- One way or another, pretty much everywhere is moving in slow motion.
- In the U.S., Europe, and Japan, promises of future social spending were made decades ago based on population and economic growth assumptions that did not happen. We have been funding those promises with debt growing far faster than population.
- We need more tax revenue and less spending, and we’ll be fine.
The biggest week for economic data in the month last week ended with no change — because markets had already changed.
In the days before the monthly employment report (first Friday every month), typically nobody wants to buy bonds or mortgages for fear of a “tape bomb.” Tape as in antique reference to ticker tape; tape today the news scroll at the bottom of screens, “bomb” as in bad surprise, strong jobs.
But this past week, bond buyers exceeded bond sellers nearly every day, the 10-year T-note dropping to 1.75 percent from its 1.93 percent April 26 high. Rates fall on slow economic news.
Adding to the timing peculiarity, there was no negative economic news to account for the bond-buying. Spinners are all over last Friday’s job data, but there’s nothing there except a modest deceleration. Same in the other news, the ISM (Institute of Supply Management) survey of manufacturing in a stall, but services brightening.
So, why lower rates? Chalk it up to the unending saga: the whole world slowing, deflationary, and now widespread breakage of faith that central banks can do anything about it. One way or another, pretty much everywhere in slow motion, the U.K. Telegraph’s Allister Heath captured the mood: “Time to Don Tin Hats, Britain: Economy Juddering to a Halt.”
If no immediately scary story to report, turn the usual bond-ghoul thinking on its head, and muse about how the world might get out of this. We can all get out of this. All of us. It’s not a mystery.
First, state the problem (remember that?). It is not the Great Financial Crisis, gone and done three years ago, or a new financial-system meltdown, or China’s predatory hot-cold whipsaw of trade, or the 1 percent stealing from everyone.
What is it? Is there an “it” affecting all five global sectors: the U.S., Europe, Japan, China and the Emergings? Yup. The first four all have the same fundamental problem, and their weakness cripples the Emergings.
“It” is: the Big Four all are in demographic trouble, and no politician Left or Right wants to talk about the heart of it. In the U.S., Europe, and Japan, promises of future social spending were made decades ago based on population and economic growth assumptions that did not happen. We have been funding those promises with debt growing far faster than population.
The population-assumption error is a double whammy: fewer young people to pay benefits, and population growth decline inevitably means lower economic growth. And leaves national debt as an immense and stinky whale on the beach.
The U.S. situation is best of all because population is still growing. Japan is in the worst shape, population declining 1 percent per year, but soon to be joined by China and Europe. And long before we die, we get old and dependent on the young. China has no social safety promises, instead relying on a hopelessly unsustainable rate of growth.
How to escape? Google the National Commission on Fiscal Responsibility and Reform. Better yet, just “Bowles Simpson,” the authors who labored all through 2010 to develop a fix for this plain-sight math problem. Demographics and spending and tax revenue are remarkably predictable. The Commission released its report on December 1, 2010, and in the worst error of the Obama presidency he rejected it, and so did Republicans in Congress, some of whom sat on the Commission.
Why rejected? Because the report exposed the falsehoods of both parties. We need more tax revenue and less spending, and we’ll be fine. The Commission’s math and proposals are inevitable — it’s only a question of how long we will defer, and how ugly the ultimate fight when cornered.
Japan has waited too long and will have to default on debt. China will have to let go of top-down control or lose big. Europe has it easier, and the U.S. easiest by far.
The first candidate to embrace the Commission report — no matter how objectionable he or she may be to me on other grounds — has my vote.
Ten-year US T-note trading range is narrowing (chart six months back). The breakout up-or-down will depend on the traditional good-news or bad-news outcome, especially overseas.
Two-year US T-note, two years back, also narrowing — note declining tops and rising bottoms. Breakout here will depend on the Fed, which will feed into the 10-year above. If the Fed’s determination to hike is appropriate, it will turn out well; if not, it will get a destabilizing result like last December’s. Odds are they will try again soon.
Much jaw-jaw about allegedly rising U.S. incomes in last week’s job report. Here is the Bureau of Labor Statistics’ own chart of incomes, 10 years back. See what you think.
This chart applies to the whole world: imports and exports both are falling. Trade can be predatory, but it is also the one free lunch to bilateral riches, and the great engine running since the 1990s is in reversal. By the way: in US trade accounts, the price of oil has no effect on the apparent decline in trade because the ex/im balance has been steady in the last year.
The spooky-accurate Atlanta Fed Tracker has Q2 growth at a non-rebounding 1.7 percent. If that estimate holds, the first half of the year will have grown at a 1.1 percent pace. To get to the Fed’s 2.2 percent forecast for 2016 GDP, the second half will need to grow at 3.4 percent, which ain’t gonna happen.
The ECRI (Economic Cycle Research Institute) is an excellent long-term forecaster, and in the last three months has steadily improved from a weak patch, but still tepid.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at email@example.com.