I have become fairly bearish. I think unfounded fears about "asset prices" and a bifurcation between returns on real estate vs. returns on fixed income is pulling the Fed to a position that is too hawkish with rate expectations that are too high. Stagnating growth in debt is a really bad sign when, given the current economic fundamentals, mortgage debt levels are far too low.
That being said, the employment flows data is looking pretty upbeat. Flows from unemployed to employed have recovered quite nicely. And, I must admit that flows look a lot like 1999, when the Fed was raising rates, but economic expansion was pulling economic growth along, and long term rates were rising right along with short term rates.
Eventually, long term rates reversed and a correction followed in 2000. So, I think the direction of long term rates is a decent bellwether of the direction of economic activity. And, this has been mixed lately too, with rates rising late last year and then generally levelling off. The sharp rise in sentiment in several surveys can't be ignored.
So, it seems we remain in a holding pattern. I don't think that the risk/reward of positioning for a contraction is worth it, and it still seems too early to commit to positions that will gain from falling interest rates or from an eventual rebound. It would be highly unusual at this point, I think, to see multi-year double-digit equity gains. So, I don't see a lot of risk with being defensive. I suppose there are idiosyncratic plays that will perform well, but this seems like a time where dry powder has its own value.
I haven't touched on unemployment duration data for a while. Long duration unemployment continues to slowly recede, providing some ammunition for continued extra growth potential. Before the Great Recession, we might have expected long term unemployment to be at about 1.2 million now, instead of 1.8 million. Inferring from the BLS's median and average duration statistics, it seems as though that is basically where we stand now. There are probably about 1.2 million workers who have been unemployed for longer than 26 weeks, who are re-entering the labor force at a typical rate. Then, there are about 600,000 unemployed workers who have been unemployed for a very long time - more than 18 months, typically - who still identify as unemployed and in the labor force. I wonder how much of that is related to the continued depression level residential construction activity. I don't see a groundswell of support for solving that problem, so if that is the cause of the persistent long term UE problem, then it probably isn't going away in any case.
So, we seem to be at "full employment", with a persistent long term unemployed population that continues to decline at maybe 100,000 to 200,000 per year. I'm not sure if that is enough of a boost to employment growth to make much difference.
Mixed signals again.