Financial markets are surprisingly stable, especially credit markets. Following the Fed’s September QE3 announcement of open-ended intent to buy mortgage-backed securities, the 10-year T-note left to the mercy of markets, 10s have not traded above 1.75% or below 1.50%. Meanwhile, 30-fixed mortgages have broken as low as 3.25%.
That spread — 10s/MBS roughly 1.60% — is the lowest/tightest since previous normality hit the wall in 2007. I had thought that Mortgage Absolute Zero was about 3.00%, but if the Fed buys MBS for long enough to work off presently infinite refinance demand (many months, maybe EOY 2013), retail mortgage prices can fall below the 3.00% barrier just by more compression of spread.
Today, the main thing holding rates above 3.00% is the profiteering of big banks, increasing their margins as the Fed tries to shrink them. The worst of the piracy: jacking margins on refis of underwater households. I would say, “Shame,” but to no effect on bank boards and executive suites ethically un-reformed through this whole process. All the new rules in the world cannot substitute for a sense of citizenship.
While we enjoy new, super-historical lows, more in prospect, consider the causes….
US data is as unchanged as can be, on a 1.5%-2.0% GDP slope but fragile. The September small-biz survey by the NFIB downshifted by an undetectable 0.1%. The trade picture was a bit more cautionary, both imports and exports contracting; imports slide when US demand fades, and exports dim when the outside world fizzles.
The strongest positive here is housing, but its improvement is far oversold in media commentary. Most economic punditry comes from financial markets, which had housing wrong all the way down, and can be counted upon to have it wrong on the way up. Housing industry analysts tend to perpetual optimism, correct only by accident.
The finance guys cannot process the differences between their markets and housing: their securities are uniform and move all together, while our houses are no-two-the-same and any concerted market movement is at the neighborhood level. Terms of credit affect stock and bond markets, but nothing like housing. Imagine if you wanted to sell a share of Apple today, and had a willing buyer at $630 but the NASDQ exchange required an independent appraisal of the stock, made you wait two weeks, and then capped the price at $500 based on “sound underwriting.”
Housing now enjoys very gradual improvement, especially in states whose foreclosure-by-trustee has speeded the process. However, the “recovery” that finance types see propelling the entire economy is still over the horizon. “Mortgage Equity Withdrawal” is a measure of net contribution of housing to personal income, during the bubble adding as much as 10% per year(!). Since 2008 MEW has subtracted about 3% annually from personal income, and still does — no mere headwind, but hail in the face.
The greatest risks are overseas, quantifiable in some ways, but timing unknown. Greece lies prostrate in depression, its national debt still 160% of GDP requiring another restructuring transfusion. That debt is now held by European governments, the ECB and the IMF, none of which can face the need to write off the two-thirds necessary to allow the Greek economy to function. Thus the next transfusion will be just enough to buy time, not for Greece itself, but the utterly corrupt European leadership.
That leadership had a signal week on other grounds. France-based EADS and UK-based BAE were close to merger, $90 billion in combined aerospace and defense sales, the merger a benefit to both, enabling competition with the likes of Boeing. Any big merger in Europe requires multi-governmental approval, and Germany insisted on a Munich HQ for the new company and expansion of German operations. All media concur: on Wednesday Angela Merkel personally pulled the plug on the merger, and Germany did not attempt any form of denial. “One Europe” the euro objective? Sure.
The global balance is delicate, but the economic/political weakness in Europe, China, and emergings still strongly favors the US, if only by removing any threat of inflation, which is the prerequisite for continuing QE3 and super-low rates here.
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