Long-term Treasury yields pierced the post-August high, 3.50%, trading today at 3.57%, but did little damage to mortgage rates still holding close to 5.00%.
The proximate causes of the rise: another huge week of Treasury borrowing finally ran into resistance (another $1.4 trillion coming in 2010, so why hurry to buy the paper?), and some good news on the consumer front. November retail sales rose 1.3%, about double the forecast, and one consumer-confidence measure also beat expectations. New claims for unemployment insurance tend to be volatile this time of year, but are holding the improved, 475,000 weekly range, down 50,000 from early fall and 175,000 below the peak of last winter.
A three-sided argument still rages: the insuppressible Strong-Recovery people, found mostly near the stock market; the Death-By-Fire tribe, still certain that inflation is the main risk, yelling about the dollar, gold, commodities, and too-easy Fed, and joined by the Puritanical Punishers; and then the Death-By-Freezing group, quietly mumbling about deflation and non-recovery. Me… I feel a little chilly.
All three groups spin whatever they find, in largest part because the world has never been through an economic/market episode like this one, and nobody really knows how to measure progress through it. Hence a focus here on original sources, hard data, and this week we got a ton.
On the second Tuesday each month comes the National Federation of Independent Business survey of small business (www.nfib.com, “SBET”). It’s political commentary is prehistoric Right, but the survey is straight (very), and a consistent measure going back to 1973. It’s categories and charts are easy to read, and stark: there is no recovery whatever underway. Sales, earnings, prices, employment, inventories, and credit access all close to or below 36-year survey lows.
On the fifth business day each month, the Fed releases its G-19 consumer credit data, this week for October. The annual rate of decline appeared to slow, but stripped of a huge one-time adjustment for Department of Education purchases of student loans, actual consumer credit walked into an elevator shaft, down 10% annualized.
Each quarter the Fed releases its massive Z-1 “Flow of Funds” — ALL funds, flows and levels. A now well-established and completely unprecedented credit-contraction deepened in all sectors but government. In the 90 days of the 3rd quarter alone, home mortgage credit shrank by $92 billion, and all domestic financial sectors by $383 billion; Treasury borrowing increased by $371 billion.
The economy is anything but uniform, but the pattern is clear. “De-leveraging” of the private sector is waterfalling, the economy living on offsetting but unsustainable Federal borrowing. Which leaves me with little but questions.
Is there some silent Fed-Administration agreement on a de-leveraging target? A Federal foot on the credit hose? Or are we waiting for credit markets to heal of their own accord, which they are evidently not, and I think cannot?
Can the economy grow its way out of excessive borrowing while credit itself contracts? Do we have de-leveraging properly calibrated, or is it beyond calibration?
Are we really de-leveraging? The notion of “leverage” is the amount of credit versus the value of the asset borrowed against. Deleveraging occurs if we pay down credit, and the value of the asset is stable. However, well-understood in prior systemic collapses (“Minsky Backswing,” after the great student of bubbles, Hiram Minsky): as credit dries up and shrinks, asset values fall faster, and leverage increases. The phenomenon is destructive to net worth, assets minus liabilities, and if it runs long enough leads to negative net worth and the miracle of the underwater house.
The objective of the game is a self-sustaining economy and tax revenue rising to stop the Treasury binge. The condition precedent, I believe, is confidence restored by rising asset values and access to credit. Not quite there yet.