Juggling Dynamite

Stephen Roach, a professor at Yale University and former non-executive chairman for Morgan Stanley in Asia, talks about the U.S. economy, and Federal Reserve and European Central Bank policies. Here is a direct link.

Two positive headlines stood out yesterday for those interested in trends that matter in supporting the consumer and therefore the real economy:

1. U.S. crude production has climbed to the highest level in more than 15 years just as fuel consumption has decreased. QE-inflated commodity and energy prices have served their usual incentive in prodding producers to find more supply just as they have forced consumers to conserve and substitute. Central bankers have focused on inflating asset prices, but eventually real demand always forces prices to recouple with reality. The excess reserves and record production today will be helpful in lowering prices as the consumer-led US economy struggles to find its new equilibrium in the “post-credit bubble” slow-growth world. See: Oil tumbles as crude production surges to 15-year high.

2. US mortgage prepayment rates soared to the highest in seven years as homeowners are taking advantage of the lowest borrowing costs on record to refinance. 30 year mortgage rates that were 5.05% a year ago last week declined to 3.4% and most importantly, consumers seem focused on refinancing to pay down the debt rather than to gut equity and spend more as they did in the credit bubble. Home loans were repaid in August at a pace that will erase 25 percent of the debt in a year. This is a good thing for re-building the financial strength and equity of US consumers. See: Mortgage prepayment rate hits highest level since 2005

Both of these developments are good for the longer-term health of the consumer, but negative for short-term demand and companies and analysts banking on record earnings to continue unabated.

Inconvenient truths that the stock Perma-bulls will never acknowledge: wave after wave of Kamikaze efforts from global central bankers, and still bond returns have trounced stocks since 2009. No wonder they are growing increasingly depleted and desperate. Just imagine how this chart will look once stocks do suffer their next big cyclical decline which arrives every 3-4 years during secular bear phases. But then again, maybe the bulls are right, maybe another decline will never come! Maybe the central banks will be able to keep stocks at this new “permanently high plateau” indefinitely. Maybe this time is different.

Source: Cory Venable, CMT, Venable Park Investment Counsel Inc.