Monetary policy in the U.S. is actually tight, believe it or not. Sure, the federal funds rate is just a hair or two above 0% but what counts is growth in credit and the money supply.
Both are trending at rates that suggest economic expansion in the U.S. will be muted in 2010, despite the 5.7% jump in GDP during the fourth quarter. So say Northern Trusts economists(a group whose reports are among the best in terms of clarity and cogency, in my opinion).
As they note: bank credit contracted at an annualized rate of 6.1% (in real terms) during the 12 months to Jan. 31 — the sharpest decline since President Carter imposed credit controls in 1980. Growth inM2 money supply over the same period registered a paltry 1.9% annualized rate.
Northern Trust economists had expected the Federal Reserve to begin raising interest rates in August. Now they think Fed rates wont start rising until early 2011.
Many people may disagree that the economic lift-off is being pushed back. Look, they say, at U.S. retail sales — which have advanced in four of the past five months and are up 3.9% over 2009.
Ah, but retail sales are a coincident, not leading indicator. While coincident indicators like retail sales growth have been rising they are likely to start easing back by mid-year, Economic Cycle Research Institute (ECRI) managing director Lakshman Achuthan told Reuters.
If one does look at the leading economic indicators, a less optimistic story emerges. Take the ECRIs own Leading Weekly Indicator (WLI), one of the best around in my view. Its annualized growth rate has fallen for 12 consecutive weeks and now stands at 13.1%. In October of 2009, by comparison, the annual growth rate in the WLI had reached 28.6%.
The continued easing in the WLI, declared Achuthan, points to a slower expansion, beginning during the summer months.
This all augurs quite well for defensive, not cyclical strategies, observed Gluskin Sheff economist David Rosenberg. And buying insurance right now to protect any long portfolios is dirt cheap with the VIX index sitting at 17.