We keep thinking that markets, both financial markets and the markets for real goods and services, are going to start showing more "normal" behavior, whatever "normal" is. Yet, this recovery is almost four years old and we have seen little of what might be called "normal" behavior.
Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve System, looking for a more robust recovery, began claiming that "Green Shoots" were appearing in March 2009. Ever since, analysts have been watching the statistics for evidence of more rapid economic growth and it seems as if a not-so-optimistic sign soon matches every encouraging sign.
Like yesterday, the Labor Department reported that jobless claims rose by 28,000 bringing the total of jobless claims to 385,000 for the week ended March 30, the highest this figure has been since the end of November. This report was issued on the heels of other, more optimistic results earlier in the week. Is this another "swing swoon"?
Today it was announced that nonfarm payrolls rose by only 88,000. Economists had expected that the number would be more around 190,000 to 200,000. Not good! And, the labor force participation rate dropped to a seasonally adjusted 63.3 percent down from the February figure of 63.5 percent. Not good! The recovery continues, but it is anything but robust!
There seems to be something behind this slow recovery and its extended nature that is not just in the economics. That something, it seems to me, is the human factor. This human factor is caught up in the feelings and emotions that lie behind the decisions being made in the financial markets and the markets for real goods and services.
It seems as if one part of this human factor has never been absent in the recovery now taking place … uncertainty. And, the uncertainty that exists has been different and more extensive than any time I can remember.
Uncertainty of this nature, I believe, can only be attributed to one thing and that thing is leadership, or, the absence of leadership. Uncertainty is always present in markets. Uncertainty increases when markets are shocked and people are not sure where prices should be. Uncertainty increases when it is unclear whether or not certain things are going to respond to policy efforts or how long it will take for the policy to work its way through the economy. But, uncertainty increases when people don't know what their officials are going to do or what they are going to propose. In this sense, the world seems particularly leaderless right now.
Maybe that is why I chose to post a book review of the recently published effort titled "The Leaderless Economy." The title certainly catches ones eye, but the credibility of the work comes from the fact that the book is written by Peter Temin, emeritus professor of economics at MIT, and David Vines, professor of economics at Oxford University, and is published by Princeton University Press. The book review will be posted this weekend.
The absence of leadership results in even higher levels of uncertainty than might exist if there were adequate leadership around. Here, I would argue that there is an extraordinary amount of uncertainty now present in markets … not only in the United States but also in the world.
Over the past four years, this uncertainty has resulted in investors looking for havens for their money. This search for havens has caused some rather unusual market relationships to exist, ones that are just the opposite of where "normal" thinking leads you.
Perhaps the prime place to see this is in the United States Treasury bond market. There is good reason for the yields on Treasury securities to be higher than they are. But, the reasons come applying reasoning to "normal" situations.
Times are not "normal". We see this in the headline "Haven Flows Push Treasury Prices to High for Year." "Late Thursday in New York, the yield on the 10-year Treasury note fell to 1.759%," the lowest point this year "and equal to its closing level at the end of 2012." Today after the payroll data were released, the 10-year note dropped to 1.700%.
Another statistic indicates to me that this market behavior is a result of more than just uncertainty. It indicates that there is also a "fear" factor associated with this "haven" investment. This statistic has to do with the yield on 10-year inflation-adjusted Treasury securities … TIPS. Yesterday, the yield on the 10-year TIPS closed at a negative 0.733%. This is not the lowest it has been recently, but it is in the neighborhood. Check out this chart.
The fact that this yield is so low represents, to me, the depth of the concern that exists in global financial markets these days. I can't explain it in any other way.
What is the cause of this latest movement? "The rally in U. S. government debt began early Thursday after the Bank of Japan launched an aggressive monetary-easing policy … Treasuries also were buoyed by investors' flight to safety following disclosure that North Korea has deployed missiles to its east coast."
I believe there is more to investor behavior than just uncertainty. I believe that it is a result of a concern about the absence of any kind of real, effective leadership in the world.
Earlier declines in the yield on TIPS can be associated with disruptions coming out of Europe, the Greek situation, the election in Italy, the banking situation in Cyprus. What is going to happen to the euro? And, then there is the potential collapse in Egypt and the on-going battle in Syria … and what about Iran?
This, however, is not just an issue of the financial markets. Many companies around the world have been poised for at least three years to move into a stronger economic recovery. The record cash balances companies have held were just to resource they needed to grow, acquire other less-well-off companies, and to move more aggressively internationally.
These companies continue to "keep their powder dry" and not move on into the future. If anything, they have used some of this cash to pay greater dividends or to buy-back some of their stock. Commit to acquisitions, commit to expanding capital, commit to a more robust economy, I don't think so. Not yet, at least.
I have written a lot recently about these structural issues. They are serious and are holding us back from a more rapid return to something we might all call "normality." Until then, the only thing one can expect is more ups and downs; more good reports and more not-so-good reports; more crisis meetings and more disappointments. The "black swan" in this is what is North Korea going to do, what is Syria going to do, will Egypt collapse?
In terms of these uncertainties and fears I continue to look at what is happening to the yield on TIPS.