Friday, May 27, 2011
Capital Markets Update
By Louis S.Barnes Friday, May 27, 2011
Events European and domestic have conspired to push the Almighty Indicator to its lowest level in six months: the 10-year T-note has broken to 3.05%.
April data still arriving shows a substantial air pocket, which the usual suspects discount as the temporary effect of gasoline prices and supply-chain disruptions after Japan's 3/11. There's more to it than that: the Chicago Fed's national index dropped from +.32 in march to -.45 in April, and -.70 would signal new recession. 1st quarter GDP was widely expected to be revised up from 1.8% but was not, and the consumer spending account was revised down a half-point. Last week's new unemployment claims were supposed to unwind a quirky rise, but popped up to 424,000.
The song on the broken record here: housing. April pending home sales tanked 11% (versus -1% forecast), down 26% year-over year. The FHFA reported that as of March, homes in 47 states plus DC had lost value in the last year, and national prices are back to 2003 levels. Housing is not waiting for jobs; this economy cannot heal when the entire nation is worried about its most important asset.
Europe. To understand this moment in Europe, watch HBO's new "Too Big To Fail." The presentation is better than the book -- better than any of the books or news shows describing the run-in to Lehman and AIG. The splendid cast nails the characters, and conveys the visceral fear that overtook each of these immensely powerful personae.
Two key lessons: How could these people not see the dominoes lined up behind each one as it went down? Second, although none of the players today gets a shred of credit, at the last possible minute, under stress found only in combat (and even there, you get to shoot back) they found the wisdom and courage to set a firebreak.
Many Americans, maybe most, still doubt the need for that firebreak, dismissing the whole post-Lehman affair a bailout of banks and the rich. Most Europeans today are in the same spectacular self-serving denial and ignorance.
The analog, Europe to Lehman, is cover-your-eyes close. The Western financial system failed in July 2007, descending into the greatest bank run of all time, institution-on-institution. The Fed for the next 14 months used every imaginable tool to support the system, but only bought time until the dominoes ran their course: Fannie and Freddie at Labor Day 2008, followed in a fortnight by Lehman, then instantly by AIG. Perfesser Bernanke told Paulson that the Fed was exhausted, and Congress would have to supply cash. Congress did, in time; and Bernanke and Paulson found the clarity and guts to pour $100 billion into the filthy hole of AIG to stop the run.
The euro experiment failed last year. Insolvent Greece, Ireland, and Portugal have been supported by the European Central Bank, which has bought their bonds and accepted them as collateral from their banks. The ECB last week said that it is at its limit, exposed to some $300 billion of Club Med IOUs. Any "restructuring" will make the ECB insolvent, needing many billions of pan-European taxpayer money to re-capitalize.
The other dominoes are lined up: Spain with 45% unemployment of those aged 29 and younger, and a gaping hole in its banking system, Italy the most indebted of all, 120% of GDP. The dominoes are linked, just as here, by banks packed with each others' sovereign paper. Soon, perhaps very soon, Europe will have to decide whether to firebreak outside Greece, or let that hopeless case go as we did Lehman.
If Greece is let go, as an object lesson and a hole too big versus benefit, Europe will instantly face its dominoes: re-capitalize its banks and the ECB to cover the Greek loss, picking up something like $1.5 trillion in Club Med paper, or....
Germany's call. Say to hell with it. German taxpayers cover German banks, and go back to some version of deutschemark with any nation that can afford our company.
Whichever way Germany goes, firebreak or sauve qui peut, cash is already running to the US for safety. Either way, the European economy slows and slows the world, deflation back in play, interest rates to the floor.
Notes to charts, which are nothing short of incredible. These show two separate accounts: 90-day-plus delinquencies not yet in foreclosure, and homes in foreclosure process. Adding the left scales, together there are roughly four million homes headed for distressed resale. This total does NOT include homes already foreclosed and in REO inventory (large debate about that group, somewhere between 500,000 and 800,000)
In the top chart the color-coded aging-scale reflects how long a loan has been 90-days or more delinquent: purple = one year or more, 40% of total (!). In the second chart the coding shows the time in foreclosure process, no payments made, but not yet taken in foreclosure: amber = 24+ months, 31% (!!). www.calculatedriskblog.com.
Events European and domestic have conspired to push the Almighty Indicator to its lowest level in six months: the 10-year T-note has broken to 3.05%.
April data still arriving shows a substantial air pocket, which the usual suspects discount as the temporary effect of gasoline prices and supply-chain disruptions after Japan's 3/11. There's more to it than that: the Chicago Fed's national index dropped from +.32 in march to -.45 in April, and -.70 would signal new recession. 1st quarter GDP was widely expected to be revised up from 1.8% but was not, and the consumer spending account was revised down a half-point. Last week's new unemployment claims were supposed to unwind a quirky rise, but popped up to 424,000.
The song on the broken record here: housing. April pending home sales tanked 11% (versus -1% forecast), down 26% year-over year. The FHFA reported that as of March, homes in 47 states plus DC had lost value in the last year, and national prices are back to 2003 levels. Housing is not waiting for jobs; this economy cannot heal when the entire nation is worried about its most important asset.
Europe. To understand this moment in Europe, watch HBO's new "Too Big To Fail." The presentation is better than the book -- better than any of the books or news shows describing the run-in to Lehman and AIG. The splendid cast nails the characters, and conveys the visceral fear that overtook each of these immensely powerful personae.
Two key lessons: How could these people not see the dominoes lined up behind each one as it went down? Second, although none of the players today gets a shred of credit, at the last possible minute, under stress found only in combat (and even there, you get to shoot back) they found the wisdom and courage to set a firebreak.
Many Americans, maybe most, still doubt the need for that firebreak, dismissing the whole post-Lehman affair a bailout of banks and the rich. Most Europeans today are in the same spectacular self-serving denial and ignorance.
The analog, Europe to Lehman, is cover-your-eyes close. The Western financial system failed in July 2007, descending into the greatest bank run of all time, institution-on-institution. The Fed for the next 14 months used every imaginable tool to support the system, but only bought time until the dominoes ran their course: Fannie and Freddie at Labor Day 2008, followed in a fortnight by Lehman, then instantly by AIG. Perfesser Bernanke told Paulson that the Fed was exhausted, and Congress would have to supply cash. Congress did, in time; and Bernanke and Paulson found the clarity and guts to pour $100 billion into the filthy hole of AIG to stop the run.
The euro experiment failed last year. Insolvent Greece, Ireland, and Portugal have been supported by the European Central Bank, which has bought their bonds and accepted them as collateral from their banks. The ECB last week said that it is at its limit, exposed to some $300 billion of Club Med IOUs. Any "restructuring" will make the ECB insolvent, needing many billions of pan-European taxpayer money to re-capitalize.
The other dominoes are lined up: Spain with 45% unemployment of those aged 29 and younger, and a gaping hole in its banking system, Italy the most indebted of all, 120% of GDP. The dominoes are linked, just as here, by banks packed with each others' sovereign paper. Soon, perhaps very soon, Europe will have to decide whether to firebreak outside Greece, or let that hopeless case go as we did Lehman.
If Greece is let go, as an object lesson and a hole too big versus benefit, Europe will instantly face its dominoes: re-capitalize its banks and the ECB to cover the Greek loss, picking up something like $1.5 trillion in Club Med paper, or....
Germany's call. Say to hell with it. German taxpayers cover German banks, and go back to some version of deutschemark with any nation that can afford our company.
Whichever way Germany goes, firebreak or sauve qui peut, cash is already running to the US for safety. Either way, the European economy slows and slows the world, deflation back in play, interest rates to the floor.
Notes to charts, which are nothing short of incredible. These show two separate accounts: 90-day-plus delinquencies not yet in foreclosure, and homes in foreclosure process. Adding the left scales, together there are roughly four million homes headed for distressed resale. This total does NOT include homes already foreclosed and in REO inventory (large debate about that group, somewhere between 500,000 and 800,000)
In the top chart the color-coded aging-scale reflects how long a loan has been 90-days or more delinquent: purple = one year or more, 40% of total (!). In the second chart the coding shows the time in foreclosure process, no payments made, but not yet taken in foreclosure: amber = 24+ months, 31% (!!). www.calculatedriskblog.com.
Friday, May 20, 2011
Capital Markets Update
By Louis S.Barnes Friday, May 20, 2011
The Great Indicator, the 10-year Treasury note, for the second week held all of its straight-line gains since early April, from 3.60% to 3.15%.
Despite the Fed mumbling about reversing extraordinary ease, some decade ahead, despite all sorts of positive media spin, despite LinkedIn’s post-IPO value of $10 billion (649 times earnings), global investors are buying US Treasurys for safety.
Low-fee Mortgages touched 4.625% for the first time in six months, refi applications up, purchase ones sinking 3% last week. April housing starts fell 10.6% and permits 4%, both versus expectations for gains. Sales of existing homes fell .8% from March, as reported from NAR’s highly questionable, seasonally adjusted lipstick factory.
Industrial production was flat in April, but distorted by parts-supply interruption in Japan. Although the Philly Fed index crumped from 18.5 in April to near-breakeven 3.9 in May, manufacturing is still a bright spot.
This week’s Baghdad Bob Prize to the Mortgage Bankers’ Association economist Jay Brinkman. After announcing no improvement in 1st quarter mortgage delinquencies, he said, “Outlook is good. Market is on the mend.” American troops are not in Baghdad (camera pans around corner, to US M-1s under the crossed swords... Boom!). They are not there at all (Boom!).
We have certainly foreclosed through a lot of the weakest households and worst loans. But, what will happen to the next at-risk layers, given widespread price declines resuming, foreclosure dumping, and limited credit for absorption?
Next, a tale in two parts, sovereign debt in the US and in Europe. All kinds of people now ask, anxiously, if Congress will fail to raise the debt limit. A few hope we won’t. One local real estate proprietor last week, nice man, frustrated, clueless: “They have enough money.”
Of all the devils whom you consult at 3:00AM, parading across your bedroom ceiling, drop that one. The debt-limit hostage crisis dates at least to 1982. Republicans will use the lever as best they can, a Democratic-controlled government paralyzed, both parties afraid of the public -- and then will extend the limit.
Here we have one Treasury, one tax code, one banking system, and a rather large but single-issuer national debt. Treasury (and mortgage) yields are falling partly from successful QE2, partly from economic slowdown, but at the moment in largest part because Europe is making another run at falling apart.
The immediate catalyst: the European Central Bank said yesterday that in the event of any restructuring of Greek debt, even something as mild (and useless) as extending maturities, the ECB would no longer accept Greek bonds as collateral. In addition to the $340 billion in direct debt (largely held by German and French Banks), the ECB has floated $126 billion to support Greek banks. Greek 10-year debt reached 16.5% overnight, and 2-year 25.1%.
The strong in Europe have demanded Greek austerity to protect the banks of the strong, but Greece has reached economic and political exhaustion. We may be a weekend away from a New Drachma trading at 30 cents on the euro, or some can-kicking longer time. The ECB’s panicked threat to pull the plug on Greek banks says shorter is more likely than longer.
In the grand scheme, Greece does not matter. However, dominoes do. The rest of Club Med and the whole European banking system are all lined up.
Here, take heart. A Euro-crater would slow the global economy, but cash would race to the dollar and Treasurys. All currency collapses in a hundred years have helped us.
Draw any lesson you wish about profligate living beyond means, and about financial pretense, but do not assume that Euro-default means the same for us. One nation, one Treasury, one tax-collector, one budget -- we won’t like the sacrifice, we don’t know which party’s ideas will prevail, and the fix will neither be tidy nor final, but we are not headed down Europe’s road to default. We have structure, means and will.
The Great Indicator, the 10-year Treasury note, for the second week held all of its straight-line gains since early April, from 3.60% to 3.15%.
Despite the Fed mumbling about reversing extraordinary ease, some decade ahead, despite all sorts of positive media spin, despite LinkedIn’s post-IPO value of $10 billion (649 times earnings), global investors are buying US Treasurys for safety.
Low-fee Mortgages touched 4.625% for the first time in six months, refi applications up, purchase ones sinking 3% last week. April housing starts fell 10.6% and permits 4%, both versus expectations for gains. Sales of existing homes fell .8% from March, as reported from NAR’s highly questionable, seasonally adjusted lipstick factory.
Industrial production was flat in April, but distorted by parts-supply interruption in Japan. Although the Philly Fed index crumped from 18.5 in April to near-breakeven 3.9 in May, manufacturing is still a bright spot.
This week’s Baghdad Bob Prize to the Mortgage Bankers’ Association economist Jay Brinkman. After announcing no improvement in 1st quarter mortgage delinquencies, he said, “Outlook is good. Market is on the mend.” American troops are not in Baghdad (camera pans around corner, to US M-1s under the crossed swords... Boom!). They are not there at all (Boom!).
We have certainly foreclosed through a lot of the weakest households and worst loans. But, what will happen to the next at-risk layers, given widespread price declines resuming, foreclosure dumping, and limited credit for absorption?
Next, a tale in two parts, sovereign debt in the US and in Europe. All kinds of people now ask, anxiously, if Congress will fail to raise the debt limit. A few hope we won’t. One local real estate proprietor last week, nice man, frustrated, clueless: “They have enough money.”
Of all the devils whom you consult at 3:00AM, parading across your bedroom ceiling, drop that one. The debt-limit hostage crisis dates at least to 1982. Republicans will use the lever as best they can, a Democratic-controlled government paralyzed, both parties afraid of the public -- and then will extend the limit.
Here we have one Treasury, one tax code, one banking system, and a rather large but single-issuer national debt. Treasury (and mortgage) yields are falling partly from successful QE2, partly from economic slowdown, but at the moment in largest part because Europe is making another run at falling apart.
The immediate catalyst: the European Central Bank said yesterday that in the event of any restructuring of Greek debt, even something as mild (and useless) as extending maturities, the ECB would no longer accept Greek bonds as collateral. In addition to the $340 billion in direct debt (largely held by German and French Banks), the ECB has floated $126 billion to support Greek banks. Greek 10-year debt reached 16.5% overnight, and 2-year 25.1%.
The strong in Europe have demanded Greek austerity to protect the banks of the strong, but Greece has reached economic and political exhaustion. We may be a weekend away from a New Drachma trading at 30 cents on the euro, or some can-kicking longer time. The ECB’s panicked threat to pull the plug on Greek banks says shorter is more likely than longer.
In the grand scheme, Greece does not matter. However, dominoes do. The rest of Club Med and the whole European banking system are all lined up.
Here, take heart. A Euro-crater would slow the global economy, but cash would race to the dollar and Treasurys. All currency collapses in a hundred years have helped us.
Draw any lesson you wish about profligate living beyond means, and about financial pretense, but do not assume that Euro-default means the same for us. One nation, one Treasury, one tax-collector, one budget -- we won’t like the sacrifice, we don’t know which party’s ideas will prevail, and the fix will neither be tidy nor final, but we are not headed down Europe’s road to default. We have structure, means and will.
Friday, May 13, 2011
Capital Markets Update
By Louis S.Barnes Friday, May 13, 2011
Financial markets have been on hold this week, the freeze a perfect reflection of widespread uncertainty about the US and global economies.
Long-term Treasury and mortgage rates have held their dramatic, near half-percent drops of the last month, but the declines themselves tend to prevent any further downward movement. A deeper slide will require something new: weaker data here, or Europe finally cracking (see Morgan Kelly, Irish Times), or a China slowdown.
The small-business survey at www.nfib.com weakened slightly in April, but broadly, seven of ten components falling; and confirmed the dive in the March survey. New claims for unemployment insurance improved from last week's odd surge, but the four-week moving average is the worst since last November. April retail sales picked up a thin .5%, but .3% of the gain was the price of gasoline alone.
Housing is the obvious catalyst for a weaker economy, all of the various measures of prices showing a half-year, sustained decline, near 1% per month. However, it is no longer polite to speak of housing. The Fed does not, the White House does not, and the Treasury Secretary is busy, droning at visitors from China (draw the short straw in Beijing, be sent to listen to Timmy).
There are lots of different home-price measures, now -- it's a growth industry, after all. Try to avoid Zillow. Do pay attention to CoreLogic, RealtyTrac, and the FHFA HPI. CoreLogic's newest is a fascinating snapshot which separates prices of distressed sales from non-distressed. The gap between the two is much less than I would have thought: nationwide, a 7.5% decline for distressed sales in the last year (most of it in the last eight-straight monthly declines), but non-distressed prices dumped 5.8%.
The dispersion of price declines in the last year says there is a lot more going on than just the collapse of the Bubble Zones. Non-distressed price declines in 32 states include Idaho -8.8%, Minnesota -5.0%, South Dakota -4.8%, Wisconsin -4.3%, Delaware -2.9%, New Hampshire -3.9%, Massachusetts -4.5%, and Maine -6.6%.
Maine? Maine? If there was a Lobstah Bubble, I missed it. What might explain such a diverse, non-Bubble list of states? Unemployment, for one, although we're all supposed to believe that's getting better. The second factor is mortgage credit, tighter than ever before, tighter in every state.
After discovery of Bin Laden's Abbottabad compound, our language has a new noun: an "abbottabad" is a bad thing hiding in plain sight, concealed by government authorities who were supposed to do something about it. The abandonment of housing to credit drought is an American abbottabad, the worst since Hoover's people allowed runs on banks to continue for three solid years.
In the movie, "The Untouchables," innocent Costner as Ness, after assembling his band of straight cops asked helplessly, "How will we find the booze?" Sean Connery snapped, "Everybody knows where the booze is!", and marched across the street to the Post Office where, sure enough, there was booze to the rafters.
Tell a non-borrowing civilian, a reporter, or a government official, credit is too tight, and they say, "Whaddya mean?" Example: the income of every applicant must be established strictly by tax return, no matter how much money they have or how big the down payment, no exceptions for unusual but legal under-reporting of income. "Well, it's about time, right?" Try not to lose temper. No, better to lose it: General Electric has no taxable income, and so Fannie wouldn't loan it a dime. That's not restoration of prudent underwriting; that's Fannie forted-up in an abbottabad.
More new data: Fannie and Freddie at the end of 2010 owned 287,184 foreclosed homes (they report late -- takes a while on fingers and toes). In February the FHA owned another 68,801, rising 5,000 per month. New delinquencies are slowing, best shown in a thorough but optimistic consumer-credit report at the New York Fed.
However, when this decomposing REO pig leaves the python and hits what's left of markets... going to be ugly. To absorb that pig, buyers need credit, not abottabad.
Financial markets have been on hold this week, the freeze a perfect reflection of widespread uncertainty about the US and global economies.
Long-term Treasury and mortgage rates have held their dramatic, near half-percent drops of the last month, but the declines themselves tend to prevent any further downward movement. A deeper slide will require something new: weaker data here, or Europe finally cracking (see Morgan Kelly, Irish Times), or a China slowdown.
The small-business survey at www.nfib.com weakened slightly in April, but broadly, seven of ten components falling; and confirmed the dive in the March survey. New claims for unemployment insurance improved from last week's odd surge, but the four-week moving average is the worst since last November. April retail sales picked up a thin .5%, but .3% of the gain was the price of gasoline alone.
Housing is the obvious catalyst for a weaker economy, all of the various measures of prices showing a half-year, sustained decline, near 1% per month. However, it is no longer polite to speak of housing. The Fed does not, the White House does not, and the Treasury Secretary is busy, droning at visitors from China (draw the short straw in Beijing, be sent to listen to Timmy).
There are lots of different home-price measures, now -- it's a growth industry, after all. Try to avoid Zillow. Do pay attention to CoreLogic, RealtyTrac, and the FHFA HPI. CoreLogic's newest is a fascinating snapshot which separates prices of distressed sales from non-distressed. The gap between the two is much less than I would have thought: nationwide, a 7.5% decline for distressed sales in the last year (most of it in the last eight-straight monthly declines), but non-distressed prices dumped 5.8%.
The dispersion of price declines in the last year says there is a lot more going on than just the collapse of the Bubble Zones. Non-distressed price declines in 32 states include Idaho -8.8%, Minnesota -5.0%, South Dakota -4.8%, Wisconsin -4.3%, Delaware -2.9%, New Hampshire -3.9%, Massachusetts -4.5%, and Maine -6.6%.
Maine? Maine? If there was a Lobstah Bubble, I missed it. What might explain such a diverse, non-Bubble list of states? Unemployment, for one, although we're all supposed to believe that's getting better. The second factor is mortgage credit, tighter than ever before, tighter in every state.
After discovery of Bin Laden's Abbottabad compound, our language has a new noun: an "abbottabad" is a bad thing hiding in plain sight, concealed by government authorities who were supposed to do something about it. The abandonment of housing to credit drought is an American abbottabad, the worst since Hoover's people allowed runs on banks to continue for three solid years.
In the movie, "The Untouchables," innocent Costner as Ness, after assembling his band of straight cops asked helplessly, "How will we find the booze?" Sean Connery snapped, "Everybody knows where the booze is!", and marched across the street to the Post Office where, sure enough, there was booze to the rafters.
Tell a non-borrowing civilian, a reporter, or a government official, credit is too tight, and they say, "Whaddya mean?" Example: the income of every applicant must be established strictly by tax return, no matter how much money they have or how big the down payment, no exceptions for unusual but legal under-reporting of income. "Well, it's about time, right?" Try not to lose temper. No, better to lose it: General Electric has no taxable income, and so Fannie wouldn't loan it a dime. That's not restoration of prudent underwriting; that's Fannie forted-up in an abbottabad.
More new data: Fannie and Freddie at the end of 2010 owned 287,184 foreclosed homes (they report late -- takes a while on fingers and toes). In February the FHA owned another 68,801, rising 5,000 per month. New delinquencies are slowing, best shown in a thorough but optimistic consumer-credit report at the New York Fed.
However, when this decomposing REO pig leaves the python and hits what's left of markets... going to be ugly. To absorb that pig, buyers need credit, not abottabad.
Friday, May 6, 2011
Capital Markets Update
By Louis S.Barnes Friday, May 6, 2011
All through the last four weeks, and accelerating in this first week of May, markets have re-priced for a weaker US economy. That process stopped today on a better-than-expected payroll report for April, itself ambiguous.
The important stuff: mortgages have approached 4.75%, the lowest since last fall, taken by the all-market arbiter of reality, the 10-year T-note. That yield collapsed from 3.60% one month ago to 3.15% yesterday, back to 3.20% today on the job data.
Crowd noise has been deafening trough the last two years, in two octaves. The background bass has been certain of an accelerating economy, and someday will be correct. The high-pitched shrieking, rising over the last winter, has been the choir certain of inflation, and accusing the Fed of debasing the currency.
Must be careful, here. The recent leader of the debasing-inflationistas has been Bill Gross, the all-time best bond-fund manager. More impressive: in youth in Las Vegas he succeeded in running a card-counting system and beat 21. Last month he announced he had dumped all Treasurys and gone short. A very bad trade.
If a guy like that can be that wrong... what is happening? Go to the data. The 244,000 gain in payrolls released today came from the “establishment survey” of businesses, the historical favorite of the Fed, historically for good reason. It is, however, heavily adjusted for seasonality (often inaccurately), and struggles to be a representative sample of businesses, especially as new ones open in expansion cycles, or close in tough ones. The Bureau of Labor Statistics also keeps a survey of households, which in April showed a loss of 190,000 jobs. Take your pick.
The detail resides at http://www.bls.gov, together with some important tidbits. The average workweek remained unchanged for all workers, which a warming economy and tightening labor market would lengthen. Average hourly earnings gained only 0.1% in April, 1.9% year-over-year -- hardly fuel for inflation. Or for anything else. Another measure: the percent of US population at work or looking for it is stuck at 64.2%, the lowest in more than 30 years.
Another job market data stream: weekly filings for unemployment insurance. Volatile, to be sure, but held near 400,000 in the winter and bottomed in the 380s in March. Two weeks ago, 431,000; last week, 474,000 -- undoubtedly bloated by some quirk, but deteriorating by any measure.
The Institute for Supply Management http://www.ism.ws surveys are among the best, near-real-time. In April manufacturing continued to be the economic bright spot, overall 60.4 (very high, 50 is breakeven), and its employment component in the first four months of 2011 has been the best in 38 years. However, the strength in the overall index came from two cycle-enders (inventories and backlogs), and exports, which are at risk to an overseas slowdown. The ISM also surveys the vastly larger service sector (five times as large), which arrived at 52.8, the lowest reading since last August, and the drop from March’s 57.3 was the steepest in the 14-year history of the survey.
On net, the accelerating-recovery people have no case at all, and even the “moderate recovery” line at the Fed is shaky, which they know.
All of the debasement/inflation howling boils down to one thing: how you feel about the Fed’s QE operations. None of the hard data supports the howlers. A lot of bright, caring, and well-informed people see QE as “money-printing,” and with all cordial respect, you are mistaken. It is not what you think. Do all you can to try to understand what is really happening to the Fed’s balance sheet, reserves, and credit creation.
QE2 began as QE1, the market selling bonds in fear of inflation, overwhelming Fed buys, rates rising; QE2 is ending as QE1 did, the Fed pulling so many long-dated bonds out of the market that it has overwhelmed the inflation sellers. The Fed might just get its way after all, and drive long-term rates down far enough to give housing a chance.
Meantime, Mr. Gross, it’s rare chutzpah to go short an asset that the Fed is buying, backed by an infinite balance sheet.
All through the last four weeks, and accelerating in this first week of May, markets have re-priced for a weaker US economy. That process stopped today on a better-than-expected payroll report for April, itself ambiguous.
The important stuff: mortgages have approached 4.75%, the lowest since last fall, taken by the all-market arbiter of reality, the 10-year T-note. That yield collapsed from 3.60% one month ago to 3.15% yesterday, back to 3.20% today on the job data.
Crowd noise has been deafening trough the last two years, in two octaves. The background bass has been certain of an accelerating economy, and someday will be correct. The high-pitched shrieking, rising over the last winter, has been the choir certain of inflation, and accusing the Fed of debasing the currency.
Must be careful, here. The recent leader of the debasing-inflationistas has been Bill Gross, the all-time best bond-fund manager. More impressive: in youth in Las Vegas he succeeded in running a card-counting system and beat 21. Last month he announced he had dumped all Treasurys and gone short. A very bad trade.
If a guy like that can be that wrong... what is happening? Go to the data. The 244,000 gain in payrolls released today came from the “establishment survey” of businesses, the historical favorite of the Fed, historically for good reason. It is, however, heavily adjusted for seasonality (often inaccurately), and struggles to be a representative sample of businesses, especially as new ones open in expansion cycles, or close in tough ones. The Bureau of Labor Statistics also keeps a survey of households, which in April showed a loss of 190,000 jobs. Take your pick.
The detail resides at http://www.bls.gov, together with some important tidbits. The average workweek remained unchanged for all workers, which a warming economy and tightening labor market would lengthen. Average hourly earnings gained only 0.1% in April, 1.9% year-over-year -- hardly fuel for inflation. Or for anything else. Another measure: the percent of US population at work or looking for it is stuck at 64.2%, the lowest in more than 30 years.
Another job market data stream: weekly filings for unemployment insurance. Volatile, to be sure, but held near 400,000 in the winter and bottomed in the 380s in March. Two weeks ago, 431,000; last week, 474,000 -- undoubtedly bloated by some quirk, but deteriorating by any measure.
The Institute for Supply Management http://www.ism.ws surveys are among the best, near-real-time. In April manufacturing continued to be the economic bright spot, overall 60.4 (very high, 50 is breakeven), and its employment component in the first four months of 2011 has been the best in 38 years. However, the strength in the overall index came from two cycle-enders (inventories and backlogs), and exports, which are at risk to an overseas slowdown. The ISM also surveys the vastly larger service sector (five times as large), which arrived at 52.8, the lowest reading since last August, and the drop from March’s 57.3 was the steepest in the 14-year history of the survey.
On net, the accelerating-recovery people have no case at all, and even the “moderate recovery” line at the Fed is shaky, which they know.
All of the debasement/inflation howling boils down to one thing: how you feel about the Fed’s QE operations. None of the hard data supports the howlers. A lot of bright, caring, and well-informed people see QE as “money-printing,” and with all cordial respect, you are mistaken. It is not what you think. Do all you can to try to understand what is really happening to the Fed’s balance sheet, reserves, and credit creation.
QE2 began as QE1, the market selling bonds in fear of inflation, overwhelming Fed buys, rates rising; QE2 is ending as QE1 did, the Fed pulling so many long-dated bonds out of the market that it has overwhelmed the inflation sellers. The Fed might just get its way after all, and drive long-term rates down far enough to give housing a chance.
Meantime, Mr. Gross, it’s rare chutzpah to go short an asset that the Fed is buying, backed by an infinite balance sheet.
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