Long-term interest rates plunged this week as any hopes for a V-shape recovery gave way to L-shape reality.
A 10-year Treasury auction drew three times as many bids as bonds offered, the yield to 3.3 percent from 4 percent last month taking mortgages under 5.25 percent. The best chance for a run back into the fours: a big break in stocks. Inflation bets sank with rates: oil broke $60 for the first time since April; gold is $912 vs. $980 in May.
Most of this sentiment shift has been follow-through from last week’s trend-breaking job news; the rest more "L" data just like it: The Reuters/University of Michigan preliminary index of consumer sentiment fell in July for the first time since February, to 64.6 percent, compared with 70.8 in June. The Institute for Supply Management service-sector survey crept to 47 in June from 45, still short of growth-marking 50. The consumer-credit contraction slowed from a fatal -7.8 percent in April to -1.5 percent in May.
The "worry-campers" are well established in the fiscal trap, no-bottom housing, and credit crunch; and even those with growth hopes expect inflation interception.
Time to look outside the box. One of the oldest Wall Street lines: "It’s never what you’re looking for that gets you." Same for unexpected good-side outcomes.
Righties think that lefties believe all solutions come from government, and lefties think all righties are stuck in rigid rules of markets and invisible hands. Both overlook the strongest force of all: consistently unpredictable human adaptation to crisis. The bigger and more unique the crisis, the faster, bigger and more unusual our response. A global and electronic economy without referee or rules magnified this mess, but its unprecedented openness and flexibility will supercharge our reaction.
Especially in the U.S., the reaction to the post-Lehman financial meltdown was the soul of prudence: Stop spending and borrowing and save any nickel seen rolling across the kitchen floor. Neither the authorities nor wizards of industry seemed to have any idea what had happened, why, or what to do. So, go to the bunker.
The resulting shift in national savings is without precedent anywhere in modern times. From slightly negative in early 2008, we are now socking away 8 percent of income. If you’re drowning in immense negative numbers, try an immense positive one: We’re on track to save $900 billion this year, despite income diminished by unemployment. Keep this up for another couple of years, and the scary debt-to-gross-domestic-product ratio will be repaired even though GDP fell. …CONTINUED
Those savings dollars have disappeared from consumption and current growth, but they are the capital for sound, non-inflationary, low-leverage growth in the next cycle. In the first quarter alone, U.S. households and nonprofits almost doubled their Treasury holdings and more than doubled the net increase in foreign holdings.
Another left-right both-wrong: Lefties think government creates jobs, and righties think kindly Daddy Warbucks does all the hiring. Reality: Most jobs are created by people who want them and are willing and eager to work — another form of capital. The nation’s unemployed know painfully well that they can’t wait for Warbucks or Washington; they are every day making hard decisions to take lesser jobs in pay and dignity, and will be productive assets for their new employers — and soon again: taxpayers.
Then there is the tap at the door of the baby boomers. The most indulged, self-satisfied, overconfident and unchallenged generation ever. Seventy-eight million of us, ages 44-64. AARP says 24 percent of us have deferred retirement since the crisis began. One would hope so, young and fit as we are. The one age demographic showing job growth: over 55. If we stay in the workforce just two or three years longer than prior models, Social Security will be overfunded and Medicare halfway fixed. Work five or six years longer … why, there’s no telling what this country could amount to.
Last: leadership and morale. The authorities still seem clueless, stuck in old-time solutions. President Obama is marvelous at the mic, but increasingly distant from events in the audience. Now I get some sense from civilians that they are bored with the bunker.
Fear and confusion get old. If leaders won’t lead, well … let’s get on with it ourselves.
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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