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Bond Yields Are Falling Because the Consumption Bubble Is Imploding

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What gets lost in the larger economic debate is that this deleveraging cycle is not so much about correcting a debt and real estate bubble but rather correcting a consumption bubble.

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PCE Vs. GDP and 10-Year Yield



As households continue to delever debt levels from 100% of income back towards 70%, consumption growth will be under significant pressure. You can see how in this type of shift in the way households finance consumption that these meager growth rates are not so far-fetched. Instead of concluding that the bond market is being manipulated by the Fed, which is driving interest rates to abnormally low levels, perhaps we should be looking for reasons why a 2.0% 10-year might actually be fair value. There is nothing unusual about these falling yields against a backdrop of decelerating consumption growth, and the impulsive rally off the 143-00 pivot should not be underestimated for what it implies about the economic reality.

The 2008 financial crisis was not about subprime mortgages or the failure of Lehman Brothers; it was the climax in a three-decade-long consumption bubble. The Fed's monetary policy aimed at stimulating aggregate demand is clearly focused on stimulating consumption by making credit free and by reflating net worth. However it's not working. You don't correct 30 years of excess with a few years of zero interest rates and QE.

The game of financing consumption growth with credit and assets is likely over, and going forward, income is going to bear the cost. As such, the respective relationships between spending, income, and economic growth are bound to revert to more sustainable levels. This will likely coincide with a very low level of economic growth for the foreseeable future and continue to foster an environment of very low long term interest rates.

Twitter: @exantefactor
No positions in stocks mentioned.
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