The economic optimists are still in charge of markets, rates and stocks still rising. However, the divergence is widening between them and those worried about credit and latent weakness. It may take a month or two to figure whose stubbornness has merit.
Markets first, then new economic data.
The 10-year T-note has jumped to 3.85 percent this morning, the highest since last fall, and even two-year Treasurys rose in yield today in belief that a Fed rate-hike has come closer. Mortgages have gone right along to 5.625 percent with lowest fees — the highest since the Fed announced its intentions to buy at Thanksgiving. A 1 percent rate-rise in two weeks has stopped refinance activity altogether, and purchase markets also suffer.
Stocks have now recovered all 2009 losses, and the Dow’s press up on 9,000 has retraced one-third of its overall collapse. A mechanical pattern typical of all major moves either up or down, these retracements also typically have little predictive value. Worriers are convinced that this move is an all-time "dead-cat bounce."
Optimists think oil touching $70 a barrel confirms their position, but that market carries a sulfuric whiff of speculative fiddling. There is no increase in global demand, and the world is awash in supply overshoot — it won’t last for more than a few years, but is deep and broad. Not even speculation can move natural gas, trading under $4 today. Industrial commodities have retraced like the stock market, but the whole agricultural sector is flat-on-bottom — one old friend says that Memorial Day retail sales of beef were the worst ever measured. National health kick, or budget beans?
The first week of each month brings the most important data. Today’s rise in rates and stocks immediately followed news that payrolls contracted by "only" 345,000 jobs in May, down a quarter-million from the first-quarter monthly average. However, unemployment jumped another 0.5 percent to 9.4 percent, new claims for unemployment insurance are steady at 625,000 weekly, and only continuing claims flattened. Possibly some people are going back to work, but only at lesser pay. The overall job picture is awful.
The twin Institute for Supply Management reports by inventory managers excited the optimists. Manufacturing rose from 40.1 to 42.8, technically close to recession-end level (actual growth lies at 50), but the juice was in the components: new orders to 51.1, and "prices paid" from 32 to 43.5 produced a delighted "Eek!" from inflationists. Wednesday’s service-sector survey (70 percent-plus of the economy) was tepid, to 44 from 43.7, and optimists ignored employment components in both surveys, which are still mired in the 30s.
The optimists, centered in the stock market and joined by the inflation-fearful, see a normal, cyclical recovery building, in which jobs are the last to recover and inflation follows. It may be on the weak side, but there will be no more Bears, Lehmans, AIGs, Chryslers or GMs. With all the big dominoes down, there is no reason to buy Treasurys for safety at no-earn yields. …CONTINUED
Housing can fend for itself — those silly people deserve this lesson, after all. Even Federal Reserve Chairman Ben Bernanke says, "Housing has shown some signs of bottoming."
The worried — mostly credit people joined by non-stock-market economists — see an extremely atypical situation: a balance-sheet recession still deteriorating. Asset values have fallen or collapsed versus debt outstanding, leaving households and banks with negative equity and little access to credit.
Without credit, there is no way to stop the asset-liquidation spiral. The cyclical turn is an illusion, merely temporary stability among big institutions while Main Street continues to erode.
The worst illusion: The rise in Treasury yields is mistaken by optimists for a sign of health, when in reality excessive federal borrowing cannot be absorbed by a still-shrinking and decapitalized financial world. Last week, Fed Vice Chairman Donald Kohn gave a careful warning about deficit-spending benefits at risk to higher long-term rates.
This week, Bernanke said, "A relapse in the financial sector could cause the incipient recovery to stall." A new shutoff in mortgage credit looks like a relapse to me.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
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