Treasury rates plunge. When will the economy get better? Independent financial advice
Posted by Don Martin on Fri, Jun 01, 2012 @ 09:41 AM
Treasury rates plunged dramatically as unemployment rate increased. The employment report was released today showing unemployment rose 0.1% to 8.2%. Only 69,000 new jobs were added to the economy, far below the consensus forecast of 150,000. My forecast was 135,000. To overcome population growth a minimum of 125,000 new jobs are needed each month. Thus in “real” terms the amount of jobs decreased by 51,000, which is which the percentage of jobless people rose by 0.1%. Economists had hoped that three years after the 2009 bottom and with lots of stimulus that the jobless rate would improve. They were wrong.
We are in a pattern similar to the Japanese Soft Depression although there are many differences that make the U.S.far better off. With our entrepreneurial culture, our ability to attract talented immigrants, our vast resources of natural gas and coal and a huge skilled non-union workforce whose wages have steadily dropped we are the best country for capital to flee to which means we will eventually get out of the recession before others do.
America has more hidden resources than others
It is possible if the jobless rate continues to increase that the ten year Treasury could go to a 1.0% yield. At the yield today of 1.49% the ten year Treasury is risky because its price is high. However depressions last for a long time and the improvement needed to recover comes gradually so perhaps the danger of Treasury bond prices crashing is not the same as in the 1970’s when rising inflation made bond prices crash. A gradual economic recovery is not the same effect on bonds as an all out assult by inflation. However the risk of a crash in bond prices is something to think about. If the Fed started QE3 and got too aggressive at some point the bond market deflation vigilantes would defect over to the camp of bond market inflation vigilantes and then bond prices could go down. However, I don’t believe QE really stimulates the economy except to tease rich people into thinking they can afford luxury housing and other goods. At some point no amount of low rates will stimulate stocks or the real economy and then there is the risk that the Fed’s credibility will be broken. People have been trained like Pavlov’s dogs to salivate whenever the Fed lowers the rates but at some point it may not work and then people will abandon the stock market. I still expect a retest of the March, 2009 stock market lows when the SP was at 666. If today’s high bond prices scare you then shorten the maturity of your holdings but still stay in investment grade bonds. The volatility will get worse. Don’t buy stocks or commodities; wait for a repeat of the March, 2009 crash before buying “risk assets” (stocks, commodities, real estate). Keep your powder dry; don’t buy stocks on a dip, buy them after a Cat 5 economic hurricane has devastated things.
I wrote an article “Jobless rate to show no real improvement” and “Employment report to damage 401k’s”.
Investors should seek independent financial advice. 