Mish's Global Economic Trend Analysis Message Board

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Strategies & Market Trends : Mish's Global Economic Trend Analysis

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To: Chispas who wrote (49825)	4/18/2006 3:37:55 PM
From: mishedlo	Read Replies (3) of 116555

Global: Oil and Bonds Stephen Roach (New York) morganstanley.com In the macro realm, bad things usually come in pairs. The confluence of yet another surge in oil prices and a long-overdue back-up in bond yields has piqued my interest in that regard. Crude oil prices are back near $70 and bond yields are at important thresholds -- closing in on 2% in Japan, 4% in Europe, and slicing through 5% in the US. My concerns stem less from a partial analysis of each development and more from the potential interplay between them. The combined impacts of these two factors raise the odds that a tipping point for an unbalanced global economy could well be close at hand. I continue to believe that the American consumer is the weak link in the global daisy chain. The combination of rising long-term interest rates and higher oil prices puts an unmistakable squeeze on discretionary income -- the last thing overly-indebted, saving-short US consumers need. The higher gasoline prices arising from the recent back-up in crude oil markets unleashes a classic negative income effect on the consumer that, by Dick Berner’s reckoning, could knock about $60 billion, or 0.6%, off disposable personal income this summer (see his dispatch in today’s Forum, “Risks for the Consumer”). At the same time, higher US bond yields could unleash a negative wealth effect -- taking a toll on a housing market that is already moving lower and also acting to constrain mortgage refinancing activity and household sector equity extraction. For a US consumer who remains chronically short of labor income but who drew support from more than $600 billion of annualized equity extraction in late 2005, that could be an especially tough blow. ....

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