Hard Proof There Is No Real Economic Recovery

Economic RecoveryThere’s a lot of talk about economic recovery these days. Mainstream economists are saying the U.S. economy will continue to grow, and the stock advisors are telling investors to buy on dips because everything is headed upward. Their arguments are: housing is hot, the unemployment rate is declining, and consumers are spending.

But I have to disagree with those claims. I believe this isn’t a real economic recovery. What we have seen since 2009 has been nothing more than a result of artificially low interest rates, money printing, and increased government spending. Real economic recovery only occurs when conditions improve across the board and return to their historical averages.

The jobs market, which should improve during an economic recovery, is actually stalled and tormented. The official unemployment rate has come down from 10% to 7.6% in May. But the official unemployment rate is not an accurate indicator of the jobs market, as it does not take into account the soaring rate of involuntary underemployment.

There is a spur of job creation in retail and other low-wage sectors, but the 4.4 million long-term unemployed in the U.S.—those who have been out of work for more than six months—aren’t seeing robust improvements. Each month, just 10% of them find jobs, and that number hasn’t changed in the last two years. (Source: Wall Street Journal, June 24, 2013.)

According to estimates from the Brooking Institution’s Hamilton Project, after adjusting for population growth, it could take up to three years for the unemployment rate in the U.S. economy to get back to its prerecession level.

The fact: American consumers are the ones that drive the U.S. economy towards economic recovery. But they are struggling right now. According to a survey by Bankrate.com, 76% of Americans live paycheck-to-paycheck. The survey, with 1,000 respondents, showed that 50% had savings that wouldn’t last them for three months without income and that 27% didn’t have any savings at all. (Source: CNN Money, June 24, 2013.)

The so-called “economic recovery” is tepid at best. The U.S. economy is growing at a much slower rate than its historical average—an annual pace of 2.2%, far below its decades-long average of 3.3%. (Source: Wall Street Journal, June 24, 2013.)

There are problems in the making for any real economic recovery. The long-term bonds rate yields are increasing very quickly. Keep in mind that the long-term bonds are used as a benchmark to price not only the mortgage rate, but also what rate the banks will charge their clients on loans. If these yields continue to skyrocket, you can expect loan rates to increase, putting businesses already struggling into greater danger—which is hardly an environment of economic recovery.

As my readers know, the anemic economic recovery and stock market rally we have seen since the financial crisis was a result of easy monetary policies. If Bernanke goes ahead with his warning last Wednesday that the Fed will pull back on printing money (and I’m still skeptical if the Fed will actually pull the trigger), the ramifications for the U.S. economy, stock market, and housing market will be more severe than most analysts can fathom.

Michael’s Personal Notes:

It hasn’t been too long since I started to warn readers of Profit Confidential about what might happen in the U.S. bond market. (See “Bond Market Shows Signs of Weakness Ahead.”) As I have said many times before, the sell-off in the bond market will start slowly and then eventually pick up speed. And, as predicted, it’s all coming together.

Take a look at the chart of the 10-year U.S. bond prices below:

UST 10 Year Treasury Note Price Chart

Chart courtesy of www.StockCharts.com

The selling in the U.S. bond market has escalated. The 10-year U.S. bonds were trading in a down channel—making successively lower lows and lower highs since the middle of 2012. Recently, after the Federal Reserve, which has turned into a major buyer of long-term U.S. bonds, said it might pull back on its purchases, it all turned. The bond prices started to come down quickly (as you can see in the red circle on the chart above).

Since the beginning of the year, the 10-year U.S. bonds prices are down about four percent—from $131.00 to below $126.00 now. The image elsewhere in the bond market is very similar. The 30-year U.S. bonds are also shifting gears, and the bonds with higher risks, such as junk bonds, are seeing an even steeper sell-off.

Investors are running for the doors, fleeing the bond market at a very fast pace. According to the Investment Company Institute’s data, in April of 2012, long-term bonds mutual funds witnessed an inflow of $24.7 billion. In April of this year, these types of mutual funds had an inflow of only $12.1 billion—51% less. (Source: Investment Company Institute, June 19, 2013.)

In this month, June, it is possible that the long-term bonds mutual funds will witness an outflow for the first time since August of 2011. For the weeks ended on June 5 and June 12, the long-term bonds mutual funds witnessed outflows of $10.8 billion and $13.4 billion, respectively.

As the U.S. bonds prices come down and the bond market faces severe pressure, I see a significant number of mainstream economists missing its implications. Here’s one: the pension funds rely heavily on the bond market; they will face losses as the bond prices continue to slide lower.

The sell-off in the bond market shouldn’t be taken lightly, because it’s much bigger than the equity markets. Investors are fleeing on speculation over when the Federal Reserve will stop purchasing U.S. bonds; if inflation starts to pour into the U.S. economy, as I expect it will, the “slowly declining” bond market will become a “crashing” bond market.

What He Said:

“When property prices start coming down in North America, it won’t be a pretty sight because consumers are too leveraged. When consumers have over-borrowed so much that they have no more room in their credit lines to borrow more, when institutions start to get tight on lending, demand for housing will decline and so will prices. It’s only a matter of logic, reality and time.” Michael Lombardi in Profit Confidential, June 23, 2005. Michael was already warning investors of the coming crisis in the U.S. real estate market right at the peak of the boom, now widely believed to be in 2005.