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Higher yields on Treasuries is good news

The 34 bps rise in 10-yr Treasury yields this month is a good indication of how market sentiment—which by late August was obsessed by the belief that the U.S. economy was on the verge of a double-dip recession—is changing. As I've explained many times before, very low yields on Treasuries only make sense if one believes that the prospects for the economy are dim. Rising yields therefore reflect rising optimism (or perhaps it would be better to say receding pessimism). The economic data of late have been not nearly as bad as the market had expected, and of course commodity prices continue to rise.

Not surprisingly, yields and equity prices have moved higher in virtual lockstep this month. I'm guessing this is only the first chapter in what will be a long story of recovery: higher yields and higher prices for risky assets.

It would be a mistake to think that higher yields threaten the recovery. It's the other way around—the recovery threatens those who have purchased Treasuries.

Quote of the day

If there’s one thing I’ve learned up here (in Washington) ... the only way to get Congress to balance the budget is to give them no choice, and the only way to keep them out of the cookie jar is to give them no choice. If you don’t tie our hands, we will keep stealing.

 Rep. Tom Perriello, D-Va., courtesy of The Washington Examiner. HT: Glenn Reynolds, who would be my nominee for Most Valuable American.

Exports have been very strong

July export data show that exports of U.S. goods have surged fully 30% since their recession low of April 2009. As of July, goods exports were only 10% below their record high, set exactly two years ago. This is not yet a complete recovery, but it's an impressive recovery nonetheless. The July data on container shipments out of Los Angeles and Long Beach suggest perhaps some moderation in the rate of growth, but these numbers are way too noisy to draw any strong conclusions.

Commodity prices continue to rise

Industrial spot commodities (this chart shows the CRB Spot Commodity Index) are on a tear, having risen over 10% since July. Where there's this much commodity smoke, there is likely an economy (or easy money) that is on fire. A long-term chart of the same index follows. Note the composition of the index—it contains no energy, consists mostly of mundane things that are part of basic industrial processes, and very few have associated futures contracts. This is a very down-to-earth collection of commodities. At the very least the commodity action is a strong vote against the existence of a double-dip recession, and a very strong vote against the risk of deflation. Most likely, it reflects both an ongoing global recovery and easy money. Easy money creates extra demand for commodities, since tangible assets in general are natural hedges against the risk that paper money loses its value.

Unemployment claims were never a real problem

The big unemployment claims scare that developed last month has now proven to have been the result of quirks in the seasonal adjustment factors. Put simply, the economy was not behaving in the manner that the seasonals assumed. This sort of thing happens from time to time, which is why one should never get too excited about sudden moves in seasonally adjusted numbers like this. (Top chart shows seasonally adjusted claims, while the bottom chart shows the raw data.)

As I have been pointing out for several weeks, the non-seasonally-adjusted claims data has been trending down all year, and did so again this week, reaching a 2-year low. There is every reason to believe that on an adjusted basis, claims are slowly declining, or at the very least they haven't rise at all this year. One more nail in the double-dip recession coffin.

Blogging is going to be light this week since we are entertaining some good friends from Argentina.

UPDATE: I now note that 9 states failed to file claims data, so even the raw numbers here are subject to adjustment. I doubt that there is any sinister news lurking here, however.

The news is not bad, and that's good

This chart shows new mortgage purchase applications, which have been very weak, but look to have bottomed in July and have increased marginally since. This is not too much to go on, of course, but at the very least it suggests that the weak home sales numbers we've seen of late are not getting worse, and that therefore the housing market is not in freefall as many have been suggesting. The recent weakness may prove to have been a temporary lull. Whatever the case, it also adds to the case that the dreaded double-dip recession is not unfolding.

In other news, today's equity rally seems to have been helped along by news that European banks are not collapsing. This action reaffirms my view that the market has been extremely worried about bad news, and therefore the absence of bad news ends up being a positive. If we end up with any positive news, there will likely be plenty of action to the upside.

Meanwhile, I note that commodity prices continue to be strong, once again confirming the absence of a double-dip, and also confirming the absence of deflation. There are of course many prices that are falling, but just as many or more that are rising. This amounts to a relative price change, not a deflation, and this is normal given the depths of the recent recession.

Obama's loss is the economy's gain

These two charts are arguably the most important of all the charts I've shown over the years, since they are predicting what could prove to be biggest political realignment of the American electorate in modern times. It's going to begin in just two months, if not sooner, and it could have an extremely positive impact on the outlook for the economy and the equity market.

Barack Obama's Approval Index, according to the daily Rasmussen survey, yesterday reached a new low of -23, while a record 47% now strongly disapprove of what he's doing. Even the Gallup polls show that a clear plurality of people disapprove. Say what you will—he's out of step with the country, he's inexperienced, he's poorly advised, he's a socialist at heart (my view all along)—he's failing on almost all fronts, and the Democrats are going to pay a huge price for this at the polls. If Obama is going to leave a legacy, it will be that he was The One that galvanized the Tea Party movement, and the Tea Party is the change on the margin that is making all the difference. Obama has left absolutely no doubt about what the Democratic Party stands for—bigger, more intrusive government—and the Tea Party's main objective is to reverse that. Already it's very likely that the Democrats will lose the House (Intrade places the odds of a Republican takeover at 70%), while some (e.g., Dick Morris) are making the bold prediction that they will lose the Senate as well.

This means that at the very least Congress will not pass any more big-government programs, particularly an onerous cap-and-trade bill that would punish the U.S. economy by unilaterally raising the cost of energy and divvying up the proceeds of a carbon tax among politically favored groups and industries. It also means that it is very unlikely that the Bush tax cuts will be allowed to expire at the end of this year. It seems clear to me that most or all of the income tax cuts are going to be extended, for at least a year or two; politicians on both sides fo the aisle realize there is huge discontent with the state of the economy, and nobody is even trying to argue that higher taxes are the solution.

The big issues remaining to be resolved are whether the cuts for "the rich" will be extended or not, and whether and by how much the tax on dividends and capital gains will rise. I'm hoping that good sense prevails, and all of the Bush tax cuts are extended. This would reduce the amount of uncertainty out there by a lot, and that is a lot better than the new "stimulus" package consisting of $50 billion in infrastructure projects that Obama is supposed to unveil tomorrow.

The distressing level of unemployment, the relatively tepid recovery to date, and the obvious failure of $1 trillion dollars of "stimulus" spending to make things better add up to very strong arguments against raising any taxes. The Keynesian approach to "jolting" the economy by throwing money at it has failed, as I and many others predicted. Building a new road or resurfacing an old one does very little if anything to create jobs, but it is one way of retaining union jobs.

A far better approach to stimulate the economy would be to permanently increase the incentives to work, save, and invest. That means making permanent the tax cuts on labor and capital, or at the very least no tax hikes, especially on the fraction of the labor force that is the most productive. Government can't spend money as wisely and as efficiently as the private sector, so we need to let the private sector keep more of the money it earns. That's the only way to help the economy grow. A confidence-boosting, low-tax-extending bill would not only guarantee more growth in the future, it would take effect almost immediately. And supply-side logic says that the "cost" of extending the tax cuts would be almost nonexistent: it's better to charge the same tax rate on a bigger tax base than to raise the tax rate on the same tax base. If Congress really wanted to do something intelligent, they would not only extend the Bush tax cuts across the board, but also lower our corporate tax rate, which is the highest in the developed world. But doing something so logical probably requires a new Congress.

My good friend Russell Redenbaugh puts the financial implications of all this in a nutshell: the likelihood of the Republicans gaining control of the House has put a floor under the market, while the odds of the Republicans winning the Senate define the upside.