Friday, December 27, 2013
Friday, December 20, 2013
Capital Markets
By Louis S. Barnes Friday, December 20th, 2013
The terrible taper has begun! As with most long-feared events, little happened in the instance. Okay, two things: the 10-year T-note and mortgages rose close to their highs of the year, but have since fallen back, and the Dow jumped 292 points. The same Dow which had supposedly bubbled in the artificial stimulus of QE leaped in exuberance at its demise.
Psychological-financial oddities aside, take two things from taper week. First, Clinton’s Law (“It’s the economy, stupid”). Second, a mortgage Christmas Carol.
The Fed affirmed its 2014 forecast: an abrupt jump in GDP from 2%-ish to 3%-ish, and a rise in inflation from sub-1% to 1.5%. If the Fed is right, then we have entered a familiar business-cycle recovery and Fed tightening cycle. The Fed’s promise to keep as-is the Fed funds rate, the overnight cost of money, this week has kept long-term rates under control (“extended guidance” at least into 2015). If the economy really does accelerate, long-term rates will rise no matter what the Fed funds rate.
Also helping long rates: the bond market is skeptical of acceleration. Bond people grasped the benefits of QE better than popular commentators, and wonder why the economy is going to do so much better without it. The Fed knows the economy is fragile and does not want to end effective stimulus; it seems to have concluded that QE has lost utility versus risk, done like a dry-breasted turkey. Yet, the lone dissenter at this week’s Fed meeting was Eric Rosengren, Boston Fed prez, in 2008 the one person to grasp that a credit shortage had more than canceled the Fed’s rate cuts. The only sector capable of pulling the whole economy: housing, and housing depends on credit.
Concealed by all the taper twitter: the last acts of a modern Scrooge. Since 2009 Edward DeMarco has been in charge of the FHFA and its duties as conservator of Fannie and Freddie (the GSEs) after their failure in the credit panic of 2008. In DeMarco’s defense: no hotter potato was ever handed to anybody, Congress has been contradictory and undermining, and the White House and Treasury AWOL. DeMarco correctly saw his job as protecting taxpayers, but like so many pinched denizens of counting houses thought the best policy was skinflint.
In a credit disaster, one sure way to make it worse: choke what little credit remains. DeMarco has for five years recalibrated GSE underwriting to strangulation. Evidence: the default rate on new production has fallen 90% below pre-bubble levels.
In the well-intended effort to pay back Treasury assistance, and to risk adjust loan pricing, DeMarco brought us the hated Loan Level Pricing Adjustments. The GSEs now run large profits and have rebated their bailout to the Treasury. But this week DeMarco announced another round of LLPA hikes and increased the GSEs’ securitization guarantee fee, now triple its pre-bubble percentage.
From 1935 to 2000 when the US mortgage market performed flawlessly, no bubbles and no busts (the S&L meltdown was commercial loans), credit pricing was socialized. 5% down or 50% down all got the same deal, only mortgage insurance added for the lowest down payments. Risk was calibrated by underwriting, not price: big down payment, relaxed scrutiny; 25% or less, we’re going to hold you upside down by the ankles and shake. Now we waterboard everybody, including supremely qualified investors, and in Libertarian zeal surcharge to death low-down borrowers.
DeMarco’s replacement, Mel Watt, has already been confirmed by Congress. The Fed even post-taper, trying to keep rates low, is still buying nearly all net-new GSE production. Yet this week DeMarco, sitting in his chair as it is wheeled out to thankless retirement, gave orders to raise the cost of mortgages on the theory that if Fannie loans become expensive enough, private markets will take over. Total private-market securitization this year: about $13 billion, roughly one week of GSE-based production. The big housing question in 2014: will Mel Watt begin to reverse DeMarco’s damage?
A Merry Christmas to one and all!! Nothing religious, just felicitations from Charles Dickens, and wishes for redemption of any troubled soul nearby. DeMarco’s to start.
The terrible taper has begun! As with most long-feared events, little happened in the instance. Okay, two things: the 10-year T-note and mortgages rose close to their highs of the year, but have since fallen back, and the Dow jumped 292 points. The same Dow which had supposedly bubbled in the artificial stimulus of QE leaped in exuberance at its demise.
Psychological-financial oddities aside, take two things from taper week. First, Clinton’s Law (“It’s the economy, stupid”). Second, a mortgage Christmas Carol.
The Fed affirmed its 2014 forecast: an abrupt jump in GDP from 2%-ish to 3%-ish, and a rise in inflation from sub-1% to 1.5%. If the Fed is right, then we have entered a familiar business-cycle recovery and Fed tightening cycle. The Fed’s promise to keep as-is the Fed funds rate, the overnight cost of money, this week has kept long-term rates under control (“extended guidance” at least into 2015). If the economy really does accelerate, long-term rates will rise no matter what the Fed funds rate.
Also helping long rates: the bond market is skeptical of acceleration. Bond people grasped the benefits of QE better than popular commentators, and wonder why the economy is going to do so much better without it. The Fed knows the economy is fragile and does not want to end effective stimulus; it seems to have concluded that QE has lost utility versus risk, done like a dry-breasted turkey. Yet, the lone dissenter at this week’s Fed meeting was Eric Rosengren, Boston Fed prez, in 2008 the one person to grasp that a credit shortage had more than canceled the Fed’s rate cuts. The only sector capable of pulling the whole economy: housing, and housing depends on credit.
Concealed by all the taper twitter: the last acts of a modern Scrooge. Since 2009 Edward DeMarco has been in charge of the FHFA and its duties as conservator of Fannie and Freddie (the GSEs) after their failure in the credit panic of 2008. In DeMarco’s defense: no hotter potato was ever handed to anybody, Congress has been contradictory and undermining, and the White House and Treasury AWOL. DeMarco correctly saw his job as protecting taxpayers, but like so many pinched denizens of counting houses thought the best policy was skinflint.
In a credit disaster, one sure way to make it worse: choke what little credit remains. DeMarco has for five years recalibrated GSE underwriting to strangulation. Evidence: the default rate on new production has fallen 90% below pre-bubble levels.
In the well-intended effort to pay back Treasury assistance, and to risk adjust loan pricing, DeMarco brought us the hated Loan Level Pricing Adjustments. The GSEs now run large profits and have rebated their bailout to the Treasury. But this week DeMarco announced another round of LLPA hikes and increased the GSEs’ securitization guarantee fee, now triple its pre-bubble percentage.
From 1935 to 2000 when the US mortgage market performed flawlessly, no bubbles and no busts (the S&L meltdown was commercial loans), credit pricing was socialized. 5% down or 50% down all got the same deal, only mortgage insurance added for the lowest down payments. Risk was calibrated by underwriting, not price: big down payment, relaxed scrutiny; 25% or less, we’re going to hold you upside down by the ankles and shake. Now we waterboard everybody, including supremely qualified investors, and in Libertarian zeal surcharge to death low-down borrowers.
DeMarco’s replacement, Mel Watt, has already been confirmed by Congress. The Fed even post-taper, trying to keep rates low, is still buying nearly all net-new GSE production. Yet this week DeMarco, sitting in his chair as it is wheeled out to thankless retirement, gave orders to raise the cost of mortgages on the theory that if Fannie loans become expensive enough, private markets will take over. Total private-market securitization this year: about $13 billion, roughly one week of GSE-based production. The big housing question in 2014: will Mel Watt begin to reverse DeMarco’s damage?
A Merry Christmas to one and all!! Nothing religious, just felicitations from Charles Dickens, and wishes for redemption of any troubled soul nearby. DeMarco’s to start.
Friday, December 13, 2013
Capital Markets
By Louis S. Barnes Friday, December 13th, 2013
It has been a quiet week for new data, except for the quarterly beaching of the Fed’s whale, the Z-1 Flow of Funds tracing the movement and landing spot of every dime in the economy.
Long-term rates have stayed under good control despite expectations of Fed QE taper as early as next week, and common assumption of an accelerating economy next year. Mortgages are just above 4.50%, the 10-year T-note holding politely near 2.85%.
Why still so low? It’s a big world out there, full of surprises: the Bank of Japan began this year to print an immense volume of yen, a last-ditch effort to end deflation and to get the place growing. The BOJ’s purchases of its government bonds have driven their yields below 0.70%, negative versus tentative inflation. So to get some real yield, Japanese investors in the last 90 days bought $98 billion in US Treasurys.
November retail sales rose .7%, and October’s were revised up to a .6% gain. All of that howling about the perils of shutdown was a tad overdone. The retail sales figures are good, but were boosted by giveaway discounts, and by one of two areas in which if you want a loan, you get one: to buy a car (the other, to go to college).
The shutdown did have one clear effect: both parties in Congress learned that voters are tired of the show and in a mood to throw everybody out. Thus we got two-year mini-deal on the budget. No progress and quiet beats no progress and noise.
The November small-biz survey by the NFIB found… nothing. Concluding another year mired in recession-level activity while the big-biz S&P500 goes nuts.
Another week, another $2 billion settlement paid by Chase. Who knew Bernie Madoff was making up results? Chase. Does Chase’s one-man CEO/Chairman still have a job? Right. We will have no real banking reform until we make malfeasance personal.
The Z-1 whale. In a financial news market polluted by salesmen an political spin, Z-1 is straight poop. First for our audience: home mortgage credit outstanding rose for the first time in five years. By $12 billion out of not quite $10 trillion, which contracted by $1.5 billion in those same five years. The contraction: second mortgages of all types have shrunk by one-third, at banks now down to $606 billion. The toxic stuff, “ABS Issuers” (private-market asset-backed securities having nothing to do with Fannie, et al) has collapsed by 63%, from $2.2 trillion to $819 billion and falling, and right-wing wizards of finance want to fold Fannie and privatize mortgages.
Commercial mortgage credit is about as it was in 2006, $2.2 trillion, negligible growth. Multifamily credit stalled at about $850 billion in 2009, but in the last year has crested $900 billion. One would hope so, as rental demand is rising as owner-occupancy falls, and rents are rising at a punishing rate nationwide.
“Total US commercial bank loans and leases” have begun some growth in the last year, from $11.8 trillion to $12.4 trillion, but after five years of stagnation, and double counting the $5.7 trillion in bank-held mortgages and MBS, above.
The one category of substantial credit growth besides cars and student loans: corporate bonds, plus $600 billion in the last year. I cannot find exact data, but the lion’s share of proceeds went not to business expansion but companies buying back their own stock. Which leads to the last story, and the toughest public-policy question.
Ballyhooed in a lot of places: Z-1′s jump in household net worth by $1.5 trillion in the last 90 days. $400 billion of that is a gain in home prices, true for some, but I’ll bet that most fell to cripple-shooters brave enough to buy Vegas at the bottom. If you don’t own a home (35% of households and rising), you didn’t gain a dime. Another $700 billion came from the rise in the stock market; cool if you have some stocks, even if puffed in buy-backs, not so cool if you don’t. More than half of US households have no retirement savings at all. Then there’s the $300 billion gain in “pension entitlements.” Given the pandemic of pension write-downs underway, a dubious gain.
It has been a quiet week for new data, except for the quarterly beaching of the Fed’s whale, the Z-1 Flow of Funds tracing the movement and landing spot of every dime in the economy.
Long-term rates have stayed under good control despite expectations of Fed QE taper as early as next week, and common assumption of an accelerating economy next year. Mortgages are just above 4.50%, the 10-year T-note holding politely near 2.85%.
Why still so low? It’s a big world out there, full of surprises: the Bank of Japan began this year to print an immense volume of yen, a last-ditch effort to end deflation and to get the place growing. The BOJ’s purchases of its government bonds have driven their yields below 0.70%, negative versus tentative inflation. So to get some real yield, Japanese investors in the last 90 days bought $98 billion in US Treasurys.
November retail sales rose .7%, and October’s were revised up to a .6% gain. All of that howling about the perils of shutdown was a tad overdone. The retail sales figures are good, but were boosted by giveaway discounts, and by one of two areas in which if you want a loan, you get one: to buy a car (the other, to go to college).
The shutdown did have one clear effect: both parties in Congress learned that voters are tired of the show and in a mood to throw everybody out. Thus we got two-year mini-deal on the budget. No progress and quiet beats no progress and noise.
The November small-biz survey by the NFIB found… nothing. Concluding another year mired in recession-level activity while the big-biz S&P500 goes nuts.
Another week, another $2 billion settlement paid by Chase. Who knew Bernie Madoff was making up results? Chase. Does Chase’s one-man CEO/Chairman still have a job? Right. We will have no real banking reform until we make malfeasance personal.
The Z-1 whale. In a financial news market polluted by salesmen an political spin, Z-1 is straight poop. First for our audience: home mortgage credit outstanding rose for the first time in five years. By $12 billion out of not quite $10 trillion, which contracted by $1.5 billion in those same five years. The contraction: second mortgages of all types have shrunk by one-third, at banks now down to $606 billion. The toxic stuff, “ABS Issuers” (private-market asset-backed securities having nothing to do with Fannie, et al) has collapsed by 63%, from $2.2 trillion to $819 billion and falling, and right-wing wizards of finance want to fold Fannie and privatize mortgages.
Commercial mortgage credit is about as it was in 2006, $2.2 trillion, negligible growth. Multifamily credit stalled at about $850 billion in 2009, but in the last year has crested $900 billion. One would hope so, as rental demand is rising as owner-occupancy falls, and rents are rising at a punishing rate nationwide.
“Total US commercial bank loans and leases” have begun some growth in the last year, from $11.8 trillion to $12.4 trillion, but after five years of stagnation, and double counting the $5.7 trillion in bank-held mortgages and MBS, above.
The one category of substantial credit growth besides cars and student loans: corporate bonds, plus $600 billion in the last year. I cannot find exact data, but the lion’s share of proceeds went not to business expansion but companies buying back their own stock. Which leads to the last story, and the toughest public-policy question.
Ballyhooed in a lot of places: Z-1′s jump in household net worth by $1.5 trillion in the last 90 days. $400 billion of that is a gain in home prices, true for some, but I’ll bet that most fell to cripple-shooters brave enough to buy Vegas at the bottom. If you don’t own a home (35% of households and rising), you didn’t gain a dime. Another $700 billion came from the rise in the stock market; cool if you have some stocks, even if puffed in buy-backs, not so cool if you don’t. More than half of US households have no retirement savings at all. Then there’s the $300 billion gain in “pension entitlements.” Given the pandemic of pension write-downs underway, a dubious gain.
Friday, December 6, 2013
Capital Markets
By Louis S. Barnes Friday, December 6th, 2013
This morning’s good news — 203,000 net-new jobs in November — is unambiguous good news. Under normal circumstances, good economic news pushes up interest rates, but today’s economy does not resemble normal, and so rates are unchanged.
This payroll data is especially helpful because we’ve been waiting to see the negative effects of the “shutdown.” Someday there may be a shutdown with significant economic impact. However, the shrieking all through September and October about damage and threats of default was political-media bloviation, nothing more.
As pleasant as the payroll news, beware happy-talk. There is no acceleration in these numbers, except in one spot: the jobs gained were better quality than in many prior reports, less retail/hospitality, more with better prospects for stability and higher pay. However, better pay is still in prospect, not in wallet: November wages rose 0.16%, no change in trend in the 2.0% overall gain in the last year. Aggregate personal income in November fell 0.1%, while spending rose 0.3%, an uneasy pair.
This job report is at the edge of justification for the Fed to begin to taper its $85 billion per month purchases of Treasurys and MBS. If the Fed will soon begin its terrible taper, maybe at its meeting 10 days hence (a good bet that Bernanke will draw first blood for Yellen), why no reaction from the bond market? Several reasons, the last the slipperiest.
First, the market has already reacted. Explosively so. The 10-year T-note run May-June from 1.70% to 2.90% was serious sprinting.
Second, inflation is dead low. Year-over-year CPI has risen only 1.0%, and that’s overall CPI, not “core,” ex-food and energy. And energy prices may be about to fall, oil finally giving way to the fracking boon. Take the nominal bond yield now close to 3.00%, subtract inflation, get a 2.00% real return. Not great, not shabby, and more than one point higher than it was in May.
Third, the Fed will promise to keep the overnight cost of money near zero for an even longer period, maybe out to 2017. Which is effectively open-ended. The limits on that promise: rising incomes (the whole purpose of the exercise), and/or an unwelcome rise in inflation (in excess of 2.5%). The unemployment rate fell from 7.3% to 7.0%, but the Fed has already suspended its 6.5% threshold for tightening, on proper grounds that the unemployment rate is a poor measure of actual labor conditions.
Fourth: the slippery one. Trying to get inside the head of the bond market will make you crazy. Stick with this thought before trying any other thinking: long-term investors think long-term. Then proceed to step two: the bond world is upside down, good news is bad, bad news is good. But we got good news today, and nothing bad happened…? Step three: aggressive stimulus by the Fed is bad for bonds, and its absence or withdrawal is good. Initially the taper is bad for bonds, a huge buyer stepping out. But, if the Fed is stepping out, less help for a deeply uncertain economy.
Those same insane principles governed the bond market response to QE ever since 2008. Rates rose at each announcement, on the presumption that Fed emergency measures would work. When in each case the economy responded little, rates then fell, the market getting the benefit of the Fed’s buys and renewed recession fear. (Note: the apparent absence of positive impact from QE emboldens rockheads to claim that QE did nothing or was counterproductive. Gather ye rocks as ye may.)
Besides watching incomes, watch housing. Mortgages just north of 4.50% is hardly “high,” but are priced higher than last year and no lower than three years ago, the stimulus effect of super-low worn off.
The bond market has no fear of any other stimulus from government. Mr. Obama this week spoke on economic inequality “The defining challenge of our time.” Droning through six pages of text, not a word on how to help our people compete in a tough world. The Republicans have nothing to offer, either. Yet, as today’s job data show, the American economy moves on, endlessly adaptable, without leadership if necessary
This morning’s good news — 203,000 net-new jobs in November — is unambiguous good news. Under normal circumstances, good economic news pushes up interest rates, but today’s economy does not resemble normal, and so rates are unchanged.
This payroll data is especially helpful because we’ve been waiting to see the negative effects of the “shutdown.” Someday there may be a shutdown with significant economic impact. However, the shrieking all through September and October about damage and threats of default was political-media bloviation, nothing more.
As pleasant as the payroll news, beware happy-talk. There is no acceleration in these numbers, except in one spot: the jobs gained were better quality than in many prior reports, less retail/hospitality, more with better prospects for stability and higher pay. However, better pay is still in prospect, not in wallet: November wages rose 0.16%, no change in trend in the 2.0% overall gain in the last year. Aggregate personal income in November fell 0.1%, while spending rose 0.3%, an uneasy pair.
This job report is at the edge of justification for the Fed to begin to taper its $85 billion per month purchases of Treasurys and MBS. If the Fed will soon begin its terrible taper, maybe at its meeting 10 days hence (a good bet that Bernanke will draw first blood for Yellen), why no reaction from the bond market? Several reasons, the last the slipperiest.
First, the market has already reacted. Explosively so. The 10-year T-note run May-June from 1.70% to 2.90% was serious sprinting.
Second, inflation is dead low. Year-over-year CPI has risen only 1.0%, and that’s overall CPI, not “core,” ex-food and energy. And energy prices may be about to fall, oil finally giving way to the fracking boon. Take the nominal bond yield now close to 3.00%, subtract inflation, get a 2.00% real return. Not great, not shabby, and more than one point higher than it was in May.
Third, the Fed will promise to keep the overnight cost of money near zero for an even longer period, maybe out to 2017. Which is effectively open-ended. The limits on that promise: rising incomes (the whole purpose of the exercise), and/or an unwelcome rise in inflation (in excess of 2.5%). The unemployment rate fell from 7.3% to 7.0%, but the Fed has already suspended its 6.5% threshold for tightening, on proper grounds that the unemployment rate is a poor measure of actual labor conditions.
Fourth: the slippery one. Trying to get inside the head of the bond market will make you crazy. Stick with this thought before trying any other thinking: long-term investors think long-term. Then proceed to step two: the bond world is upside down, good news is bad, bad news is good. But we got good news today, and nothing bad happened…? Step three: aggressive stimulus by the Fed is bad for bonds, and its absence or withdrawal is good. Initially the taper is bad for bonds, a huge buyer stepping out. But, if the Fed is stepping out, less help for a deeply uncertain economy.
Those same insane principles governed the bond market response to QE ever since 2008. Rates rose at each announcement, on the presumption that Fed emergency measures would work. When in each case the economy responded little, rates then fell, the market getting the benefit of the Fed’s buys and renewed recession fear. (Note: the apparent absence of positive impact from QE emboldens rockheads to claim that QE did nothing or was counterproductive. Gather ye rocks as ye may.)
Besides watching incomes, watch housing. Mortgages just north of 4.50% is hardly “high,” but are priced higher than last year and no lower than three years ago, the stimulus effect of super-low worn off.
The bond market has no fear of any other stimulus from government. Mr. Obama this week spoke on economic inequality “The defining challenge of our time.” Droning through six pages of text, not a word on how to help our people compete in a tough world. The Republicans have nothing to offer, either. Yet, as today’s job data show, the American economy moves on, endlessly adaptable, without leadership if necessary
Friday, November 29, 2013
Capital Markets Update
By Louis S. Barnes Friday, November 29th, 2013
The mighty Consumer Financial Protection Bureau has delivered new works. We have until August 2015 to get used to the new mortgage Loan Estimate and Closing Disclosure, replacing the previous Good Faith Estimate, Truth In Lending, and HUD-1.
These forms are an improvement over the hastily done 2010 GFE, but so would have been three blank pages, the Magna Carta, or the Gettysburg Address. The demise of the 2010 GFE will instantly reduce demand for landfills.
Many people are so frustrated with government efforts like this that they hate government. Not me. We need financial regulation. Smart regulation, which is possible.
After the credit bubble, which fed the housing bubble, a period of reinvention was inevitable. The Dodd-Frank legislation began the process, a great, emergency spasm. Four bad ideas stick out: the Volcker Rule (more another time), skin in the game (retention of 5% of mortgages securitized), QM and QRM gobbledygook intended to define good underwriting for mortgages (we know how to do that), and creation of the CFPB. The very last thing that our government needed was a new agency, duties overlapping the Fed, the Comptroller, the FDIC, HUD, the SEC, the FHFA, the FTC, and two or three others on the payroll but forgotten.
New agencies are compelled to do things. They are incapable of reviewing old procedures and saying, “Really pretty good. We could fiddle with it, but not make it much better.” They cannot ever acknowledge that the conditions they were created to prevent have died on their own. Today you could not get a subprime MBS off the ground if you put an H-bomb underneath. Six years ago, no loan officers were licensed; today all are. We can track any loan misbehavior all the way to the original perp.
Alluring for a long time: make mortgages transparent, easily compared, terms in concrete from day one, and all consequences disclosed to borrowers.
Unfortunately, mortgages are complicated even if transparent, not easily compared, terms shifting in real-time markets, and consequences… why, some people go to law school to understand contracts, property, promissory notes, and security instruments. No two states have the same law and documents, and few counties have the same foreclosure procedures.
So, what information should all borrowers receive, and how? The new Loan Estimate is not bad, just three pages. APR lives on, a concept alarming to anyone not facile with NPV math (“This is not your interest rate.” Then why do I have to sign this?). News that you can shop for title services (ick). However, the one-page GFE used for 50 years before the bubble worked just fine for anyone with sense to ask for help if confused.
The new five-page Closing Disclosure preserves all the confusion of the old HUD-1 (no minus signs for credits, FOURTEEN sub-totals), wanders off into liability after foreclosure, and duplicates other items in today’s easily understood three-page Fannie Note. Too much information. Of no use at all to those who most need help, and an intimidating waste of time to the most experienced borrowers. Pre-closing borrowers will have a mandatory three-day, no-changes review period, in which an attempt to make a change will add three more days and may forfeit a rate lock or earnest money.
Disclosure zealotry often fails in format. Edward Tufte (“The Visual Display of Quantitative Information”) gave us the term, “chart junk” for enthusiastic efforts at density and compression. The worst problem with these forms: info-junk. Too much in too little space, no way to repair without adding several more pages.
Of course, the real way to repair: go back to the pre-2010 GFE, drop TIL/APR altogether, stick with the HUD-1 which everyone already understands, and put in bold type on every application and closing document, GET PROFESSIONAL HELP. As every real estate commission requires Realtors to advise.
I understand the hopelessness of asking for common sense from the CFPB. The rule it published introducing these new disclosures is one-thousand, eight-hundred and eighty-eight pages long. 1,888. Pages.
Friday, November 22, 2013
Capital Markets
By Louis S. Barnes Friday, November 22nd, 2013
Ben Bernanke on Tuesday night, like most fine executives soon to retire, reminded everyone that he is still Chairman. One of his best speeches laid out where the Fed has been, where it is now, and set wide boundaries for what lies ahead. Worth any thousand pieces of media or Wall Street “analysis,” posted at www.federalreserve.gov. The Fed will reduce slightly its purchases of Treasurys and MBS upon any figleaf of improving data, and then see how markets take tip-toe tapering. The Fed’s first try was jawbone-only in May and June, and did not go well. The Perfesser, referring to that jump in long-term rates: “…It was neither welcome nor warranted, in the judgment of the FOMC.” That language means a large majority at the Fed did not intend to induce the rate rise, and feels that markets overreacted. Going forward the Fed’s plans could not be more clear. The Fed signals big stuff ahead by a concert of communication. In the last two weeks The Fed has posted this Bernanke speech, Ms. Yellen’s testimony, and two huge research papers by the Fed’s most senior monetary staff. The Fed wants to get out of the asset-buying business for fear of market distortion, to get off a super-emergency setting (to merely emergency), and in conviction that the economy will gradually improve through 2014 into 2015. The Fed thinks bond markets misunderstood last summer’s announced 6.5% target for unemployment a trigger for raising its rate, despite its use of “a threshold, not a trigger.” Now the Fed has suspended the 6.5% altogether. Bernanke: “…After the unemployment threshold is crossed, many other indicators become relevant to a comprehensive judgment of the health of the labor market. The Committee can be patient… before considering any increase in its target for the federal funds rate.”Okay. All depends on two simple expectations: 1) faster growth and 2) a long-term commitment to hold the fed funds rate will keep long-term rates low. Two simple problems: 1) prospects for faster growth are apparent only in Fed models, which have been mistaken for five years, and 2) markets are not going to trust the Fed’s soft-shoe tap-dance commitment to low rates. One other problem: global growth seems to be slowing. If the Fed tippy-toe tapers, and the economy slows instead of waltzing, what will the Fed use for heroics next time? Change subject: to the structural issues of Fed decisions and communication, which keep the public and professionals badly confused.“The Fed” is not a monolith, and the Chairman does not run the place. The President appoints and Congress confirms six governors including the Chairman. All six vote at every meeting of the Federal Open Market Committee which sets policy. Governors are nominated with the assent of the Chairman and are not political hacks (the last of that was in the Reagan years). The governors tend to vote with the Chairman even if they disagree. There are twelve regional Feds. Five of their presidents vote at FOMC meetings, the NYFed always, the other four rotating. The regional Feds are antiques, their boards self-replacing and often comically unqualified to express an opinion on anything beyond golf. In an anti-democratic star chamber, the regionals were intended to represent local interests, from small banks to charitable organizations, and they do. Thus the proclivity of regional Fed presidents to speak on the lines of financial creationists and political extremists (usually right-side… bankers and bankers and bankers, oh my). Worth your time: the November 14 speech by Charles Plosser, Philadelphia Fed prez www.phil.frb.org. Plosser articulates the alternate universe Fed: no bailouts, intervene only in Treasurys and price stability, set and obey simple rules for action, and in any doubt wait for Congress. As you read it, imagine Bernanke having to listen to it; imagine what the last five years would have been like if it were policy; understand why dissents at Fed meetings have so little real meaning; and grasp how difficult the job is on the inside, even before the Chairman gets to the economy. Very best of luck, Ms. Yellen - See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-november-22-2013#sthash.YtevWrUL.dpuf
Ben Bernanke on Tuesday night, like most fine executives soon to retire, reminded everyone that he is still Chairman. One of his best speeches laid out where the Fed has been, where it is now, and set wide boundaries for what lies ahead. Worth any thousand pieces of media or Wall Street “analysis,” posted at www.federalreserve.gov. The Fed will reduce slightly its purchases of Treasurys and MBS upon any figleaf of improving data, and then see how markets take tip-toe tapering. The Fed’s first try was jawbone-only in May and June, and did not go well. The Perfesser, referring to that jump in long-term rates: “…It was neither welcome nor warranted, in the judgment of the FOMC.” That language means a large majority at the Fed did not intend to induce the rate rise, and feels that markets overreacted. Going forward the Fed’s plans could not be more clear. The Fed signals big stuff ahead by a concert of communication. In the last two weeks The Fed has posted this Bernanke speech, Ms. Yellen’s testimony, and two huge research papers by the Fed’s most senior monetary staff. The Fed wants to get out of the asset-buying business for fear of market distortion, to get off a super-emergency setting (to merely emergency), and in conviction that the economy will gradually improve through 2014 into 2015. The Fed thinks bond markets misunderstood last summer’s announced 6.5% target for unemployment a trigger for raising its rate, despite its use of “a threshold, not a trigger.” Now the Fed has suspended the 6.5% altogether. Bernanke: “…After the unemployment threshold is crossed, many other indicators become relevant to a comprehensive judgment of the health of the labor market. The Committee can be patient… before considering any increase in its target for the federal funds rate.”Okay. All depends on two simple expectations: 1) faster growth and 2) a long-term commitment to hold the fed funds rate will keep long-term rates low. Two simple problems: 1) prospects for faster growth are apparent only in Fed models, which have been mistaken for five years, and 2) markets are not going to trust the Fed’s soft-shoe tap-dance commitment to low rates. One other problem: global growth seems to be slowing. If the Fed tippy-toe tapers, and the economy slows instead of waltzing, what will the Fed use for heroics next time? Change subject: to the structural issues of Fed decisions and communication, which keep the public and professionals badly confused.“The Fed” is not a monolith, and the Chairman does not run the place. The President appoints and Congress confirms six governors including the Chairman. All six vote at every meeting of the Federal Open Market Committee which sets policy. Governors are nominated with the assent of the Chairman and are not political hacks (the last of that was in the Reagan years). The governors tend to vote with the Chairman even if they disagree. There are twelve regional Feds. Five of their presidents vote at FOMC meetings, the NYFed always, the other four rotating. The regional Feds are antiques, their boards self-replacing and often comically unqualified to express an opinion on anything beyond golf. In an anti-democratic star chamber, the regionals were intended to represent local interests, from small banks to charitable organizations, and they do. Thus the proclivity of regional Fed presidents to speak on the lines of financial creationists and political extremists (usually right-side… bankers and bankers and bankers, oh my). Worth your time: the November 14 speech by Charles Plosser, Philadelphia Fed prez www.phil.frb.org. Plosser articulates the alternate universe Fed: no bailouts, intervene only in Treasurys and price stability, set and obey simple rules for action, and in any doubt wait for Congress. As you read it, imagine Bernanke having to listen to it; imagine what the last five years would have been like if it were policy; understand why dissents at Fed meetings have so little real meaning; and grasp how difficult the job is on the inside, even before the Chairman gets to the economy. Very best of luck, Ms. Yellen - See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-november-22-2013#sthash.YtevWrUL.dpuf
Friday, November 15, 2013
Capital Markets
By Louis S. Barnes Friday, November 15th, 2013
The Yellen era has arrived, and it is already refreshing. The visual of her, and her presence and bearing… this is Yoda as Fed Chair. Diminutive, deeply wise, and all eyes. She writes clearly and with great force, but her spoken words break a tradition going back through Greenspan to Volcker: the Fed Chair as a celebrity. Yellen’s halting and awkward cadence does not make good television, so we will see less of her. Even if she is tempted to stardom (she shows no sign), we’ll have at least four years of a lower Fed profile than we’ve seen in almost 50 years. And that is the proper role of the central bank: somewhere between anonymous and invisible. The Fed can execute its duty to make policy adequately transparent without spending time on the grandstand. Perfesser Bernanke would have been much the same, but didn’t have the chance — a wild emergency brought him farther forward than he would ever have chosen, and he rose to the occasion. Hope Ms. Yellen won’t have to. Her definitive line: “I consider it imperative that we do what we can to promote a very strong recovery.” Not just sustainable recovery, not just a strong one, but imperative…very strong. She gets it. We must get GDP growing faster than debt, and we must get incomes growing faster than the inflation rate. Half won’t do. Many have noted that Ms. Yellen is the best-qualified person ever to take the job. We know a lot about management, and about the traits of chief executives and their paths to success and failure, and no matter what their skill, their need to be a little bit lucky, and to have some black-art talent that cannot be learned. No matter how well-qualified, she is a rookie CEO. Wish her well, be patient, and keep your fingers crossed. To write anything now about the Affordable Care Act is unsportsmanlike. Piling on. A late hit. So write with extreme politeness and detachment. Our President is the CEO of the executive branch. Its duty is to execute, to get things done. Suspend your feelings about Mr. Obama’s political tilt. Grant him the difficulty of overdone Republican opposition, and of the job itself. Jack Kennedy once fairly wailed at how hard it was to get his orders followed. Set aside animosity. Examine only performance as CEO. Mr. Obama has had two major legislative achievements: the ACA and Dodd-Frank. All good executives know instinctively that a poor plan well-executed is better than a great plan poorly done. Every good CEO relies on staff but makes certain that information, especially bad news, flows to the top; demands constant accountability, and reaches out to find hard decisions to be made. Our words have meaning. The more pressure we’re under, the more meaning leaks unintended. Mr. Obama’s answer to the second question at Thursday’s presser: “I was not informed directly that the website would not be working as — the way it was supposed to. Has [sic] I been informed, I wouldn’t be going out saying, boy, this is going to be great. You know, I’m accused of a lot of things, but I don’t think I’m stupid enough to go around saying, this is going to be like shopping on Amazon or Travelocity, a week before the website opens, if I thought that it wasn’t going to work.”Capable executives never think in the passive tense. They never, ever wait to be informed; they know that if they don’t find out –constantly, daily pressing downward for good information and results — disaster awaits. Every time. Ahead for ACA lies more administrative chaos, and worse: sometime next year we’ll know that the ACA expense/income forecast is off by hundreds of billions annually. Tie the two CEOs together. The executive deficiencies visible in the ACA have under the surface for three years been at least as bad in the execution of Dodd-Frank and re-regulation of the financial system. The markers all the same: intent presumed to deliver result; disinterest in unintended consequence; incompetent and disempowered staff; and constant puzzlement at the disconnect between plan and world. No matter how effective Ms. Yellen, she will labor beside an ineffective executive branch. Hope for her own performance and development, hope also that Mr. Obama can learn on the job. So far he shows no sign. - See more at: http://pmglending.com/blog/author/loubarnes#sthash.60wT7Nnr.dpuf
The Yellen era has arrived, and it is already refreshing. The visual of her, and her presence and bearing… this is Yoda as Fed Chair. Diminutive, deeply wise, and all eyes. She writes clearly and with great force, but her spoken words break a tradition going back through Greenspan to Volcker: the Fed Chair as a celebrity. Yellen’s halting and awkward cadence does not make good television, so we will see less of her. Even if she is tempted to stardom (she shows no sign), we’ll have at least four years of a lower Fed profile than we’ve seen in almost 50 years. And that is the proper role of the central bank: somewhere between anonymous and invisible. The Fed can execute its duty to make policy adequately transparent without spending time on the grandstand. Perfesser Bernanke would have been much the same, but didn’t have the chance — a wild emergency brought him farther forward than he would ever have chosen, and he rose to the occasion. Hope Ms. Yellen won’t have to. Her definitive line: “I consider it imperative that we do what we can to promote a very strong recovery.” Not just sustainable recovery, not just a strong one, but imperative…very strong. She gets it. We must get GDP growing faster than debt, and we must get incomes growing faster than the inflation rate. Half won’t do. Many have noted that Ms. Yellen is the best-qualified person ever to take the job. We know a lot about management, and about the traits of chief executives and their paths to success and failure, and no matter what their skill, their need to be a little bit lucky, and to have some black-art talent that cannot be learned. No matter how well-qualified, she is a rookie CEO. Wish her well, be patient, and keep your fingers crossed. To write anything now about the Affordable Care Act is unsportsmanlike. Piling on. A late hit. So write with extreme politeness and detachment. Our President is the CEO of the executive branch. Its duty is to execute, to get things done. Suspend your feelings about Mr. Obama’s political tilt. Grant him the difficulty of overdone Republican opposition, and of the job itself. Jack Kennedy once fairly wailed at how hard it was to get his orders followed. Set aside animosity. Examine only performance as CEO. Mr. Obama has had two major legislative achievements: the ACA and Dodd-Frank. All good executives know instinctively that a poor plan well-executed is better than a great plan poorly done. Every good CEO relies on staff but makes certain that information, especially bad news, flows to the top; demands constant accountability, and reaches out to find hard decisions to be made. Our words have meaning. The more pressure we’re under, the more meaning leaks unintended. Mr. Obama’s answer to the second question at Thursday’s presser: “I was not informed directly that the website would not be working as — the way it was supposed to. Has [sic] I been informed, I wouldn’t be going out saying, boy, this is going to be great. You know, I’m accused of a lot of things, but I don’t think I’m stupid enough to go around saying, this is going to be like shopping on Amazon or Travelocity, a week before the website opens, if I thought that it wasn’t going to work.”Capable executives never think in the passive tense. They never, ever wait to be informed; they know that if they don’t find out –constantly, daily pressing downward for good information and results — disaster awaits. Every time. Ahead for ACA lies more administrative chaos, and worse: sometime next year we’ll know that the ACA expense/income forecast is off by hundreds of billions annually. Tie the two CEOs together. The executive deficiencies visible in the ACA have under the surface for three years been at least as bad in the execution of Dodd-Frank and re-regulation of the financial system. The markers all the same: intent presumed to deliver result; disinterest in unintended consequence; incompetent and disempowered staff; and constant puzzlement at the disconnect between plan and world. No matter how effective Ms. Yellen, she will labor beside an ineffective executive branch. Hope for her own performance and development, hope also that Mr. Obama can learn on the job. So far he shows no sign. - See more at: http://pmglending.com/blog/author/loubarnes#sthash.60wT7Nnr.dpuf
Friday, November 8, 2013
Capital Markets Update
By Lois S. Barnes Friday, November 8th, 2013
In this weird economic-political time a few things are moving toward clarity.
Remember that awful government shutdown doing so much harm to the economy? Forget that. October payrolls jumped 204,000, plus another 60,000 revised up in September. The economic world flowed on around a furloughed government like a stream around an old, abandoned tire.
Did the shutdown conceal the long-awaited economic acceleration? No. Uh-uh. Half of these new jobs are in retail and hospitality/leisure. Entry jobs with zero upside and security. Wages in October grew again by 0.1%, half the rate of inflation.
The interest rate reaction to the job surge has been modest, and should be: in an eyeblink the 10-year T-note from 2.60% to 2.75%, mortgages pressing 4.50%. No big deal until the economy really changes, not yet, and still the mystery.
Third quarter GDP eye-popped to 2.8% annual growth, but one-third of that was accumulation of unsold inventories. Not a good sign for the fourth quarter, but there is no new recession in these cards.
The players in the economic mystery game are the Fed and political leadership. Everyone expecting a post-WW II cyclical pattern has been wrong, and citizens labor in a tangle of competing alternate-universe theories. Government is not the problem, nor is more government the solution.
One month, one election, and one website have dumped the political world on its head. Try to shift your anger at politicians toward comic relief, and genuine hope that the new predicaments afflicting both parties will force them to do useful things. A perfect metric of the month has been the Virginia gubernatorial race between Teapot Ken Cuccinelli and Clinton-hack Terry McAuliffe. Virginia ain’t what it used to be: some of its countryside still is, but the north is heavily infected by govermint Yankees.
Cuccinelli had annoyed enough normal people to give McAuliffe a steady 4% lead until the shutdown, which put McAuliffe into a 10% poll-taking landslide by October 20. Then, one little website oops-a-daisy and shutdown rage flipped to flipping off Democrats. McAuliffe eked out a win by 2.5%.
Both parties are now in trouble. The Republicans are making progress, their center acting quickly to weld a lid on the Teapots. The White House is in deepest disarray, yanked from its Wolkenkuckkucksheim (Aristophanes’ cloud-cuckoo-land via splendid German). There will be hell to pay if that website is not up as-promised by November 30. Just 22 software shopping days! And likely even more hell to pay once it’s up, and citizens find out how far ObamaCare diverges from promises.
Next year is an election year. Goody. Nobody in either party wants to run on its record, and blaming the other guy is done, too. These guys have to compete by actually getting beneficial things done. Right now, and together. Couldn’t be better.
The Fed has its own internal tangles, two big technical staff papers delivered this week advocating more and longer stimulus. The Fed has to taper QE because net MBS and Treasury issuance has fallen in half in 18 months, and the $1-trillion-per-year pace is too big and benefits thin. The Fed will rely on a longer-term promise to keep its rate low, maybe extending to 2017, which will do less than it hopes. Long-term rates will tip upward from time to time, limiting housing’s pull forward, but have a good chance to stabilize where they’ve been summer-fall.
Economic rescue? Depends on what you think the problem is. I am convinced that the entire world is caught in two very powerful deflationary forces: IT, and the entrance 20 years ago of two billion previously locked-out workers, IT magnifying the wage-leveling impact of labor oversupply. The Fed has done all it can, same for other central banks: let excessive private debt migrate to sovereign debt, which can be warehoused indefinitely, and compress rates and print cash as necessary to prevent deflation.
There is no fix for the oversupply. Only time, and meanwhile don’t do stupid things. The Teapot and ObamaCare crackups have gone a long way to prevent the latter.
In this weird economic-political time a few things are moving toward clarity.
Remember that awful government shutdown doing so much harm to the economy? Forget that. October payrolls jumped 204,000, plus another 60,000 revised up in September. The economic world flowed on around a furloughed government like a stream around an old, abandoned tire.
Did the shutdown conceal the long-awaited economic acceleration? No. Uh-uh. Half of these new jobs are in retail and hospitality/leisure. Entry jobs with zero upside and security. Wages in October grew again by 0.1%, half the rate of inflation.
The interest rate reaction to the job surge has been modest, and should be: in an eyeblink the 10-year T-note from 2.60% to 2.75%, mortgages pressing 4.50%. No big deal until the economy really changes, not yet, and still the mystery.
Third quarter GDP eye-popped to 2.8% annual growth, but one-third of that was accumulation of unsold inventories. Not a good sign for the fourth quarter, but there is no new recession in these cards.
The players in the economic mystery game are the Fed and political leadership. Everyone expecting a post-WW II cyclical pattern has been wrong, and citizens labor in a tangle of competing alternate-universe theories. Government is not the problem, nor is more government the solution.
One month, one election, and one website have dumped the political world on its head. Try to shift your anger at politicians toward comic relief, and genuine hope that the new predicaments afflicting both parties will force them to do useful things. A perfect metric of the month has been the Virginia gubernatorial race between Teapot Ken Cuccinelli and Clinton-hack Terry McAuliffe. Virginia ain’t what it used to be: some of its countryside still is, but the north is heavily infected by govermint Yankees.
Cuccinelli had annoyed enough normal people to give McAuliffe a steady 4% lead until the shutdown, which put McAuliffe into a 10% poll-taking landslide by October 20. Then, one little website oops-a-daisy and shutdown rage flipped to flipping off Democrats. McAuliffe eked out a win by 2.5%.
Both parties are now in trouble. The Republicans are making progress, their center acting quickly to weld a lid on the Teapots. The White House is in deepest disarray, yanked from its Wolkenkuckkucksheim (Aristophanes’ cloud-cuckoo-land via splendid German). There will be hell to pay if that website is not up as-promised by November 30. Just 22 software shopping days! And likely even more hell to pay once it’s up, and citizens find out how far ObamaCare diverges from promises.
Next year is an election year. Goody. Nobody in either party wants to run on its record, and blaming the other guy is done, too. These guys have to compete by actually getting beneficial things done. Right now, and together. Couldn’t be better.
The Fed has its own internal tangles, two big technical staff papers delivered this week advocating more and longer stimulus. The Fed has to taper QE because net MBS and Treasury issuance has fallen in half in 18 months, and the $1-trillion-per-year pace is too big and benefits thin. The Fed will rely on a longer-term promise to keep its rate low, maybe extending to 2017, which will do less than it hopes. Long-term rates will tip upward from time to time, limiting housing’s pull forward, but have a good chance to stabilize where they’ve been summer-fall.
Economic rescue? Depends on what you think the problem is. I am convinced that the entire world is caught in two very powerful deflationary forces: IT, and the entrance 20 years ago of two billion previously locked-out workers, IT magnifying the wage-leveling impact of labor oversupply. The Fed has done all it can, same for other central banks: let excessive private debt migrate to sovereign debt, which can be warehoused indefinitely, and compress rates and print cash as necessary to prevent deflation.
There is no fix for the oversupply. Only time, and meanwhile don’t do stupid things. The Teapot and ObamaCare crackups have gone a long way to prevent the latter.
Friday, November 1, 2013
Capital Markets
By Louis S. Barnes Friday, November 1st, 2013
The Shutdown has opened, but has been replaced by Stuck. Interest rates are stuck, the 10-year Treasury wandering north of 2.50%, and mortgages wandering south of 4.50%. Delayed September data is slow-side: factory production up 0.1%, retail sales ex-autos no gain at all, core CPI up 0.1% and only 1.2% year-over-year. In the first glimpse of October the manufacturing ISM pink-cheeked to 56.4, up .2 from September, but given the Shutdown no telling its validity. ObamaCare is stuck. Hoo-ee, baby. Any big-website rollout will have trouble, and tekkies tell me the expected failure rate is 50%. However, those not experienced in running large organizations have management confused with flipping switches. This executive branch has even less management experience than its predecessor, these the two least-experienced since Harding. In an irony of the stuck, we won’t be able to tell if ObamaCare will work until it starts to. The Fed is stuck. It met this week, but shed no light. Markets assume that it will need to see a lot of post-Shutdown data before its next try at Taper Roulette. Housing is stuck. NAR’s index of pending sales was expected to be flat in September and instead fell 5.6%, even seasonally adjusted. Housing boomers are scrambling to explain the obvious stall, in largest part because the economy is not going anywhere without housing. Goldman leads the pack in blaming the rise in rates caused by the taper try. Nice try, but rates today are only a half-percent higher than in spring. A legitimate explanation goes to the diminished supply of distressed housing for sale, rising prices thereof, and the dampened ardor of cripple-shooters. But the deep reasons are these: incomes are not rising, which means that damaged households cannot repair themselves, and mortgage credit is absurdly tight. Stuck. Follow that thread in a meander past a financial oddity, and sneak up on the whys and wherefores of mortgage dysfunction. The oddity: Jumbo mortgage rates are the closest to “conforming” since the crisis began in July 2007. A caution: be careful mentioning the Jumbo Fannie Spread. Holding constant the down payment, credit score, and housing type, the spread today is only about .25%. Two intellectually impaired media groups have leapt on to the story: one saying the spread is zero, or even upside down, the other in political space saying, “See, the private sector is fine — we don’t need Fannie any more.” Details of the spread are not quite so pleasant as the headline. You can get a Fannie loan with as little as 5% down and a credit score as low as 620. You’ll pay heavily in rate and/or mortgage insurance, but the loan is available. You cannot get a Jumbo 30-fixed with less than 20% down OR a Fico less than 720, and you’ll pay a penalty for a down payment as small as 20% and a Fico below 740. The natural position of Jumbos in the ’80s and ’90s before the Bubble was a spread of .25%-.50%, just where we are. But with tough underwriting and limits on loan size you could get 90% and 95% Jumbos. The spread exploded to 2.00% and more after 2007, really no market at all, but has consistently narrowed as QE put a floor under mortgage freefall. The private sector back? Jumbo dollar originations this year will total a very few tens of billions. Total Fannie-Freddie and VA-FHA? Not quite a trillion. The “private sector” is a handful of struggling and over-regulated banks and a couple of in-and-out securitizers. QE has compressed the yield on anything banks can buy, the list further shortened by good and bad regulation. Thus banks tip-toe into Jumbos with an agenda partly interest rate, but just as much trying to loss-leader households with high net worth into being bank customers. Minimal Jumbo securitization traces to non-bank investors desperate for fixed-income returns, Jumbos as attractive as anything. Give thanks daily for QE and Fannie. This economic recovery depends on housing more than any other single factor. Housing isn’t going anywhere without credit, and mortgage credit is still on life support. - See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-november-1-2013#sthash.WlIP3iAH.dpuf
The Shutdown has opened, but has been replaced by Stuck. Interest rates are stuck, the 10-year Treasury wandering north of 2.50%, and mortgages wandering south of 4.50%. Delayed September data is slow-side: factory production up 0.1%, retail sales ex-autos no gain at all, core CPI up 0.1% and only 1.2% year-over-year. In the first glimpse of October the manufacturing ISM pink-cheeked to 56.4, up .2 from September, but given the Shutdown no telling its validity. ObamaCare is stuck. Hoo-ee, baby. Any big-website rollout will have trouble, and tekkies tell me the expected failure rate is 50%. However, those not experienced in running large organizations have management confused with flipping switches. This executive branch has even less management experience than its predecessor, these the two least-experienced since Harding. In an irony of the stuck, we won’t be able to tell if ObamaCare will work until it starts to. The Fed is stuck. It met this week, but shed no light. Markets assume that it will need to see a lot of post-Shutdown data before its next try at Taper Roulette. Housing is stuck. NAR’s index of pending sales was expected to be flat in September and instead fell 5.6%, even seasonally adjusted. Housing boomers are scrambling to explain the obvious stall, in largest part because the economy is not going anywhere without housing. Goldman leads the pack in blaming the rise in rates caused by the taper try. Nice try, but rates today are only a half-percent higher than in spring. A legitimate explanation goes to the diminished supply of distressed housing for sale, rising prices thereof, and the dampened ardor of cripple-shooters. But the deep reasons are these: incomes are not rising, which means that damaged households cannot repair themselves, and mortgage credit is absurdly tight. Stuck. Follow that thread in a meander past a financial oddity, and sneak up on the whys and wherefores of mortgage dysfunction. The oddity: Jumbo mortgage rates are the closest to “conforming” since the crisis began in July 2007. A caution: be careful mentioning the Jumbo Fannie Spread. Holding constant the down payment, credit score, and housing type, the spread today is only about .25%. Two intellectually impaired media groups have leapt on to the story: one saying the spread is zero, or even upside down, the other in political space saying, “See, the private sector is fine — we don’t need Fannie any more.” Details of the spread are not quite so pleasant as the headline. You can get a Fannie loan with as little as 5% down and a credit score as low as 620. You’ll pay heavily in rate and/or mortgage insurance, but the loan is available. You cannot get a Jumbo 30-fixed with less than 20% down OR a Fico less than 720, and you’ll pay a penalty for a down payment as small as 20% and a Fico below 740. The natural position of Jumbos in the ’80s and ’90s before the Bubble was a spread of .25%-.50%, just where we are. But with tough underwriting and limits on loan size you could get 90% and 95% Jumbos. The spread exploded to 2.00% and more after 2007, really no market at all, but has consistently narrowed as QE put a floor under mortgage freefall. The private sector back? Jumbo dollar originations this year will total a very few tens of billions. Total Fannie-Freddie and VA-FHA? Not quite a trillion. The “private sector” is a handful of struggling and over-regulated banks and a couple of in-and-out securitizers. QE has compressed the yield on anything banks can buy, the list further shortened by good and bad regulation. Thus banks tip-toe into Jumbos with an agenda partly interest rate, but just as much trying to loss-leader households with high net worth into being bank customers. Minimal Jumbo securitization traces to non-bank investors desperate for fixed-income returns, Jumbos as attractive as anything. Give thanks daily for QE and Fannie. This economic recovery depends on housing more than any other single factor. Housing isn’t going anywhere without credit, and mortgage credit is still on life support. - See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-november-1-2013#sthash.WlIP3iAH.dpuf
Friday, October 25, 2013
Capital Markets
By Louis S. Barnes Friday, October 25th, 2013
The Shutdown preoccupied markets and everyone else, and as the world reboots there’s a lot of eye-rubbing and Whazzat?! Economic data. What a novelty. The September payroll gain at 148,000 (undistorted by Shutdown), wages up 0.1% for the month and 2.1% for the year are embarrassing to the Fed’s forecast for acceleration. Orders for durable goods had no gain at all in September. There is no justification in these numbers for tapering QE. Markets now suppose that the soonest we’ll see that is in March, when Janet Yellen takes the gavel. New data from now into December will be distorted, including October payrolls due November 8. Distorted either by possible economic drag inflicted by the Shutdown, or by nobody-home faults in collecting the data. In the vacuum, “technical” aspects tend to dominate, and a powerful 10-year Treasury chart formation has the eye of every bond trader on the globe. If the 10-year yield takes another step down, through 2.47%, mortgages will head for the threes. Even if not, it will take very strong economic data for rates to go up any distance. Led by overconfident stock market people, many finance types question the need for QE, oblivious both to the spike in rates caused by taper-talk, and the continuing global weakness. Led by Europe. Ignore, please, talk of an end to European recession spawned by fractional percentage gains in GDP. The overall Eurozone economy is 3% smaller than in 2007, Spain by 8% and Italy by 9%. Overall unemployment is 12%; in Spain 26%, Italy 14%. The European Central Bank is about to begin its new job of stress-testing European banks. Operation Clouseau. It will fuss about all sorts of loans and securities, but not these entombed in Euro banks: 700 billion euros in Spanish bonds, and another 800 billion of Italian. Since they are government guaranteed, and the euro cannot fail, then these bonds cannot default. Uh-huh. And you were worried about US default? Spanish GDP grew by 0.10% last quarter. Its government debt is now 92% of GDP, up from 77% one year ago (Eurostat/WSJ), Italy headed for 120%. Chancellor Merkel has complained that the US has been spying on her cell phone. One response: “Why no, Chancellor, there is nothing worth listening to. We could tell you if you do say something that is worth the trouble. By the way, you might consider a secure phone. The Russians will listen to anything.”The fundamental problem facing the developed world: sovereign debt growing faster than GDP, from here to Europe to Japan and China. Not Germany. Europe is desperate for Germany to loosen its purse and to buy its exports. In the last year German debt has fallen from 82% of GDP to 80%, forcing the rest of deflating Europe to sell exports elsewhere, which exports deflation elsewhere. QE is fully justified to get the world growing faster than its debt, and the Bank of Japan has joined the effort. China’s version is already far overdone, no help there, and Germany will not allow the ECB to participate. Even if it did, the underlying problem may be global wage competition causing wage deflation which even aggressive QE cannot solve. Until we see progress there we’ll feel the creepy sensation of buying time. A few other tidbits lost in Shutdown: the world’s number one importer of oil, and the Saudi’s largest customer: China. The world’s largest oil producer: the US. From “peak oil” to this. The world’s largest oil field is Saudi Ghawar. The second-largest is Spraberry/Wolfcamp in Texas — for the moment. It and possibly Ghawar may be replaced by Argentina’s shale. A shale belt in the UK, just one in the Midlands, can probably supply all UK gas needs for the rest of the century, Greens willing. China’s shale may be second only to the US’.The US is unique in private ownership of subsurface rights, and severable from surface ownership. In Europe the subsurface is owned by government, shale there paralyzed by Luddites. A stable cost of energy is a huge help while buying time - See more at: http://pmglending.com/blog/uncategorized/credit-news-by-lou-barnes-october-25-2013#sthash.tr6fFVfd.dpuf
The Shutdown preoccupied markets and everyone else, and as the world reboots there’s a lot of eye-rubbing and Whazzat?! Economic data. What a novelty. The September payroll gain at 148,000 (undistorted by Shutdown), wages up 0.1% for the month and 2.1% for the year are embarrassing to the Fed’s forecast for acceleration. Orders for durable goods had no gain at all in September. There is no justification in these numbers for tapering QE. Markets now suppose that the soonest we’ll see that is in March, when Janet Yellen takes the gavel. New data from now into December will be distorted, including October payrolls due November 8. Distorted either by possible economic drag inflicted by the Shutdown, or by nobody-home faults in collecting the data. In the vacuum, “technical” aspects tend to dominate, and a powerful 10-year Treasury chart formation has the eye of every bond trader on the globe. If the 10-year yield takes another step down, through 2.47%, mortgages will head for the threes. Even if not, it will take very strong economic data for rates to go up any distance. Led by overconfident stock market people, many finance types question the need for QE, oblivious both to the spike in rates caused by taper-talk, and the continuing global weakness. Led by Europe. Ignore, please, talk of an end to European recession spawned by fractional percentage gains in GDP. The overall Eurozone economy is 3% smaller than in 2007, Spain by 8% and Italy by 9%. Overall unemployment is 12%; in Spain 26%, Italy 14%. The European Central Bank is about to begin its new job of stress-testing European banks. Operation Clouseau. It will fuss about all sorts of loans and securities, but not these entombed in Euro banks: 700 billion euros in Spanish bonds, and another 800 billion of Italian. Since they are government guaranteed, and the euro cannot fail, then these bonds cannot default. Uh-huh. And you were worried about US default? Spanish GDP grew by 0.10% last quarter. Its government debt is now 92% of GDP, up from 77% one year ago (Eurostat/WSJ), Italy headed for 120%. Chancellor Merkel has complained that the US has been spying on her cell phone. One response: “Why no, Chancellor, there is nothing worth listening to. We could tell you if you do say something that is worth the trouble. By the way, you might consider a secure phone. The Russians will listen to anything.”The fundamental problem facing the developed world: sovereign debt growing faster than GDP, from here to Europe to Japan and China. Not Germany. Europe is desperate for Germany to loosen its purse and to buy its exports. In the last year German debt has fallen from 82% of GDP to 80%, forcing the rest of deflating Europe to sell exports elsewhere, which exports deflation elsewhere. QE is fully justified to get the world growing faster than its debt, and the Bank of Japan has joined the effort. China’s version is already far overdone, no help there, and Germany will not allow the ECB to participate. Even if it did, the underlying problem may be global wage competition causing wage deflation which even aggressive QE cannot solve. Until we see progress there we’ll feel the creepy sensation of buying time. A few other tidbits lost in Shutdown: the world’s number one importer of oil, and the Saudi’s largest customer: China. The world’s largest oil producer: the US. From “peak oil” to this. The world’s largest oil field is Saudi Ghawar. The second-largest is Spraberry/Wolfcamp in Texas — for the moment. It and possibly Ghawar may be replaced by Argentina’s shale. A shale belt in the UK, just one in the Midlands, can probably supply all UK gas needs for the rest of the century, Greens willing. China’s shale may be second only to the US’.The US is unique in private ownership of subsurface rights, and severable from surface ownership. In Europe the subsurface is owned by government, shale there paralyzed by Luddites. A stable cost of energy is a huge help while buying time - See more at: http://pmglending.com/blog/uncategorized/credit-news-by-lou-barnes-october-25-2013#sthash.tr6fFVfd.dpuf
Friday, October 18, 2013
Capital Markets Update
By Louis S. Barnes Friday, October 18th, 2013
Merry Christmas! We will be free of renewed budget crisis until January. Party, party, party.
A few inconveniences remain from this last Shutdown round, and a few small piles of smoking wreckage, but also a lot of good news. We will finally get September employment data next week, and then get October’s on time on November 1st. Will these all-important reports be distorted by the Shutdown? Sure. How? No idea.
There is a chance that this data-blind period will muddle some significant change in the economy, but it’s more likely to be on the slow side as a Shutdown effect. Then again, the Shutdown might have concealed or briefly delayed an acceleration.
Thus the credit markets will be nervous and volatile for months. The Fed will cobble together its own internal view, but post-Shutdown interest rates are sliding slightly in expectation that the Fed will continue QE un-tapered at least until it has decent economic data. During regime change from Bernanke to Yellen the Fed is not likely to do anything dramatic, anyway.
Give up on all of that over-thinking. Stick with bond market simplicity: through all of the media crisis-porn and lurid anticipation of US default, the Treasury bond market didn’t move an inch. No professional took any of that crap seriously, here or overseas. The 10-year T-note, the ultimate measure of risk, stayed between 2.70% and 2.60%.
The good news… most important, millions of Americans who had tuned out the federal government years ago tuned it in, horrified. State and local governments have been worthy of attention, solving problems in the last decade, Washington a posturing bore. But Washington matters, and it listens to public opinion.
What really happened in the last-minute resolution? Headline in NYT: “Republicans Back Down.” In the WSJ: “Congress Strikes a Debt Deal.” Thus spake the wings of the mainstream media, each partly correct. Two big things happened. Mr. Obama: “There were no winners” — and for once he seemed to include himself, not just the undergraduates and Law Review staff. He has been in a non-productive standoff with House Republicans for two years — with all of them, not just the Teapots — and now knows that he can spend the next three years getting nothing done, or deal.
87 House Republicans joined 198 Democrats to break the jam on the first try at a vote on a clean bill, and at least half of the 144 Republican nays would have joined the ayes if the deal was at all close — nay only for cover. That’s a working, bi-partisan majority to pass sensible centrist budget and tax proposals next year.
Second, and linked: mainstream Republicans for the first time formally broke with the Teapots. Many people don’t like John Boehner, and don’t understand his conduct in the last two weeks. He gave the Teapots time to come to their senses, and then enough rope to hang themselves. They still do not understand that they are dangling in space. They think they have made a point and will gain strength in next year’s primaries.
In the unique deafness of fools, listening only to themselves, the Teapots cannot hear the cold dismissal by colleagues in their own party — let alone the angry contempt in which the political center now holds them. You… peabrains… would hold this nation hostage? To make a point? You made it, all right. To witness the magnitude of defeat, catch a few minutes of Fox’ Sean Hannity, disbelieving his own post-disaster bluster.
When Congress and the President go back at this it won’t be any prettier than usual, but has a good chance to be productive. It may be incremental, but lost trust is always restored in increments.
Printed under Thursday’s WSJ headline was a chart of the debt limit: in 20 years from $4.9 trillion to $16.7 trillion. Nobody’s fault and everyone’s; war, financial crisis, and procrastination. As big as that policy failure, the larger structural deficit from over-promised entitlements and insufficient tax revenue lies ahead.
If we can make progress, nothing would take more heat off the Fed and interest rates. And nothing would more restore confidence among citizens and business.
Merry Christmas! We will be free of renewed budget crisis until January. Party, party, party.
A few inconveniences remain from this last Shutdown round, and a few small piles of smoking wreckage, but also a lot of good news. We will finally get September employment data next week, and then get October’s on time on November 1st. Will these all-important reports be distorted by the Shutdown? Sure. How? No idea.
There is a chance that this data-blind period will muddle some significant change in the economy, but it’s more likely to be on the slow side as a Shutdown effect. Then again, the Shutdown might have concealed or briefly delayed an acceleration.
Thus the credit markets will be nervous and volatile for months. The Fed will cobble together its own internal view, but post-Shutdown interest rates are sliding slightly in expectation that the Fed will continue QE un-tapered at least until it has decent economic data. During regime change from Bernanke to Yellen the Fed is not likely to do anything dramatic, anyway.
Give up on all of that over-thinking. Stick with bond market simplicity: through all of the media crisis-porn and lurid anticipation of US default, the Treasury bond market didn’t move an inch. No professional took any of that crap seriously, here or overseas. The 10-year T-note, the ultimate measure of risk, stayed between 2.70% and 2.60%.
The good news… most important, millions of Americans who had tuned out the federal government years ago tuned it in, horrified. State and local governments have been worthy of attention, solving problems in the last decade, Washington a posturing bore. But Washington matters, and it listens to public opinion.
What really happened in the last-minute resolution? Headline in NYT: “Republicans Back Down.” In the WSJ: “Congress Strikes a Debt Deal.” Thus spake the wings of the mainstream media, each partly correct. Two big things happened. Mr. Obama: “There were no winners” — and for once he seemed to include himself, not just the undergraduates and Law Review staff. He has been in a non-productive standoff with House Republicans for two years — with all of them, not just the Teapots — and now knows that he can spend the next three years getting nothing done, or deal.
87 House Republicans joined 198 Democrats to break the jam on the first try at a vote on a clean bill, and at least half of the 144 Republican nays would have joined the ayes if the deal was at all close — nay only for cover. That’s a working, bi-partisan majority to pass sensible centrist budget and tax proposals next year.
Second, and linked: mainstream Republicans for the first time formally broke with the Teapots. Many people don’t like John Boehner, and don’t understand his conduct in the last two weeks. He gave the Teapots time to come to their senses, and then enough rope to hang themselves. They still do not understand that they are dangling in space. They think they have made a point and will gain strength in next year’s primaries.
In the unique deafness of fools, listening only to themselves, the Teapots cannot hear the cold dismissal by colleagues in their own party — let alone the angry contempt in which the political center now holds them. You… peabrains… would hold this nation hostage? To make a point? You made it, all right. To witness the magnitude of defeat, catch a few minutes of Fox’ Sean Hannity, disbelieving his own post-disaster bluster.
When Congress and the President go back at this it won’t be any prettier than usual, but has a good chance to be productive. It may be incremental, but lost trust is always restored in increments.
Printed under Thursday’s WSJ headline was a chart of the debt limit: in 20 years from $4.9 trillion to $16.7 trillion. Nobody’s fault and everyone’s; war, financial crisis, and procrastination. As big as that policy failure, the larger structural deficit from over-promised entitlements and insufficient tax revenue lies ahead.
If we can make progress, nothing would take more heat off the Fed and interest rates. And nothing would more restore confidence among citizens and business.
Friday, October 11, 2013
Capital Markets
By Louis S. Barnes Friday, October 11, 2013
Thursday's explosive market reaction to a potential Shutdown resolution demonstrated perfectly our national tension. Final resolution will get a similar reaction: a relief surge in stocks, a brief rise in rates, and then a new wait to see how much damage the fiasco has done to the economy.
We wondered here last week if the vacuum of economic data meant that September did not take place, and now we have confirmation: it did not. Reports are not just suspended, so is the data collection itself. October also may be a hallucination.
The very limited private data is reassuring: the NFIB small business survey for September was unchanged, and in a minor miracle the University of Michigan consumer confidence measure slipped only from 77 to 75.
Janet Yellen! Come on down! On the way to senate confirmation she must endure gnawing by Lefties who want more blood from the bank turnip, and by deeply foolish Righties who wish to shackle the Fed and unleash markets. The latter group also believes that "price stability" involves fighting inflation only, and cannot comprehend the deflation hazard following a free-market credit meltdown. Yellen will do very well.
Then, the Shutdown.
At this hour the situation reminds me of James Thurber's short story, "If Grant Had Been Drinking at Appomattox."
Mr. President, we're here to surrender.
"What's that? Speak up!" Some of us want to give up. About half. For a while.
"Well, then, surrender. Get on with it. Raise the debt limit, promise never again to use it to hold me hostage, and begin to negotiate with me. I like negotiating. Sit quietly for six hours while I explain the error of your ways and then agree to do as I say. Or I'll talk some more."
If we agree, our own people will shoot us, but your proposal is worse than death. A fig leaf of some kind…?
"Unconditional. I lecture, you sit and listen."
It's not really this bad. Possibly worse. But there is a clear path to resolution, paved, well-lit, terrific signage. The National Commission on Fiscal Responsibility and Reform. AKA Bowles-Simpson. In Alan Simpson's judgment, "The only way to get this job done is to harpoon every whale in the ocean." Un-Green, but perfect wisdom.
In early 2010, pre-occupied by creating ObamaCare, Mr. Obama punted the budget deficit to the Commission. The 14 members could not agree, but the two, fine chairmen did and issued a report in December 2010 which stands as one of the best documents in US history.
www.fiscalcommission.gov: establish an upper limit for government as a percent of GDP (24% sliding over 15 years to 22%, roughly the same services as government provides today, a little higher than post WW II average), then fund it, requiring a boost in tax revenue from 18% of GDP (post WW II average) to 21%, and the small resulting deficit over 25 years would reduce national debt from about 80% of GDP back down to the safety zone of 35%. Reduce tax bracket percentages, but increase net dollar paid by higher-income earners by closing all tax freebies, and reduce future spending by raising the retirement age, and means-testing all payout goodies.
Upon delivery Mr. Obama gave a cursory, impolite "thank you" and ash-canned the deal. Democrats have made a living for 80 years by increasing the size of government and "paying bills" by borrowing. That is not "paying bills" -- it is deferring them. Utterly phony propaganda from a bunch of debt junkies.
The Republicans were worse. Self-anointed saint Paul Ryan, seated on the Commission voted "no" on the report. To insist that government shrink and the greatest sacrifice be borne by the least of our brethren, by chopping social support? That transcends addiction. That is immoral, disgusting.
If Mr. Obama tomorrow embraced Bowles-Simpson and devoted his remaining term to enactment, we'd add him to Mount Rushmore.
As it is, everything somebody else's fault… the sickly sweet scent of decadence.
Friday, October 4, 2013
Capital Markets
By Louis S. Barnes *******************************Friday October 4th, 2013
Credit markets are paralyzed by the shutdown, unable to handicap its outcome, whistling past the graveyard. Mortgages are holding near 4.50% and the 10-year T-note 2.60%. Rates might fall if the stock market dives — those people will trade without any information — and rates will rise when the shutdown clears.
The bond market trades on economic data, and crucial reports are now suspended. The most important one in any month is payroll data due the first Friday of each month, September data due today. We have no idea when we will know what happened.
Which raises important questions of epistemology and metaphysics. If we don’t get reports from September, did it happen?
The only private-source data to make it around Teapot barricades: the twin ISM surveys for September. Manufacturing was forecast to cool off from August’s healthy 55.7 but rose to 56.2. The service sector was also supposed to slip from its 58.6, but overdid it to 54.4 — on net, no clarity. Since the Fed says it’s watching jobs, markets seized on the ADP payroll forecast, often far from reality but suggested slight slowing.
The longer reports are delayed, given the markets’ miniscule attention span, in which last week was the Jurassic, the more violent market movement can be when we finally get news.
The shutdown itself can’t be quantified. An old, smart, moderate Republican politician friend says he assumes it will end in a whimper, some quiet, face-saving Republican surrender. But even he says he has no idea when, or faith in that conclusion. If you have frothing extremists on one side, and the other side self-convinced of its moral superiority and power, you can wake up one morning at Fort Sumter not knowing how you got there or how to back down.
Two things we can measure. Mortgages and the Fed.
We are still taking applications, locking rates, processing our little hearts out, and closing. Our principal problem: in the post-Bubble spasm authorities decided that ALL borrowers should produce two years’ tax returns (not just the few self-employed, or owners of rental property, or those needing investment income to qualify). And authorities decided that neither the borrowers nor their CPAs could be trusted to give us true copies, so we must pull transcripts from the IRS (the dreaded 4506T).
The IRS is shut. When it re-opens it will have to process a backlog growing by the hour. Are the authorities helping by waiving the transcript, or granting good faith safe harbor? NooOOOooo. Many lenders — to their great credit — seem willing to defer the risk to post-closing. However, home sales and closings will suffer soon, if only by expired rate locks.
The Fed story is masked by media noise and fantastic dishonesty among investment salespeople. Most of the market “analysis” available — essentially every talking head on CNBC and Bloomberg — is a sales pitch. The most basic approach is to induce fear in the audience by playing up the hazards of potential disasters, or from government incompetence. (That last one has been a big seller.) Extra effort: constantly add complexity which only the shill understands and can protect you from.
Fed commentary from these people ranges from the Santelli approach (the Fed is always wrong and a government intrusion into private affairs), to disgraceful second-guessing, or accusation that the Fed communicated poorly, failing to tell you how to make guaranteed money on its policy moves.
Behind all that jive, in the last ten days surprising new understanding: since announcing in May and June targets for the unemployment rate, the Fed has re-thought. The unemployment rate is falling but the overall labor market is hardly improving at all. The Fed has political cover under the Congressional “dual mandate” of price stability and low unemployment, but its vision is far more broad and detailed.
Depending on the data that we are not receiving, the Fed may suspend the QE taper well into next year, and rates have room to drop. Or not. Do have a nice shutdown.
Credit markets are paralyzed by the shutdown, unable to handicap its outcome, whistling past the graveyard. Mortgages are holding near 4.50% and the 10-year T-note 2.60%. Rates might fall if the stock market dives — those people will trade without any information — and rates will rise when the shutdown clears.
The bond market trades on economic data, and crucial reports are now suspended. The most important one in any month is payroll data due the first Friday of each month, September data due today. We have no idea when we will know what happened.
Which raises important questions of epistemology and metaphysics. If we don’t get reports from September, did it happen?
The only private-source data to make it around Teapot barricades: the twin ISM surveys for September. Manufacturing was forecast to cool off from August’s healthy 55.7 but rose to 56.2. The service sector was also supposed to slip from its 58.6, but overdid it to 54.4 — on net, no clarity. Since the Fed says it’s watching jobs, markets seized on the ADP payroll forecast, often far from reality but suggested slight slowing.
The longer reports are delayed, given the markets’ miniscule attention span, in which last week was the Jurassic, the more violent market movement can be when we finally get news.
The shutdown itself can’t be quantified. An old, smart, moderate Republican politician friend says he assumes it will end in a whimper, some quiet, face-saving Republican surrender. But even he says he has no idea when, or faith in that conclusion. If you have frothing extremists on one side, and the other side self-convinced of its moral superiority and power, you can wake up one morning at Fort Sumter not knowing how you got there or how to back down.
Two things we can measure. Mortgages and the Fed.
We are still taking applications, locking rates, processing our little hearts out, and closing. Our principal problem: in the post-Bubble spasm authorities decided that ALL borrowers should produce two years’ tax returns (not just the few self-employed, or owners of rental property, or those needing investment income to qualify). And authorities decided that neither the borrowers nor their CPAs could be trusted to give us true copies, so we must pull transcripts from the IRS (the dreaded 4506T).
The IRS is shut. When it re-opens it will have to process a backlog growing by the hour. Are the authorities helping by waiving the transcript, or granting good faith safe harbor? NooOOOooo. Many lenders — to their great credit — seem willing to defer the risk to post-closing. However, home sales and closings will suffer soon, if only by expired rate locks.
The Fed story is masked by media noise and fantastic dishonesty among investment salespeople. Most of the market “analysis” available — essentially every talking head on CNBC and Bloomberg — is a sales pitch. The most basic approach is to induce fear in the audience by playing up the hazards of potential disasters, or from government incompetence. (That last one has been a big seller.) Extra effort: constantly add complexity which only the shill understands and can protect you from.
Fed commentary from these people ranges from the Santelli approach (the Fed is always wrong and a government intrusion into private affairs), to disgraceful second-guessing, or accusation that the Fed communicated poorly, failing to tell you how to make guaranteed money on its policy moves.
Behind all that jive, in the last ten days surprising new understanding: since announcing in May and June targets for the unemployment rate, the Fed has re-thought. The unemployment rate is falling but the overall labor market is hardly improving at all. The Fed has political cover under the Congressional “dual mandate” of price stability and low unemployment, but its vision is far more broad and detailed.
Depending on the data that we are not receiving, the Fed may suspend the QE taper well into next year, and rates have room to drop. Or not. Do have a nice shutdown.
Friday, September 27, 2013
Capital Markets
By Louis S. Barnes **************************Friday September 27th, 2013
Economic data this week continued the Three Bears pattern, adding to the national state of annoyance. Porridge, porridge, porridge. Couldn’t we have some that’s too hot or too cold, just to break the tedium? And to take our minds off the replay of 2011 Budget Chicken? Long-term rates continued to fall this week, but gently, mortgages near or a little below 4.50%. The all-important 10-year T-note has made it almost to 2.60% from the 2.98% high three weeks ago — all because the Fed de-tapered, and about the best we’re going to do unless the economy weakens. New orders for durable goods fell 0.1% in August, but better than forecast. Personal income rose 0.4% and spending by 0.3%, exactly as forecast. Same for sales of new homes, stuck near 400,000 monthly, and pending sales of all homes, about unchanged. The revision of 2nd quarter GDP did not revise; the final figure the same, 2.5% growth, far short of the Fed’s hopes. Claims for unemployment insurance have fallen to a cyclical low near 300,000 weekly, which in a normal labor market would presage higher wages via competition among employers, but this job market is anything but normal, weighed by overseas competition as never before. Porridge, porridge, porridge. Japan is quiet, and emerging nations are adjusting fairly well to higher interest rates and weaker currencies. The wrestling under the China blanket is increasing. Bo Xilai got life in the big house for corruption while everyone else’s could not be mentioned at his kangaroo trial. Outsiders now doubt most official reports of China’s economic health. Europe has waited a year for Angela Merkel’s re-election, thinking change would follow. Forget that. She was re-elected in trust that she will not to allow change. A bright spot, a very bright one: NYFed Prez Bill Dudley’s speech on Monday (www.newyorkfed.org, in English). After the Fed’s surprise last week, the Wall Street chorus performed its Ode to Whining, accompanied by mis-tuned violins each missing a string, in the style of massed cats whose tails have been stepped on. The Street considers it unfair for the Fed to adjust to new conditions, and of course if the Fed had not adjusted would have howled even louder. Dudley laid out the Fed’s reasoning just as Perfesser Bernanke did last week: “Another new source of drag for the economy is the sharp rise in long-term interest rates.” Duh. Get it? The Fed did. The reasons to taper were to expose any leverage bubble created by QE, and gradually to wean the economy back to living on its own resources, all the while keeping long-term rates low by promising not to raise the overnight cost of money for another two or three or more years. The promise — “forward guidance” — did not work. The Fed is neither blind nor stupid. The 1.50% explosion in long-term rates has had vastly more slowing effect on the US and global economy than the taper itself, even if complete. The exit from QE is going to be herky-jerky, and markets will overreact again and again because this situation is unprecedented. Suspending the taper makes a hell of a lot more sense than mechanically proceeding, adding to unexpected damage. Dudley made three other points: 900,000 new housing starts are nice, but he’d like to see 1.5 million; to taper he would like to see more “forward momentum,” not present in current numbers; and he is concerned about “fiscal drag,” this year the largest combined tax increases and budget cuts in modern record. Which leads to the Chicken Wreck. The President is annoyed because everyone else will not do as they are told. The Left wants a “clean bill,” raising the debt limit without any spending conditions, now or ever. Bloomberg reports that 61% of citizens are opposed to a clean bill and only 28% support one. Republicans are annoyed at each other. The Republican Right would be ridiculous if not so dangerous. The President’s approval rating is descending through the 40s. The 2011 wreck involved a lot of righteous anger; now everyone is weaker, and annoyed. Might be a brief opening for common sense. I can dream - See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-september-27-2013#sthash.JknwlQT6.dpuf
Economic data this week continued the Three Bears pattern, adding to the national state of annoyance. Porridge, porridge, porridge. Couldn’t we have some that’s too hot or too cold, just to break the tedium? And to take our minds off the replay of 2011 Budget Chicken? Long-term rates continued to fall this week, but gently, mortgages near or a little below 4.50%. The all-important 10-year T-note has made it almost to 2.60% from the 2.98% high three weeks ago — all because the Fed de-tapered, and about the best we’re going to do unless the economy weakens. New orders for durable goods fell 0.1% in August, but better than forecast. Personal income rose 0.4% and spending by 0.3%, exactly as forecast. Same for sales of new homes, stuck near 400,000 monthly, and pending sales of all homes, about unchanged. The revision of 2nd quarter GDP did not revise; the final figure the same, 2.5% growth, far short of the Fed’s hopes. Claims for unemployment insurance have fallen to a cyclical low near 300,000 weekly, which in a normal labor market would presage higher wages via competition among employers, but this job market is anything but normal, weighed by overseas competition as never before. Porridge, porridge, porridge. Japan is quiet, and emerging nations are adjusting fairly well to higher interest rates and weaker currencies. The wrestling under the China blanket is increasing. Bo Xilai got life in the big house for corruption while everyone else’s could not be mentioned at his kangaroo trial. Outsiders now doubt most official reports of China’s economic health. Europe has waited a year for Angela Merkel’s re-election, thinking change would follow. Forget that. She was re-elected in trust that she will not to allow change. A bright spot, a very bright one: NYFed Prez Bill Dudley’s speech on Monday (www.newyorkfed.org, in English). After the Fed’s surprise last week, the Wall Street chorus performed its Ode to Whining, accompanied by mis-tuned violins each missing a string, in the style of massed cats whose tails have been stepped on. The Street considers it unfair for the Fed to adjust to new conditions, and of course if the Fed had not adjusted would have howled even louder. Dudley laid out the Fed’s reasoning just as Perfesser Bernanke did last week: “Another new source of drag for the economy is the sharp rise in long-term interest rates.” Duh. Get it? The Fed did. The reasons to taper were to expose any leverage bubble created by QE, and gradually to wean the economy back to living on its own resources, all the while keeping long-term rates low by promising not to raise the overnight cost of money for another two or three or more years. The promise — “forward guidance” — did not work. The Fed is neither blind nor stupid. The 1.50% explosion in long-term rates has had vastly more slowing effect on the US and global economy than the taper itself, even if complete. The exit from QE is going to be herky-jerky, and markets will overreact again and again because this situation is unprecedented. Suspending the taper makes a hell of a lot more sense than mechanically proceeding, adding to unexpected damage. Dudley made three other points: 900,000 new housing starts are nice, but he’d like to see 1.5 million; to taper he would like to see more “forward momentum,” not present in current numbers; and he is concerned about “fiscal drag,” this year the largest combined tax increases and budget cuts in modern record. Which leads to the Chicken Wreck. The President is annoyed because everyone else will not do as they are told. The Left wants a “clean bill,” raising the debt limit without any spending conditions, now or ever. Bloomberg reports that 61% of citizens are opposed to a clean bill and only 28% support one. Republicans are annoyed at each other. The Republican Right would be ridiculous if not so dangerous. The President’s approval rating is descending through the 40s. The 2011 wreck involved a lot of righteous anger; now everyone is weaker, and annoyed. Might be a brief opening for common sense. I can dream - See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-september-27-2013#sthash.JknwlQT6.dpuf
Friday, September 20, 2013
Capital Markets
By Louis S. Barnes **************************Friday September 20th, 2013
Several jigsaw pieces to assemble this week, but they fit neatly into pictures of leadership from the Fed all the way to Pope Francis. First the taper-taper caper. Don’t misunderstand: the Fed’s un-taper is a stay of execution, not a commutation. One day the governor will say, get on with the show, and the lights in the Big House will dim. Only an economic relapse will preserve QE. Those mewling about Fed inconsistency and bad communication and how confusing it all is — if you want certainty, pick a different line of work. I admire Perfesser Bernanke’s honesty: “…The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy.” Translation: our taper jawbone jacked rates a lot farther than we expected, here and overseas, and we’re going to let all of that settle down and see what new data say. Next to that puzzle piece fits an amoeba-shaped thingy. Larry Summers put himself out of his misery, triggering a stock rally — not because an alternate would provide easier money, but because we won’t have to watch Congress hang Summers. A fate which absolutely everybody knew long before the President in June indicated his Summers desire — everybody except the President. Centrist senator Jon Tester, D Montana, sitting on Senate Banking last weekend revealed his Summers “no” intention, and that the first White House question of him regarding Summers came last Friday. The next piece requires a hammer to put in place. The White House is now scrambling to vet the nomination of Janet Yellen, whose quiet dignity through the Summers fiasco should be admired by all. The White House has treated her as the fifth choice in a field of two. It has also mistaken the position of Fed Chairman for Supreme Court-style political football. We’ve nearly wrecked that joint, but the Fed has great internal integrity despite fierce policy disagreements. Get on with Yellen. Then slip in the piece with the erased red line, and we have half of the overall puzzle: a President lost in professorial self-enrapture, the rest of us lesser beings. The other half of the puzzle-picture comes together quickly, the doppelganger of the first found in Congressional Republicans. For destructive self-congratulation, they and the White House are each other. De-fund ObamaCare? What for? If you are right and the whole thing collapses of its own weight, then disassembly does not require your attention. There is no going back: the prior “system” had long-since failed. Since ObamaCare will not be de-funded, and if it works in a process of evolution, you Teapots are going to look worse than usual. Quite the feat. Same for the budget. Obama is not going to reform entitlements and is not going to allow any Bowles-Simpson-style tax and budget reform. We’re going to waste the next three years and that’s how it is. That’s the Democrats’ problem. You Republicans have a heaven-sent opportunity as the minority party to look responsible. Zounds — even act responsibly! Make your points, dig in on the sequester line, stop this debt-limit brinkmanship, and offer something useful to the country. Census data released this week confirm the terrible flaw in the economy and the fatal flaw in ObamaCare. US median household income adjusted for inflation is the same as it was in 1988. Much of the tax burden of those households properly has been shifted to higher-earning ones, but the cost of health care in real dollars has doubled. Ideas, Teapots? Restore house calls by Marcus Welby, MD? Religion is dangerous, and I fear to trespass. However, slide this last piece between the halves of the puzzle above. Yesterday Pope Francis said that his church has become “obsessed” with abortion, gay marriage and contraception. “The dogmatic and moral teachings of the church are not all equivalent… a disjointed multitude of doctrines to be imposed insistently. We have to find a new balance.”He did not change official church doctrine, nor become entangled its bureaucracy. Nor did he fear wisdom. When at a dead end, redefine priorities and move on. Thus endeth the lesson. - See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-september-20-2013#sthash.Luf1qHoj.dpuf
Several jigsaw pieces to assemble this week, but they fit neatly into pictures of leadership from the Fed all the way to Pope Francis. First the taper-taper caper. Don’t misunderstand: the Fed’s un-taper is a stay of execution, not a commutation. One day the governor will say, get on with the show, and the lights in the Big House will dim. Only an economic relapse will preserve QE. Those mewling about Fed inconsistency and bad communication and how confusing it all is — if you want certainty, pick a different line of work. I admire Perfesser Bernanke’s honesty: “…The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy.” Translation: our taper jawbone jacked rates a lot farther than we expected, here and overseas, and we’re going to let all of that settle down and see what new data say. Next to that puzzle piece fits an amoeba-shaped thingy. Larry Summers put himself out of his misery, triggering a stock rally — not because an alternate would provide easier money, but because we won’t have to watch Congress hang Summers. A fate which absolutely everybody knew long before the President in June indicated his Summers desire — everybody except the President. Centrist senator Jon Tester, D Montana, sitting on Senate Banking last weekend revealed his Summers “no” intention, and that the first White House question of him regarding Summers came last Friday. The next piece requires a hammer to put in place. The White House is now scrambling to vet the nomination of Janet Yellen, whose quiet dignity through the Summers fiasco should be admired by all. The White House has treated her as the fifth choice in a field of two. It has also mistaken the position of Fed Chairman for Supreme Court-style political football. We’ve nearly wrecked that joint, but the Fed has great internal integrity despite fierce policy disagreements. Get on with Yellen. Then slip in the piece with the erased red line, and we have half of the overall puzzle: a President lost in professorial self-enrapture, the rest of us lesser beings. The other half of the puzzle-picture comes together quickly, the doppelganger of the first found in Congressional Republicans. For destructive self-congratulation, they and the White House are each other. De-fund ObamaCare? What for? If you are right and the whole thing collapses of its own weight, then disassembly does not require your attention. There is no going back: the prior “system” had long-since failed. Since ObamaCare will not be de-funded, and if it works in a process of evolution, you Teapots are going to look worse than usual. Quite the feat. Same for the budget. Obama is not going to reform entitlements and is not going to allow any Bowles-Simpson-style tax and budget reform. We’re going to waste the next three years and that’s how it is. That’s the Democrats’ problem. You Republicans have a heaven-sent opportunity as the minority party to look responsible. Zounds — even act responsibly! Make your points, dig in on the sequester line, stop this debt-limit brinkmanship, and offer something useful to the country. Census data released this week confirm the terrible flaw in the economy and the fatal flaw in ObamaCare. US median household income adjusted for inflation is the same as it was in 1988. Much of the tax burden of those households properly has been shifted to higher-earning ones, but the cost of health care in real dollars has doubled. Ideas, Teapots? Restore house calls by Marcus Welby, MD? Religion is dangerous, and I fear to trespass. However, slide this last piece between the halves of the puzzle above. Yesterday Pope Francis said that his church has become “obsessed” with abortion, gay marriage and contraception. “The dogmatic and moral teachings of the church are not all equivalent… a disjointed multitude of doctrines to be imposed insistently. We have to find a new balance.”He did not change official church doctrine, nor become entangled its bureaucracy. Nor did he fear wisdom. When at a dead end, redefine priorities and move on. Thus endeth the lesson. - See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-september-20-2013#sthash.Luf1qHoj.dpuf
Friday, September 13, 2013
Friday, September 6, 2013
Capital Markets
By Louis S. Barnes*********************************Friday September 6, 2013
The first week of each month always brings the most, the most important, and the newest news. The net result of this week’s load: a brief pause in the next leg up in long-term rates.
For forty years one of the most reliable economic indicators has been the monthly survey of manufacturing purchasing managers, renamed “ISM” (don’t ask). For August that value jumped to 55.7 (50 is breakeven, 60 a runaway) in an uptrend beginning early this year of the kind historically telling the Fed that it’s time to pull back. The companion ISM for the five-times-larger service sector has a history less than half as long, thus a suspect indicator but rocketed to 58.6 in August.
After those two releases, the 10-year T-note on Thursday touched 3.00% and mainstream low-fee mortgages reached 5.00%.
Today’s job data bought us some time, the 10-year down to 2.90%, mortgages high-4s. The headline 169,000-job gain was enough to maintain Fed-fear, but not the 74,000 jobs revised out of June-July, not the 2.2% year-over-year increase in wages (nominal; negative after inflation), and not the jobs themselves, heavy on the low-end.
The bond market also got help from the unspeakable Mr. Putin who said today in the event of US attack he would “support” his friend and barbarian Mr. Assad.
To make sense of it all… context, context, context.
Ever since bottom in 2009, many people and markets have expected a recovery to unfold in historical pattern, led by credit-sensitive housing and autos. These expectations have been mistaken, but that doesn’t mean forever, and the Fed’s top worry always is an economy running away from it. Credit has been restored for autos, and they are screaming at a 16-million-annual-sale pace. US auto companies are also much more competitive, free of legacy costs of millions of retirees.
Every recovery is lumpy, and the two lumpiest in this expansion are housing and jobs. If you’re in one of a half-dozen metro areas (Seattle, Bay Area, parts of LA and Texas, Denver, Minnenoplace, DC, Boston, and NYC…), and keep the right kind of friends, housing is a gas. The distressed areas have had a nice run from oversold, but are flattening. Absent restoration of credit to pre-Bubble standard, there is no chance whatever of a re-Bubble. The wealth effects from rising prices are helping the economy in modest ways, but a shadow of traditional-historical.
The job market is widely misunderstood. If you’re in the top 20% or so of employment, life is good — from the Fed’s perspective, hot and maybe too hot. The bottom 60% is stuck in ever-tougher global competition, replacing lost jobs with inferior ones, and has no way to build household net worth. Income inequality is a rising political issue, the Left with ideas centered on taking money from people who have too much, or making it harder to earn too much in the first place. The Right has offered nothing to help the struggling majority to ladder its way to success.
The Fed has no means to help that majority. It works, as it must, in the aggregate. As weird as it may sound, this unprecedented two-part economy can overheat, as the cohort of IT-adept, global-skilled, productive-by-nature pull away from the rest.
On net, fresh August data in hand, the Fed is on track to taper QE. And nobody knows if the sustained run-up in long-term rates is overdone, just starting, soon to abort recovery (as never in any prior recovery), or to undercut the rest of the world. Nor can we know if the run-up is the result of QE pullback, or anticipation of later Fed tightening, or an artifact of over-regulated banks unable to absorb new bonds.(Had to run that paragraph. Hedge all bets. Keep ‘em guessing. But the up-trend is still on.)
I don’t mean to over-emphasize, but the amateur in the explosives shop brings unusual risks. His decision to disengage in the Middle East has been correct and overdue, but disengagement is the most dangerous of all military maneuvers. 535 commanders in chief in Congress are having a wonderful, useless time. And why the amateur is stuck on Larry Summers for the Fed… a disturbing mystery to the markets.
The first week of each month always brings the most, the most important, and the newest news. The net result of this week’s load: a brief pause in the next leg up in long-term rates.
For forty years one of the most reliable economic indicators has been the monthly survey of manufacturing purchasing managers, renamed “ISM” (don’t ask). For August that value jumped to 55.7 (50 is breakeven, 60 a runaway) in an uptrend beginning early this year of the kind historically telling the Fed that it’s time to pull back. The companion ISM for the five-times-larger service sector has a history less than half as long, thus a suspect indicator but rocketed to 58.6 in August.
After those two releases, the 10-year T-note on Thursday touched 3.00% and mainstream low-fee mortgages reached 5.00%.
Today’s job data bought us some time, the 10-year down to 2.90%, mortgages high-4s. The headline 169,000-job gain was enough to maintain Fed-fear, but not the 74,000 jobs revised out of June-July, not the 2.2% year-over-year increase in wages (nominal; negative after inflation), and not the jobs themselves, heavy on the low-end.
The bond market also got help from the unspeakable Mr. Putin who said today in the event of US attack he would “support” his friend and barbarian Mr. Assad.
To make sense of it all… context, context, context.
Ever since bottom in 2009, many people and markets have expected a recovery to unfold in historical pattern, led by credit-sensitive housing and autos. These expectations have been mistaken, but that doesn’t mean forever, and the Fed’s top worry always is an economy running away from it. Credit has been restored for autos, and they are screaming at a 16-million-annual-sale pace. US auto companies are also much more competitive, free of legacy costs of millions of retirees.
Every recovery is lumpy, and the two lumpiest in this expansion are housing and jobs. If you’re in one of a half-dozen metro areas (Seattle, Bay Area, parts of LA and Texas, Denver, Minnenoplace, DC, Boston, and NYC…), and keep the right kind of friends, housing is a gas. The distressed areas have had a nice run from oversold, but are flattening. Absent restoration of credit to pre-Bubble standard, there is no chance whatever of a re-Bubble. The wealth effects from rising prices are helping the economy in modest ways, but a shadow of traditional-historical.
The job market is widely misunderstood. If you’re in the top 20% or so of employment, life is good — from the Fed’s perspective, hot and maybe too hot. The bottom 60% is stuck in ever-tougher global competition, replacing lost jobs with inferior ones, and has no way to build household net worth. Income inequality is a rising political issue, the Left with ideas centered on taking money from people who have too much, or making it harder to earn too much in the first place. The Right has offered nothing to help the struggling majority to ladder its way to success.
The Fed has no means to help that majority. It works, as it must, in the aggregate. As weird as it may sound, this unprecedented two-part economy can overheat, as the cohort of IT-adept, global-skilled, productive-by-nature pull away from the rest.
On net, fresh August data in hand, the Fed is on track to taper QE. And nobody knows if the sustained run-up in long-term rates is overdone, just starting, soon to abort recovery (as never in any prior recovery), or to undercut the rest of the world. Nor can we know if the run-up is the result of QE pullback, or anticipation of later Fed tightening, or an artifact of over-regulated banks unable to absorb new bonds.(Had to run that paragraph. Hedge all bets. Keep ‘em guessing. But the up-trend is still on.)
I don’t mean to over-emphasize, but the amateur in the explosives shop brings unusual risks. His decision to disengage in the Middle East has been correct and overdue, but disengagement is the most dangerous of all military maneuvers. 535 commanders in chief in Congress are having a wonderful, useless time. And why the amateur is stuck on Larry Summers for the Fed… a disturbing mystery to the markets.
Friday, August 30, 2013
Captial Markets Update
By Louis S. Barnes ****************************Friday August 30th, 2013
Long-term rates stayed about the same this week, mortgages just above 4.50% for most products.
There are many things to write about this week, but the most important news for most Americans is the first retreat from Dodd-Frank toward common sense.
Economic data stayed in-pattern, reasonable growth without acceleration. Overall orders for durables goods fell 7% in July, but excluding volatile orders for airplanes and such gained .6%. Pending sales of homes fell 1.3% in July, but from an improved level. 2nd Quarter GDP was revised up from 1.7% to 2.5% annualized, but net of accounting gyrations still two-ish, way under the Fed’s forecast — as is inflation, barely 1% annualized. Consumer spending and incomes in July rose .1% versus forecast gains of .2% and .3% respectively.
The threat of action against Syria is still suppressing rates, but that won’t last long. A brief hail of Tomahawks won’t change anything, serious regional upset unlikely.
The Fed’s policy shift raising rates here is causing declines in emerging-nation currencies, but that is a perfectly normal self-corrective. US exports just set a new high, which says the dollar was somewhat undervalued, and emerging nations drunk on export demand from China will soon be helped by weaker currencies. The wrecks are wrecks (India, maybe Brazil), and the healthy will be fine (South Korea, Taiwan).
New budget collisions ahead in Congress create anxiety, but even Republicans understand that the nation is flat bored with the hysterical behavior of the teapots. A fall fizzle is more likely than a run over the brink.
All the above is minor-league today compared to excellent news for the country: six regulators agreed that the central mortgage provisions of Dodd-Frank are bad ideas. Dodd-Frank tried to define permissible mortgages, the Qualified Mortgage and Qualified Residential Mortgage. The QM standard would be a safe harbor for lenders, protection against claims of misbehavior, and the tighter QRM the benchmark for the worst idea to come out of the post-bubble period, the alleged need for lenders to have “skin in the game.” Any non-QRM would have required the lender to retain part of the risk.
Here, six years after mortgage misbehavior stopped cold, we still do not have a national understanding of what happened, laboring in ignorance, score-settling, and the entirely successful effort by Wall Street investment bankers to dodge accountability.
1. Pre-Bubble, every mortgage bank and broker was contractually obliged to repurchase any loan with deficient underwriting, whether it defaulted or not.
2. Commercial banks have always hated mortgage banks and brokers. Banks are ponderous and dim; brokers are light on their feet and live on their wits. Banks have huge balance sheets, brokers are small. Require brokers to grow balance sheets, and — voila! — a tough competitor is dead.
3. Loans against land pre-date Rome. US mortgage underwriting after 1929 was low-default, clear, of record, and did not require reinvention. Loans with small down payments need greater rigor, and with large ones need less, especially if the borrower has assets sufficient to pay off the loan (the latter two types still locked out today).
4. The Wall Street banks did not just buy bad loans 2000-2007, they designed and vacuumed them. They knew exactly what they were doing, the finest credit analysts in the world, and each firm thought it would be able to leave the market just before it blew. None did. The individual decision-makers, perps in suits, still scot-free.
This first pull-back from Dodd-Frank presages more “refinement” of that great legislative spasm, but don’t get your hopes too high. The containment of QM/QRM damage is not an easing of currently over-tight standards, just turning away from more tightening. In blackest comedy, the regulators cited as a principal reason to retreat that credit is already far too tight.
Restoration of common sense will gradually follow rates of default on new loans, by historic standards now almost undetectable.
Long-term rates stayed about the same this week, mortgages just above 4.50% for most products.
There are many things to write about this week, but the most important news for most Americans is the first retreat from Dodd-Frank toward common sense.
Economic data stayed in-pattern, reasonable growth without acceleration. Overall orders for durables goods fell 7% in July, but excluding volatile orders for airplanes and such gained .6%. Pending sales of homes fell 1.3% in July, but from an improved level. 2nd Quarter GDP was revised up from 1.7% to 2.5% annualized, but net of accounting gyrations still two-ish, way under the Fed’s forecast — as is inflation, barely 1% annualized. Consumer spending and incomes in July rose .1% versus forecast gains of .2% and .3% respectively.
The threat of action against Syria is still suppressing rates, but that won’t last long. A brief hail of Tomahawks won’t change anything, serious regional upset unlikely.
The Fed’s policy shift raising rates here is causing declines in emerging-nation currencies, but that is a perfectly normal self-corrective. US exports just set a new high, which says the dollar was somewhat undervalued, and emerging nations drunk on export demand from China will soon be helped by weaker currencies. The wrecks are wrecks (India, maybe Brazil), and the healthy will be fine (South Korea, Taiwan).
New budget collisions ahead in Congress create anxiety, but even Republicans understand that the nation is flat bored with the hysterical behavior of the teapots. A fall fizzle is more likely than a run over the brink.
All the above is minor-league today compared to excellent news for the country: six regulators agreed that the central mortgage provisions of Dodd-Frank are bad ideas. Dodd-Frank tried to define permissible mortgages, the Qualified Mortgage and Qualified Residential Mortgage. The QM standard would be a safe harbor for lenders, protection against claims of misbehavior, and the tighter QRM the benchmark for the worst idea to come out of the post-bubble period, the alleged need for lenders to have “skin in the game.” Any non-QRM would have required the lender to retain part of the risk.
Here, six years after mortgage misbehavior stopped cold, we still do not have a national understanding of what happened, laboring in ignorance, score-settling, and the entirely successful effort by Wall Street investment bankers to dodge accountability.
1. Pre-Bubble, every mortgage bank and broker was contractually obliged to repurchase any loan with deficient underwriting, whether it defaulted or not.
2. Commercial banks have always hated mortgage banks and brokers. Banks are ponderous and dim; brokers are light on their feet and live on their wits. Banks have huge balance sheets, brokers are small. Require brokers to grow balance sheets, and — voila! — a tough competitor is dead.
3. Loans against land pre-date Rome. US mortgage underwriting after 1929 was low-default, clear, of record, and did not require reinvention. Loans with small down payments need greater rigor, and with large ones need less, especially if the borrower has assets sufficient to pay off the loan (the latter two types still locked out today).
4. The Wall Street banks did not just buy bad loans 2000-2007, they designed and vacuumed them. They knew exactly what they were doing, the finest credit analysts in the world, and each firm thought it would be able to leave the market just before it blew. None did. The individual decision-makers, perps in suits, still scot-free.
This first pull-back from Dodd-Frank presages more “refinement” of that great legislative spasm, but don’t get your hopes too high. The containment of QM/QRM damage is not an easing of currently over-tight standards, just turning away from more tightening. In blackest comedy, the regulators cited as a principal reason to retreat that credit is already far too tight.
Restoration of common sense will gradually follow rates of default on new loans, by historic standards now almost undetectable.
Friday, August 23, 2013
Capital Markets Update
By Louis S. Barnes********************************Friday, August 23, 2013
As we approach the end of the traditional, news-starved Silly Season, there are important things going on. And some other things.
Release of the Fed’s July 31 meeting minutes on Wednesday collapsed the last courage in the bond market, 10-year T-notes to 2.90% and low-down, low-fee mortgages to 5.00%. The minutes were incomprehensible, but their failure to pull back from taper of QE3 means that it is still a “go.”
This morning Treasury short-sellers so pleased with themselves got clobbered by word that new home sales had fainted 13.4% in July, and June was revised down by 8%. The 10-year briefly to 2.81%. New home sales are measured by new contracts written, thus these June-July results are the first since mortgage rates jumped 1% from May to June. Correlation is not cause… some of the weakness is due to a shortage of inventory in turn caused by a shortage of credit to developers and builders.
Another upward force on long-term rates has been slightly better reports overseas: purchasing managers have new readings in China and Europe above the break-even 50 mark. This improvement is far more likely to be a temporary wobble than a trend change, but bonds and mortgages require a steady diet of bad economic news. US data continues a modest growth pattern with no sign of acceleration.
The sillies came in two places: the still-running QE debate, and the White House.
The Fed has obviously decided to exit QE as fast as it can, and then to unload what it has bought if it can. Why it is so spooked is mysterious, possibly an aspect of the Bernanke succession to someone who can be confirmed, and who has sufficient admiration of the President to be nominated. Some at the Fed may resemble Alec Guinness at the end of Bridge on the River Kwai (“My God — what have I done?”).
Much as markets are worried about doing without QE, an amazing crowd claims that it didn’t do anything, anyway. I was there, and it saved our sorry patoots. In 2008, as the world neared the Lehman brink, 10-year T-notes fell from 5.25% to 3.75% while mortgage rates rose to 6.50%, the largest spread on modern record. QE1 began in January 2009 and mortgage rates fell 1% in 30 days, 2% in one year.
In May the Fed forecast an end to QE, and mortgage rates rose 1% in 30 days. Yet, at the big Fed conference in Jackson Hole this week, one propeller-head after another says, nope, QE didn’t do a thing.
As QE leaves the scene we are going to find out how well-recovered the financial system is. Early returns are poor despite progress. A great many losses and write-offs are behind us, and a mountain of capital has been raised. Bad credits of the kind inflating the Bubble 2000-2007 are today inconceivable. However, we have empowered a generation of uber-regulators to layer on rules to be sure there will not be a new bubble, and to fireproof banking in general.
Nevermind that you could not today launch a synthetic CDO tranche with a canon, nor that there is no way to create cyclically safe banks. March ever onward to fight the last war! On Monday Mr. Obama called in Bernanke and the heads of the FHFA, CFPB, SEC, CFTC, FDIC, and NCUA to berate them for moving too slowly to enact regulations called for by Dodd-Frank, specifically to emplace the Volcker Rule (ending proprietary trading) and to be certain that by the end of this year all banks could fail. And to raise more capital, and to find fools to buy minimum amounts of long-term bank debt (you, too can be a water-barrel in front of a highway bridge abutment).
Fortunately a stern talking-to is mistaken for action by this White House, but damage is already serious. Since bubble peak in 2007, corporate bonds on bank-dealer balance sheets have fallen 76% (Bloomberg), and the volume of most-basic and secure liquidity (repurchase agreements, mostly of Treasurys) from $7 trillion to $4.6 trillion. Finding counterparties to execute a significant trade used to take minutes, now hours.
Past a certain point, de-risking banks just moves the risk someplace else. A world short on liquidity and credit is just as dangerous as one with too much.
As we approach the end of the traditional, news-starved Silly Season, there are important things going on. And some other things.
Release of the Fed’s July 31 meeting minutes on Wednesday collapsed the last courage in the bond market, 10-year T-notes to 2.90% and low-down, low-fee mortgages to 5.00%. The minutes were incomprehensible, but their failure to pull back from taper of QE3 means that it is still a “go.”
This morning Treasury short-sellers so pleased with themselves got clobbered by word that new home sales had fainted 13.4% in July, and June was revised down by 8%. The 10-year briefly to 2.81%. New home sales are measured by new contracts written, thus these June-July results are the first since mortgage rates jumped 1% from May to June. Correlation is not cause… some of the weakness is due to a shortage of inventory in turn caused by a shortage of credit to developers and builders.
Another upward force on long-term rates has been slightly better reports overseas: purchasing managers have new readings in China and Europe above the break-even 50 mark. This improvement is far more likely to be a temporary wobble than a trend change, but bonds and mortgages require a steady diet of bad economic news. US data continues a modest growth pattern with no sign of acceleration.
The sillies came in two places: the still-running QE debate, and the White House.
The Fed has obviously decided to exit QE as fast as it can, and then to unload what it has bought if it can. Why it is so spooked is mysterious, possibly an aspect of the Bernanke succession to someone who can be confirmed, and who has sufficient admiration of the President to be nominated. Some at the Fed may resemble Alec Guinness at the end of Bridge on the River Kwai (“My God — what have I done?”).
Much as markets are worried about doing without QE, an amazing crowd claims that it didn’t do anything, anyway. I was there, and it saved our sorry patoots. In 2008, as the world neared the Lehman brink, 10-year T-notes fell from 5.25% to 3.75% while mortgage rates rose to 6.50%, the largest spread on modern record. QE1 began in January 2009 and mortgage rates fell 1% in 30 days, 2% in one year.
In May the Fed forecast an end to QE, and mortgage rates rose 1% in 30 days. Yet, at the big Fed conference in Jackson Hole this week, one propeller-head after another says, nope, QE didn’t do a thing.
As QE leaves the scene we are going to find out how well-recovered the financial system is. Early returns are poor despite progress. A great many losses and write-offs are behind us, and a mountain of capital has been raised. Bad credits of the kind inflating the Bubble 2000-2007 are today inconceivable. However, we have empowered a generation of uber-regulators to layer on rules to be sure there will not be a new bubble, and to fireproof banking in general.
Nevermind that you could not today launch a synthetic CDO tranche with a canon, nor that there is no way to create cyclically safe banks. March ever onward to fight the last war! On Monday Mr. Obama called in Bernanke and the heads of the FHFA, CFPB, SEC, CFTC, FDIC, and NCUA to berate them for moving too slowly to enact regulations called for by Dodd-Frank, specifically to emplace the Volcker Rule (ending proprietary trading) and to be certain that by the end of this year all banks could fail. And to raise more capital, and to find fools to buy minimum amounts of long-term bank debt (you, too can be a water-barrel in front of a highway bridge abutment).
Fortunately a stern talking-to is mistaken for action by this White House, but damage is already serious. Since bubble peak in 2007, corporate bonds on bank-dealer balance sheets have fallen 76% (Bloomberg), and the volume of most-basic and secure liquidity (repurchase agreements, mostly of Treasurys) from $7 trillion to $4.6 trillion. Finding counterparties to execute a significant trade used to take minutes, now hours.
Past a certain point, de-risking banks just moves the risk someplace else. A world short on liquidity and credit is just as dangerous as one with too much.
Friday, August 16, 2013
Capital Markets Update
By Louis S. Barnes Friday, August 16th, 2013
Long Treasuries broke upward, out of the trading range of the last eight weeks. Not by much, but out, the 10-year T-note above 2.80% for the first time in more than two years, 2.86% at this moment. Mortgages are stickier, the rise negligible (investors have lost fear of another refi wave), but the march toward 5.00% is underway.
Two patterns are helpful, one 24-hours old, the other a 60-year vintage.
Before discussing those, dismiss a false lead: the 17-nation euro zone enjoyed positive GDP in the 2nd quarter, ballyhooed in US press as an “end to recession.” A positive quarter is the technical definition recession-end, but not even the Europeans believe this is anything more than a passing moment of stabilization.
Yesterday’s trading was instructive. News which should have helped long-term rates did not: Egypt’s descent into civil war, 200 points off the Dow, and zero-gain industrial production in July. News which overwhelmed all else and pushed up rates: new claims for unemployment insurance last week fell to a six-year low 320,000.
Thursdays’ market calculus is now persistent: jobs override all. If employment is strengthening, the Fed will taper QE to zero within six months. Thus stocks traded down on good economic news. I have never found a direct conveyor of QE cash to stocks, except running through the vacant minds of stock boosters. Whether real or imaginary, the mind prevails, but it does not say much for the investment-value underpinnings of stocks that good economic news is bad news.
The trading-desk shorthand for unemployment insurance applications is “claims.” Every US recession since the big war has ended in the same pattern: credit-sensitive housing and autos rebound as soon as the Fed cuts rates. The job market is the last to recover, often lagging housing by two years. Jobs are the most politically sensitive element, which typically forces the Fed to be too easy during recovery for too long — and which the Fed knows as surely as sunrise. Claims have been the best leading indicator for the Fed, but when claims plunge the Fed is already too late, forcing it into catch-up, which many fear today.
The Fed chopped rates in late 2008, but housing did not turn until 2012. Too much distress in the market, and tight credit offset cheap rates. Today, one year into housing recovery, right on schedule jobs are showing signs of life.
However, the job market today has headwinds even stronger than housing. For one, housing will continue to be thin until Congress and the White House take their feet off the mortgage hose. Even more important, since the early 1990s the US has faced unprecedented competition from labor overseas. Median household income had been stuck near $55,000/year from the mid-1990s until 2009 when it fell almost to $50,000, where it still is, and its purchasing power undercut by health-care racketeering.
Claims are down in part because there isn’t anybody left to fire. The drop in claims this time may not have cyclical counterparts: more jobs and higher incomes. The whole point of the Fed’s removing the punch bowl is to prevent overheating and inflation, but we can’t have either one without rising incomes. And they ain’t. And no economy anywhere ever overheated without a surge in credit. Not here, not hardly.
Another historical pattern: when the Fed appears to be turning, long-term rates always rise. And people like me always warn that the rise may abort the recovery, and it never has. This time is different in two ways (maybe). First, the panicked run up in long rates since May is not justified by Fed statements or implications, or by economic data — especially inflation. Too far too fast. Second, can it be that a still-impaired and mis-regulated financial system has been more dependent on QE than we or the Fed have known? Despite falling mortgage production and Treasury issuance, the Fed has been the only buyer, and rates must go much higher to find another?
Then there is the world. As US markets and the Fed conspire to jack long rates, they are rising everywhere. The US economy is better, but everywhere else is slowing or in trouble one way or another. Fainting elsewhere is our best chance for lower rates.
Long Treasuries broke upward, out of the trading range of the last eight weeks. Not by much, but out, the 10-year T-note above 2.80% for the first time in more than two years, 2.86% at this moment. Mortgages are stickier, the rise negligible (investors have lost fear of another refi wave), but the march toward 5.00% is underway.
Two patterns are helpful, one 24-hours old, the other a 60-year vintage.
Before discussing those, dismiss a false lead: the 17-nation euro zone enjoyed positive GDP in the 2nd quarter, ballyhooed in US press as an “end to recession.” A positive quarter is the technical definition recession-end, but not even the Europeans believe this is anything more than a passing moment of stabilization.
Yesterday’s trading was instructive. News which should have helped long-term rates did not: Egypt’s descent into civil war, 200 points off the Dow, and zero-gain industrial production in July. News which overwhelmed all else and pushed up rates: new claims for unemployment insurance last week fell to a six-year low 320,000.
Thursdays’ market calculus is now persistent: jobs override all. If employment is strengthening, the Fed will taper QE to zero within six months. Thus stocks traded down on good economic news. I have never found a direct conveyor of QE cash to stocks, except running through the vacant minds of stock boosters. Whether real or imaginary, the mind prevails, but it does not say much for the investment-value underpinnings of stocks that good economic news is bad news.
The trading-desk shorthand for unemployment insurance applications is “claims.” Every US recession since the big war has ended in the same pattern: credit-sensitive housing and autos rebound as soon as the Fed cuts rates. The job market is the last to recover, often lagging housing by two years. Jobs are the most politically sensitive element, which typically forces the Fed to be too easy during recovery for too long — and which the Fed knows as surely as sunrise. Claims have been the best leading indicator for the Fed, but when claims plunge the Fed is already too late, forcing it into catch-up, which many fear today.
The Fed chopped rates in late 2008, but housing did not turn until 2012. Too much distress in the market, and tight credit offset cheap rates. Today, one year into housing recovery, right on schedule jobs are showing signs of life.
However, the job market today has headwinds even stronger than housing. For one, housing will continue to be thin until Congress and the White House take their feet off the mortgage hose. Even more important, since the early 1990s the US has faced unprecedented competition from labor overseas. Median household income had been stuck near $55,000/year from the mid-1990s until 2009 when it fell almost to $50,000, where it still is, and its purchasing power undercut by health-care racketeering.
Claims are down in part because there isn’t anybody left to fire. The drop in claims this time may not have cyclical counterparts: more jobs and higher incomes. The whole point of the Fed’s removing the punch bowl is to prevent overheating and inflation, but we can’t have either one without rising incomes. And they ain’t. And no economy anywhere ever overheated without a surge in credit. Not here, not hardly.
Another historical pattern: when the Fed appears to be turning, long-term rates always rise. And people like me always warn that the rise may abort the recovery, and it never has. This time is different in two ways (maybe). First, the panicked run up in long rates since May is not justified by Fed statements or implications, or by economic data — especially inflation. Too far too fast. Second, can it be that a still-impaired and mis-regulated financial system has been more dependent on QE than we or the Fed have known? Despite falling mortgage production and Treasury issuance, the Fed has been the only buyer, and rates must go much higher to find another?
Then there is the world. As US markets and the Fed conspire to jack long rates, they are rising everywhere. The US economy is better, but everywhere else is slowing or in trouble one way or another. Fainting elsewhere is our best chance for lower rates.
Friday, August 9, 2013
Capital Markets
Friday August 9th *****************************************By Lou Barnes
Long-term rates have been unchanged for a month and a half, the 10-year T-note 2.50%-2.70%, mortgages near 4.50%. That stability is an illusion.
Trading desks now labor in deafening toe-tapping, pencil-drumming, fidgeting, and superstitious desk-rearranging (and sock selection) as everyone waits for the economy to declare itself. Will the Fed’s acceleration appear? Or another false dawn?
It’s going to take months to know, hence the rate paralysis. A thin week for data supported acceleration: the ISM service-sector jumped to 56.1 in July, way above expectation and one of the best readings in five years. Stocks are sliding, the fear of Fed withdrawing stimulus trumping a better economy — which seems odd, but so has the stock market run.
Do not believe news of European bottom, let alone turn. Germany is doing better, but its improvement reveals the fatal problem: its trade surplus is still 7% of GDP. Its weak partners trapped in the euro must be able to run surpluses of their own, including in trade with Germany. The zone cannot turn until Germany imports from the others, or subsidizes the others with its winnings from a euro undervalued for Germany’s productivity and overvalued for all the others.
Mr. Obama delivered his third speech of five on the economy. May the saints preserve us. Only two to go. This one was about mortgages, and the Fannie-Freddie badminton underway, swatting around feathered but no-fly proposals.
The speech was designed in part to head off the right-side rockheads who want to close the agencies and shut off any government support for mortgages. Hence a long song and dance about protecting taxpayers. A second purpose was to demonstrate the President’s knowledge of the subject and engagement with the economy and housing.
Better not to have tried. Technical speeches are better delivered by technical officers — the Secretary of the Treasury, or of HUD, charged with running the show.
The speech contained errors of fact and perspective, common to speakers cold to contrary ideas or correction. The first described his grandfather after WW II and the GI Bill helping him to get a loan from the FHA, and then the need for citizens to “save up to buy a home.” Savings are a good and necessary thing for families and the economy, but the President’s granddaddy got a VA loan, not FHA (created in 1934, not by the GI Bill in 1944), and VA loans then and ever since have not required down payments.
Accompanying White House fact-sheets attempting counter-right propaganda advocated “bright lines” in underwriting standards, and the President ridiculed “Liars’ Loans.” There are no bright lines. All is grey. Rigor should increase as down payments fall, and decrease as they rise. Some people can be trusted with nothing down, some can’t. In a 1912 Congressional investigation, the committee’s attorney asked J.P. Morgan if he would only make loans to those who already had money. Morgan: “The first thing is character. A man whom I do not trust could not get a loan even if secured by all the bonds in Christendom.” Local housing authorities with their mandatory counseling have made the same discovery, and exceptionally low rates of default.
Bulletin: Fannie and Freddie in the last 90 days rebated $20 billion in net income to the Treasury, on the road to repaying all assistance by 2015.
Late in the speech: “…We’re simplifying overlapping regulations; we’re cutting red tape…. We’ve got a Consumer Financial Protection Bureau… desigining a new, simple mortgage form.” Politics is politics. Puffery is part of the game. Still, I wonder what compells politicians to rise to trumpet things which everyone knows are false.
Fannie and Freddie will be around for quite some time, if only because they guarantee $6 trillion in MBS. Total first mortgages outstanding are about $9 trillion inclusive of the agencies, in the range of total assets in the entire US banking system. There is no conceivable source of private capital, not even at significantly higher rates to replace the liquid and government-guaranteed supply. Safe for now. Over time, as the bubble fades, true history of the agencies and lending will come forward.
Friday, August 2, 2013
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