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
Subscribe to:
Comments (Atom)