The Fed’s “quantitative tightening” program (herein, “QT”), plus, the Federal government’ financing of spending and tax cuts with Treasury auctions- may be pushing bond prices down and yields up- even if ever so slightly.
So, we may, at least in sentiment, be even flatter than we look.
Rates might be lower- and the curve flatter- were it not “but-for” past and future Treasury auctions and QT. To say that significant government actions and interventions, from the monetary (the Fed) and the fiscal (the Treasury) sides, are not affecting the economy or interest rates or the yield curve, I think would be foolhardy and naive.
Domestic, international, institutional, individual, and sovereign investors may be refraining from bond purchases because of the expectation of future QT and the expectation of future Treasury auctions, and a resulting government-caused “ceiling” on prices pushing bond prices even lower. Of course, yield is attractive, but only to the degree that principal is not more greatly depleted.
Even as longer term bond yields have gone slightly lower as of late- investors still may be operating with the expectation that they may be subject to a “floor” on yields that prevents further bond buying which would, otherwise, be occurring.
Thus, maybe the yield curve would be flat – or inverted – today “but-for” artificial government stimuli pushing prices lower, along with investors’ concerns and responses thereto. How can it be legitimately guaranteed that a combination of actions by The Treasury, The Federal Reserve and expectations thereabout on the part of institutions, individuals, and nations, has no affect on financial outcomes- including the shape of the yield curve. Clearly, that’s impossible.
If interest rates are rising, solely, or primarily, due to government interventions, and the resulting expectation and concerns, sans inflation, especially sans income growth … this would not be good. The dollar may be weak because it knows this truth- which causes real incomes to be even lower, and commodities, such as oil and gas, to cost more in real terms- as rates rise … all sans wage growth (and now, potentially, sans continued jobs growth, too- per the March jobs report).
Chairman Powell says he sees no housing bubble. That is almost an affirmation of the existence of one. Mortgage costs are higher, and incomes are stagnant- and a weakening dollar will bring real incomes even lower. Powell and the Fed are raising interest rates while expressing confusion as to why there is no wage growth. Yet, the Fed is determined to normalize its balance sheet and raise interest rates, or cause them to rise, on all ends of the curve, without any real signs of inflation.
If the Fed does not see housing risk based on today’s prices while incomes are stuck and interest rates rise, then the Fed is simply mistaken- or does not want to scare the market. But there is no way that high housing prices can be rationalized in an economy with stagnant wages. Stagnant incomes, academically, are in direct conflict with growing home prices. If Powell announces a bubble, it becomes a bubble- and causes a selloff, especially since the Fed controls the capital used for housing (i.e. interest rates). It becomes a self-fulfilling prophecy if the Fed says it, and could take down the economy.
As for Powell’s comments, I’d suggest not taking real estate advice from an economist (well, technically, a lawyer). Anyhow, if you want to check the Fed’s record on housing expertise- just see 2006-2007.
If the aforesaid, is, in fact, accurate about interest rates and the yield curve, let’s hope supply-side tax cuts trickle down in the form of business owners and corporations spending their extra monies, and that capital expenditures trickle down in the form of higher wages due to the need for labor. Interest rates hikes without wage growth can’t be good unless the trickle of supply-side tax cuts is really more of a “gusher”, and new opportunities, thus, arise for more workers and entrepreneurs. Without higher incomes for the demand side, even growth from business spending on cap-ex and higher income consumers on good s and services (i.e. the supply side) will be- ultimately- fruitless.
Were in not for fiscal stimulus, the Fed would not even be concerned with the prospect of inflation, rates might be lower (or at least not going much higher), and the yield curve could have flattened or inverted by now (if not prevented from doing so prevented by the artificial input of QT). Growth and inflation would both have likely been halted. It remains to be seen how the fiscal stimulus plays-out.
Employment is low, but wages are not rising. The Fed is standing-pat on its “Phillips-Curve” position that inflation is inevitable (even while Chairman Powell has expressed concern about the trickle down affect of the tax cuts- which, of course, is contradictory). The fact is that large companies, while hiring, are not replacing the wages of the better paying jobs they are replacing. From pizza shops to hardware stores, from liquor stores to clothing stores, from signage stores to cleaning companies- large companies have decimated Main Street jobs. The people who get new jobs in large companies have to work more and make less. For example, a hardware store employee or owner who wants to stay in the hardware industry has to go work at Home Depot at a lower wage and longer hours then his assistant manager job at a local store. The growth of large companies that are getting larger and taking market share from smaller retailers due to their better prices derived from their enormous scale is why the jobs are there- but the wages stink. The data speaks for itself.
The market is also still whispering about China potentially sell significant amounts of U.S. bonds (which I doubt), causing investor trepidation. It could, actually, be the opposite. In an effort to keep our consumer spending, China could buy, and presently be buying, U.S. bonds (which would also be a “governmental” intervention, by a different government, in bonds and yields). But, this perception could be scaring bond investors into cash.
Despite Fed rate hikes and the expectation, nay, the promise of more to come … along with QT, the dollar remains weak.
I’m not suggesting that growth is impossible. But it must be organic- there must be consumer/employee participation through income growth. There must be demand side growth and not just EPS growth due to buybacks and cap-ex spending that may find little demand side customers, post the cap-ex investments. GDP should be looked at closely to determine why consumer spending and business spending is higher, and in what industries growth is being realized. There are stories below the numbers. How much growth is from government spending?
The yield curve always speaketh loudly, yet, it may be getting stifled by government interventions, to some degree.
Watch the dollar. George Washington never tells a lie.
Neil S. Siskind, Esq., President
The Siskind Law Firm
Neil Siskind is the Founder & Chairman of The Fatherhood Assignment
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The Neil S. Siskind Nature Preserve is over 7 acres of environmentally-pristine waterfront land in a magnificent setting along New York’s majestic Hudson River. The Preserve includes a variety of species of animal and plant life, and is a precious example of the thoughtful maintenance of New York’s priceless open spaces. The land’s uses are limited to outdoor recreation such as hiking and climbing, and the study of ecology, nature and land use. The Neil S. Siskind Nature Preserve allows for the intelligent contemplation of our valuable natural resources and the most effective ways to maximize them and keep them protected.
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– Memorial Sloan Kettering Cancer Center, Volunteer
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Neil Siskind’s Pro Bono Work:
– Saving Senior Citizens- Protecting New York’s senior citizens from fraud and financial abuse www.savingseniorcitizens.com
– Senior FreeStart Business– Pro Bono: We seek to help put senior citizens in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/
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– In development: The Neil S. Siskind School of Hope: A free school to teach inner-city youths the skills of entrepreneurship and importance of economic self-sufficiency.
Neil Siskind’s Government Work:
– Suffolk County District Attorney’s Office, Boston, MA, 1994, Intern
– Office of Senator Christopher J. Dodd, Newington, CT, 1992, Intern
– Hartford County Department of Probation, Hartford, CT, 1991, Intern
Neil Siskind’s Community Assistance:
Financed & operated a legal clinic providing low-cost legal services to struggling Long Islanders during the recession to help clients resolve debt, organize finances, and launch new businesses.
Neil Siskind’s Professional Curriculum Vitae: http://neilsiskind.com/
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