Long-term rates stabilized this week as events, puzzles, forces and conflicts scattered all over the world canceled each other.
We focus on the yields of long-term debt (like bonds and mortgage-backed securities) because they are the result of real-time voting on economic prospects. Belief in improved growth and its companion inflation push rates on long-term bonds and mortgages up. Poor or weakening prospects push them down. Political instability pushes down, relief pushes back up.
We stabilized this week, but in a down pattern. The bond market has traded daily on Ukraine, but in a displaced way. For now, the risk of conflict there is remote to the rest of the world. But if Europe at last pulls up its socks and inflicts real sanctions on Russia, that will slow the whole world.
When Europe makes courage noises, like the Cowardly Lion from the Wizard of Oz, rates go down. When Europe whimpers, markets relax, and rates go back up.
In the background in Europe: the still-deteriorating financial structure. European flinching from sanctions is not entirely a lack of intestinal fortitude. The place is such a mess that sanctions could tip over its pretense.
German 10-year bunds pay 1.15 percent, Spain’s 2.52 percent, and Italy’s 2.71 percent. Italy’s sovereign debt is now 135 percent of GDP and rising; falling yields are a sign of disaster, banks and investors piling into the safest possible investment while other credit dries up. Russia is weaker. Its central bank today again raised the overnight cost of money, now 8 percent, to try to stop cash from escaping.
Uncertainty is driving us battier than a lot of the possible outcomes. The one-Europe fantasy is a bust, but could take a decade or a month to unglue. Ukraine-Gaza-Syria-Iraq-Afghanistan today collectively is nothing compared to Cuba ’62, or to Berlin ’48 or ’61, or to either ’73 or ’80 oil crisis — let alone to actual wars.
But today’s world is different: Pathetic Europe is no longer a stabilizing force. The U.S. can’t do it alone. China, the fastest-rising great power, is preoccupied with its navel. Anybody hear anything from Xi Jinping on the need for a cease-fire in Gaza?
Here in the U.S., one of the all-time puzzles. We could be right on the edge of a terrific expansion born of 25 years of wage-suppression and renewed competitiveness. The one missing piece: rising incomes. Get that, and everything else falls into place.
This week initial claims for unemployment insurance fell to 284,000. The four-week moving average is only 302,000. Going back to the early 1970s, U.S. population only two-thirds of today’s, every time the claims number fell as low as 300,000 the economy was overheating and inflationary. So much so that each Fed had to react and recession ensued. Not claims on a percentage basis, population-adjusted, but 300,000 raw.
How is it possible to drop so low now, a super-duper-cyclical drop in layoffs, and not mark the beginning of employer competition for workers? What kind of new age economy is this, in which record-few people get fired, but businesses can’t or won’t pay up to get new workers, or even hire them on a full-time basis?
Is global substitution that strong? Or has global commerce altered the business cycle?
All prior U.S. expansions and most foreign ones, the national and central bank problem has been the strong tendency of economies to enter reinforcing spirals, either up or down. See claims numbers like this, unemployment falling, new hires even if shaky jobs, every Fed would rush to pre-emptive action. But that doesn’t feel right, not to me and mercifully not to Federal Reserve Chairwoman Janet Yellen. It feels as though some force of cosmology, some dark energy has tamped down U.S. acceleration.
I hear all the violin-screeching that it’s the fault of “Obamacare,” or debt, or not enough debt, or Congress, or too much government or too little, but none of that truly fits the data. Very much like the geopolitical scene, the uncertainty is worse than the likely outcomes.
Next week we’ll get some clarity. Friday brings July payroll data and ISM. If acceleration is not evident, then we don’t have it. I had an English professor who said of hidden meaning in poetry, “If it’s hidden, it’s not there.” And we’ll know if Europe will engage Czar Putin. If you’re going down, might as well go down with your head high.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
