If the stock market is truly a leading indicator (and it tends to be one of the more reliable ones), then the Obama campaign had better start worrying. May has been a brutal month for the Dow. It closed May 1 at 13,279. As it approached noon today, it’s at 12,360, down 59 on the day. That’s a decline of 7.1 percent for the month, wiping out all the gains since Jan. 1.
The reasons, of course, are not hard to find: the crisis in Europe, lackluster economic data in general, a sharp drop in consumer confidence in May, an uptick in weekly jobless claims, and more.
Perhaps the biggest news is the drop in bond rates. The benchmark ten-year treasury bond is currently yielding 1.53 percent. On July 1 last year, the ten-year treasury was yielding 3.2 percent, more than twice as much. This is good news and bad news. The good news is that the federal government can finance its huge deficits more easily (and consumers can borrow more cheaply as well: mortgage rates are at near record lows). But the bad news is that bond yields go down for two reasons: a slowing economy and/or a financial crisis. As nervous investors seek safe haven, demand for treasuries rises, pushing down yields. (French and German bond rates are also very low for the same reason, yielding 2.35 percent and an astonishing 1.24 percent respectively.)
But countries at the heart of the crisis are not faring so well. Spain is not borrowing so cheaply, to put it mildly. Its current rate on ten-year bonds is 6.67 percent, more than five times what Germany has to pay to borrow. Spanish banking is near collapse and the country is in deep recession. If Spain were unable to meet its obligations and rescue its banking sector, it would be a much bigger deal than Greece’s problems. At about $1.5 trillion, its economy is five times the size of the Greek economy. Not even Germany (the world’s fourth largest economy) can write a check that big.
All eyes will be on tomorrow’s release of the jobs report for May, at 8:30 a.m., an hour before the market opens. But there are a lot of other economic shoes to drop in the next few weeks. As Bette Davis, playing Margot Channing, said in “All About Eve”: “Fasten your seat belts. It’s going to be a bumpy night.”
A record low yield is also explained by the fact that investors don’t think growth will be significant over the long term(in the stock market for instance), same with inflation(and that implicitly means lower wage growth expectations, which in of itself is tied to lower overall growth).
You touched on the ‘fear factor’ but these two other reasons are also important to remember. Japan went this route before. The rates for Germany are in some sense artificial in that they are a byproduct of a flawed system – the Eurozone – which gives them a very high advantage compared to rest of the 17 eurozone countires. Yields for UK gilt is similarly very low.
For America, it’s more of an indictment of our long-term growth capacity. Low rates have helped Japan to fund it’s huge debt load. But it induces paralysis. Japan can never go back to higher growth(which is needed for reducing debt load), in part of demographics but even if it had our demographic advantage, the debt is so large that once the yields would rise on the heels of growth, the country’s interest payments would swamp everything.
If our interest payments went up to 4 % or so, more closer to our post-WWII historical average, then it would be on par with our defence spending.
The low yields are a very dangerous sign: the markets expect very long-term stagnation coming for the next decade, if not more.
The Japanization of America continues.