This week’s data reports convey a narrative of a thriving economy. According to the Commerce Department’s announcement on Tuesday, sales of single-family homes have risen by 2.1 percent, reaching a seasonally adjusted annual rate of 476,000 units—the highest level since July 2008.
The news doesn’t stop there. U.S. consumer confidence has soared to a five-year peak. An AP report indicates that:
“The Conference Board, a New York-based private research organization, revealed on Tuesday that its consumer confidence index surged to 81.4 in June, marking the best reading since January 2008. This figure is up from May’s revised reading of 74.3, which had been slightly adjusted downward from 76.2.”
Additionally, the Commerce Department confirmed an increase in earnings. With more disposable income, people are purchasing more goods:
“Personal income rose by $69.4 billion, or 0.5 percent, while disposable personal income (DPI) also climbed by $57.0 billion, or 0.5 percent, in May,” according to the Bureau of Economic Analysis. “Personal consumption expenditures (PCE) increased by $29.0 billion, or 0.3 percent.”
These reports are indeed impressive, suggesting that prosperity is making a comeback. If the trend continues, widespread wealth might soon be a reality.
The Best Scenario for the U.S. Economy
However, the situation may not be as rosy as it appears. In a previous discussion, we explored the idea that The United States Can’t Afford Prosperity.
The underlying concern is that extensive fiscal and monetary intervention has placed the U.S. economy in a precarious situation. Here’s a summary of our earlier thoughts:
While the Federal Reserve might maintain 10-Year note yields around 2 percent during economic downturns, growth will inevitably resume. With it, inflation will arise.
Currently, the Federal Reserve is committed to expanding its balance sheet by over $1 trillion annually until employment levels improve. Given the multiplier effect and the “magic” of fractional reserve banking, it’s possible that each new trillion could yield $5 trillion—or more—flowing into the economy.
This influx of cash is bound to escalate prices and devalue the dollar. Foreign creditors, such as China and Japan, holding substantial amounts of Treasuries will likely seek higher returns due to the diminishing value of their assets. Consequently, interest rates would increase, making government debt increasingly burdensome.
Any rise in GDP or tax revenues could quickly be eclipsed by the soaring cost of interest on government debt. In a tragic twist, the most favorable scenario for the U.S. economy could be slow, sluggish growth, as anything more might simply be unsustainable.
Where the Big Lessons Will Be Learned
Living through the intricacies of aggressive fiscal and monetary experimentation allows us to witness the rapid mood swings within market participants almost instantaneously. Reactions of greed, fear, mania, and panic can occur all within a single trading session.
For instance, last week, while considering options outside the U.S., investors became unsettled at the mere suggestion that the Fed might reduce its money printing in the future. Yields on the 10-Year Treasury surged to 2.55 percent, up from 1.65 percent in May, with stocks subsequently taking a hit.
This week, while yields have stabilized for now, the stock market has rebounded, with the DOW climbing back above 15,000. But what are the reasons behind this movement? Is it merely a reflection of improving consumer confidence and rising housing prices?
Truthfully, the answer remains unclear. The reality is that financial markets have been so heavily influenced by government actions that understanding the current landscape has become exceedingly difficult. Mark Hulbert suggests that, for stocks, The Worst is Yet to Come.
He may well be correct. Regardless of whether stocks experience an upward trajectory or plummet, our focus remains on Treasuries, as that’s where significant lessons will emerge.
We believe interest rates have reached a pivotal juncture. In other words, rates are expected to rise over the next 30 years—this is certain.
Moreover, the entire economic structure, which has been crippled by artificially low rates, won’t withstand higher rates until all the systemic flaws have been addressed. By that time, debt may become the subject of ridicule, akin to the President’s mom jeans.
Sincerely,
MN Gordon
for Economic Prism
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