There are times to suspend analysis and just listen to markets.
Have to be careful even with that. First, pick the right markets. The stock market is not worth the trouble, thousands of different stocks at once sounding like a symphony performed by 5th-graders. Pick bullet markets: the 10-year US T-note has one issuer and is the most creditworthy and widely traded IOU on the planet. And oil.
The second caution: Doonesbury’s Zonker Harris speaks to his flowers and they reply. He’s stoned, but even if you’re not, be careful to listen to markets and not your own echo.
Last week had three big events:
Release of May CPI, the Fed meeting, and the further fragmentation of Iraq.
Tuesday’s CPI jumped in an unpleasant surprise: 0.4% overall and 0.3% “core.” The 10-year T-note yield rose instantaneously — not far, just from 2.59% to 2.65%, but that 2.65% is one foot over the threshold toward a significant run upward. From January to May the 10-year traded 2.60%-2.80%, and in late May broke down to 2.45% but a week later was back above 2.60%.
The Fed met the day after CPI, the 10-year poised to jump. The Fed’s statement and press conference could not have been more dovish. Back down to 2.57% by Thursday morning, safely below 2.60%. For an hour. Then back up to the edge.
The bond market could not be more clear. No matter what the Fed intends — stay at 0% until doomsday — if inflation is crawling out of the box then yields are going higher. Given stagnant wages it is hard to see how inflation can rise, but it can. Perhaps 40% of US households are doing well (IT-skilled, marketable educations, careers in health care or education, plugged into the global economy), and their rising purchasing power can raise general prices for a time. The other 60% of households lose “real” purchasing power, and will substitute cheaper products, but it can take a long time for statisticians to adjust the aggregate US shopping basket.
(BTW: Brace yourselves for more election-year “inequality” from the Left, cruelly disinterested in helping weaker households to compete in a global economy, instead focused on demonizing the successful to justify raising their taxes.)
Oil is a less-tidy chart
It began a sustained rise from $95/bbl in February, now $107 and certainly feeding into inflation fears. Natural gas rose at the same time from $4.00, but has been relatively steady since at $4.75. The two markets interact, for the next several years not in short supply, but oil is “geopolitically sensitive.”
I risk Zonkerism, but oil is telling me that sequential instability in Syria, Ukraine, and Iraq is the cause of the move. Add Czar Vladimir, who goes to sleep and wakes each day hoping that Middle Eastern instability gives him higher prices, and much more important, power. He will make all the mischief he can.
The US is late to begin a strategic withdrawal from positions taken after WW II when our power was infinite. Especially in the Middle East we have held the lid so tight that pressure has grown instead of gradually releasing and cooking and releasing.
Since 1950 the US population has a little more than doubled to 330 million while Iraq has grown from 5 million to 33; Saudi Arabia from 3.8 million to 27; Syria from 3.5 to 22; Iran from 16 to 81, Egypt from 21 to 88. Each is over-weighted to men because of female infanticide. Immense growth in numbers, some nations now inconceivably wealthy, most still poor, but all share primitive social capital.
Great powers seldom, if ever, begin strategic withdrawal in time, before the fatal hollowing-out from overextension (see Kennedy 1989 “Rise and Fall of The Great Powers”). We can hope to be the exception because we have never aspired to empire, just stability. The big risk alongside “too late” is that one or more adversaries will underestimate our power and fortitude as we pull back, and try to take advantage.
As now. There is no rulebook for Mr. Obama or his successors. Strategic defense while maintaining tactical offense is an art form, and markets are unforgiving judges.
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10-year T-note last six months. Holding this 2.65% is big: Click on charts to enlarge.
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10-year T-note last week. CPI Tuesday early, Fed at Wednesday close:
Crude oil, one year back:
Natural gas, one year back:
“Personal Consumption Expenditure” is the Fed’s favorite measure of inflation. Not yet in the danger zone, as CPI suggests is on the way, but the trend has changed.
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