlikely to be wildly off the mark. As the chart above shows, claims have hit a new low for the current business cycle. No sign at all of any impending downturn in the economy.
U.S. banks are now holding almost $7 trillion in savings deposits for retail customers, up from $4 trillion just over four years ago. Considering that savings deposits are paying almost nothing these days, this is rather extraordinary. People aren't flocking to savings deposits because of their yield; safety is the top concern of most people these days, and that is driven to a great extent by concerns for the future. It also suggests that if consumer confidence were to improve, there could be a veritable flood of liquidity headed away from banks and towards risky assets of all kinds.
It's likely that most people with savings accounts fail to fully appreciate how unattractive they really are. It's one thing to stash money in a savings account in order to preserve principal; it's quite another to stash money in a place where it is losing its purchasing power. As the chart above shows, the real yield on three-month T-bills -- a decent proxy for the real return on savings deposits -- has been negative since Feb. 2008, and for most of the past decade. Since February 2008, the real return on T-bills has been -6.4%.
Contrast that to the 5.3% real return on the S&P 500 over the same period. Despite the extraordinary volatility of the equity market over the past four-plus years, stocks have beat savings deposits by over 12%, and money placed in savings deposits has lost over 6% of its purchasing power. Savers, in other words, are paying a huge price for safety that is proving illusory.