Pardon me, sir, your yield curve is bent

I recently threw a stink bomb into our bright and rosy prospects for the United States economy. The premise: if the meteoric rise in the stock market gets pulled down to earth, American consumers–who are up to their eyeballs in debt–might close their wallets and amend their free spending ways.

We talk a lot about the Commonwealth’s economy being linked to Japan’s, and to a lesser extent Korea’s, but don’t lose sight of the fact that the U.S. is THE market for our garment exports. It’s largely an invisible link: while tourists are tangible and visible entities, the U.S. consumer is an abstraction to us.

I’m no party pooper, and shortly after my jaded observations, the Asian Wall Street Journal ran an article entitled “Will Economy Derail if Stocks Take a Tumble?”

The article, scribed by Greg Ip, notes “Robust consumer spending has been the bulwark of the U.S. economic boom, but a lot of that consumption is coming out of investors’ stock winnings.”

Yes, indeed, it is.

A couple of dark clouds are brewing over Uncle Sam’s financial landscape of milk and honey. The continue slide in the Dow Jones Industrial Index in recent weeks telegraphs the prospect of economic turbulence.

And to delve into even more esoteric data, I’ve noted that the “yield curve” for American bonds has gone inverted. In essence, the conventional relationship between bond yields and bond terms has gone kersplat.

In normal times, the longer the bond term is, the higher the yield is. Now, though, bond returns for the longer term bonds (30-year Treasuries) are lower than for shorter terms (5-year Treasuries). Those of us who dwell on Cartesian coordinates graph this stuff out, and the positive slope we expect to see is actually negative at the longer term–that is, the yield curve has gone “inverted.”

I’m sure that entire dissertations have been written on the yield curve, but the essence of the gig is that the U.S. bond market smells some economic weirdness afoot.

Stocks have been spooked lately. And, just as importantly, bonds are now spooked, too. If all of this continues, consumers will eventually wind up spooked, and the booming market for our garment exports will eventually have to come to grips with a plateau.

If this rotten scenario was to play out, it would be a number of months before our fair shores felt any impact. It’s not panic button material, but just another fact that shows how important is it for the CNMI to get as competitive as possible when it comes to all things industrial.

Of course, sounding the alarm here before the roof is actually on fire will only serve to irritate ears that prefer the quiet of slumber. And there’s nothing we can do about the U.S. stock and bond markets, of course. Still, as the CNMI should have learned, if you’re going to compete in the global economy, you might want to keep a sharp eye on it.