Consumer Confidence nears 18 year High while the Cost of Borrowing Rises
After US GDP ripped higher to a clip over 4%, US consumer confidence is nearing an 18 year high. With wage growth appearing in the economy, job creation, robust hiring, low employment, and tax plan incentives, consumers surveyed are showing optimism. Sources https://www.conference-board.org/data/consumerconfidence.cfm and market watch.com
Having worked in logistics out of college, I know a good indicator of true economic activity is truck tonnage, in other words how much freight are US trucks actually moving. Here is the chart.
10 yield Treasury yields have climbed back to 2.95. Inflation is remaining tame and now the big question, will the FED continue to raise rates? They have risen rates too quickly in the past causing too much slowing of the economy too quickly.
Meanwhile, the cost of borrowing Dollars is rising also. Here is a chart of the USD Libor Rate. Why the increase in the cost of barrowing dollars? Perhaps the FED isn't pumping cheap dollars into the system anymore at ultra low rates. In the past few years, you could barrow dollars at ultra low rates. A couple years ago, at one of my real estate closings, the APR on a 30 year mortgage note was 3.0%. Wow! Now the APR is approaching 5.0% on these same 30 year mortgage notes. The cost of borrowing dollars is rising.
Some financial instruments take the staircase up, step by step, like the S&P Index, while taking the elevator down. Other financial instruments take the elevator up and then back down like USD Libor has at some points in history. No doubt, the "elevator" may represent and probably does represent volatility. So what is the lesson here? Let's generalize in parable form--maybe what goes up comes back down, and perhaps what comes down may go back up--how quickly increases and decreases occur would seem to indicate the level of volatility. One of the volatility indicators I look at is a S&P based index ticker, VXX, which moves in inverse to the S&P typically.
We all know economies have boom and bust cycles that they progress through--the challenging part is figuring where in the economic cycle we currently are. If I'm a builder, should I spec more homes or focus on contract to builds? If I'm an index investor, should I be buying the indexes or move into cash? If I'm a bond investor, should I buy corporate, municipal bonds, or move towards Treasuries? I think many economists would agree that we are 9 or 10 years into an economic expansion currently.
I was recently looking at Credit Default Spreads, a credit derivative, (see chart below) on some pan-European financial institutions and WOW Deutsche Bank (DB) seems to have some issues, though CDS don't typically reflect counterparty risk or funding costs. I've read DB's CDS holdings of other companies and institutions are very large, perhaps in the Trillions.
In Greenville and Spartanburg, we are still experience low housing inventory.