The Everyman Economist

In case the Everyman hasn’t noticed, medium term and long term interest rates have been skyrocketing for the last few weeks. Ever since the day the Fed announced that they would enter the market to buy securities and rates dipped briefly, they have reversed course. The rate on 10 year US government securities is nearly 4%, which is up from 2.25% earlier in the year and even 5 year securities which were as low as 1.38% earlier in the year, have now climbed to almost 3%. These are massive moves, especially without any real changes in the economy, so why has it happened? And will the impact on mortgage rates, which have also risen by about 1%, hurt an economic recovery?

First, a little background information. We’ve probably seen the worst of the downturn in the economy, so it’s no surprise that most markets are in the process of consolidating their huge declines. Stocks are up, oil is up, commodities are up and the dollar is down. This is all part of the normal process that markets should go through after the recent global financial meltdown. But make no mistake about it, many markets are now in the process of believing their own baloney. After the Dow bottomed at about 6500 and now has climbed to 8500, there are lofty predictions of a new bull market. The same is true of oil, metals, and many other markets. Unfortunately, the big picture scenario does not support this thinking. The economy is just too far from health and is very susceptible to aftershocks from every direction. Whether it’s the auto industry, consumer debt, private and commercial real estate or interest rates, the economy needs a lot of good things to fall into place and they are just not happening yet. The markets may wish it to be, but wishing and hoping does not make for sound investing.

And that brings us to interest rates. The securities markets are about to be overrun by new supply. All of the government spending that we’ve seen over the last several months will get paid for by issuing securities. With a deficit the size of the Grand Canyon, that means there are a lot of securities in the pipeline. The more securities, the more upward pressure on interest rates, as they seek a price level where the supply can be absorbed by investors, traders and foreign governments. You can throw in predictions of runaway inflation and a collapsing dollar, and interest rates have a steady stream of bad news to deal with. In all likelihood, rates will top out for the short term near their current levels. Any more climbing and whatever plans the Obama administration has for an economic victory celebration will have to be put on hold. So the environment will take care of itself and rates should settle down soon. They will not likely fall too far, however, and they will continue to be plagued by supply and demand issues, but the economy will be the big determining factor. Choke off a recovery and we will see lower rates again and quickly. The recovery is not yet guaranteed and even if it was, it would be feeble at best, so don’t expect rates to soar much more.    

Just when the Everyman thought that the financial system had learned its lesson, here we go again. The traders are at their old games and the markets are acting like we’re back in the chips. We’ve just come through the worst scenario since the Great Depression and nobody can seriously believe that we’re off to the races, or can they? Well apparently the pundits, the pros and the posers can. In their views, we’re either in a raging bear market or a raging bull market, and nothing in between. Stocks can go from 14,000 to 6,500 and back to 14,000 again…oil can go from $147 to $33 and back to $147 again…and so on and so on and so on. Of course when you can leverage yourself 10, 20, 30 times or more, you can force things your way for a time and that’s where we are once again. The same people that did it to us before are at it again, but this time we have to put a stop to it. The global economy isn’t suddenly growing by leaps and bounds, yet oil is nearly double in price in a few short weeks. If we don’t regulate these guys soon, we’ll be back to $4 a gallon, but this time we won’t have the jobs and income to pay for it. Enough is enough. It’s going to take a number of years to get through these dire times and we don’t need the same old overzealous risk mongers running loose in the markets. It’s time to grab them by their necks and slow them down before they take us all down with them. Where is the regulation we were promised and when will it begin? It better be soon or we’ll have an even steeper price to pay than we’ve paid already. Call your Congressperson, your Senator and anyone else who will listen and demand the regulation the markets need NOW!