by Charles Biderman
In my last video, before taking some time off, I said that I expected a weak August jobs report and an imploding housing market to postpone the start of taper time. Well, the August jobs report was weaker than expected and mortgage bankers today reported that new mortgage applications have plunged to levels not seen since the 2008 low. Regardless of the weakness, the bond market apparently still believes that even if the Fed might not start tapering this month, tapering will start before year end.
To repeat what I said yesterday to Rick Santelli on CNBC, as long as the markets believe that the Fed will soon start reducing and eventually stop buying bonds, interest rates will keep going up. Why will interest rates keep going up? Duh! The Federal Reserve is the biggest bond buyer and when the market started to believe this past May that the Fed, the biggest buyer ever, was getting ready to slow and then stop buying, everybody started selling. Today the 10 year yields are approaching 3 percent up from 1.63 percent at the May low. What's more, my bet is that interest rates will spike the day the Fed actually announces a Taper Time start date.
Remember, the Fed has been buying $85 billion monthly of financial assets. And this is why by early May of this year the 10 year Treasury bond was yielding all of 1.63 percent; down more than half from 3.5 percent just 12 months before in May 2012. So, if the 10 year Treasury just goes back to 3.5 percent from 2.9 percent today, that means mortgage rates will be topping 5.5 percent and maybe even the amount of money available for auto loans will slow.
What amazes me is that anyone is surprised that interest rates are and have been rising. Not only are bond market pros not buying, but individuals have redeemed a huge $130 billion out of bond mutual and exchange traded funds since May, even though the average bond fund is only down 8 percent in price. I just recommended to a 90 year old relative that he sell his bond mutual funds.
So unless the Fed changes its tune and says tapering is off the table for the foreseeable future, interest rates will keep rising. Higher interest rates have already popped the housing bubble. By the way it is no secret that this recent housing bubble was intentionally created by the Fed at the September 2011 FOMC meeting with Operation Twist.
Besides housing, the Fed's zero rate policy has also created a bubble in auto sales. Today anybody with a pulse and no outstanding arrest warrants can get an auto loan. Just like the good old days in the 2005 2006 housing market. A year from now, many of this year's auto loans will be in default, and goodbye auto sales bubble.
The reason higher interest rates will send the U.S. economy into a recession is that wages and salaries are already barely growing and even a minor slowdown will create both a sequential and year over year decline in the U.S. economy. Based upon adjusting the withheld income and employment tax reported in each day's Daily Treasury Statement; wages and salaries are, at most, growing at one percent year over year before inflation. So if the Fed actually does taper, and with fools in charge in Washington, there is very little chance of the U.S. economy averting a recession.
And if the U.S. economy gets a cold, how sick will the rest of the world get? Hopefully we will not screw up the next recovery as badly as we have this one.