By Mike Whitney
Improving economic data has sent US Treasuries plunging as investors ditch low-yielding assets and load up on equities.
This is the way the financial media is spinning the giant moves that have taken place in the bond market in the last week, but the media’s got it wrong. While there have been improvements in employment, manufacturing and consumer confidence, the economy is still limping along at half-speed well below its potential level of output. More importantly, wages are flatlining and consumer credit is in the doldrums. Aside from a slight-uptick in credit card receipts, there’s no indication that debt-stricken consumers are ready to go on another wild spending-binge. So, how’s a credit-based economy going to rebound when credit’s not expanding?
It won’t, which is why this whole “surge in Treasury yields-thing” is just another false alarm. Keep in mind, it’s not the little guys (retail investors) who are jettisoning their risk-free bonds. It’s the banks and other deep-pocket institutional investors. Some of these guys think that inflation is just around the corner, but they’re mistaken. Once oil prices settle down, the CPI will flatten out, and Bernanke will have to fire-up the printing presses for the umpteenth time.
Now get a load of this “happy talk” from The Economist:
“ARE we witnessing one of those historic turning points in markets, on a par with March 2000 (when the dotcom bubble burst) or March 2009 (the post-Lehman low)? The issue is not so much with equities which are continuing the stop-start recovery that has lasted for three years. The interesting issue is the bond market which has seen a steady decline, taking the 10-year Treasury yield to a five-month high. Gold is also weaker, down at around $1640 an ounce, and a long way below the $1900 peak reached last year.” (The Economist)
No, we are not witnessing “a historic turning point”. 10-year yields were much higher last year and no one was prattling this nonsense. So, why now? Does the Economist believe that “animal spirits” derive from sky-high unemployment, rising levels of extreme poverty, and 45.4 million people on food stamps? Get a grip! The economy is on the ropes, anyone can see that.
Yes, the stock market continues to rise, but what would you expect when the Fed sets rates below the rate of inflation, floods the financial system with liquidity, and exchanges $2.3 trillion in cold-hard cash for a flatbed-load of garbage assets? Did you really think that stocks were going to fall with all that funny money floating around?
Rising yields have more to do with seasonal factors than anything else. 2012 was the 4th warmest winter on record, which explains why so many people were out buying things instead of cooped up in the house drinking tea. So called
“seasonal adjustments” also explain the consistently strong employment reports which are likely to fade in the coming months. It’s worth noting that Gallup continues to dispute the BLS’s claims that unemployment is falling. Here’s a clip from their latest report:
“U.S. unemployment, as measured by Gallup without seasonal adjustment, increased to 9.1% in February from 8.6% in January and 8.5% in December….
The 0.5-percentage-point increase in February compared with January is the largest such month-to-month change Gallup has recorded in its not-seasonally adjusted measure since December 2010, when the rate rose 0.8 points to 9.6% from 8.8% in November….” (“U.S. Unemployment Up in February”, Gallup)
Readers can draw their own conclusions, but (at least you can see that) there are serious analysts who distrust the government’s unemployment figures. The discrepancies should shake-out in the next few months and we’ll know whose calculations were closer to the truth.
In any event, retail sales and the improving jobs market have increased optimism which is why more investors are moving out of risk-free assets like USTs and into stocks. But there’s another reason why Treasuries are getting clobbered, too. It’s because the Fed has given the banks the green light to issue dividends to their shareholders, which means that less capital will be allocated for government bonds. That’s what the phony “stress tests” were all about. Bernanke wanted to make it look like these teetering behemoths were healthy enough to start recycling money to their parasite friends again when, in fact, they’re as over-leveraged as ever. As an article in Thursday’s Wall Street Journal notes, current borrowing is “29 times capital…eerily reminiscent of levels seen before the crisis.” (“Stressed over stress tests for the Banks”, WSJ) In other words, the banks are as maxed-out as ever. Dodd-Frank hasn’t changed a thing.
The stress tests have also cleared the way for massive stock buybacks that are designed to goose equities prices and, thus, inflate bonuses. Charles Bidermen explains how these buybacks have been driving the market in a recent post on his website at Trim Tabs. Here’s an excerpt:
“…in February new stock buybacks were the most since in any one month since last September. Since stock buybacks are the only new source of money for the stock market, a pop in buyback activity says to me that stocks prices could to go higher over the next few weeks.
…. In the past a consistently rising stock market almost always was related to a rapidly growing economy. That is why most investors now believe that the reason stock prices have not gone down at all recently is due to a rapidly improving US economy.
But the current growth rate of the US economy is nowhere near correlated with the growth rate of stock market wealth. The value of all stocks is up over $9 trillion from the three year ago March 2009 bottom, and is up over $3 trillion from the early October 2011 low.
At the same time wages and salaries for all tax payers is up, maybe $400 billion a year over the past three years to about $6.3 trillion a year compared with $5.9 trillion in early 2009, that is a 2%+ annual gain, less than the about 3% rate of inflation.” (“Biderman’s Daily Edge: “Stock Prices Supported by New Buyback Activity”, Trim Tabs)
Trimtabs just confirms what we already know; that the soaring stock market cannot be explained in terms of the minuscule improvements in the real economy. While it’s true that the economy has been taken off life-support; it’s also true that demand remains weak, unemployment is high, and consumers and households are still trying desperately to reduce their debt-load. All of this suggests that — absent another round of fiscal stimulus–the economy will continue to underperform and remain sluggish for the foreseeable future. And that means yields on US Treasuries will stay low.
There’s one thing, however, that could change the present dynamic and (potentially) send UST yields into orbit—another round of quantitative easing (QE). Although, the Fed’s asset purchases have had little effect so far, the reaction from abroad –where nearly 50 percent of USTs are owned–has grown increasingly hostile due to disruptive capital flows that push up inflation in emerging markets. Should patience wear thin and foreign investors decide to abandon their Treasuries, risk premiums would rise sharply triggering eratic price fluctuations across all asset classes. This is the nightmare scenario that Bernanke hopes to avoid. Seismic moves in the bond market–brought on by the Fed’s persistent interventions–could send foreign investors racing for the exits crashing the dollar on their way out. A bond market meltdown would be the end of America as “the world’s only superpower.” So it’s worth keeping an eye on.