Back from a day in the trenches doing research on gas-bearing shale formations in Australia, your editor rejoins the action in the stock market and the wider war between inflation and deflation. And what do we notice upon our return? There are winners and losers and lots of confusion.
Earlier in the week we noted that the action in the U.S. bond market was the prime mover for stock and commodity prices. Thursday trading in the States confirmed that. For the first time in five days, U.S. bond prices rose and yields fell. The spread between two-year U.S. government notes and 10-year notes had blown out 276 basis points as investors gagged on the amount of debt being auctioned by the Treasury Department this week (over $100 billion).
But Thursday’s auction of $27 billion in seven-year notes seemed to go off without too much trouble. The market swallowed the new debt and did not chuck it back up. It’s a little nauseating when you realise that U.S. debt outstanding is $11.2 trillion, or 76% of GDP.
Our guess is that it’s going to be 100% of GDP by the halfway point of Obama’s term as President. For this week, however, the new wave of Treasuries sent in to battle deflation, recession, and capitalism itself seem to have stemmed the advance of bond yields. Victory! Viva Obama! Viva Bernanke! Viva la deficit! Viva el dollar!
Still, there are other forces that threaten to overrun the Fed’s efforts to keep the U.S. mortgage market from further imploding. Eight percent of U.S. homeowners were late on their mortgage payments in the first quarter, according to the Mortgage Bankers Association. The delinquency numbers tend to track unemployment, and unemployment is rising.
What’s worse, with prices still falling, more and more mortgages are going under water, where the mortgage exceeds the current market value of the house. After that, foreclosure isn’t far behind. And in the States, a record 3.85% of mortgages are in the process of foreclosure. When you add the delinquency and foreclosure figures together, you find that 12% of U.S. mortgage holders are either late on their mortgage payments or already in foreclosure.
That is a nightmare for the Fed. And if 10-year bond yields resume their march higher next week, they will take 30-year mortgage rates with them, killing off for this year (and probably next) any hope from a rally in U.S. house prices. Our guess? Home sales will pick up at these levels but prices will keep falling.
And what does this mean for the rest of the world? U.S. bond prices are in full retreat. The Fed is covering that retreat, turning around long enough to fire more money into the market and slow the advance of the bond vigilantes. But as money flees the sovereign bond market, it will seek refuge in tangible assets and non-debtor economies with more stable currencies and less net debt.
In midst of all this broken recordism, oil prices are climbing higher. OPEC met in Vienna and decided to keep its production levels stable. The group also said it expects world oil demand to rebound later this year, led by Asia. Crude futures are currently trading above $65.00. The energy sector was up on Wall Street and will probably be up for the week here in Australia.
Hey here’s some good news for the next one hundred years. “Among advanced economies, Australia is the most integrated with Brazil, Russia, India, China and South Africa, according to a new index from Maplecroft, a U.K.- based global risk analysis firm,” reports Bloomberg. Australia is first, followed by Finland, Japan, and the United States.
Jim O’Neill, the chief economist at Goldman Sachs, says “As the economies of the U.S. and Europe struggle to recover, those of the BRICs will prove to be more robust, and will be instrumental in pulling the world out of recession.” So it will be prosperity by association if the Maplecroft index is correct.
Whether or not it the BRICS will pull the world out of a recession this year, or next year, or the year after that, we can’t say. But the world economic order is definitely changing and the change-what we’ve called the Money Migration from the West to the East-favours Australia…in the long run. And in the short run? More on that next week!
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