"The best laid schemes o’ mice an’ men gang aft a-gley," wrote the Scottish poet Robert Burns, noting the tendency of even the best plans to go awry. We are not sure exactly what he had in mind when he wrote it, but we think we see some signs of "a-gley" coming pretty soon in this market.
Today, we belabor one sign:
If you had lent the U.S. government money yesterday, you would have gotten a yield of 4.71% on a six-month loan. On a loan for a longer period, the yield would have been lower: 4.51% for a 30-year bond.
Obviously, there is something distinctly odd about this. Why would you get less money for a loan that takes longer to come back to you? The longer the time, the more risk. Tsunamis, nuclear wars, the melting of the polar ice caps, a new Fed chief…so many things can happen over a longer time, dear reader. So many things can exhibit this nasty tendency to go "a-gley," which is why the long-term rates should be higher. And if they’re not, then it’s what economists like to call an "inverted yield curve." This means that the line on the chart that indicates yield goes down with time. And most economists now think the yield curve will become even more inverted by the end of March, after Mr. Bernanke announces another rate hike.
Generally, or at least since the 1950s, an invested yield curve has been a signal of a coming slump. It signals that the Fed’s short-term rates are too high, which is what makes the economy slump, many believe.
And the fourth quarter of 2005 suggested – well, it was more like proclaimed at the top of its voice – that a slump might be on its way. GDP grew far more slowly than expected, inching along painfully at an annual rate of only 1.1%.
Ours is an economy dominated by consumption, and consumption requires spending, which insists that people have something to spend. In today’s news we find that average weekly consumer incomes in the month of January went down 0.4% from the year before. We also find more circumstantial evidence that the spendable cash is getting tighter and tighter.
The reason is not hard to find. The spending boom of the 2001-2005 period owed its genesis to the boom in real estate. Their own four walls and roof turned many Americans into party animals. Asha Bangalore, an economist at Northern Trust Company, figures that 43% of the jobs created in the U.S. during that period were a by-product of real estate. People were put to work building houses, fixing up houses, financing houses, selling houses…or put to work serving drinks to people who made money on houses. In the first nine months of 2005, calculates Bangalore’s colleague Paul Kasriel, 100% of the increase in household net worth came from asset-price appreciation, most of which was the increase in house prices.
We can still hear echoes of the boom reverberating, but the source of the explosion seems to have died down. In Orlando, for example, the local paper tells us that there are now twice as many houses for sale as there were a year ago. "Homes hit market in record numbers," says a Sun Sentinel headline.
Since there is no "spot" market in houses, owners adjust their expectations slowly. No one knows what the exact market price really is, and few are willing to accept a figure lower than the one gotten by their neighbor down the street. So, instead of adjusting quickly to a softer market, prices tend to trail off slowly as inventories build. The boom ends with a whimper, not a bang.
It’s not really any of his business, but the housing market is bound to be weighing on Ben Bernanke’s mind as he considers the Fed’s next rate move. The yield curve will be bothering him, too. In a speech last March, Bernanke already told listeners what he would do when he took the top post. He would aim the fed funds rate so that "the slope of the term structure of interest rates is approximately normal, as best as can be determined."
Unfortunately, there is nothing even remotely normal about the present U.S. economy.
But we will let that pass and focus on the shape of that yield curve. "Approximately normal" is a curve that slopes up, not down. To get the present curve back to "approximately normal" either short rates have to go down or long rates have to go up. Mr. Bernanke controls only the rates on the short end. It is hardly a stroke of genius on our part to suggest that he will not raise them. Heck, he might even lower them.
Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.