When is Less Money Better Than More Money?
Shock and Awe or Boiled Frog?

The Unwinding Free Fall

Merrill Lynch put the massive scale of this bond bull market in perspective. The last 6 years of central bank manipulation have wrought 520 rate cuts across the globe, $33 Trillion in fiscal and monetary stimulus, half of the market cap for global government bonds yielding less than 1% and the lowest government bond yields in 220 years!

Deflating this bubble is ugly so we are on track for the worst bond year since 1978 and investment grade binds since 1973. Friday’s move was the most severe negative move in MBS history. 5% is here and the public has no idea (Thanks weekly Freddie Mac survey!). Good news is that housing affordability is still historically strong but declining weekly. The combination of rising rates and sales prices are aggressively eroding the pool of buyers. The only help to that is the still shrinking pool of rental properties keeping comparable rental prices high.

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The median national house price in May was $208,700 or 15.8% higher than last year. The average household income can afford this home even if rates back up to 6%. So there are still economically sound reasons why the housing boom can continue, it’s the emotional and personal confidence reasons that are anyone’s guess.


The “good/bad” news of Friday’s numbers is that although we showed more numbers than expected, when the polling of households vs. employers was done the rate was still 7.6%, plus the numbers were driven by a 360,000 gain in Part-Time workers and a 240,000 decline in full-time workers, with the rest being self-employed. Showing these numbers of less-than employed individuals plus the “discouraged” workers who have stopped looking for a job, the Underemployment rate jumped to 14.3%. Also the Employment index in the ISM survey has fallen below 50 for the first time employment has contracted below 50 since 2009. Bottom-line, it doesn’t matter what really happens, it’s the way the Street thinks the reality is that matters; and they believe the bond bull market is over and they are climbing over each other to liquidate out the exits. In those cases you find a back door or hopefully have already been preparing to leave and been hanging by the exits or already left the party.

This historic unwinding from a historic central bank intervention will be painful and scary. Too many companies that should have known better will be shown to have big holes in their operations. Shotgun weddings will be popping up right and left. Fewer players will be good for the smaller pool of loans in front of us.  As the great California Raisin from Calabasas used to say, “When the tide goes out, you can see who isn’t wearing swimming trunks!”

BTW, the new party may be BYOB but it’s just as much fun and has the staying power to last a long time! The highs won’t be as high but it’s a natural high that you earn and is manageable. It’s a good living doing good business...

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