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.
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