pro-LEP-sis
1. The use of a descriptive word in anticipation of the result. Example: The word hot in hot water heater.
2. The anticipation and answering of an objection or argument before it's raised. Also known as prebuttal.
3. The representation of an event before it actually happened. Example: He lost the game even before the match began.
4. A literary technique in which the author drops hints of things to come. Also known as foreshadowing.
From Greek prolepsis, from prolambanein (to anticipate), from pro- (before) + lambanein (to take). Earliest documented use: 1450.
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TIP OF THE WEEK
There could be an economic prolepsis with government guaranteed lending.
Concerned about possible escalations in defaults the California Infrastructure & Economic Development Bank (IBank) has reduced its maximum guarantee from $2,500,000 to $1,000,000 effective July 1st. Even with this reduction, the State Guaranteed Lending Program remains a viable complement to SBA guaranteed financing.
For the period ending June 7th, SBA 7(a) loan approvals have declined over 8% compared to the same period a year ago. This is the first sustained decline in loan approvals in almost 10 years.
Just for fun I calculated the correlation coefficient between SBA 7(a) loan volume and GDP for over six years using the Microsoft CORREL function. It came out to a statistically significant 0.86.
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Indices:
PRIME RATE= 5.50%
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SBA 504 Loan Debenture Rate for June
For 20 year debentures, the debenture rate is only 2.60% but note rate is 2.645% and the effective yield is 3.983%.
For 25 year debentures, the debenture rate is only 2.77% but note rate is 2.806% and the effective yield is 4.09%.
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AHEAD OF THE YIELD CURVE
It is widely accepted that that an inverted yield curve creates splenetic presentiment of a recession. The slope of the yield curve—the difference between the yields on short- and long-term maturity bonds—is a simple forecaster of economic growth. The rule of thumb is that an inverted yield curve (short rates above long rates) indicates a recession in about a year. More generally, a flat curve indicates weak growth and conversely, a steep curve indicates strong growth.
A key measure of the yield curve deepened its inversion, with the usually positive spread between the 3-month bill yield and 10-year yield at a negative 11 basis points as of Friday. An inversion along that measure has historically preceded a recession, though the timing can vary.
One of the recessions predicted by the yield curve was the most recent one: The yield curve inverted in August 2006, a bit more than a year before the most recent recession started in December 2007. There have been two notable false positives: an inversion in late 1966 and a very flat curve in late 1998.
Although an inversion in some measures of the yield curve, such as the 3-month/10-year spread, might point to an economic downturn, other segments of that curve suggest a more optimistic view of the U.S.’s growth prospects. The 2-year/10-year gap has yet to turn negative. The spread between the 2-year/10-year stands at a positive 25 basis points, from a recent low of 14 basis points on May 28.
The longer end of the curve with the 30 year Treasury bond is also holding up. Last week’s auction of $16 billion in 30 year Treasury bonds was met with strong demand as the yield ended up at 2.607%.
The Federal Reserve also reported last week that industrial production rose 0.4% in May, the strongest monthly rise in six months. Capacity utilization edged up two-tenths of a point to 78.1%. The biggest gain came from the most volatile category, utilities, which surged 2.1% in response to consumers cranking up air conditioners. Industrial production is up just 2% from 12 months ago.
Here is what capacity utilization rates have done:
2007- 81.5
2008- 79.9
2009- 66.9
2010- 74.8
2011- 76.7
2012- 79.0
2013- 77.8
2014- 78.8
2015- 76.5
2016- 75.4
2017- 76.2
2018- 78.5
2019- 78.1
What does all this mean?
I don’t know.
One of the Fed’s favorite leading indicators on inflation is capacity utilization which measures the amount of a plant that is in use at factories, mines and utilities. Several analysts have pointed to a rate between 81% and 82% as a tipping point over which inflation is spurred. At a capacity utilization rate of 78.1%, inflation is the least of the Federal Reserve’s concerns.
The Fed’s next meeting on monetary policy concludes on June 19th.
Investors foresee zero probability that the Fed will raise rates anytime this year. And in fact, their bets indicate a roughly 64% likelihood that the Fed will cut rates before year’s end.
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OFF BASE
There is often prolepsis over summer with Memorial Day. Summer does not start until this Friday, June 21st.
The day of the summer solstice is the longest day of the year. The length of time elapsed between sunrise and sunset on this day is a maximum for the year. There are about 14½ hours of daylight on this day for most of us.
