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The Economic Recovery’s ‘Elephant in the Room’

By Rick Ackerman Posted on June 13, 2013, 12:01 am EDT Last Updated June 13, 2013, 1:37 am EDT

Well, that’s two straight Tuesdays that U.S. stocks have fallen. Has Wall Street finally noticed that the real estate sector – the only big winner in American’s sham “recovery” besides the stock market itself – is starting to deteriorate?  Hard to say, although lately we’ve had our doubts that yield-crazed U.S. investors would lose a beat even if an epidemic were to wipe out half of the world’s population. They barely flinched a couple of weeks ago when Japan’s stock market was freefalling. And if deepening recession in Europe and a steep drop in China’s output bode trouble head for the global economy, neither factor has yet to have a significant impact on U.S. stocks, which touched record highs as recently as two weeks ago.

Now, however, comes a worry that will literally hit investors where they live: a steep increase in long-term yields that has pushed 30-year mortgage rates up by 56 basis points in just the last five weeks.  As our colleague Michael Belkin notes, this is equivalent to two rate hikes by the Federal Reserve. An immediately visible result, he says, is that mortgage applications dropped 11% last week and mortgage lenders are starting to lay off brokers. If home sales start to cool even slightly, we wouldn’t be surprised if the “wealth effect” mirage that the Fed has struggled so hard to create over the last five years vanishes in a trice, since Americans have precious few things these days, other than inflated home values, to make them feel wealthier. (Certainly not higher real incomes, which have stagnated since the 1970s.)

From a technical standpoint, T-Bond futures still have a little room to fall before they hit our red zone.  That would imply a drop to around 137-7/32, basis the September contract. (Note: yesterday’s low was 137-25/32.)  In recent years, the Fed has moved aggressively to reverse the bearish tide when it reached or slightly exceeded our proprietary “Hidden Pivot” targets. Although the futures got a strong bounce yesterday off the lows, we still expect a relapse that will bring them even closer to the danger zone. Market-watchers should pay close attention if and when 137-7/32 is approached, since a decisive breach of that price – implying a move below 137 – could imply that market forces are beginning to push back against Fed stimulus. (Click here for a free trial subscription to Rick’s Picks that would allow you to follow these trends in real time.)

End Easing? Get Real!

We have repeatedly emphasized here that worries about the central bank tapering off its quantitative easing program are way overblown, since even a mere hint that the Fed would be willing to seriously consider such an option has sent stocks into violent swoons and spasms. However, if market forces were to cause long-term yields to rise even another 50 basis points, that could jolt the markets severely. What might give rise to such “market forces”? Most obviously, weakness in the U.S. dollar. The greenback has been leaden over the last two weeks, raising doubts about whether its status as the world’s safe-haven currency can endure indefinitely.  Probably not, but our hunch is that the current bull market will resume once investors get over their misplaced fear that Japan is done trashing its own currency. In any case, the ICEUS Dollar Index, currently trading for around 81.11, still has further to fall before reaching our correction target. If this forecast is correct, you should look for the bull market in the dollar to regain traction from 80.66, or if any lower, 80.19.

  • Robert June 13, 2013, 11:17 pm

    Secular bull markets all end with the consistent and unilateral viewpoint that the market being run by the bull can NEVER go back down.

    Sentiment, moreso than technical parabolic chart moves, is what actually ends secular bull markets.

    And we are witnessing it right here, right now.

    “The Fed can not allow rates to rise”

    “The government can not fund itself without issuing more bonds”

    “Bill Gross tweets to sell bonds, but Pimco is buying”

    “The Primary Dealers are appealing to the Fed to instantiate officially sanctioned negative yield policies on US debt”

    This is only my opinion, people, but I’m gonna throw it out there, anyway…

    The smart money is already net short the US bond market. If you are still riding this bull, then you are perfectly positioned, with empty bag in hand.

    Just hold on to that bag for a while longer- maybe a month, maybe a year… But we NEED you to keep holding that bag…

    Got it?

  • dst June 13, 2013, 5:09 pm

    I guess Cam was not a teacher in the 1903’s to the 1960’s where there was very little pay 40-45 in a class room, in the 30’s and 40’s really no pay but a room to stay in and food brought in from the students parents.

    Leave education alone or we all will be 3rd world.

    I am not a teacher.

    • Rick Ackerman June 13, 2013, 5:16 pm

      What on earth are you talking about?

  • Andrew Gutterman June 13, 2013, 3:49 pm

    I sure don’t understand what the panic about rising interest rates is. If you look at this chart of the 10 year T-bond yield its plainly obvious that even if the rate rose to 3.5% from the current 2.2% we would still be in a bull market for bonds:

    http://www.chartoftheday.com/20130612.htm?T

    The higher rates ONLY affect those borrowers who need to borrow now. Any borrowing they did in the past, at lower rates, is not effected. My 4% mortgage will remain at 4% no matter what happens to interest rates. It will only change if I choose to refinance, and event that’s waiting on the final fall in interest rates to 1% or less. I’d LOVE a 2% mortgage!

    I just listened to the venerable (and ignorant) Peter Schiff expound on how rising yields are going to bankrupt the government and everyone else, as if everyone will immediately be paying the higher rates on ALL of their debt.

    My forecast?

    The 10 year bond will hit 1% long before it gets above 4%, and gold will go down to $1150 or lower. As for the economy its only a matter of time before the overwhelming load of debt sends us back into depression mode.

    Guess what happens to interest rates in a depression? They fall.

    And the FED? Well there isn’t a damn thing the FED can do about any of this. All the FED can do is create credit. They can’t make anyone use the credit they create, they cannot make consumers spend it and they cannot force companies to use their excess cash to expand markets and increase employment. In fact the FED can’t do much of anything except stand idly by and watch events that are completely out of their control happen.

    So far the FED has been lucky. They have convinced everyone that they are all powerful and just by their actions they can prop up the economy. But if you really dig down into the lower levels of life you find most everyone is in deep s**t, with the exception of the top 10%.

    But their day is coming. They all depend on us to keep the charade going, and when we finally throw in the towel they are going to experience the rapid wealth shrinking effect. They are much less able than we are to deal with a sudden loss of wealth or income.

    Bad days are coming, and if you are in the lower 60% The best you can do is try and cut your debt load. Not easy to do.

    Andy

    • Rick Ackerman June 13, 2013, 5:15 pm

      Higher rates would apply to a quadrillion dollar, leveraged derivatives edifice and all borrowing, public and private. Both are at civilizational highs. That is what the panic is all about.

    • gary leibowitz June 13, 2013, 9:14 pm

      Andrew, The FED has orchestrated this recovery very well indeed. the bond purchase has allowed short term rates to stay very low for a long time. That is called allowing the economy to heal. Banks got free money and free interest on that money. no losing proposition there. Rates are rising because the economy is improving, even in parts of the EU. Are you suggesting these last 4 years did not do anything for this economy? Are you suggesting that the data on the consumer is faked? At what cost is the only unanswered question. Can we slowly grow our way back and pay off our debt? It would be a long shot.

      Higher long term rates help banks and in turn create more lending. A balancing act. What becomes too high? “Borrow short, lend long”.

  • ter June 12, 2013, 9:29 pm

    Unrebuttable summary, Cam. I can only add the unionized police have become a law unto themselves. Through their unions, they intimidate politicians, elected and appointed municipal and county attorneys. They aren’t prosecuted for shooting or beating to death unarmed civilians daily across the country because they “felt threatened” or ” feared for their lives”. They get a year of paid leave, then are reinstated when their own investigators judge their homicides warranted, after the feckless public has forgotten what happened.

  • mava June 12, 2013, 3:53 pm

    I don’t understand why the expectation of the FED “exiting” ?

    If what the FED is doing is “GOOD”, then why should we not have the FED do that all the time? Are we supposed to expect the FED to do “BAD”?

    So, presumably, there is something “BAD” about what the FED is doing then? What is it? The FED never said he is going to do something “BAD”. And, there is no natural limit to how fast the FED can “recapitalize” anyone. No matter how fast the need for funds arises, the FED can always issue digital money even faster.

    • VegasBob June 13, 2013, 7:13 am

      mava,

      The problem is that at some point, not only Wall Street but the populace-at-large realizes that all of the Fed’s counterfeit digital currency is utterly worthless. When that happens, confidence in the dollar is gone forever and the game is over, period.

      I’m basically a bond investor, and I don’t remember ever seeing Treasuries melt down as fast and furiously as they have over the past 6-7 weeks. The Treasury market is telling me that Bernanke’s manipulative games (ZIRP and quantitative easing) are no longer effective, even to prop up stocks.

      Municipal bonds are circling down the drain along with Treasuries, and my gut is telling me that stocks will probably start circling the drain very quickly as well.

    • Robert June 13, 2013, 11:07 pm

      Vegas Bob-

      The game is not over when the dollar collapses, unless you have wagered heavily on the “fact” (opinion, actually) that the dollar can never collapse…

      and, if you are a bond investor who is witnessing what we all have seen the past 6 weeks or so, all I can ask is:

      WHY are you a bond investor? Volatility in a market affects the psychology of those who HOLD the most.

      Ergo- the question to ask is:

      If Bond prices should collapse, will you (as a Bond investor) see such resultant prices as a “bargain”…?

      People ask me how I can hang with the PM’s and still sleep at night over the past 6 months, and the answer is simple:

      “Buy Low, Sell High”

      If you can’t identify a bargain when you see one, then you are slated to lose money… forever.

      Oh, and BTW– Natural Gas is a BARGAIN.

      Uranium is a BARGAIN

      the MOO ETF is a BARGAIN

      Silver Wheaton is a STUPENDOUS BARGAIN

      Tesla motors? eh- not so much.

  • gary leibowitz June 12, 2013, 4:15 am

    If rates do continue higher we will have problems in the stock market. The dollar is not however anywhere near technical breakdown. The reports I get is that the EU is doing better than expected while China/India worse. That suggests most commodities stay flat to lower in the near term. Gold’s pattern is very negative. Another wedge pattern is seen and will resolve soon. I suggest 1530 will be the first stop down.

    Regarding my remarks on Unions, while it is obvious governments can’t afford the perks today they should be held responsible, not the recipients. You hate bailouts of “too big to fail” corporations that get themselves in a financial mess, yet you find it perfectly alright to allow governments to get off. The other point is that Unions and their pay scale and perks are very transparent to anyone wishing to become a public servant. These jobs required entry exams and certain level schooling. Nothing was ever hidden. In fact they continue to make it easier to enter some of these jobs because they needed qualified people. If the public job market was so good why didn’t it compete with the private sector. Strong demand for the position always reduces costs, both in the public and private sector. There was no demand until very recently with the massive layoffs. Unfortunately Union contract renewals are reflecting this reality. Givebacks, and less perks to new workers is now the norm. When the government sector reduces Union membership, as it has been done in the private sector, who will be blamed then? The ruling few has always managed to stay in power by creating civil discourse. Unions and Immigrants are always the first to get blamed. Were the Italians first followed by the Irish, or the other way around? Look back at history for a guide as to how it is done.

    • VegasBob June 12, 2013, 7:12 am

      Gary writes: “while it is obvious governments can’t afford the perks today they should be held responsible…”

      Unfortunately, Gary, governments exist only because taxpayers pay taxes. When taxpayers stop paying, governments will collapse.

      So, Gary, what you are really suggesting is that in order to hold governments responsible for labor contracts that are unsustainable, hapless taxpayers should be soaked even more, even though those hapless taxpayers are lucky to earn half of the pay and benefits of the government workers their taxes already pay for?

      Sorry, but I ain’t paying. I ain’t ready to vote Republican, but I ain’t paying.

    • Cam Fitzgerald June 12, 2013, 8:02 am

      Sure thing, Gary. The recipients should not be held responsible. Because they of course had nothing to do with the pattern of striking that sometimes lasted for months while depriving the public of basic and essential services.

      Those poor innocent workers!

      The teachers had a monopoly on the best version of holding the public hostage because parents simply could not afford to stay home with their own kids during long periods of labour unrest. I think the correct terminology for their tactics is better know as being “held over a barrel”.

      Strikes organized around summer months were invariably wrapped up to the satisfaction of teachers just as school was about to get back in session. When the money was flowing there was no political will to oppose those who were coming to the table with every crazy perk imaginable. Teachers got it all and so is it a wonder they now look responsible for bankrupting some municipalities?

      Police, Fire and Ambulance crews fared just as well and the public became so enamored of certain occupations it was political suicide to oppose them (too much). Their pay scales went parabolic in the 70’s and 80’s in some cases.

      And was it not Unions supporting one another who joined large politically motivated rallies that marched on city halls and paraded down main streets to stare down the legislators whose public popularity was suffering at the expense of an electorate that was oftentimes quite supportive of the strikers demands?

      Maybe you were not around when much of the public service could be shut down in some states even by workers who were not in the current bargaining process.

      That was how unions leveraged their power through membership and extorted benefits they should not have been entitled too nor that could be afforded. Like any good team they just struck together even when they were not part of the bargaining process.

      It was gang mentality using the power of numbers. Unions became no better than thugs robbing the taxpayer at the height of their power.

      And we should also not forget that it got so bad in some years that laws had to be passed legislating “back to work” rulings for certain union groups while at the Federal level other employees were defined as “essential” and could not, by law, strike at all anymore.

      What they got instead was the easy way out. They were granted the same benefits that their cousins in the groups who were still permitted to strike had achieved through collective bargaining without having had spend even one day protesting in the rain with a placard and chanting about how poor they were.

      As if the general public and taxpayer who were also suffering the same impacts of rising costs were somehow to blame and should pick up the bill. Good grief. Of course, some of us just called “bargaining” another word for blackmail in those days.

      Remember the Air Traffic Controllers and how they basically paralyzed the countries airspace in 1981? When Reagan had finally had enough he fired the whole lot that refused to return to work amounting to a one day dismissal of 11,000 employees. Then he instituted lifetime bans on any of the traitors from ever working for the public service again.

      Some of us cheered, Gary, because up until then little had ever been done to reign in the demands of groups who thought they held all the cards and got most every demand met by withholding of services.

      So I won’t be shedding too many tears for the pensions lost by union workers whose hard fought battles with (so-called) heartless local government meant they really only bargained their way into empty promises everyone knew could never be fulfilled.

      We can all put away the crying towels because this was already predicted thirty years back. So yes, Gary….the workers of yesterday are to blame for their own circumstances today. They got exactly what they bargained for.

    • redwilldanaher June 13, 2013, 2:40 am

      What’s taking Gary Leibnizowitz so long to respond?

    • gary leibowitz June 13, 2013, 8:57 pm

      Cam, you know not what you say. Government jobs went begging. That’s why they added perks. As for contracts in the 70’s and 80’s they were under paid due to the spiraling inflation we experienced. Perhaps you forgot? Isn’t it great that everyone NOW wants the same contract. It’s called envy. Anyone, I repeat anyone could have applied all those decades if you thought it was so great. Obviously they didn’t. It was called supply and demand. Germany and Canada have high Union “like” perks. How are they doing? In fact Wal-Mart employees are forced to Unionize in Germany. But I guess Germany is not a good financial model. Always the one-sided solutions so you can defuse your anger. Sorry to punch some holes in your clear cut problem solving. So the consensus here is that world governments should have stepped aside and allow the financial engine to stall and punish the corporate greed. A very one-sided solution indeed. if you can think things thru I would love for someone to actually predict the outcome of such a folly.

      Why hold governments to contracts? Why hold private business? Why hold anyone to any contract? Social Security has one big IOU for all the money it supposedly has to cover it expenses. Why not just stop that contract as well? After all the Fed can’t afford it. Where is the outcry for that program to cease. How about Medicaid? All those fat old folks that stashed loads of money away for their children’s inheritance while we pay for their care? How absurd. We can’t afford it. Let the game begin.

      Banks are breaking out of their long standing pattern. Higher long term yields while keeping short term low is ideal for banks. A win-win. They borrow short and lend long. So much for the one-sided assumption that long term rates will kill this market. It could actually encourage more lending.

      The dollar has been pretty well contained for years. In fact most people never thought we would be so strong for so long, especially since the bond purchase program. There are signs of the EU gaining some traction as China/India lose some. Not sure how that plays out for our dollar. Commodities are either on a hold pattern or dropping. That has got to help ease inflation worries.

      The one-sided arguments presented here all these years has produced just one common denominator. The inability to understand or accept reality. Only when/if your doom and gloom arguments are realized will you once again open your eyes. BTW, an asteroid came very close to hitting earth recently. One that wiped out the dinosaurs. Now that’s a one-sided problem that need no debate.

      I do believe over 18 months ago I stated we will be exactly where we are today. In fact I gave an approx. May thru July 2013 end to this bull run. I have not been consistent in my stance that it was “the” top. Early on thought so, now pretty convinced it is only a bear trend that should last one year or so, followed by another big move up. I expect this site will get excited and keep wanting to push the indices ever lower during the bear cycle. I am sure that will give you some relief from the hate mongering.

    • Cam Fitzgerald June 15, 2013, 1:09 pm

      Gary, it is self evident that union contracts and the associated pension plans were flawed at the outset. The heavy expenses those past deals now impose are the primary force behind the decline in service levels at the state and municipal levels. What can you really add when it is clear from reading the statements of some cities that the majority of expenditures are going to workers who have departed and as a result current employees must be terminated in order to meet past agreements with retirees? What can you add when police, fire and lighting are reduced, clinics closed and road crews eliminated because pensions were not adequately funded and current taxes are insufficient to meet to demand? There is a huge shortfall in revenues in many cities today. Simple as that. There is no remedy in most cases either. Not unless civic leaders impose massive increases to taxation and then accept the outcome of business and residents pulling up stakes and moving elsewhere to limit their exposure. So limits do exist to increasing revenues through levies and unless the business environment improves or employment turns around quickly there are precious few solutions available. I hardly need to argue the obvious with you. On the point of whether or not contracts should be respected I think you can appreciate that bankruptcy will nullify many and also that you cannot go on strike to fight over what does not exist. Especially if you are already retired!! Contracts will indeed be broken in the future or benefits will be rolled back and the courts will fix judgments after reviewing the facts. I assume of course that there will be plenty of litigation in the future…bankruptcy tends to shorten the process considerably and offer the practical solutions that everyone needs. So the only two options available of higher taxation or further reductions in services may be untenable if new funds cannot be found elsewhere to paper over the holes. We are learning now why some of the rich benefits granted in the past during better days should not have been agreed too in the first place. You might as well howl at the moon about fairness or the lack of it. Taxpayers are simply not willing to pick up the tab and there is not enough money to pay the bills. This is especially so as current union people will never enjoy the same privileged deals cut in the past so it only begs to reason they will be defiant about paying into plans that don’t benefit them. You surely must appreciate that there are economic forces at work today that will determine the future of all social benefits and that the outcome looks bleak in some jurisdictions. The millions of jobs that were lost due to the effects of globalization are just the tip of the iceberg. Keep in mind that some of the most generous benefits were granted exactly as free-trade and the deindustrialization process were well underway. There were people arguing even then that caving to labour demands was going to backfire because in essence what was happening in the larger scheme was that low wage countries were going to flatten incomes across the globe and bring new levels of competition. That has indeed happened and it is accelerating as more of the developing and emerging countries enter the fray. India which is largely insular in the global economy has barely made a ripple on Western salaries yet but we know for a fact that increasing export trade is high on the agenda there. You can bet this will impact us and perhaps even more profoundly than what happened after so many industries fled to China because the same symbiosis does not yet exist between India and the West on trade issues. This devil of global wage arbitrage can simply not be contained in the long run so we do expect a long term deterioration in both incomes and living standards as a result. Our heyday is now in the rear view mirror. And by the way, is there really a difference between a company that bankrupts leaving nothing in its plan for past employees and a municipality or government entity that is so strung out that it cannot keep the lights on or even afford current pay for existing employees? I don’t think so. No money means no payments. Detroit has just bankrupted and what it does a major American city may become a template for what others who are also in dire straits in the future. So throw out all your assumptions about fairness and equity. If a contract was negotiated on the poor premise of ever increasing tax revenues and economic stability turns out to be in error then those contracts will be revisited, torn up or rewritten despite what transpired in the past. You can take that to the bank. Unless the government and Fed decide to deliberately hyper-inflate to make all the troubles go away we are in for a long bitter period of deleveraging unfunded liabilities and pensions.

  • Nitram June 12, 2013, 4:11 am

    Hold on get a tight grip–http://www.safehaven.com/article/30125/middle-section-forecasts


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