Via Mark J. Grant, author of Out of the Box,
Sitting In The Middle Of The Desert
It is rather like sitting in the middle of the desert. Nothing but sand. You can hope for rain and you can wander around aimlessly looking for an oasis but you are pretty much stuck with sand. This would be a fairly accurate description of the bond markets these days. Nothing but sand.
We are a scant 40 bps off the low yield for the ten tear Treasury. We have $100 billion of new sand being pumped in by the Fed each month. Our desert doesn't get much wider as defined by new issuance and so one dune is heaped on another, the compression continues and yields, even from here, will decline. As equity prices are forced up; yields and spreads are forced down. Then any "event," which would be negative for equities would be a positive for Treasuries and so the unrelenting pressure continues unabated and could grow far worse if something happens.
Our sand trap is a fabulous world for borrowers and issuers and a miserable world for investors. The general thinking usually stops here but there is more to this story than that. Over a period of time wealth declines as the bonds markets hold five times the assets of the equity markets and so the lack of yield, of income, begins to take its toll on consumer spending, on corporate revenues and then on profits and on the ability of those dependent of savings to maintain their standard of living. The continual flow of money has helped the banks and helped corporate borrowers but it has not filtered down to the savers and, in fact, their position has been lessened by what the Fed has done.
Someplace on the timeline there is a line of declination coming. America's unemployment rate, 11.6% currently, and not the funny money bogus number provided by the government, is one piece of data showing that all of this money is not making its way into the Main Street economy. As a matter of fact, people are getting poorer while banks and corporations are getting richer and so the ability of the consumer to keep buying goods and services is declining which pushes on the deflation part of the equation and the consequences will eventually be felt back at the corporate level as the wheel continues to turn. Wall Street tends to concentrate on the positive effects of money creation but there are also negative implications that accompany the way the Fed distributes its money. The longer that the Fed continues on with its grand scheme; the poorer people and pension funds become because the bond markets lever their effect at five times greater than the appreciation of the equity markets.
Consequently if driven by an event or driven by a meaningful decline in corporate earnings as the consumer cuts back on his purchases as mandated by his fall in income; real trouble begins. If the rise in equities no longer picks up the slack and if yields break down past the old lows then it will not only be corporate revenues that falter but the GDP of the country while our national debt increases. The sand trap has been dug by the Fed and it is now just a question of when the little white ball gets chipped into this treacherous part of the course.
We are wandering in the desert. There is no Moses in sight.