I'd like to start off by saying that I'm generally a pessimistic person when it comes to today's economy, politics and the overall mindset of the American citizens. So me being bearish on the markets/economy shouldn't be a surprise to anyone. But after the action in the markets today, I really am getting worried about the future prospects of our economy and therefore the standard of living in this country. Practical economists, which there seem to be very few of today, at least in Washington, have been worried for quite a while. The velocity of this pending tidal wave seems to be gaining speed each day, at least in my humble opinion. I remind you, I don't have much hands on experience dealing with the changing of business cycles, shifts in social mood, economic recessions or trading stocks while going through turbulent times. I do consider myself to be a very practical and analytical individual, who puts in a lot of time studying those subjects. What I'm getting at is that I truly believe bad times are coming. When I say bad times, I don't mean a recession for a few years with low GDP growth and high unemployment. I'm thinking more along the lines of a complete change of the way people live within this country.
We have seen the first of many changes beginning with consumer psychology. The bling bling days are over folks. The longer you want to hold on to those days, which were great, don't get me wrong, the more you are ill-preparing yourself for the future. Social moods are shifting towards a more austere lifestyle and there are signs of this all over. Listen to commercials on the radio or on t.v. You'll hear advertising in commercials poking fun at federal bailouts or how everyone needs to save money these days or how in these tough times you should look to the such and such product to help you feel good again. Advertising is all psychology and the advertisers are changing their methods before the consumers, as a whole, have changed their psychology. The marketers are smart and see shift towards a darker social mood, which is why they already have ads to coincide with these shifts. Now, a darker social mood doesn't mean that everyone is going to become gothic, start wearing trench coats and dying their hair black. It simply suggests that as a whole, the people of this country hit a peak on their positive social moods and things are naturally going to be in a rut for some time. It all moves in cycles. It just so happens that this cycle has the potential to be the cycle of all cycles. A mega cycle, if you will. There is a lot on the line here with societal acrimony seemingly deteriorating day by day along with the global economy. I could go on for days about this, but I think you get the picture. The sooner you can prepare for these darker days, the better position you'll be in to profit in those tough times.
As for the market today, I'll keep it quick. The 5-yr Treasury auction actually went well today. Normally this would be a great sign for the market and equities would have rallied, but this couldn't be further from the truth. The odd thing was that foreign demand for the shorter term Treasuries was higher than it has been in past auctions. Combine that with the fact that the rate on the 10-yr jumped to 3.7%...yea that's right 3.7% (now up 46.25% since the Fed announced it purchasing of Treasuries in mid March) and you'll notice that investors are skittish about the longer term debt in the U.S. This led to a major sell off in the long dated Treasuries and forced yields up again. As I've said before, rising 10-yr yields is going to kill any type of housing recovery. Historically, with the 10-yr at 3.7%, 30-yr fixed mortgage rates are around 5.6%. Right now they are at 5.06% and just a month ago they were 4.8%. This means that people won't be able to sell their houses at the prices they are asking now, if mortgage rates continue to rise. This will lead to further housing price declines and therefore make the banks balance sheets even more toxic. It's like a death spiral. The 2 & 10 spread (10-yr treasury - 2-yr treasury) widened to its largest spread ever today. This shows that investors will buy short term treasuries, but are nervous about the long term solvency of our sovereign debt and are demanding higher rates of return for the higher risks they are taking. The chart below depicts this.
Adding to the fact that Treasuries sold off heavy around 2:30 pm, equities sold off as well. Stocks were trading flat for the most part, but finished down over 2%. This is an ominous sign from where I'm standing. Investors are have no where to hide right now. The dollar has made a small bounce due to technicals, which is a positive sign. We are quickly approaching the point of recognition. The scary thing is that you don't actually know what the point of recognition is, until you are staring the beast in the eyes....and by that time, it's too late to run.
Good luck tomorrow and be careful out there because risks are getting higher each day.
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