Friday, October 28, 2011
Capital Markets Update
By Louis S. Barnes Friday, October 21st, 2011
“Vee now shivt coverage from our new breaktrough polizy vich hes saved ze euro, Europe, and all mankind to events in ze colonies….”
On the same morning the newest Euro-can clunked along came news that American 3rd Quarter GDP jumped 2.5% — not far above forecast, but the shape of the gain was a stunning surprise. The strength was in the consumer, a 2.4% increase in household spending. Common distortions were absent: no weird upside-downs in trade accounts, and inventories if anything understated GDP. Inflation also waned.
The Euro-can got all the ink, but in any cross-weaving flow of economic data, the most important thread is always US data. The report distributed concussions evenly among all of those who had bet on a new recession; and banged an especially embarrassing knot on the head of the respected Economic Cycle Research Institute. The ECRI had never in its history false-called a recession; two weeks ago it said that the US was either rapidly falling into recession or was already in one.
The Count Dracula of economics, Nouriel Roubini, brushing up his Transylvania accent for Halloween, expects a revision all the way down to 1%. The strong consumer does not at all crossfoot with September personal income gaining a mere point-one percent (nor the .1% decline in August), but a 2.5% GDP announcement — right, wrong, temporary or revised — if you had bought 10-year T-notes down to 1.70%, and shorted stocks, you got caught in a huge panic running to the other side of the boat.
The 10-year soared to 2.40%; although back now to 2.30% will take a lot of ugly news to do much better. Mortgages near 4.375% have ended the refi party altogether. Snide churls needle the Fed, saying so much for the Fed’s sell-short, buy-long Twist to knock down long-term rates — but, good grief, nobody stops an avalanche.
Economic data is always ambiguous, if only because instantly superseded by guesses at the next reports. Policy-making, on the other hand, tends to turn corners and stay turned. This week brought a turn in housing policy for the first time since meltdown six years ago. On Monday, October 24, Larry Summers wrote for the Financial Times the most compelling policy piece yet, noting among other things that Fannie and Freddie were created as counter-cyclical agencies, but during the Bubble aftermath have acted to make the cycle worse. Only anti-government diehards now fight re-mobilizing the GSEs. Sadly, there are a lot of those.
A mass-refi proposal for underwaters, HARP2, rolled out this week over the objection of the GSEs’ regulator, FHFA, and its director, Edward DeMarco. We’ll see. Borrower qualification requirements will not appear for three more weeks, and DeMarco, the top-termite of bureaucrats, all mandibles and no brain, has managed to undermine every previous initiative. Mr. Obama jumped on the bandwagon at the last instant, having offered not one single housing idea in the last 18 months. He does deserve great credit for this week’s student-loan proposal; please, more like that, sir.
Back to Europe, and a scorecard for colonials to follow the action. On Thursday, July 21 the EU announced a modified European Financial Stability Facility including a private-sector 21% haircut of Greek debt. Markets had a splendid day, no follow-through the Friday following, and on the next Monday began an eight-week freefall.
The breakthrough deal announced Thursday has no market follow-through Friday. Monday may be as entertaining as July 25, or may take a while; whichever, this new can-kick will have a short roll. It has not one new pfennig in cash or guarantee. The private-sector write-down of Greek debt (voluntary: “You, you, you, and you”) will be 50%, but limited to the e210 billion in private/bank hands, leaving at full-phony market value e140 billion held by the ECB. Thus the net debt relief to Greece leaves 67% outstanding, which on the market is worth 40%, and the Greeks can’t pay even that.
The EFSF is to lever-up from e440 billion to e1 trillion, method not specified, but aided by new private and foreign capital. European ministers are off to China, expecting it to throw in e100 billion, a deal so good that the Germans have passed on it.
Thursday’s report took GDP back to its pre-recession starting point for the first time, a marker showing how far we have come, and how far we have to go.
“Vee now shivt coverage from our new breaktrough polizy vich hes saved ze euro, Europe, and all mankind to events in ze colonies….”
On the same morning the newest Euro-can clunked along came news that American 3rd Quarter GDP jumped 2.5% — not far above forecast, but the shape of the gain was a stunning surprise. The strength was in the consumer, a 2.4% increase in household spending. Common distortions were absent: no weird upside-downs in trade accounts, and inventories if anything understated GDP. Inflation also waned.
The Euro-can got all the ink, but in any cross-weaving flow of economic data, the most important thread is always US data. The report distributed concussions evenly among all of those who had bet on a new recession; and banged an especially embarrassing knot on the head of the respected Economic Cycle Research Institute. The ECRI had never in its history false-called a recession; two weeks ago it said that the US was either rapidly falling into recession or was already in one.
The Count Dracula of economics, Nouriel Roubini, brushing up his Transylvania accent for Halloween, expects a revision all the way down to 1%. The strong consumer does not at all crossfoot with September personal income gaining a mere point-one percent (nor the .1% decline in August), but a 2.5% GDP announcement — right, wrong, temporary or revised — if you had bought 10-year T-notes down to 1.70%, and shorted stocks, you got caught in a huge panic running to the other side of the boat.
The 10-year soared to 2.40%; although back now to 2.30% will take a lot of ugly news to do much better. Mortgages near 4.375% have ended the refi party altogether. Snide churls needle the Fed, saying so much for the Fed’s sell-short, buy-long Twist to knock down long-term rates — but, good grief, nobody stops an avalanche.
Economic data is always ambiguous, if only because instantly superseded by guesses at the next reports. Policy-making, on the other hand, tends to turn corners and stay turned. This week brought a turn in housing policy for the first time since meltdown six years ago. On Monday, October 24, Larry Summers wrote for the Financial Times the most compelling policy piece yet, noting among other things that Fannie and Freddie were created as counter-cyclical agencies, but during the Bubble aftermath have acted to make the cycle worse. Only anti-government diehards now fight re-mobilizing the GSEs. Sadly, there are a lot of those.
A mass-refi proposal for underwaters, HARP2, rolled out this week over the objection of the GSEs’ regulator, FHFA, and its director, Edward DeMarco. We’ll see. Borrower qualification requirements will not appear for three more weeks, and DeMarco, the top-termite of bureaucrats, all mandibles and no brain, has managed to undermine every previous initiative. Mr. Obama jumped on the bandwagon at the last instant, having offered not one single housing idea in the last 18 months. He does deserve great credit for this week’s student-loan proposal; please, more like that, sir.
Back to Europe, and a scorecard for colonials to follow the action. On Thursday, July 21 the EU announced a modified European Financial Stability Facility including a private-sector 21% haircut of Greek debt. Markets had a splendid day, no follow-through the Friday following, and on the next Monday began an eight-week freefall.
The breakthrough deal announced Thursday has no market follow-through Friday. Monday may be as entertaining as July 25, or may take a while; whichever, this new can-kick will have a short roll. It has not one new pfennig in cash or guarantee. The private-sector write-down of Greek debt (voluntary: “You, you, you, and you”) will be 50%, but limited to the e210 billion in private/bank hands, leaving at full-phony market value e140 billion held by the ECB. Thus the net debt relief to Greece leaves 67% outstanding, which on the market is worth 40%, and the Greeks can’t pay even that.
The EFSF is to lever-up from e440 billion to e1 trillion, method not specified, but aided by new private and foreign capital. European ministers are off to China, expecting it to throw in e100 billion, a deal so good that the Germans have passed on it.
Thursday’s report took GDP back to its pre-recession starting point for the first time, a marker showing how far we have come, and how far we have to go.
Friday, October 21, 2011
Capital Markets Update
By Louis S. Barnes Friday, October 21st, 2011
Markets are barely trading at all while waiting for a conclusion in Europe. The continent that gave us Cirque du Soleil now has at center ring 17 panicked, flower-squirting clowns trying to jam themselves into a VW Bug. Although terribly at risk, financial people no longer care how it turns out. Fix it, blow it up, but drop this act.
Much as Euro-bears would like to bet on Euro-breakup by buying bonds and mortgages, they don’t dare — can-kicking will not end until it ends. And the bears are matched by a ton of people who still think that all the clowns will get in the car.
The Occupy Wall Street movement is a daily reminder of the greatest hazard to the world since 2007, and perhaps greater today than ever. I can’t take the OWS micro-mobs seriously — I am a child of the ’60s, and if we had turned out like OWS, water fountains would still be segregated and we’d still be drafting soldiers for Vietnam. Even when we were wrong, we had clear objectives; these OWS sign-makers do not know what Wall Street did before the Dark Side, during it, or what it does now.
That mass ignorance of money and banking is our deepest hazard, and has led to the strangest political confluence of my lifetime. The Left believes in regulation, that an infinite number of pages and agencies will stop the bad stuff and leave the good stuff operating. Professors of law think that way. The Right’s answer to ignorance is simplicity: shrink or dismantle the system and go back to cash. In combination, financial Luddites mixing up Jim Jones Kool-Aid.
Good things have happened in the Bubble aftermath: living wills for systemic-risk institutions, a global drive to limit the size of any bank, and a separation between safe, deposit-taking banking and risky operations. However, lost on the body politic: the near-absolute inability to shrink the system during a time of economic distress.
Example: the drive to increase bank capital. In good times, it’s not hard to sell stock. Excessive capital reduces profitability and lending capacity, but it can be done. Today, no sensible person would provide more capital to a bank only to watch it written off in new losses. The Europeans dare not let sovereign debt to default because it would wipe out banks; but, to force them to recapitalize and then write down fails also.
Bankers’ standard solution to capital-add pressure: shrink the bank. A given unit of capital then will meet new requirements. Unfortunate follow-on effects: a reduction in credit, which tends to stall economic recovery and to undercut assets and to increase losses. Worse, if every major bank tries to shrink at the same time, they must all try to sell the same stuff into the same markets, crashing the innocent along with the guilty.
At this moment of maximum vulnerability, enter the Kool-Aid team. Insist that in any bank failure that only depositors be made whole. In the US, not so bad; in Europe, 60% of bank funding is “wholesale,” IOUs issued mostly to other banks, the banks in the aggregate three to four times European GDP (in the US only about 70%).
Civilians in the 1930s knew exactly what a bank “run” was because they and their parents and their parent’s parents since childhood had seen long lines of frightened depositors in bank “panics.” Today’s civilians have no experience with nor concept of the utterly invisible bank-on-bank run that began in 2007. Disembodied, detached from their own wallets, it’s the easiest thing in the world for two opposite political wings to agree on free-lunch, disastrous solutions.
Thus to protect taxpayers, the Fannie-Freddie conservator DeMarco has adopted an ultra-conservative stance which is making taxpayer losses all the larger. To protect its taxpayers, Germany insists that before it will help the others they must adopt policies that will make their losses larger than Germany can solve.
One place has it right. Devalue your currency, accept some inflation, balance your budget mostly by cutting spending; and to keep things going until you heal, let your central bank buy assets with invented money, and force your banks to provide credit. Policy aside, all should study the unique national character traits that in difficulty avoid self-deception and allow getting on with it. In England, Wales, and Scotland.
Markets are barely trading at all while waiting for a conclusion in Europe. The continent that gave us Cirque du Soleil now has at center ring 17 panicked, flower-squirting clowns trying to jam themselves into a VW Bug. Although terribly at risk, financial people no longer care how it turns out. Fix it, blow it up, but drop this act.
Much as Euro-bears would like to bet on Euro-breakup by buying bonds and mortgages, they don’t dare — can-kicking will not end until it ends. And the bears are matched by a ton of people who still think that all the clowns will get in the car.
The Occupy Wall Street movement is a daily reminder of the greatest hazard to the world since 2007, and perhaps greater today than ever. I can’t take the OWS micro-mobs seriously — I am a child of the ’60s, and if we had turned out like OWS, water fountains would still be segregated and we’d still be drafting soldiers for Vietnam. Even when we were wrong, we had clear objectives; these OWS sign-makers do not know what Wall Street did before the Dark Side, during it, or what it does now.
That mass ignorance of money and banking is our deepest hazard, and has led to the strangest political confluence of my lifetime. The Left believes in regulation, that an infinite number of pages and agencies will stop the bad stuff and leave the good stuff operating. Professors of law think that way. The Right’s answer to ignorance is simplicity: shrink or dismantle the system and go back to cash. In combination, financial Luddites mixing up Jim Jones Kool-Aid.
Good things have happened in the Bubble aftermath: living wills for systemic-risk institutions, a global drive to limit the size of any bank, and a separation between safe, deposit-taking banking and risky operations. However, lost on the body politic: the near-absolute inability to shrink the system during a time of economic distress.
Example: the drive to increase bank capital. In good times, it’s not hard to sell stock. Excessive capital reduces profitability and lending capacity, but it can be done. Today, no sensible person would provide more capital to a bank only to watch it written off in new losses. The Europeans dare not let sovereign debt to default because it would wipe out banks; but, to force them to recapitalize and then write down fails also.
Bankers’ standard solution to capital-add pressure: shrink the bank. A given unit of capital then will meet new requirements. Unfortunate follow-on effects: a reduction in credit, which tends to stall economic recovery and to undercut assets and to increase losses. Worse, if every major bank tries to shrink at the same time, they must all try to sell the same stuff into the same markets, crashing the innocent along with the guilty.
At this moment of maximum vulnerability, enter the Kool-Aid team. Insist that in any bank failure that only depositors be made whole. In the US, not so bad; in Europe, 60% of bank funding is “wholesale,” IOUs issued mostly to other banks, the banks in the aggregate three to four times European GDP (in the US only about 70%).
Civilians in the 1930s knew exactly what a bank “run” was because they and their parents and their parent’s parents since childhood had seen long lines of frightened depositors in bank “panics.” Today’s civilians have no experience with nor concept of the utterly invisible bank-on-bank run that began in 2007. Disembodied, detached from their own wallets, it’s the easiest thing in the world for two opposite political wings to agree on free-lunch, disastrous solutions.
Thus to protect taxpayers, the Fannie-Freddie conservator DeMarco has adopted an ultra-conservative stance which is making taxpayer losses all the larger. To protect its taxpayers, Germany insists that before it will help the others they must adopt policies that will make their losses larger than Germany can solve.
One place has it right. Devalue your currency, accept some inflation, balance your budget mostly by cutting spending; and to keep things going until you heal, let your central bank buy assets with invented money, and force your banks to provide credit. Policy aside, all should study the unique national character traits that in difficulty avoid self-deception and allow getting on with it. In England, Wales, and Scotland.
Friday, October 14, 2011
Capital Markets Update
By Louis S. Barnes Friday, October 14, 2011
New, non-recession data here, more elegant pretending in Europe, now can-kicking at two-week intervals, and fear has left markets. For now.
September retail sales rose 1.1% over August, and the small business NFIB survey also found conditions in September slightly improved. In direct result, 10-year T-notes are trading up from 1.70% just two weeks ago to 2.25% -- last so high two months ago. Mortgage rates have risen accordingly, pressing 4.375%.
Some self-correction is in play, as mortgage refi demand is now shut off altogether, but the Treasury is a continuous seller of paper, the Fed's Operation Twist unable to offset. This last week the Treasury auctioned $66 billion long-term notes and bonds and everyone who bought is today under water. Until and unless markets get more negative news there is zero chance of rate improvement.
Pauses in news flow, and hence in markets are routine. This one…not routine.
Europe, as everyone now knows is the most immediate and powerful market-mover. Our rates would be much higher if there were any market belief that Europe will find a real solution. At its self-imposed deadline in two weeks, perhaps another band-aid, but the Euro-chatter sounds like any other failing deal. The wacky hope that China and other emergings will fund a Euro-bailout, or that banks will self-recapitalize in some miracle of loaves and fishes… all silly. Either Germany throws in, big, or not.
The Fed is paralyzed by internal politics. The dissenters, Fisher in Dallas, Plosser in Philly, and Kocherlakota in Minneapolis, are mistaken and rigid in their demand that the Fed leave the field. They could be overcome by the others, who are aware of peril, but they have lost the foundation for their case.
The Fed's staff is the power center. The staff forecast historically is more accurate than any other, public or private, but the staff is lost. Its forecasts going back two years have been more wrong than right, repeatedly betting on accelerating recovery only to have the economy slide back. At the Fed's September meeting, the staff revised down its near-term forecast for the fifth straight time, and that may be a mistake.
Everybody knows that the Administration and Congress are frozen, and may stay so for another 18 months. Events may warm them to action, but left to themselves they'll do nothing. A great deal of commentary from all political directions says that this state of locked and hostile partisanship is new.
It is not new. It is certainly as old as this country, and as old as democracy. In financial crises, the S&L disaster is the most recent example. Everyone connected to the thing knew by 1980 that a $3 trillion industry (in today's dollars) was toast. Paul Volcker, modern folk hero, pushed the S&Ls of the back of the sled without a shred of planning; Jimmy Carter in his last year did nothing; Ron Reagan at first ignored the matter, then his "grow-out" policies that quadrupled the damage, and the '86 tax reform accidentally doubled the losses again. Bush '41 finally raised the money to pay off the depositors, and the RTC by 1993 disposed the assets -- 14 years total!!
And the S&Ls were a small problem compared to this one.
A prior problem as big as this: the run-up in inflation from 1965 to 1981, punctuated by two oil crises, oil from $3/bbl to $38/bbl at the peak, and by two nasty recessions, unemployment as high or higher than this.
From 1929 to 1933, essentially every step taken by government either did nothing, or made the Depression worse.
Today, we are six years into blown housing bubble, twenty years into international-competitiveness absent-mindedness, and at the end of 45 years of borrowing to cover promises to ourselves that we cannot afford.
Today's trouble is real, but we are no different. Our institutions are intact. We are right on plan: we won't do anything until we get a better consensus on what went wrong, what is wrong now, and what to do. Just like always.
Patience. Although for the moment it is a real pain in the ass.
New, non-recession data here, more elegant pretending in Europe, now can-kicking at two-week intervals, and fear has left markets. For now.
September retail sales rose 1.1% over August, and the small business NFIB survey also found conditions in September slightly improved. In direct result, 10-year T-notes are trading up from 1.70% just two weeks ago to 2.25% -- last so high two months ago. Mortgage rates have risen accordingly, pressing 4.375%.
Some self-correction is in play, as mortgage refi demand is now shut off altogether, but the Treasury is a continuous seller of paper, the Fed's Operation Twist unable to offset. This last week the Treasury auctioned $66 billion long-term notes and bonds and everyone who bought is today under water. Until and unless markets get more negative news there is zero chance of rate improvement.
Pauses in news flow, and hence in markets are routine. This one…not routine.
Europe, as everyone now knows is the most immediate and powerful market-mover. Our rates would be much higher if there were any market belief that Europe will find a real solution. At its self-imposed deadline in two weeks, perhaps another band-aid, but the Euro-chatter sounds like any other failing deal. The wacky hope that China and other emergings will fund a Euro-bailout, or that banks will self-recapitalize in some miracle of loaves and fishes… all silly. Either Germany throws in, big, or not.
The Fed is paralyzed by internal politics. The dissenters, Fisher in Dallas, Plosser in Philly, and Kocherlakota in Minneapolis, are mistaken and rigid in their demand that the Fed leave the field. They could be overcome by the others, who are aware of peril, but they have lost the foundation for their case.
The Fed's staff is the power center. The staff forecast historically is more accurate than any other, public or private, but the staff is lost. Its forecasts going back two years have been more wrong than right, repeatedly betting on accelerating recovery only to have the economy slide back. At the Fed's September meeting, the staff revised down its near-term forecast for the fifth straight time, and that may be a mistake.
Everybody knows that the Administration and Congress are frozen, and may stay so for another 18 months. Events may warm them to action, but left to themselves they'll do nothing. A great deal of commentary from all political directions says that this state of locked and hostile partisanship is new.
It is not new. It is certainly as old as this country, and as old as democracy. In financial crises, the S&L disaster is the most recent example. Everyone connected to the thing knew by 1980 that a $3 trillion industry (in today's dollars) was toast. Paul Volcker, modern folk hero, pushed the S&Ls of the back of the sled without a shred of planning; Jimmy Carter in his last year did nothing; Ron Reagan at first ignored the matter, then his "grow-out" policies that quadrupled the damage, and the '86 tax reform accidentally doubled the losses again. Bush '41 finally raised the money to pay off the depositors, and the RTC by 1993 disposed the assets -- 14 years total!!
And the S&Ls were a small problem compared to this one.
A prior problem as big as this: the run-up in inflation from 1965 to 1981, punctuated by two oil crises, oil from $3/bbl to $38/bbl at the peak, and by two nasty recessions, unemployment as high or higher than this.
From 1929 to 1933, essentially every step taken by government either did nothing, or made the Depression worse.
Today, we are six years into blown housing bubble, twenty years into international-competitiveness absent-mindedness, and at the end of 45 years of borrowing to cover promises to ourselves that we cannot afford.
Today's trouble is real, but we are no different. Our institutions are intact. We are right on plan: we won't do anything until we get a better consensus on what went wrong, what is wrong now, and what to do. Just like always.
Patience. Although for the moment it is a real pain in the ass.
Friday, October 7, 2011
Capital Markets Update
Louis S. Barnes Fryday, October 7th, 2011
Maintain sense of humor. Most of the following could not be made up.
Freddie Mac yesterday announced the lowest mortgage rates ever found in its 40-year survey, 3.94% with .8% origination fee. National media today trumpet that result. Freddie takes its horse-and-buggy survey early each week and releases on Thursdays; in a financial world fully real-time for 20 years, consensus rates available at a keystroke, Freddie reports three-day-old trash. Clueless boobs.
In real time rates rose all week long, today about 4.25%, completing a second, perfect two-week cycle: the 10-year T-note broke below 2.00% to 1.72% on September 22, taking mortgages below 4.00% for the best borrowers (only). Lasted two days. By September 28 the 10-year was back to 1.99%, mortgages 4.125%. Over last weekend, 10s fell to 1.75%, mortgages to 3.875%; today, the 10-year is 2.10%.
This 2.10% is the highest high since mid-September, and has technical analysts fearful of an upward breakout. Likely not. These moves are driven by two things: first, new lows beget waves of refi rate-locks, which overwhelm financial markets that do not want to buy anything, and it takes a couple of weeks to digest the supply. Second, if you missed it, confused and frightened markets do not want to buy anything. At all.
One tell-tale: mortgage spreads to the 10-year are at least 35bps wider than normal, despite the Fed’s resumption of MBS buys in OpTwist.
Refi strategy: pick a target just above — above — the low that your banker says that you (or he) has just missed. Yes, we should revisit the lows, but they will fly by lickety-split. The idea is to get something done, not just enjoy the view.
Nothing in the economic picture has changed. Despite widespread forecasts of recession (40% chance by Goldman, guaranteed by the very reliable ECRI), we are not in recession or close to it. September job data confirm: another stumbling, sorry gain, half the jobs necessary for real growth, but a gain. The ISM’s September service-sector survey arrived at 53, only a hair off September, and three points into positive ground.
Europe. Merciful heavens. Club Med plus France are in a free-falling elevator. The plan: just before impact, all will jump up as high as they can. The European Financial Stability Facility is just that: the insolvent 60% of Europe offering its own guarantees to a new fund that will borrow new money to bail itself out. Rescued by lifting its own suspenders — that was the phony deal announced July 21 that pulled the plug on global markets for everything, banks in another all-time run on each other.
European Plan B: as the elevator car passes each floor, a new cry from inside to Angela Merkel standing outside: “Would you please do the proper thing for One Europe, and get down in the bottom of the shaft and catch this thing?”
Merkel stirred herself this week to advocate recapitalization of European banks, quickly, each nation to guarantee its own. France immediately requested access to the EFSF to do so because its bank-hole is too big for it to recap by itself. Among Europe’s problems, each of the weak has its own fatal illness; France has relatively low (to Italy) sovereign debt, pays its taxes, saves money, but has a banking system three or four times its GDP and with the largest holdings of Club Med bonds. Adieu, Cheri, adieu.
Everybody knows that if a way to save Spain and Italy cannot be found, the problem would be too big for Germany to fix, even if it were willing. However, right now France is key: banks are the arteries of post-coinage-and-barter economies.
The first big institution to run for cover, giving up on Euro-self-salvation: the Bank of England. Its Governor, Mervin King, was slow to understand in 2008, but not now; in anticipation of an unfortunate conclusion the BoE yesterday announced the doubling of its own QE. When the guy in the elevator next to you puts on his parachute….
Hanging over all is this other-world White House. Mr. Obama at last mentioned economic “emergency,” but his DOA jobs and tax plans, and sudden revelation of hard-Left conviction leave the Center that put him in office feeling deceived. And speechless, the spectacle too unnerving for discussion even among friends and at trading desks.
Maintain sense of humor. Most of the following could not be made up.
Freddie Mac yesterday announced the lowest mortgage rates ever found in its 40-year survey, 3.94% with .8% origination fee. National media today trumpet that result. Freddie takes its horse-and-buggy survey early each week and releases on Thursdays; in a financial world fully real-time for 20 years, consensus rates available at a keystroke, Freddie reports three-day-old trash. Clueless boobs.
In real time rates rose all week long, today about 4.25%, completing a second, perfect two-week cycle: the 10-year T-note broke below 2.00% to 1.72% on September 22, taking mortgages below 4.00% for the best borrowers (only). Lasted two days. By September 28 the 10-year was back to 1.99%, mortgages 4.125%. Over last weekend, 10s fell to 1.75%, mortgages to 3.875%; today, the 10-year is 2.10%.
This 2.10% is the highest high since mid-September, and has technical analysts fearful of an upward breakout. Likely not. These moves are driven by two things: first, new lows beget waves of refi rate-locks, which overwhelm financial markets that do not want to buy anything, and it takes a couple of weeks to digest the supply. Second, if you missed it, confused and frightened markets do not want to buy anything. At all.
One tell-tale: mortgage spreads to the 10-year are at least 35bps wider than normal, despite the Fed’s resumption of MBS buys in OpTwist.
Refi strategy: pick a target just above — above — the low that your banker says that you (or he) has just missed. Yes, we should revisit the lows, but they will fly by lickety-split. The idea is to get something done, not just enjoy the view.
Nothing in the economic picture has changed. Despite widespread forecasts of recession (40% chance by Goldman, guaranteed by the very reliable ECRI), we are not in recession or close to it. September job data confirm: another stumbling, sorry gain, half the jobs necessary for real growth, but a gain. The ISM’s September service-sector survey arrived at 53, only a hair off September, and three points into positive ground.
Europe. Merciful heavens. Club Med plus France are in a free-falling elevator. The plan: just before impact, all will jump up as high as they can. The European Financial Stability Facility is just that: the insolvent 60% of Europe offering its own guarantees to a new fund that will borrow new money to bail itself out. Rescued by lifting its own suspenders — that was the phony deal announced July 21 that pulled the plug on global markets for everything, banks in another all-time run on each other.
European Plan B: as the elevator car passes each floor, a new cry from inside to Angela Merkel standing outside: “Would you please do the proper thing for One Europe, and get down in the bottom of the shaft and catch this thing?”
Merkel stirred herself this week to advocate recapitalization of European banks, quickly, each nation to guarantee its own. France immediately requested access to the EFSF to do so because its bank-hole is too big for it to recap by itself. Among Europe’s problems, each of the weak has its own fatal illness; France has relatively low (to Italy) sovereign debt, pays its taxes, saves money, but has a banking system three or four times its GDP and with the largest holdings of Club Med bonds. Adieu, Cheri, adieu.
Everybody knows that if a way to save Spain and Italy cannot be found, the problem would be too big for Germany to fix, even if it were willing. However, right now France is key: banks are the arteries of post-coinage-and-barter economies.
The first big institution to run for cover, giving up on Euro-self-salvation: the Bank of England. Its Governor, Mervin King, was slow to understand in 2008, but not now; in anticipation of an unfortunate conclusion the BoE yesterday announced the doubling of its own QE. When the guy in the elevator next to you puts on his parachute….
Hanging over all is this other-world White House. Mr. Obama at last mentioned economic “emergency,” but his DOA jobs and tax plans, and sudden revelation of hard-Left conviction leave the Center that put him in office feeling deceived. And speechless, the spectacle too unnerving for discussion even among friends and at trading desks.
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