2. 3-Month Libor-OIS Basis Contracted
The FF-GC basis had widened significantly last year due to stress in funding markets and risk aversion, leading to a severe shortage of treasury collateral. This was one of the factors pushing 2-year swap spreads wider. This basis has normalized due to the Fed's pro-active policy measures and a significant increase in treasury supply. Another peg in the same equation was the LIBOR-OIS basis. Interbank cash markets were dis-functional due to counter-party risk concerns among banks. This was preventing the Fed's policy stimulus from flowing through into cash markets. Narrowing of both these spreads is good news for the transmission mechanism of monetary policy and ultimately, growth.
3. Baltic Dry Index Off the Lows
Is this a reflection of the Chinese stocking activity or a genuine pick up in growth? Hard to say, but the trend over the last couple of months does indicate that the world economy has most likely bottomed.
4. Oil Outperforming Oil Stocks
This was certainly the case early last year when oil rose to stratospheric levels. Equity investors questioned the sustainability of the move in the underlying commodity and were right. I would agree with stocks this time as well because a significant increase in oil price at this stage of the cycle will likely nip the incipient recovery in the bud.
5. Gold Stocks Outpacing Gold
Gold is a great bet going forward. What is the probability that global central banks will get it just right? Pretty low, in my view. Most likely, monetary authorities will be late in withdrawing the extraordinary stimulus, making inflation a real risk at some stage in the future.
6. VIX is Significantly Down from the Highs
When equities collapsed in early 2009, the VIX did not climb back to the post-Lehman levels. This indicates that investors are now more sanguine about the worst fears expressed during the last quarter of 2008.
Overall, I think that we now can invest as if we are in a standard recession. I had always thought that proactive policy measures would minimize the probability of the Great Depression tail event. That is what the markets are saying now and I concur wholeheartedly.
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