Friday, December 28, 2012
Capital Markets Update
By Louis S. Barnes Friday, December 28th, 2012
In reverence of Peter Drucker ("Nobody predicts the future -- the idea is a firm grasp of the present") no predictions here for the New Year. Just prioritize the puzzles ahead, the things to watch. Nothing in 2013, no issue at all compares to the need for fiscal repair. The Fed can for another year buy our new debt, but now we must make progress. And the Fiscal Cliff is a preliminary, only the first turn in a large maze.
None of us can know another's mind, and even first-hand reporters can misunderstand intentions. And political matters today are touchy almost beyond discussion. However, the mind of the President is central to the fiscal issue.
A high level of frustration for Mr. Obama is now two years old. His priorities -- stimulus spending, ObamaCare, and Dodd-Frank -- were all in place by the end of 2010. That November Republicans took the House, and his Fiscal Commission (Bowles-Simpson) delivered recommendations he cannot accept (although he has not said exactly why). Since the end of 2010 the White House has been nearly inert, without achievement, except for its part of the 2011 fiscal fiasco with Congress.
Once re-elected, feelings of mandate and confirmation were justified, although Mr. Obama ran more against Mr. Romney than for a specific program, except for raising taxes on those households earning more than $250,000. In the last two years, not even Ahab had it in for a whale as Mr. Obama has had it in for this group.
The Fiscal Cliff negotiations since the election are a mystery to me. The basic issues are a minor skirmish compared to the debt-limit fight two months ahead, and the inevitable big-money -- really big -- battle on Bowles-Simpson ground which will consume most of Mr. Obama's second term.
Why the total lock-up on the Cliff? What for? Polling places had barely closed before Republicans conceded on new revenue, and then their leadership re-conceded farther than the rank and file could stand. The concessions were met by White House demand for new revenue 3:1 in excess of spending cuts, while the Bowles-Simpson touchstone is 2:1 the other way, cuts over spending.
The only first-person accounts of negotiations inside the White House that I know of appeared in the WSJ on Saturday, December 15. In news pages, not Op-Ed, and based on notes taken by participants. This testimony describes Mr. Obama as tougher in private than in public, over the edge to insulting, goading Mr. Boehner into a walkout which he managed to resist. But, why? The President and most media have succeeded in demonizing Republicans, but to what purpose? They still hold a veto in the House.
Compromise does not mean that you get what you want. Ron Reagan cut deals with Tip O'Neill, but the price was larger government in each of his terms. Bill Clinton spoke his own frustration: the '93 fiscal deal meant he had to be an "Eisenhower Republican." Daddy Bush's fiscal deal was a great thing for the country, but cost him the job. Lyndon Johnson was not the king of bludgeoning Republicans, and Dixiecrats in his own party, but a magician of horse-trading.
In our government, compromise must begin with the President. The Republicans are of course at fault in their wishes for unaffordable spending on defense, and too-low taxes, but no compromise of the magnitude necessary now has ever come forth from Congress. Gravy did not flow from your turkey; it was the work of a skilled cook.
I wish not to say what I think I see: Mr. Obama intends to break the Republicans. Break their will now, so badly that Democrats will take the House in two years. The means: refuse resolution of the Fiscal Cliff and debt limit on terms Republicans can bear, and blame the Republicans for failure. And then Ahab will be free to pursue a tax-heavy defense of indefensible entitlements. I hope this conclusion is mistaken.
Sam Rayburn, master of the House, to fellow-Texan Lyndon Johnson upon his ascent to Senate Majority Leader: "Lyndon, don't tell anybody to go to hell unless you can make 'im go." How Mr. Obama manages to balance his frustration and righteousness with the need for compromise will tell the tale in 2013.
In reverence of Peter Drucker ("Nobody predicts the future -- the idea is a firm grasp of the present") no predictions here for the New Year. Just prioritize the puzzles ahead, the things to watch. Nothing in 2013, no issue at all compares to the need for fiscal repair. The Fed can for another year buy our new debt, but now we must make progress. And the Fiscal Cliff is a preliminary, only the first turn in a large maze.
None of us can know another's mind, and even first-hand reporters can misunderstand intentions. And political matters today are touchy almost beyond discussion. However, the mind of the President is central to the fiscal issue.
A high level of frustration for Mr. Obama is now two years old. His priorities -- stimulus spending, ObamaCare, and Dodd-Frank -- were all in place by the end of 2010. That November Republicans took the House, and his Fiscal Commission (Bowles-Simpson) delivered recommendations he cannot accept (although he has not said exactly why). Since the end of 2010 the White House has been nearly inert, without achievement, except for its part of the 2011 fiscal fiasco with Congress.
Once re-elected, feelings of mandate and confirmation were justified, although Mr. Obama ran more against Mr. Romney than for a specific program, except for raising taxes on those households earning more than $250,000. In the last two years, not even Ahab had it in for a whale as Mr. Obama has had it in for this group.
The Fiscal Cliff negotiations since the election are a mystery to me. The basic issues are a minor skirmish compared to the debt-limit fight two months ahead, and the inevitable big-money -- really big -- battle on Bowles-Simpson ground which will consume most of Mr. Obama's second term.
Why the total lock-up on the Cliff? What for? Polling places had barely closed before Republicans conceded on new revenue, and then their leadership re-conceded farther than the rank and file could stand. The concessions were met by White House demand for new revenue 3:1 in excess of spending cuts, while the Bowles-Simpson touchstone is 2:1 the other way, cuts over spending.
The only first-person accounts of negotiations inside the White House that I know of appeared in the WSJ on Saturday, December 15. In news pages, not Op-Ed, and based on notes taken by participants. This testimony describes Mr. Obama as tougher in private than in public, over the edge to insulting, goading Mr. Boehner into a walkout which he managed to resist. But, why? The President and most media have succeeded in demonizing Republicans, but to what purpose? They still hold a veto in the House.
Compromise does not mean that you get what you want. Ron Reagan cut deals with Tip O'Neill, but the price was larger government in each of his terms. Bill Clinton spoke his own frustration: the '93 fiscal deal meant he had to be an "Eisenhower Republican." Daddy Bush's fiscal deal was a great thing for the country, but cost him the job. Lyndon Johnson was not the king of bludgeoning Republicans, and Dixiecrats in his own party, but a magician of horse-trading.
In our government, compromise must begin with the President. The Republicans are of course at fault in their wishes for unaffordable spending on defense, and too-low taxes, but no compromise of the magnitude necessary now has ever come forth from Congress. Gravy did not flow from your turkey; it was the work of a skilled cook.
I wish not to say what I think I see: Mr. Obama intends to break the Republicans. Break their will now, so badly that Democrats will take the House in two years. The means: refuse resolution of the Fiscal Cliff and debt limit on terms Republicans can bear, and blame the Republicans for failure. And then Ahab will be free to pursue a tax-heavy defense of indefensible entitlements. I hope this conclusion is mistaken.
Sam Rayburn, master of the House, to fellow-Texan Lyndon Johnson upon his ascent to Senate Majority Leader: "Lyndon, don't tell anybody to go to hell unless you can make 'im go." How Mr. Obama manages to balance his frustration and righteousness with the need for compromise will tell the tale in 2013.
Friday, December 21, 2012
Capital Markets Update
By Louis S. Barnes Friday, December 21st, 2012
In the absence of significant economic data or market movement, and in the presence of more economic and policy confusion than ever in my lifetime among civilians and professionals alike -- here an early jump on prospects for the new year.
All optimistic outlooks have housing as the primary ingredient, which is true as far as obvious thinking goes. We have all-time low rates and affordability, and the pig of distressed resales is departing the python in tidy bacon slices, not a mass, and slowly. However, in simple math, to get to a higher level of sales and prices will require growth in aggregate mortgage balances. Instead they are shrinking, the Fannie-Freddie conservator standing on that hose. And now the FHA faces an existential battle, to be punished for lending when no one else would, and suffering losses now.
When we see the mortgage supply rising, then housing will be able to lead. Until then we have a problem traditional at this season: Santa is stuck in the chimney.
Then we have the Fed's epic new promise to buy $1 trillion-worth of Treasurys and MBS next year. Some worry that a flood of cash will trigger inflation, or new bubble-buying of stocks, or pigs, or some other damned thing. However, in a recurrent theme looking forward, Fed cash cannot enter the real economy until the financial system uses it to make loans. Not. Until then the best the Fed can do is to hold down rates.
"Dear, did you say something?" No, but I thought I heard a funny noise over by the fireplace.
Another line of hope goes to the consumer. Indomitable. Resilient. Deleveraged. I would love to believe that, but the average household is still tapped out. Median income for a family of four has fallen 10% in the last five years. Too much net worth was lost in the housing fizzle, health insurance premiums and tuition have defied gravity, and so households desperately need increased income. But that increased income depends on a rising economy, which depends on the, ummm… consumer?
"Honey, it was so thoughtful of you to build a fire for us. The nice fireman at the door says that after they put it out we should have the chimney checked."
Europe announces to itself weekly that the worst is over. That its economy will begin to recover next year. That it is taking very meaningful steps toward unified action although these measures will require some additional negotiation, treaty re-ratification, and rather a lot of someone else's money. One year soon, the last resort:
"Draghi, vee hef nossing but chateau fumons. I tell you, vee cannot breathe! Make fire plus gros, plus vite!! Throw ECB kerosene!"
The Cliff, about which so many seem so preoccupied.... put it aside. On December 31 the Cliff will or won't, but this Cliff is just the first in a series ahead. Either Obama's soak-'em or Boehner's cut-'em at maximum would result in an annual deficit reduction of about $130 billion -- in an annual deficit of $1 trillion.
The weird part about the Cliff adjustments ahead is the disappearing money. Tax increases are routine, but usually result in increased spending. First have no doubt that these are tax increases, not merely ending a tax cut: the Bush brackets have been law longer than the Clinton ones were. Nor believe that the rich will pay "a little bit more," or will not feel the bite. $100 billion a year is real dough, as will be the next two similar hikes via tax reform. The bite is clear, but the odd part is hidden: new tax money will replace money presently being borrowed -- thus gone poof! by accounting austerity magic -- and spending will decline simultaneously in any semi-balanced deal.
"Darling, do you remember when you heard something by the fireplace last winter? I don't think the living room smells so good."
This family drama is perfectly human. We have never been in this situation before, and our puzzlement at what might be the matter, and what to do is appropriate. However, I do wish those in authority this holiday season would rent the movie Christmas Vacation, and study the scene in which Clark Griswold can't figure out why his lights won't come on and stay on. Some of this is hard, but some is not.
Friday, December 14, 2012
Capital Markets Update
By Louis S. Barnes Friday, December 14th, 2012
Lot goin’ on. First the Fed, then the Cliff.
The Fed has embarked on QE4, or open-ended, or without end. Whatever. Next year the Fed will buy $1 trillion in Treasurys and MBS, and continue to buy until enough people are back at work, and stop short only if inflation becomes a problem. The buying is designed to keep long-term rates of all kinds low, and thereby revive the economy.
Naturally, rates rose since the announcement. Not a lot, the 10-year T-note above 1.70% from lows near 1.58%, and mortgages pushing 3.50%.
There is a logic to the rise. Several logics. First the crowd who from the onset of Fed efforts to save us in 2007 have been certain — certain — that inflation would follow, and been totally mistaken. Then the mob which believes QE opens the free-money door to “risk assets” — stocks, gold, and commodities. This time stocks fell, but more because of Cliff crumbling than loss of QE faith. Last a sensible group: if the Fed is trying this hard to revive the economy, it may work. All roads from that thought lead to the same place: for the moment, sell bonds, sell more than the Fed is buying. Thus rates rose.
The Fed’s focus is on unemployment, but I continue to believe that’s more statutory fig leaf than fact. The economy is in soggy shape, going nowhere, the rest of the world in worse shape, and austerity is coming here (see “Cliff” below).
The NFIB, surveyor of small-business conditions since 1971, found a substantial drop in its overall measure of confidence: down 5.6 points in the month to a low (87.5) exceeded on the downside only nine times in 41 years. Small-biz people are heavily Republican, maybe depressed at Romney’s loss, but the survey of small-biz earnings also plunged six points, sliding since April now to the worst since 2010. Same for sales.
Italy’s industrial production as of October has fallen 6.2% in one year; its youth joblessness now 36.5%, and its debt-to-GDP ratio rising faster than all estimates, 126% now, well over 130% next year. French auto sales tanked 19% last month — before austerity kicks in. Japan’s economy shrank 3.5% annualized in the 3rd quarter, contracting in five of the last eight quarters. China’s export decline gives the lie to all happy-talk, official and market-based.
I’m stickin’ to my Acme Parachute on the nearby Cliff: no way to know if or how it will be resolved, or consequences if not. I’m much more concerned about the case of Acme Dynamite that we are all standing on: the several years of tax increases and spending cuts ahead.
H. L. Mencken said that his job was to comfort the afflicted and afflict the comfortable. I try to chew equally on Right and Left in these pages. However, while confessing doubt about the difference between true negotiating positions and posturing, Mr. Obama right now is more out of bounds than the Republicans.
He did “win” in November, but this is not the Super Bowl. This is a deeply divided nation, and more confused than divided. He’s trying to roll the Republicans into a far worse deal than both sides could have had in 2011, all tax increase and no spending cut. And he still fails to explain to all the people what our true situation is — which he must do to get enough votes from his own party. Bowles-Simpson Truth: we must adopt cuts in future spending promises 3:1 tax increases. He looks like he’s making the same mistake as in his first term, trying to push the nation farther Left than it lives.
Marker. One of Mr. Obama’s demands: any budget deal must end the requirement to vote on increases in the national debt. I despise the posturing and wasted time around these votes, ever since 1980. However, the most precious parliamentary possession for a thousand years has been the power of the purse. Obama’s people counter: Well, we voted to spend the money — what’s the difference? Why should we have to go through these hostage-taking filibusters?
Every successful household knows the difference between a decision to spend and one to borrow. They are NOT the same. That’s exactly how we got in the soup we’re in. Spending is fun. You can borrow to keep at it until one day you’re bankrupt.
Lot goin’ on. First the Fed, then the Cliff.
The Fed has embarked on QE4, or open-ended, or without end. Whatever. Next year the Fed will buy $1 trillion in Treasurys and MBS, and continue to buy until enough people are back at work, and stop short only if inflation becomes a problem. The buying is designed to keep long-term rates of all kinds low, and thereby revive the economy.
Naturally, rates rose since the announcement. Not a lot, the 10-year T-note above 1.70% from lows near 1.58%, and mortgages pushing 3.50%.
There is a logic to the rise. Several logics. First the crowd who from the onset of Fed efforts to save us in 2007 have been certain — certain — that inflation would follow, and been totally mistaken. Then the mob which believes QE opens the free-money door to “risk assets” — stocks, gold, and commodities. This time stocks fell, but more because of Cliff crumbling than loss of QE faith. Last a sensible group: if the Fed is trying this hard to revive the economy, it may work. All roads from that thought lead to the same place: for the moment, sell bonds, sell more than the Fed is buying. Thus rates rose.
The Fed’s focus is on unemployment, but I continue to believe that’s more statutory fig leaf than fact. The economy is in soggy shape, going nowhere, the rest of the world in worse shape, and austerity is coming here (see “Cliff” below).
The NFIB, surveyor of small-business conditions since 1971, found a substantial drop in its overall measure of confidence: down 5.6 points in the month to a low (87.5) exceeded on the downside only nine times in 41 years. Small-biz people are heavily Republican, maybe depressed at Romney’s loss, but the survey of small-biz earnings also plunged six points, sliding since April now to the worst since 2010. Same for sales.
Italy’s industrial production as of October has fallen 6.2% in one year; its youth joblessness now 36.5%, and its debt-to-GDP ratio rising faster than all estimates, 126% now, well over 130% next year. French auto sales tanked 19% last month — before austerity kicks in. Japan’s economy shrank 3.5% annualized in the 3rd quarter, contracting in five of the last eight quarters. China’s export decline gives the lie to all happy-talk, official and market-based.
I’m stickin’ to my Acme Parachute on the nearby Cliff: no way to know if or how it will be resolved, or consequences if not. I’m much more concerned about the case of Acme Dynamite that we are all standing on: the several years of tax increases and spending cuts ahead.
H. L. Mencken said that his job was to comfort the afflicted and afflict the comfortable. I try to chew equally on Right and Left in these pages. However, while confessing doubt about the difference between true negotiating positions and posturing, Mr. Obama right now is more out of bounds than the Republicans.
He did “win” in November, but this is not the Super Bowl. This is a deeply divided nation, and more confused than divided. He’s trying to roll the Republicans into a far worse deal than both sides could have had in 2011, all tax increase and no spending cut. And he still fails to explain to all the people what our true situation is — which he must do to get enough votes from his own party. Bowles-Simpson Truth: we must adopt cuts in future spending promises 3:1 tax increases. He looks like he’s making the same mistake as in his first term, trying to push the nation farther Left than it lives.
Marker. One of Mr. Obama’s demands: any budget deal must end the requirement to vote on increases in the national debt. I despise the posturing and wasted time around these votes, ever since 1980. However, the most precious parliamentary possession for a thousand years has been the power of the purse. Obama’s people counter: Well, we voted to spend the money — what’s the difference? Why should we have to go through these hostage-taking filibusters?
Every successful household knows the difference between a decision to spend and one to borrow. They are NOT the same. That’s exactly how we got in the soup we’re in. Spending is fun. You can borrow to keep at it until one day you’re bankrupt.
Friday, December 7, 2012
Capital Markets Update
By Louis S. Barnes Friday, December 7th, 2012
Markets are very quiet despite the usual first-week-of-month flood of new data. In the last week the 10-year T-note has not traded above 1.63% nor below 1.58%, and mortgages are holding just below 3.50% depending on borrower and property.
The November payroll survey estimate arrived with a 146,000-job gain, better than forecast but garbled by Sandy — and we cannot know whether up or down. The unemployment rate fell to 7.7%, but may have been more distorted by Sandy than payrolls: the percent of unemployed fell because the surveyed workforce shrank.
“I’m calling from the Bureau of Labor Statistics. If you are not at work, do you still have a job but just can’t get to it? Have you quit looking for work because you’re demoralized, or because a tree fell on your car? Hello? Hello? You’re too cold to talk? You don’t seem to understand how important this call is to the nation. Hello? Is your phone out? Yes, I know that if it were we wouldn’t be talking. No need to be insulting.”
The Institute of Supply Management (“Purchasing Managers” in old days) takes two surveys at the end of each month. The manufacturing one for November dumped two points from October to 49.5, the worst since 2009. The second one, for the service sector, rose to 54.7 from 52.3 in October. Tend to trust the manufacturing number: it has longer history, four decades versus one.
This morning the University of Michigan released its consumer confidence survey for December. It had been on a rising trend since late summer, up to 82.7 last month and was expected to stay there or higher, and instead tanked to 74.5. Economy rolling over? Republicans who just discovered who won in November? Nobody knows.
Intermission for Fiscal Cliff. The election has brought order to Republicans, most of whom understand they could have had a better deal in 2011. Speaker Boehner fired two unruly Tea Pots from their committee posts, and Senator Jim DeMint resigned altogether, headed for the Heritage Foundation, where he can screech in its phone booth undisturbed. Mr. Obama has less feel for his tax base and the economy than Mitt Romney for the people, but this time might not overreach his way out of a deal in plain sight. I think chances have reversed two bad weeks and improved now.
Back to reality. Each quarter the Fed releases Z-1, describing the movement and landing place of every buck in the financial system. Some new numbers are striking.
The net worth of US households in the last 90 days rose by $1.7 trillion. Feel that?
Didn’t think so. A mere wobble in a base of $64 trillion. Which by the way is not a shabby net worth. Over the last year the wobbles have combined for genuine progress, a gain of $4.5 trillion. The Fed estimates recovery of $1 trillion of the $7 trillion in home equity lost since 2006, a long way to go but moving. The other $3.5 trillion gained is in financial assets, most buried out of sight in pension funds, insurance company reserves, and retirement accounts, slow and quiet, but real.
Included in Z-1 are mortgage accounts. Yesterday’s release shows a pickup in post-Bubble plodding in some places, but a total stall in another. The overall figure contains both the good and the troublesome news: aggregate US residential mortgages have fallen by $88 billion in 90 days, $289 billion in the last year, and are now below $10 trillion for the first time since 2005 (from the $11.2 trillion peak in 2007).
Some of the overall decline is from overdue write-offs. Loans also disappear via sales and refis, but there is little of that in the worst stuff. The trash in private-label MBS is down to $936 billion from $2.2 trillion in 2007. Home equity loans (including seconds) from a same-year peak at $1.13 trillion have fallen to $790 billion.
The bad news: without added mortgage supply, a genuine housing recovery lives only in the minds of the pollyannas. The nation’s sole new supply, Fannie-Freddie-FHA-VA, has been the same since 2009, about $5.8 trillion. All other sources, the “private” dreamland of government-haters, are just as inert as they have been since 2007.
When these mortgage aggregates begin to rise, then we’ll know that housing really is healing, and the economy with it.
Markets are very quiet despite the usual first-week-of-month flood of new data. In the last week the 10-year T-note has not traded above 1.63% nor below 1.58%, and mortgages are holding just below 3.50% depending on borrower and property.
The November payroll survey estimate arrived with a 146,000-job gain, better than forecast but garbled by Sandy — and we cannot know whether up or down. The unemployment rate fell to 7.7%, but may have been more distorted by Sandy than payrolls: the percent of unemployed fell because the surveyed workforce shrank.
“I’m calling from the Bureau of Labor Statistics. If you are not at work, do you still have a job but just can’t get to it? Have you quit looking for work because you’re demoralized, or because a tree fell on your car? Hello? Hello? You’re too cold to talk? You don’t seem to understand how important this call is to the nation. Hello? Is your phone out? Yes, I know that if it were we wouldn’t be talking. No need to be insulting.”
The Institute of Supply Management (“Purchasing Managers” in old days) takes two surveys at the end of each month. The manufacturing one for November dumped two points from October to 49.5, the worst since 2009. The second one, for the service sector, rose to 54.7 from 52.3 in October. Tend to trust the manufacturing number: it has longer history, four decades versus one.
This morning the University of Michigan released its consumer confidence survey for December. It had been on a rising trend since late summer, up to 82.7 last month and was expected to stay there or higher, and instead tanked to 74.5. Economy rolling over? Republicans who just discovered who won in November? Nobody knows.
Intermission for Fiscal Cliff. The election has brought order to Republicans, most of whom understand they could have had a better deal in 2011. Speaker Boehner fired two unruly Tea Pots from their committee posts, and Senator Jim DeMint resigned altogether, headed for the Heritage Foundation, where he can screech in its phone booth undisturbed. Mr. Obama has less feel for his tax base and the economy than Mitt Romney for the people, but this time might not overreach his way out of a deal in plain sight. I think chances have reversed two bad weeks and improved now.
Back to reality. Each quarter the Fed releases Z-1, describing the movement and landing place of every buck in the financial system. Some new numbers are striking.
The net worth of US households in the last 90 days rose by $1.7 trillion. Feel that?
Didn’t think so. A mere wobble in a base of $64 trillion. Which by the way is not a shabby net worth. Over the last year the wobbles have combined for genuine progress, a gain of $4.5 trillion. The Fed estimates recovery of $1 trillion of the $7 trillion in home equity lost since 2006, a long way to go but moving. The other $3.5 trillion gained is in financial assets, most buried out of sight in pension funds, insurance company reserves, and retirement accounts, slow and quiet, but real.
Included in Z-1 are mortgage accounts. Yesterday’s release shows a pickup in post-Bubble plodding in some places, but a total stall in another. The overall figure contains both the good and the troublesome news: aggregate US residential mortgages have fallen by $88 billion in 90 days, $289 billion in the last year, and are now below $10 trillion for the first time since 2005 (from the $11.2 trillion peak in 2007).
Some of the overall decline is from overdue write-offs. Loans also disappear via sales and refis, but there is little of that in the worst stuff. The trash in private-label MBS is down to $936 billion from $2.2 trillion in 2007. Home equity loans (including seconds) from a same-year peak at $1.13 trillion have fallen to $790 billion.
The bad news: without added mortgage supply, a genuine housing recovery lives only in the minds of the pollyannas. The nation’s sole new supply, Fannie-Freddie-FHA-VA, has been the same since 2009, about $5.8 trillion. All other sources, the “private” dreamland of government-haters, are just as inert as they have been since 2007.
When these mortgage aggregates begin to rise, then we’ll know that housing really is healing, and the economy with it.
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