I am going to talk about Texas tonight, this being my annual report on the status of the Texas economy. I will walk you through a series of slides that illustrate the strength of the Texas economy, a series of economic records we have set this year, and to provide a balanced view, some of the growing pains that we are encountering. But first, I want to make a comment on monetary policy. Thinking outside the box It strikes me as timely for the Fed to consider implementing one of the possible options under the “normalization principles” the FOMC articulated in September: allowing our security holdings to run off as the bonds in our massive portfolio mature. 1 Before you jump out of your skin at this “radical” thought, let me ask you to consider the following. The 10-year Treasury note has rallied in price and declined in yield to 2.29 percent. German 10-year bunds, the equivalent market-anchoring European security, are trading to yield 0.74 percent; the Japanese 10-year yields 0.42 percent. The spread between the U.S. and the German sovereign yields is slightly narrower than it was at the end of third quarter 2014, but it remains historically large and attractive for investors. 2 Hold that thought.
Now, if you read page C3 of today’s Wall Street Journal, specifically the article titled “Watchdog Warns of Risks in Markets” about the risks of a repeat of the bond market turmoil of October and concerns about market stability as seen through the eyes of the Office of  1  The FOMC’s “Policy Normalization Principles and Plans” released on Sept. 17 is available at www.federalreserve.gov/newsevents/press/monetary/20140917c.htm. 2  Over the past 15 years, the U.S. long rate has averaged about 40 basis points higher than the German long rate. Since January 2013, the yield spread has widened by 110 basis points to about 1.50 percent. Over the same period, German 10-year inflation expectations have dropped from 1.9 percent to 1.0 percent, or 90 basis points. U.S. 10-year CPI inflation expectations have dropped from 2.3 percent to 2.2 percent – just 10 basis points. So it is worth noting that the drop in German inflation expectations relative to U.S. expectations can account for most of the widening of the yield spread between these two sovereigns. For investors who measure performance in terms of nominal returns or returns against nominal indexes, however, the currently widened spread is relatively attractive. BIS central bankers’ speeches  1  Financial Research (a bureaucracy of some 225 people and growing, created by the DoddFrank law), you would have noted the following sentences: “A reduction in securities that are available to lend against in financial markets – such as Treasury bonds and asset-backed securities – also is fueling...volatility.