Return of the 'Bond Vigilantes'
Commentary: Threat of investor revolt may pre-empt inflation
By Lou Barnes, Friday, June 19, 2009.
Flickr photo by creo que soy yo.Long-term rates dipped briefly this week on shaky economic data, the 10-year Treasury to 3.59 percent and mortgages to 5.375 percent, but ran right back up in the shadow of another $104 billion in new Treasury borrowing next week.
Optimists tried to find a housing bottom in modest rises in starts and new permits, but the reports were garbled by apartment overweight, and the reality is the same: New-home construction is steady 77 percent below the 2005 total. Inflation may come, but not now, CPI up 0.1 percent in May, no way to rise with industrial capacity utilization at a new-record low 68.3 percent (health = 80 percent-plus), and production off another 1.1 percent.
Leading indicators put in a second-straight solid increase, up 1.2 percent for May, but the internal components are suspect. One is the rise in long-term rates; in normal times a healthy precursor, but today has undercut purchase-mortgage applications and collapsed refis. All surveys show modest increases in confidence, but all is relative: A shift from panic to anxiety is better, but is not "confidence."
At this stage, neither authorities, traders nor civilians can confirm an economic bottom forming, let alone the extent and slope of recovery ahead. Fiscal and monetary stimulus deployed ... now we wait. We'll know soon, this summer.
The strange and circular tale of the Bond Vigilantes defines this moment, and includes backhanded good news -- at least for inflation.
The term was coined in 1984 by economist Ed Yardeni to describe then brand-new self-protective behavior by bond investors. For city folk, and those too young to know cowboy movies, vigilantes form a civil-defense "posse," either rounded up by the sheriff, or a self-organized mob as dangerous to civilization as the bad guys they would catch and drag to a necktie party.
Prior to 1981, the bond market was a very small and sleepy place. Federal deficits became chronic after 1963, but were dinky even during Vietnam. Most Treasurys were the rolled-over remnant from World War II. Even giant businesses were financed by banks, not bonds. Muni bonds were a tiny market, mostly for infrastructure funding as local governments stayed in fiscal balance. Mortgage securitization had hardly begun, with home loans held in S&Ls. Bonds were physical pieces of paper, awkward and slow to trade. ...CONTINUED
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Submitted by Jon Astaris on June 19, 2009 - 2:10pm.
As the word "recovery" is becoming the hourly mantra of the Propaganda Ministry talking heads, Lou's weekly mewsings become increasingly more cryptic, more esoteric, more disconnected.
The difference is that the talking heads have the megaphone, thus - they believe strongly - real power; they wanted Obama so out of inertia they were singing the "recession" chorus long after their man was on the throne. Now suddenly they are told they must change the chant to "recovery" and there they go. There is not a doubt in their minds: THEY created the recession by talking it into existence, like God, and now they'll bring recovery by simply saying "recovery" ad nauseam. Economic reality is irrelevant, ANY kind of reality is irrelevant to them. They have become convinced that them in the media can make us believe anything, make us do anything they want.
On the other hand, Lou is searching the constellations for
evidence of an orderly, rational "system" that would enable him to guide us peons around the black hole that's sucking us all in.