The bond rally (and hence, mortgage rally) that began last Friday has grown from short-term correction to something deeper and perhaps more durable.
T-bonds reached 4.11 percent, down from last week’s post-July high at 4.42 percent, and mortgages are slightly under 5.75 percent. Other markets made huge moves also, all confirming the bond rally: gold is off $22/oz.; oil is still in the low-$40s; and the dollar is in a continuing rally against all currencies.
There was not enough domestic economic data to account for these mass reversals, though there was a modest confirmation of last week’s poor job numbers: new claims for unemployment insurance are in a sustained rise, have crossed the 350,000/week barrier and reached a 10-week high.
The fingerprints of international fundamentals are all over the markets this week. The drumbeat in the background for months has been…dollar crash…dollar crash…dollar crash, as the U.S. tries devaluation as a “cure” for our trade deficit. This week, the drummers crashed into reality: the dollar can fall only so far as our trading partners’ economies can withstand the damage.
The limit of pain is different for each trading partner. When the buck fell to 1.35/euro, and 1.95/pound, everybody in Europe knew that their export markets could not make a living at that exchange rate, and therefore their economies were all in immediate peril. A nifty trade has been to short T-bonds and buy German bunds, getting the double whammy of Fed pressure on T-bonds and the currency pop from the euro. The exits from that trade were crowded this week.
The economies of South Korea and Japan have already stalled for internal reasons, credit excess in the former, and relentless demographic disaster in the latter. Japan cannot make an export living at 100 yen/buck, and maybe not below 105; it’s been trading 102-103. China is desperate to grow its way out of old Maoist state industries and their uncollectable bank loans, simultaneous with escaping labor strife in the streets from layoffs by those failed industries.
In the deadliest international politics short of war, our trading “partners” will take desperate measures to protect themselves from our effort to devalue the dollar. This week, foreign central banks bought two-thirds of a $15 billion, 5-year T-note auction, pushing rates down and the dollar up.
We tell Europe that it should loosen its labor markets and stimulate its economies so that it can buy more from us. We tell Asia that it must not manage its currencies to protect its exports, and buy more from us.
The world looks back at us and says, “You are the one misbehaving. You are the one living beyond its means, borrowing at a ruinous rate, blaming us for your profligate excess. Get your budget in order.”
Both are right, but our trading partners are righter than we are. We are trying to rectify our import bloat by debasing our currency, thereby forcing our “partners” to change their internal policies in ways politically impossible for them. It won’t work. They will debase right along with us in a competitive devaluation pirouette, one of the most dangerous games of economic chicken. Anything…any misjudgment that interrupts the flow of trade will cause the global economy to slow, and that prospect is a good reason to buy long Treasurys – dollar bears, gold bulls, and inflation Cassandras notwithstanding.
We need a tax increase, and then to offer that self-discipline in trade for change among our partners’ behavior. We won’t get it. Instead, we got this absurd adventure with the Treasury Secretary, going…going…gone…staying. Currency markets regard Secretary Snow as a potted plant, and a guarantee of more chicken games.
On the bright side, all this for the moment is helpful to mortgages.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at email@example.com.
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