This week has been another lesson in market reactions to news economic and otherwise. And at deeper levels, how not to run railroads.
The net result, before whys and wherefores: a new flight to quality, the U.S. 10-year down to 2.32 percent, it and European bonds in something close to free-fall. As in last week’s prior leg down, and typical of international runs to safety, U.S. mortgages are not following. Not yet anyway, still in the low fours. The German 10-year bund is trading 0.957 percent, almost a quarter-point below its all-time record low of two weeks ago.
Which is more important: fear of war or of recession? Czar Vladimir gave a speech midweek to a domestic audience with all the right words. Russia should not act with “arrogance,” and should not “close itself off from the world.” And President Obama declared victory in humanitarian bombing in Iraq, at least temporarily reducing the chance of bigger-longer back to Iraq.
The flight to quality should have reversed on this peaceful news — would have if something else had not happened during the same days. But something else did happen. New economic results from Japan, Europe and the U.S. all deteriorated. And any effort to lipstick it would look like Nicholson as The Joker.
Japan’s second-quarter GDP contracted at a 6.8 percent annual pace under the weight of the increase in its national sales tax from 5 to 8 percent. Ten-year JGBs are trading 0.505 percent.
Europe’s second-quarter GDP was without any growth at all, inflation down to 0.4 percent, debt still growing in the periphery at annual rates 5 to 7 percent, monetary union ever-so-gradually failing.
U.S. data are better than that, but retail sales have stalled here, and every national home-price report shows a weaker year-over-year price gain than the previous report. Consumers, if not weakening, are defensive and not healing.
Collectively, those reports offset good news in Ukraine and Iraq, and so rates were stable until today. Reports are still murky, but Czar Vladimir is up to something again, Ukraine appears to have shot up a trespassing Russian armored column, and confrontation awaits the absurd Great White Truck Trojan Horse. And Russian exercises near disputed Kurile Islands enraged Japan.
Hence today’s new flight to quality, marking fear of recession and war. Sometimes panic is prudent, but from other markets, other signals. The U.S. stock market seems to rise on any news except the prospect of Fed rate hikes, quickly dismissing even risk of war. Oil is especially sensitive to war risk near supply sources, yet despite Libya, Iraq and Russia, prices are falling. Even very troubled places need to continue to pump, the U.S. boom has offset supply losses, and global consumption is down. Conservation, substitution and economic weakness have combined to pull down prices.
It is daunting to watch capital race to safety into sovereign bonds of dubious quality, away from useful economic activity. The chance that Japanese and non-German European bondholders will be paid back in yen and euros worth what they are today: zero. Yet that prospective loss is shallower than any other option.
There is more to this market motivation, I think, than mini-wars, recessions and stalls. As the events of the last few weeks have marched by, one element is most striking in its absence from the parade: leadership.
Especially here in the U.S., with a government designed to inhibit action, we do pretty well with a void at the top. But this week’s global economic news, if not quickly reversing, is even more corrosive than nobody home. None of us anywhere can tolerate for long being misled. We, inside and far beyond this country, now confront five years of “recovery” talk as just talk.
Something is going on in the global economy transcending the credit meltdown in 2008. Politicians try their old prescriptions only with friendly audiences. Central bankers have filled the political gap with rickety bridges, their own forecasts hollow.
Who will rise to lead?
Ten-year T-note in the last two years. From a technical perspective, only a little support near 2.2 percent, the next at 2 percent.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
