The bond market could not be more clear: Yields are going higher

Instability is driving up oil prices, feeding inflation fears

There are times to suspend analysis and just listen to markets.

Have to be careful even with that. First, pick the right markets. The stock market is not worth the trouble, thousands of different stocks at once sounding like a symphony performed by fifth-graders.

Oil wells image via Shutterstock.
Oil wells image via Shutterstock.

Pick bullet markets: The 10-year U.S. T-note has one issuer and is the most creditworthy and widely traded IOU on the planet. And oil.

The second caution: Doonesbury’s Zonker Harris speaks to his flowers and they reply. He’s stoned, but even if you’re not, be careful to listen to markets and not your own echo.

Last week had three big events: release of May CPI, the Fed meeting and the further fragmentation of Iraq.

Tuesday’s CPI jumped in an unpleasant surprise: 0.4 percent overall and 0.3 percent “core.” The 10-year T-note yield rose instantaneously — not far, just from 2.59 percent to 2.65 percent, but that 2.65 percent is one foot over the threshold toward a significant run upward. From January to May the 10-year traded 2.6 percent-2.8 percent, and in late May broke down to 2.45 percent, but a week later was back above 2.6 percent.

The Fed met the day after CPI, the 10-year poised to jump. The Fed’s statement and press conference could not have been more dovish. Back down to 2.57 percent by Thursday morning, safely below 2.6 percent. For an hour. Then back up to the edge.

No matter what the Fed intends ... if inflation is crawling out of the box then yields are going higher."

The bond market could not be more clear. No matter what the Fed intends — stay at zero percent until doomsday — if inflation is crawling out of the box then yields are going higher.

Given stagnant wages, it is hard to see how inflation can rise, but it can. Perhaps 40 percent of U.S. households are doing well (IT-skilled, marketable educations, careers in health care or education, plugged into the global economy). Their rising purchasing power can raise general prices for a time.

The other 60 percent of households lose “real” purchasing power, and will substitute cheaper products, but it can take a long time for statisticians to adjust the aggregate U.S. shopping basket.

Brace yourselves for more election-year “inequality” from the Left, cruelly disinterested in helping weaker households to compete in a global economy, instead focused on demonizing the successful to justify raising their taxes.

Oil is a less tidy chart. It began a sustained rise from $95 a barrel in February, now $107 and certainly feeding into inflation fears. Natural gas rose at the same time from $4, but has been relatively steady since at $4.75. The two markets interact, for the next several years not in short supply, but oil is “geopolitically sensitive.”

I risk Zonkerism, but oil is telling me that sequential instability in Syria, Ukraine and Iraq is the cause of the move. Add Czar Vladimir, who goes to sleep and wakes each day hoping that Middle Eastern instability gives him higher prices, and much more important, power. He will make all the mischief he can.

The U.S. is late to begin a strategic withdrawal from positions taken after World War II when our power was infinite. Especially in the Middle East, we have held the lid so tight that pressure has grown instead of gradually releasing and cooking and releasing.

Since 1950 the U.S. population has a little more than doubled, to 330 million. During that period, Iraq has grown from 5 million to 33 million, Saudi Arabia from 3.8 million to 27 million, Syria from 3.5 million to 22 million, Iran from 16 million to 81 million, and Egypt from 21 million to 88 million. Each is overweighted to men because of female infanticide.

Immense growth in numbers, some nations now inconceivably wealthy, most still poor, but all share primitive social capital.

Great powers seldom, if ever, begin strategic withdrawal in time, before the fatal hollowing out from overextension (see Kennedy 1989 “Rise and Fall of The Great Powers”).

We can hope to be the exception because we have never aspired to empire, just stability. The big risk alongside “too late” is that one or more adversaries will underestimate our power and fortitude as we pull back, and try to take advantage.

As now. There is no rulebook for President Obama or his successors. Strategic defense while maintaining tactical offense is an art form, and markets are unforgiving judges.

Lou Barnes is a mortgage broker based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.


Related Articles

Comments