Yeee-Haaaaw!

Capital Markets

Friday June 28, 2013******************************************* By Lou Barnes Interest rates have stopped rising, but after a move as violent as this, markets should have improved and have not. Central bankers have fallen all over themselves to reverse Bernanke’s Bungle: Draghi at the ECB, King at the Bank of England, five regional Fed presidents and two governors, all to no result. The 10-year T-note straight-lined from 1.63% in early May to 2.60%, now stuck at 2.50%, mortgages 4.50% or more. Neither bad days in stocks nor weak data have had the power to push down rates. 1st Quarter GDP was revised from a pinking 2.4% to 1.8%, entirely because of over-measured consumer spending. To the bond market, the central bank choir is absurd, each speaker insisting that policy has not changed, but that growth will increase a lot in 2014, and that’s just because the Fed will not be as easy as it was, it is not tighter. Fool me once, shame on you, fool me twice, shame on me. If you have the day off on July 5, don’t forget to check that morning’s report of June employment data. Markets will be skeleton-staffed, a stupid choice of day which will magnify the effect of any surprise in the most important data of the month. Enough of beating on the USA just before our birthday. We’ve forgotten about Europe, and the best chance to knock our rates down is a frightful pratfall someplace else. In a big week, European Commission president Jose Barosso called Fance “reactionary” and posessed of an “anti-global agenda” for its effort to block an EU-US free-trade agreement. France is of course desperate to protect its un-competitive industries, suffocating in vats of government fat. The EU concluded another try at the “doom loop,” in which a nation’s finances are too busted to save a banking system three or four times its GDP. Since all except Germany are doom-loopers, banding together adds nothing to credit capacity unless they can get into Germany’s wallet. Nein. So the EU’s Djesselbloem announced success (Grimm’s tales pale at each crack of ‘bloem): a bank-failure agreement to haircut not just stockholders but any party which had loaned money to a bank, and large depositors, before reaching into an empty national treasury. And no multi-national assistance. And just when banks need more stockholders and long-term lenders. The bright light over there: Britain, its leaders nevertheless flayed for excessive “austerity.” Britain has had the best policy set anywhere: devalue the pound (which the doom-loopers cannot), reform banks (see above), BOE to QE (the Bundesbank will not allow), and cut government spending at the careful slope of 1% of GDP annually (Europe missing on one, two, and three cannot execute the fourth). The Left believes austerity is mean and unnecessary, that we should invest in infrastructure and cut spending some other decade when all is well. Part of the Fed’s problem with the levitating 10-year: our defict will fall this year to “only” $650 billion, and soon begin to rise again. The US sequester at $85 billion is one-half Britain’s discipline. An accounting error. As diets go, setting a limit at one piece of cake. Britain has gone for stomach stapling. Europe has embraced bulemia. Many on the Left point to the harmlesness of WW II borrowing to 125% of GDP. It was harmless, but at a cost. Imagine today fixed-price rationing of all staple goods. Imagine conscripting into national service 43,000,000 people, mostly young men, and paying them $210 per month. That was austerity (population and inflation-adjusted). Here we are, by a trillion candlepower the light of the world. Yet, our only functional element of government has been the person of Ben Bernanke, about to retire. Our economy is growing through mangled policy toward fiscal repair, and the Fed’s worst worry: the economy may get too hot next year. For 227 years the rest of the world has been unable to imagine how a free people in constant roiling chaos has pulled it off. I wonder from time to time myself. Happy 4th!!

Capital Markets

Friday June 21, 2013******************************************* By Lou Barnes The days are getting shorter now, football closer — at least the Fed can’t take that away from us. Given its fantastic bungling this week, it might try. First, get the fairy tales out of the way. No, Obama has not asked Bernanke to leave; the Perfesser is exhausted (which may explain some of this week), and orderly competition to succeed him began in January. And no, the market wrecks this week do not invalidate the QE campaign. It was exactly the right thing to have done. Perfesser Bernanke is an American hero, his inventiveness and courage is without parallel in our peacetime history. However, the skills and instincts necessary to save us in the post-Lehman event are completely different from those required to manage a gradual tightening of policy. Perfesser Bernanke on May 22 did an expert and appropriate job of mumbling. Markets needed to be warned that QE might taper in the next several months, and be reminded that someday QE would end altogether, and in the long run Fed policy would normalize. The Perfesser’s muffled jawbone took the 10-year T-note from a broad range 1.70%-2.05% into June’s 2.08%-2.25%, mortgages just above 4.00%. The economy may or may not be self-sustaining, but asset prices in 2013 might have begun to pre-bubble. Maybe. New Fed governor Jeremy Stein began to thump the bubble tub immediately on arrival. Household net worth jumped $3 trillion in the first 90 days of the year, all on stocks and houses. The delicate conundrum: rising asset values were a principal purpose of QE and have the economy doing better; at what point do they become a bubble? Hedge the bet by bubble-burble. The June Fed meeting concluded on Wednesday and the written statement was harmless. Then in the post-meeting press conference Barnanke gave the most unfortunate public performance by a Chairman in my memory. He is compelled to transparency and specifics of future intentions, which made QE work, but are disastrous in a tightening cycle. And he clearly does not understand why. In the press conference, regarding the jump in rates after May 22: “We were a little puzzled by that.” He went on into tired, old, tightening-is-not-tightening, “Just letting up on the accelerator, not touching the brake.” But the Fed is not a car, it is a two-button machine, one marked “Go,” the other “Not Go.” QE began at Thanksgiving 2008. In herky-jerky stages since (Go, Not Go), the Fed by last summer finally convinced the bond market that it was safe to buy bonds. QE3 was open-ended, the Fed would keep the world safe for bonds until it got economic recovery. Along the way much academic jaw-jaw about whether the cumulative volume of QE was more important than the flow, but neither mattered to markets. Treasurys and Agency MBS in circulation are about $20 trillion, not counting infinite synthetics (swaps, etc.). Whether you buy $85 billion per month, half that, quadruple, or five bucks per month is immaterial. Are you going to keep me safe, or not? Bernanke destroyed the game at the press conference by delivering a multi-year if-then, if-then economic/policy forecast leading to Fed normalization, and death for anyone invested in bonds. A tidy, academic schedule. He seems to think that the “ifs” — if the economy is not so hot, we won’t kill you — would cause bond investors politely to retreat on his schedule, each lining up quietly for a future turn at the guillotine. That was bungling beyond imagination. The bond market’s mission is to collapse the future into the present. If you tell markets that it’s going to be unsafe to own bonds next year, then it’s unsafe now. Right now. Sell and keep selling, each stage exposing another layer, encouraging profit-taking, shorting, and sell-hedging. Worst of all: there is no way the Fed can un-bungle, to tell markets it’s safe again to own bonds. After this exercise it will be along time before the bond market trusts the Fed. At this instant the 10-year has crested 2.50%, mortgages 4.50%-plus. Temporary pauses ahead, but no end to this until something in a real economy cracks, or the Fed conceives a sensible exit strategy, beginning by watching data and shutting up

Nope - Bottom Fell Out!!!!!

Maybe A Bottom Forming-Let's Hope!

Capital Markets Update

By Louis S. Barnes***********************************Friday, June 14th, 2013 In the last 24 hours long-term rates have pulled back from the brink of panic. The first leg down came as thinking replaced short-selling: the Fed does not want to abort the mini-maybe-recovery underway. The second leg, overnight Thursday-Friday came with safety buying after the US announced it will intervene in Syria. Somebody today with perfect credit and 40% down might get a no-point mortgage below 4.00%, but the 10-year T-note still sits at 2.11%, halfway between max-panic 2.27% and the 1.95% when Perfesser Bernanke scared everyone to death on May 22. This interest rate volatility has little to do with economic data. Maybe nothing. May retail sales crept up 0.6%, and industrial production was flat after two-straight monthly declines. The NFIB survey of small business had one of its best readings during the Great Recession, but not a breakout. For the time being, assume that all confidence surveys are boosted by better housing markets, although those are still not remotely sufficient to pull the economy into a normal recovery. A lot is going on under the surface of Perfesser Bernanke's "taper." A term common to Fed-watching prior to the Bernanke era, "jawbone," has been lost in his faculty-club collegial cacophony. Bernanke allows all to speak; his predecessors very carefully crafted the few policy words spoken in public, and thus they had great power. 99% of speeches and papers were nothing more than obtuse filler, intentionally confusing. Bernanke has tried to run a transparent show. Most old-timers think the children should not hear everything that parents say to each other. I am certain that the Chairman knew what he was doing on May 22, swinging the old-fashioned jawbone to hint at a miniscule policy change at some indefinite point ahead, but I suspect that he has been surprised by the magnitude of effect. The taper-tantrum since has made some sense, but in most respects makes no sense at all. The Fed's overnight cost of money remains near zero and will stay there open-ended until clear, self-sustaining recovery, which makes it very lucrative to hold long Treasurys with leverage even at low yields. The Fed has made it clear that it intends to continue to buy Treasurys and MBS, and even when it stops has no intention to sell them. In the case of MBS the Fed may hold all until they pay off. So, where's the fire? Carry the jawbone thought forward. Central banks have the ability to change the course of markets and whole economies just by talking, doing nothing, and the foundation of that power is a confidence game. Example: ten months ago the ECB announced Outright Monetary Transactions, the direct buying of European sovereign debt in any quantity necessary to hold down costs of borrowing. Long rates there fell almost in half and have stayed down, although Europe is in worse shape every day, and sovereign defaults are more likely than ever. However, the ECB OMT has not bought a single euro-worth of anybody's bonds. It has been a pure, defiant con game. It works so long as the ECB makes it look suicidal to trade against it. Perfesser Bernanke in QEs 1-2-3 was running the same con, but on May 22 invited the world to trade against him. He may have a very hard time reinstating the con. The entire purpose of QE and zero percent overnight has been to keep down long-term rates to secure recovery. Long term rates now are rising all over the world while the global economy slows, exactly the opposite of proper market function. Not just the Fed is exposed: all central banks are at risk. They can buy time, but cannot simultaneously stimulate and withdraw. Several people raised voices this week to point out the obvious: if every sovereign is desperately selling paper to avoid "austerity," and central banks are not going to buy (except too-far-gone Japan), and global banks are over-regulated, capital-pinched, proprietary trading shut down by Volcker Rules, unable to buy or finance others… then who is going to buy? There is a silver lining. Ultimately all economies must reform and rationalize. Might have to get on with that, starting with a conclusion to the Bubble over-reaction.

Capital Markets

Friday June 7, 2013 **************************************** By Lou Barnes Early this week a spate of poor data started a bond and mortgage rally, but stopped cold today on a very ordinary employment report for May. 10-year T-notes have traded back up to the 2.15% high of 2013, mortgages solidly above 4.00%. If the credit markets are going to read news this way, rates are still vulnerable on the upside. On Monday the May ISM tanked to 49.0 versus the tepid 51.0 expected, and a drop below 50 has been good for bonds every time since these surveys began in the early 1970s. The ISM has weakened steadily since January 2011. Today’s employment data: 175,000 net-new jobs in May, but hourly earnings and hours at work were flat. The rise in rates is hard to square with the data. The Fed will pull back from bond-buying at some point, but not now, and not soon in a meaningful way. It may reduce its purchases, but they are rising relative to bonds in the market: Treasury borrowing has fallen in half in 18 months, and mortgages outstanding have fallen for six years. During any Fed exit, a QE-castaway market may be unwilling to buy at today’s yields. Or it may be unable — over-regulated and capital-crimped, still trying to shrink. We have other data on the state of the recovery: the Fed’s Z-1 (renamed now “Financial Accounts”) and FHFA home prices for the first quarter. Z-1 shows a remarkable rebound in US household net worth, up $3 trillion in 90 days and at $70 trillion surpassing the 2007 peak. A stock market run will do that, puffing pension and life reserves, non-profits, and retirement funds included in “households,” but not felt in wallets, not necessarily permanent, and just back where net worth had been. I am less alarmed than some by US financial inequality, but to enjoy rising financial assets your household had to hold them, and most do not have any at all. I am alarmed by no-growth wages, which inhibit saving and assets. Z-1 also shows that the Fed now owns $1.1 trillion of agency MBS, but only 15% of the total $7.6 trillion outstanding. The Fed is not anywhere near a purchase limit. Overall residential mortgages fell another $57 billion in the first quarter, nearly all due to further write-downs of private-sector MBS created in the trash bubble. That account peaked at $2.2 trillion, now foreclosed down to $885 billion, hundreds of billions still to go. Government-haters take note: it is unwise to consider privatizing $7.6 trillion in agency MBS, and the private sector which you so admire caused more losses than all other mortgage categories put together. Z-1 further reveals zero growth in commercial real estate lending, and little growth in lending of any kind. Housing is the legitimate bright spot in household net worth (although not so if you lost yours, pre-bust the sole asset of many middle and lower-middle families). Aggregate home value is about 35% of the way back to the 2006 peak. However, housing is acutely regional, and there are creepy signs that places that were already in good economic shape are getting a lot better, those that took terrible hits are bouncing from bottom but miles from daylight, and ordinary places don’t feel a thing. In the FHFA’s 20 fastest-rising housing MSAs in the last 12 months out of 300 nationally, four are still 20%-30% below values five years ago, nine are 30%-40% below, and two are more than 40% below. Two are positive — of the 20 best. Cripple-shooters are doing well, which is natural, useful, and unavoidable. Of the 20 worst markets in the last year, only three have prices 20% or more below five years ago. Of the 50 states plus DC, the best three in the last year: NV, AZ, and CA, but prices still 38%, 26%, and 16% below five years ago. Only eleven of the 51 are positive versus five years ago, six of those in one fracking patch or another. Prices rising in Bubble zones has one magnificent effect: fewer families under water. Shortly after their first deep breath, many will try to sell, and then we’ll see how easily we absorb with mortgage credit still strangled. Also, as prices rise faster than rents, the cash cripple-shooters will back away, and listed inventory is already rising in spots. Long way to go, for us and the Fed. Long way.

Maybe A Bottom Forming