OUCH!!!

Capital Markets Update

By Louis S. Barnes ***********Friday January 25th,2013****************** Another thin week for economic data, but plenty going on and patterns are forming. The dominant one is positive expectation for the economy: some is legitimate, although hope-based; some is illegitimate, salesmen mostly on wall Street; and some is a form of habit, that sooner or later we’ll enter an old-fashioned cyclical recovery. Mr. Obama’s inaugural falls into the third group, affirming his approach since first elected: the economy requires some attention, but it is a distraction from more important things. In a speech five times as long as this column, the inaugural included the word “economy” once, “jobs” twice, and “prosperity” once. The surprise datum on Monday: sales of existing homes slid 1% in December. Financial markets were briefly jolted by the absence of ramp-up. However, the many who are certain that housing will drive a strong and typical recovery went into sputtering and unseemly defense of their positions. Housing in general is better, but I don’t see the cyclical locomotive. Rebounds underway in previously dead markets get a lot of press, but the 9% price gain in Phoenix last year after a 42%, 5-year decline… no choo-choo. The US is a big place with some genuine hot spots (Bay Area), but heavily outnumbered by soggy ones. The housing hopeful think demographics will drive the show, new households and pent-up demand. But immigration is down by at least 1 million/year, the US birth rate has fallen as not since the Depression, and doubled-up households, or kids home… still are. The count of seriously delinquent loans dropped last year from 4.4 million to 3.7 million, a lot, but still a lot. Many argue that the big deal in a housing recovery is the contribution of “residential investment” to GDP, hoping next year for a 1%-2% add, but it’s not the most important thing. By miles and miles, prices are most important. Rising prices of homes produce the wealth effect, stop underwater walkaways and short sales, and restore net worth even to the 30% free-and-clear owners. My back yard — the Front range of Colorado — is a perfect example of headwinds slowing the locomotive, and why some national data is not as it appears. The most inaccurate single measurement of housing is its price. There is no way to reach a real-time weighted average value of one hundred million unique dwellings. Financial market types were wrong all the way down, overstating decline, and are going to overstate improvement in an extended recovery. Despite diligent efforts by several outfits, it is impossible to adjust price for changes in the mix of sales, especially during market turns. All data is based on homes that have sold — in any year barely 5% of the total stock — and inferring the value of the other 95%. The most dramatic national shift in distressed sales in the last year has been away from foreclosure and toward short-sale. The former sell at deeper discounts than the latter. Voila: prices are rising. A little, but no Little Engine That Could. Here in affluent Boulder County, population 300,000, the FHFA found prices rising 1.91% last year. Our unit sales ’09-’10-’11 had been 4,000 each year, 40% off prior normal (we had no Bubble). In 2012 we bounced to 5,000 sales, inventory at an all-time low. Anyone on the ground knows that prices in the best spots and lower ranges here ran up 5% or more. But with few distressed sales past or present, foreclosure or short, we have no statistical price-pop, and our actual price rise is under-measured. In huge Denver Metro, 2.5 million people, FHFA has prices up 2.88% last year. Short sales there rising over foreclosures, distressed sales way off from peak, and prices appear to be rising faster than in a better market in nearby Boulder. Colorado has the sixth-lowest delinquency rate in the US. If our off-the-bottom 2012 is better than nearly anyplace… we are the locomotive? Few here would say so. Hopes for construction and sales are too high, and existing-home prices too low and not moving up fast enough. The steepest grade facing this train is of course… credit. We cannot have a normal-looking housing recovery without normal credit, coal for the firebox. No coal, no steam. Fannie is handling out clinkers one at a time.

Still Trying To Find It's Way

Capital Markets Update

By Louis S. Barnes Friday, January 18th 2013 Thus week brought lots of minor reports but nothing to change the outlook. A 12% spike in December housing starts got more attention than it deserved — a dead-of-winter month is not a good indicator — and pushed interest rates up a hair, but inflation remains completely under control, core CPI up only 1.7% in the whole of 2012. Three long-runners contribute to frozen markets: first, misinformation and scare-mongering about the Fed’s QE; second, the European gap between wishful public pronouncement and weakening data; and third, the prospect of Japan trying to print its way out of deflation — not contained QE, but a true, inflation-inducing print job. The core hazard facing us all: how to get right the timing and magnitude of fiscal austerity before the Fed has to stop buying our debt. We may be making more accidental, near-term progress than we know. The newest estimates of deficits since the Fiscal Anthill deal suggest we may already be trying to reduce the deficit too fast. Going from $1 trillion to $750 billion in 2013 alone is about all the reduction the economy can take. The real problem begins a half-dozen years from now, when un-funded Boomer demand for health care hits the budget. We can make it through Obama’s second term while reducing current-year deficits alone, but it would be so much better to re-define the out-years now. Our current borrowing binge is fading by one key metric: percent of GDP. US GDP will cross $16 trillion this spring. If we borrow $750 billion this year, that’s 4.7% of GDP, about half where we were four years ago. A general rule (also applicable in Europe and Japan): as your debt approaches the size of your GDP, it had better not grow faster than nominal GDP or you’ll soon be borrowing just to pay interest. This year for the first time in five years our borrowing may roughly equal growth in nominal GDP. The listlessness in markets corresponds to the policy vacuum in the White House. Where are we going, anyway? All normal people outside of government grasp the need for growth in order to escape our twin budget and unemployment predicaments. Any ideas, fellas? Mr. Obama has taken a reasonable approach to the Republicans’ debt-limit hostage plans: don’t negotiate at all. Fair enough. There could come a time for a principled vote, “Not another penny,” but not now. But, what will we do to get the economy going? In the next three weeks we’ll know. Mr. Obama’s second inaugural will be Monday, and three weeks later on February 12 the State Of The Union. Mr. Obama’s new, combative version is not playing well even in his own party. Get on the wrong side of the NYT’s Maureen Dowd — as he has — and he’ll wish he hadn’t. Embrace the center? Or entrench on the Left, asking for consumption and carbon taxes to fund 20-year-old social promises made unaffordable by an economy that did not turn out as expected? Many historians think the greatest-ever American speech was Abraham Lincoln’s second inaugural, on March 4, 1865, forty-two days before his death. Among its strengths: it is the shortest inaugural ever given. It began: “At this second appearing to take the oath of the presidential office, there is less concern for an extended address than there was at the first. Then a statement, somewhat in detail, of a course to be pursued, seemed fitting and proper. Now… little that is new could be presented.” Brevity is good. Forces the mind to boil to essentials. Inflicts priority. Limits ego. The great grace of Lincoln’s words just weeks before Appomattox, an occasion for exultation at victory and a prostrate foe: Lincoln instead spoke of healing. He concluded: “With malice toward none; with charity for all; with firmness in the right, as God gives us to see the right, let us strive on to finish the work we are in; to bind up the nation’s wounds…” In these five years of Great Recession we have suffered nothing like the Civil War, but we have endured greater economic pain than any time in 80 years. May Mr. Obama find this a time for binding up, not for stuffing down throats. Surprising progress in the near term, and assumes a still-soggy economy. Better economy, more progress… and the converse.

This Trend Is NOT Your Friend!

Capital Markets Update

By Louis S. Barnes Friday, january 11th, 2013 Markets barely moved this week, and there was no new data of note except the NFIB survey of small business. Its economist, Bill Dunkelberg: “The current Index value of 88 is a recession level reading.” The index has had some better days recently, but is in the same basic place it has been since early 2008. The NFIB work is so sound, so long-running (same format since 1973), that those claiming a stronger national recovery underway have some explaining to do. The Consumer Financial Protection Bureau created by the Dodd-Frank spasm released its long-awaited Thou Shalt Not to the mortgage industry. After more than a year of probing, at who knows what taxpayer cost, the CFPB report and new rules found not one single mortgage practice underway today which should be stopped. A witch hunt worthy of Massachusetts in 1692 could not find a solitary agent of Satan. Then, back to the Fiscal Cliffs. In the serial encounter ahead, one Cliff stands out for misunderstanding: the vote on the federal debt limit. In the near-hit preplay in 2011 (and in others clear back to the ’80s) many people have shouted that a failure to pass a higher limit would result in US “default.” Not so. Absolutely not so. Money definitions and precision matter a great deal. Direct, “full faith and credit obligations of the US Treasury” are senior claims on US revenue. Default means to fail to pay interest or principal on time. We have plenty of revenue to pay interest when due, and even under a debt-limit freeze could roll-over existing debt, issuing a new bond every time one came due. “Bond” is another important word. “My word is my bond” means my promise is as good as a bond, the highest and most senior financial obligation. In a bankruptcy, senior bondholders are paid before any other claimant. If the debt limit froze and the Treasury ran out of cash after interest payments, some other federal spending would have to stop for a day or a while. We have tax revenue for about 70% of spending and intend to borrow the rest this year. Hit the debt ceiling, then pay interest, pay Social Security, Medicare/Medicaid, put Defense on a starvation diet… the rest of the government would go on furlough. Not “default.” Mr. Obama: “Congress should pay the tab for a bill they’ve already racked up.” Now we’re getting somewhere. Future spending is an “appropriation,” not a debt. All governments constantly revise future appropriations: they are not “bonded” obligations in any way. Mr. Obama’s use of the third person, “they,” is a charming way to describe those who have appropriated spending that we cannot now afford. Most of that work was done by his own party. Republicans have resisted adequate tax revenue and insisted on bloated “defense” spending. However, the Democrats in Congress ever since the 1960s have appropriated more and more social spending, never with adequate revenue support, and expecting economic growth to cover the bet. For a long time it did cover; not now, not soon. How can this be? They all voted on it, now they refuse to borrow? Incredibly, no they did not vote on “it.” As our fiscal difficulty has deepened, Congress votes on “continuing resolutions” for spending, and rarely simultaneous tax revenue. Only in the Bush I and Clinton “paygo” deals did we actually demand of ourselves income before we agreed to spend. And the result was a budget surplus. Dubya fought two wars without tax revenue, and Obama has yet to submit an actual budget. Congress just voted $60 billion for Sandy damage, but no revenue. The most important principle in democracy: Minorities should not be abused by majorities, nor should minorities abuse majorities. The Republicans are close to the line in using the debt limit to hold Democrats hostage, but the Democrats entirely deserve the treatment. Like a drunk facing intervention, they say, “Okay, okay, I’ll stop, but don’t take my booze. I can quit any time I want, but times are tough and I need a snort once in a while. Besides it’s my booze, not yours. Hey! No! Don’t break those bottles!”

Ouch!

Capitla Markets Update

By Louis S. Barnes                 Friday January 4th, 2013

First the real stuff, then the Wheelchair Accessible Fiscal Door Sill.
Long-term interest rates rose sharply this week, the 10-year T-note’s 1.93% the highest since last April, and mortgages above 3.50% the top since summer. Three forces are in play: the Fed’s December meeting minutes released yesterday indicated a 2013 end to QE4 bond-buying; second, hints of a better economy; and third, markets less than thrilled by fiscal substance-abusers.
Fear of Fed reversal is overdone. It is buying $85 billion/month in Treasurys and MBS, a $1 trillion/year pace which was never likely to continue for long. The Fed’s commitment to a zero-percent cost of money stands unchanged, linked to a 6.5% unemployment rate (not soon), and that 0% cash will hold down long-term rates. Nearly every Fed forecast for the economy since 2008 has been wrong on the high side, and the economy is now entering protracted period of fiscal drag.
As always the economy trumps all, and the first week of each month brings the freshest data. December payrolls grew on forecast, 155,000 jobs, but no change in trend. The ISM manufacturing index in December flipped from just below stall speed at 49.5 to just above, 50.7; and its service-sector twin popped from 54.7 to 56.1. No recession, no acceleration; theories behind either are as suspect as ever since 2009.
The Cliff. The politics of this week’s resolution say a lot.
Imagine if in mid-November the President gathered the usual suspects and said, “We all know we’ve got to rig a miniature deal by New Year’s Day. We have a series of tough collisions ahead, ugly ones, but just this once, nothing at stake but easy horse-trades, how about we let the country think we know what we’re doing, smile a lot, say ‘bi-partisan’ in every other sentence, and carve this baby up by Thanksgiving?”
Our assessment of blame for bad politics is blinded by our biases: Boehner is impossible, or the Tea Pots, or Reid, or Obama. But how this week’s deal got done requires a lift of the ol’ eye-patch.
At all accounts, by the Sunday before New Year’s Day, the only person able to get out of the box was anti-telegenic Senator Mitch McConnell (R-KY), the tough and smart Minority Leader, who picked up the phone to Joe Biden and said, “Can anybody down there cut a deal?” (“Down” is the physical slope of Capitol Hill to the White House.)
Joe Biden has been treated from day one as the Official Fool by the court of Prince Barak. Funny Old Joe. Can’t stop talking, says crazy things, has impossible ideas, like Afghanistan is a bust to be escaped quickly. Cartoon-relic politician. Doesn’t get the transformational importance and infallibility of the Prince.
Within 36 hours and without a public word, Old Joe and McConnell had a deal. The Prince is a professor whose key skill is lecturing established wisdom. He has not progressed as a negotiator, although new opportunities lie immediately ahead in the debt limit and the State of the Union agenda. Also in the choice of a new Treasury Secretary. We need someone like Erskine Bowles, but it looks as though we’ll get Jack Lew, current White House Chief of Staff, another lawyer/professor ignorant of markets.
In the last years’ fiscal arguments, the Right-side Republicans win the prizes for bad manners and stingy vision. However, the Left takes the overall crown for “Who took my cheese?” Inclusive of this mini-Cliff deal the 2013 Federal deficit will remain about $1 trillion. As-is the deficit will fall by 2015 to $750 billion, but no Fed to buy the bonds. Then by 2017 the inexorable rise to $1.25 trillion in 2022, and $2 trillion and beyond by 2030, Medicare, Medicaid, and Social Security alone consuming all tax revenue in 2035.
If the economy does better, then rising tax revenue, but a lot of the possibilities for new revenue went into this week’s all-tax-no-cut deal. Can’t jack ‘em forever. Whether the economy does better or not, one year soon we’ll pay more to roll over 5-year T-notes than today’s 0.75%. Each percentage point increase will add $150 billion to each those future-annual deficit numbers, depending on how much we’ve borrowed by then.
And you, on the Left, think those debt-limit votes are a tiresome sham?