Has the US economy slipped into reverse? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 1 February 2013
Has the US economy slipped into reverse? A  A  A

Baltimore, Maryland

"US Economy Slips into Reverse," was the headline in yesterday's Financial Times.

The economy didn't move ahead in the last quarter of 2012. Instead, it started backing up at a 0.1% annual rate, to be precise.

That didn't seem to bother anyone. They hardly noticed; and they didn't seem to care what direction it was actually going. The Dow slid a little, but not much.

In the bar car, journalists generally dismissed the whole thing. It was a kind of optical illusion, they seemed to think, caused by the fact that the gunslingers had been a little slow on the draw in the waning months of 2012. Perhaps, on the South Bank of the Potomac they had heard that the world was going to end on December 12th and decided that further security spending might not pay off. They had no defense against the end of the world, after all.

Or maybe, as the press reported, they were just preparing for the curtain to come down on their freewheeling, free-spending ways... That too was on the calendar during the darkening days of last year. Maybe morale among the terror fighters fell into a terror of their own...and their generals, with downcast eyes, went around the pentagon switching off the lights and turning down the heat.

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We don't know what happened, but it didn't seem to matter anyway. Everyone said it was a fluke. The rest of the economy was okay.

Nobody seems to care about the increase in US debt yields either. Since Ben Bernanke announced his QE Forever program, bond prices have gone down. This is the opposite of what was supposed to happen.

Everyone seems convinced that the economy is moving forward, even though it is not. They're also persuaded that we have the Fed's QE Forever program to thank, even though the drive shaft - bond yields - is going in the wrong direction.

Bernanke is buying $85 billion worth of bonds every month, trying to lower bond yields. This will bring down long-term lending rates - especially important to the housing industry - which will help people borrow with the wild abandon they showed in the '05-'07 spree. Then, according to the theory, the economy will grow. At least, that's the stated goal.

Go figure.

What we're trying to figure is where this clunky old machine ends up.

We've just seen how slippage at the Pentagon can put it into reverse. Reports suggested that the brass wasted $40 billion less than planned in the quarter. But $40 billion is only a tiny bit of the feds' $1 trillion deficit. What would happen if they cut out the entire $1 trillion in deficit spending to bring the budget in balance?

Theoretically, GDP would race backwards 25 times faster...surely crashing into something...

No one seems worried about it. Which is probably because they see ol' Casey Jones Bernanke at the controls. Never mind that there doesn't seem to be a direct link between Bernanke's gearbox and what actually happens to the wheels below. He puts bonds into high gear - buying $85 billion per month...approximately the same amount as the US government offers for sale. With that kind of buying power, you'd think the bond market would get so hot you'd need to put your bid in an asbestos envelope. But no. Instead, it cooled down. The 10-year note fell to yield almost 2% yesterday.

What do we make of it? Don't know yet. But at some point, observers are going to notice that the train is going in the wrong direction and that the conductor should have his license revoked.

Michael Hasenstab is arguably the most successful bond investor of the last 10 years. He runs the portfolio of Templeton's $67 billion Global Bond Fund.

Of US debt he asks "is that really a safe asset?"

    "It's not paying you anything and you have the risk of principal losses when rates rise."
There's the potential for pain. Where's the gain?

And the risk is huge. Bonds are near the top of a mammoth 33 -year bull market. Investors buy them for safety. But what safety is there? The Fed is buying, trying to boost them up. And still they go down.

And so we have to wonder? Has QE reached its limit? If the Fed announces another QE Forever +, will bond prices go up in anticipation of more Fed buying? Or will they go down in anticipation of more risk?

We don't know. We'd like to see the Fed to it just to find out what would happen.

But this is a train we don't want to be aboard when the word gets out.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "Has the US economy slipped into reverse?"


Feb 1, 2013

Dear Bill
Low yields on US bonds make sense when the fed is bying them in huge quantities, creating non real market conditions. What I dont understand is what will happen to all these bonds that fed holds. At maturity the US government will have to pay for them. So what if they pay for them by issuing more bonds which the fed will again purchase in an never ending cycle of money printing. At what point will we see inflation taking its toll. And what are the international consequnces of this? What are the annual amounts of bonds maturing and held by non fed holders? How will it affect the dollar, commodity prices, international reserves, use of dollar as exchange currency?

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