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May 29, 1998
T-bond yields have fallen below 5.80% this morning on more worrisome news from Asia, but mortgage rates are holding in the 7.125-7.25% range.
Bad news from the Submerging Rim has helped rates ever since December, but the help has been transient. Asian money has flooded to safety in American Treasurys for a day or a week; then as the immediate panic has subsided, so has the interest rate improvement.
If these relatively gentle tidal flows grow to typhoon force (China devalues, Hong Kong abandons dollar peg), or tsunami (Nikkei under 14,000 and falling), the effect on American rates would be bigger, but still temporary.
For the Asian trouble to cause a deeper and longer-lasting drop in American interest rates, it must cause the American economy to slow down. Only a slowdown would cause the Fed to reverse field, and contemplate easing credit. Until it does, bond and mortgage yields cannot fall any meaningful distance.
An Asia-caused slowdown has been the consensus forecast for the American economy since last September (there have been a few disbelievers... here, for one), and the forecast has been laughably wrong. 1st quarter GDP was revised up this week from 4.2% growth to 4.8%. The latest excuse for blown forecasts is El Nino: "A very warm winter pulled growth from the 2nd quarter into the first, and the economy will surely slow now...."
If you can't forecast the economy, you may as well try the weather.
To hell with forecasts in this situation; stick with describing the present, and keep it simple -- no New Era theorizing. The experience of the last nine months says the Asian Flu is stimulating our economy, not slowing it.
The primary effect of cash flowing to the States is not on interest rates, it is a high and rising dollar. A large and growing trade deficit should be driving the dollar down, but isn't: the yen sets a new low every day, and the buck is rising even against the euro-currencies.
A strong dollar makes us feel rich. Same with strong-dollar propped stock prices. And dollar-cut commodity prices: oil back under $15/bbl, gold at $292/oz, wheat down a third from a year ago... pushed down further by weak demand in Asia.
If you feel rich, you spend, and your economy accelerates when economic models say it shouldn't.
How does this peculiar situation play out? The New Agers say we ought to be rich, so we are. The Deflationists say we shouldn't be rich, so the richer we act, the poorer we will be when Asia finally hits. Then there's the Old Timer here, who says to forget about Asia, and watch the Fed.
Take your pick.
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