US Economy: Simply Not Sustainable

There was plenty of reasons to be optimistic with last week's unemployment report showing a sizable slow down in initial unemployment claims. This week's blog is going to be brief but I would like to present 5 reasons why our Economy may be headed for a substantial slowdown over the next 18 months. Let me repeat: I believe things may get much worse from here should any combination of the following happen:

1. China begins to back away from buying our debt
2. China's growth continues to drive up the demand (and price) for oil
3. Consumer spending slows as the cost of capital is driven higher because of the continued US Treasury drive for capital
4. Discussions continue in the global market about replacing the US dollar as the currency of choice to be replaced by the Euro
5. Housing slows even further as a huge backlog of REO properties makes its way onto the market. Add the large number of adjustable rate and negative arm mortgage products (most with negative HPA) and this appears to be the one most likely baked in the cake.

As you can see, we have a lot riding on another Country to facilitate us moving beyond this recession. The question I keep asking myself is, "what drives this next waive of growth?". From 2001 through 2007, it was housing. In all likelihood it appears that government spending will be the answer. So, what will facilitate that? Borrowing more money. Problem not solved.

As it relates to housing, I am afraid it will have many more dark days ahead of it. Rates are going up as is the cost of home ownership. Unlike the unemployment report, I am not seeing many things to get excited about. Unfortunately, I have more questions today than I did in August 2007 when I predicted a paradigm shift in our economy.

Release Date & Time
Economic Indicator
Consensus Estimate
My Analysis

Mon. June 8
Tue. June, 9. 10;00 a.m. ET
Apr. Wholesale Inventories
-1.1% vs. last -1.6%
This old stale data.

Tue. June 9, 1:00 p.m. ET
Treasury auctions $36 bil. of
3-year notes
The relative short maturity of this security should be attractive to a large number of investors. If so, this event will likely have little, if any meaningful impact on the direction of mortgage interest rates today.

Tue. June 9, before the end of the day
Most mortgage-backed securities "roll" to July delivery
This is a standard monthly administrative function of the mortgage market. The price impact of this event is already reflected on most investors’ rate sheets.


Wed. June 10, 1:00 p.m. ET
Treasury auctions $19 bil. of
10-year notes
The yield on this security has climbed above 3.9% - probably making this offering very attractive to a broad array of investors. If my comments above prove accurate, this will support higher mortgage interest rates.

Wed. June 10, 2:00 p.m. ET
Fed "Beige Book" is released
This report, named for the color of its cover, will provide an assessment of economic conditions in all 12 Federal Reserve districts. Most analysts anticipate the data will show that recessionary pressures are moderating in most of the country.

Thurs. June 11, 8:30 a.m. ET
Initial jobless claims for the week ended 6/06
Down 6,000
Look for this data to have little, if any meaningful impact on the market as investors discount today’s decline in the face of ramped-up expectations for a strong surge in jobless claims once the ramifications of the auto industry bankruptcies begin to work through the economy.

Thurs. June 11, 8:30 a.m. ET
May Retail Sales
Ex. auto
+0.5% vs. last -0.4%
+0.2% vs. last -0.5%
The government’s one time payment to Social Security recipients combined with tax refunds and other fiscal stimulus likely contributed strongly to the gains for both of the components of this report. If the consensus estimates proves accurate, mortgage investors will likely shrug the May Retail Sales gains off as a statistical aberration. Look for this data to have little, if any meaningful influence on the direction of equity markets today.

Thurs. June 11, 10:00 a.m. ET
Apr. Business Inventories
-1.0% vs. last -1.0%
This old stale bit of macro-economic news will likely do nothing more than take up space on this week’s calendar.

Thurs. June 11, 1:00 p.m. ET
Treasury auctions $11 bil. of
30-year bonds
The yield on this offering is above 4.5% -- a level that will hopefully be attractive to a large number of investors. If not, this event will likely serve to push fixed long term interest rates higher before the end of the day. This is not good news for mortgage rates as many a client are sitting out there waiting for things to turn around.


Fri. June 12,