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August 20, 1993
New, newer, newest lows. Not by much, but 23-year lows instead of last week's 22-year ones.
The immediate cause of lower rates was a huge increase in the trade deficit, to $12 billion in the single month of June. A weak world economy had little demand for American exports.
The Second Quarter GDP was initially reported at a 1.6% gain, widely expected to be revised up. This sudden weakness in exports means the revision will likely be down, maybe to little growth at all. Falling economy, happy bonds.
"Chasing a yield" is the contemptuous tag given by professionals to investors in a buying panic.
Everybody chases the highest return they can get for the least risk. But, in a panic, investors lose their fear of risk, and scramble to get aboard what they see as the last boat.
People who thought bonds were a poor bet at a yield under 8.00, and still worse at 7.25, are elbowing each other out of the way to buy the "last" of the 6.25s.
"Everybody" knew the stock market was overbought at 3,000. In a sorry economy, corporate earnings could not justify these stock prices. Yet, you could get trampled in the crowd trying to buy as the Dow cruised through 3,600.
Through its narrow grate, the Fed regards buying panics as a sign of too much money in the hands of irresponsible parties. Like us.
Any sign of too much money, and the Fed feels that it should provide a little tonic for the economy; a purgative, perhaps a quart of castor oil laced with sulfur.
Instead, the Fed is perplexed. The buying panic extends no farther than stocks and bonds.
A barrel of oil costs less in constant dollars than it did in 1970. Despite widespread snorkeling in the Midwest, farm prices are going nowhere. Gold had an exciting month, but gave up half its gains, and is still cheap.
Oddest of all is real estate, that most interest rate sensitive of all commodities. Except for the Boulder-to-Bozeman Rocky Mountain Boom, real estate is doing nothing.
There may be a very happy reason for peculiar trading patterns; a reason so pleasant that even the Fed will relax.
What if this buying panic turned out to be a saving splurge? Instead of a precursor to new inflation trouble, the early stages of runaway discipline?
Almost half of refinances are 15-year loans taking out 30s. The available interest savings are therefore going to principal, and being saved. The stock and bond market runs have been prodded by savings pouring in to mutual funds, IRAs, 401Ks, pension funds -- every manner of savings.
There hasn't been anything like this since our parents turned forty in the Fifties.
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