Economy, SPX, Long Treasury

US Economy Comment
By the indicators, the US economy steadily lost growth momentum potential from mid-2014 right
into 2016. My weekly leading economic indicators have been rising since Feb. of this year, and
now monthly leading and coincident measures are rising. As well, my future inflation pressure
gauges have been advancing since Feb. after a number of months of decline. The US industrial
base fell to low, near recession levels going into 2016 but appears to be firming modestly. The
weakening economy from mid-2014, aided and abetted by a bust in the oil price, has lead to
a significant decline in profitability and earnings, too. Lead indicators suggest profits may soon
start to do better. The Fed badly misjudged the negative impact the cessation of QE would have
on economic activity and compounded the error by raising short rates in late 2015. With ongoing
decent private sector liquidity growth, the economy may finally be righting itself after a fallow
period. Indications of stronger growth could turn out to be a flash in the pan, but if not, then
the real economy and recovering pricing power will put downward pressure on the excess liquidity
which has sustained the capital markets for many months.

Stocks and Bonds
Since late 2014, as profits  prospects and inflation pressures waned, the smart bet was to prefer the
long Treasury over the SP 500. $USB vs. SPY High quality bond prices have firmed as the economy
slowed, inflation pressures abated, and the Fed was forced to put a cap on further tightening. Even
though forward economic and inflation measures have strengthened since earlier in the year, players
have been interested in giving the edge to bonds on a trend basis despite the volatility. So much so,
that even the 30 yr. Treasury at a 2.15% yield is trading inside the yield on the SP 500.

Viewed longer term, both the S&P and the long Treasury price are overvalued. However, if the
economy is indeed regaining some sustainable traction, stock players will fret over future
monetary policy, but long Treasury buyers may even have more to worry over.

Closing
Ever since the Fed announced it would taper and then close out its huge QE 3 program as 2014
wound up, I have been concerned how well the US economy would fare without the very large
large tailwind. Here we are 18 months later, and the best I can do is cross my fingers that the
economy can progress decently with private sector funding support. If it can, the ballgame will
change markedly in various markets.