Friday, September 26, 2014
Capital Markets Update
By Louis S. Barnes Friday, September 26, 2014
Long-term rates have stabilized, mortgages just under 4.50%, but markets are rattled and it’s hard to tell exactly who or what is doing the shaking.
The Fed has everybody uneasy, simultaneously saying it may raise the cost of money faster than markets think, but is not in a hurry, but will do something next year, which draws ever-closer.
The stock market hit a li’l’ air pocket, but it’s very difficult for stocks to “correct” deeply, as so many have forecast. If you sell, where will you go? Cash pays nothing and bonds are vulnerable.
Bill Gross, greatest bond trader of all time, has left Pimco for far-smaller Janus, apparently one sunrise ahead of a firing squad. Age is kind to some of us, not to others. The bond market fears that Pimco will dump Gross’ bloated holdings.
Economic data are okay, but for the umpteenth month not accelerating. Housing is flat, sales of existing homes not increasing in August, and FHFA home price data for July a 0.1% gain, the year-over-year down to 4.4% continuing to decline .5%/month.
The yen and euro continue precipitous declines versus the dollar, the former 109.37/dollar, the latter now $1.268. Low inflation for us, but rapid, large and sustained one-way moves in currencies are not good for anybody.
Our air assault on ISIS includes the first combat missions of the F-22 Raptor, at last a soft target without anti-aircraft capability. Nine years in hangars because of deficiencies, $67 billion for only 188 buzzards. In a similar achievement, a Bloomberg study puts the cost of the Obamacare website at $2 billion.
Back to markets. As the aftermath of the Great Recession still unfolds, we have been confronted with all sorts of frights and warnings. Prudence and exhaustion have advised turning down the volume and proceeding with something productive. I do not mean the following to be another scare-story, just marking the passing of an era.
Bye-bye QE. Quantitative easing. The Fed buying Treasurys and MBS to inject credit directly into the economy around a broken banking system, and to keep long-term rates low. QE1 worked beautifully, QE2 less so, and QE3 possibly unnecessary. Exactly two years ago, QE3 began its buys, $80 billion per month, until the Fed began to taper only a little more than a year later. Markets were terrified last fall, wondering who would pick up the $80 billion monthly tab.
Turned out not to be a problem, but I don’t know anyone certain as to why it has been so easy to find buyers for US paper at rates lower than the first “taper tantrum,” and Fed rate hikes in prospect. The biggest help: foreign economic weakness and ultra-low yields overseas. One key propellant in this “rising dollar”: huge moves out of foreign bonds into ours.
A related question has been, how will the US economy and markets do when the Fed stops mainlining $80 billion monthly in cash heroin? The principal answer has been revived bank lending. Total bank credit, the Fed’s weekly H-8, has this year run at a 9% annual growth rate, replacing the QE credit add. Until last month. Since mid-August H-8 has actually declined slightly. Watch that. An anomaly? Temporary? Banks at last wilting under over-regulation?
The sheer mass Of QE is something. The US has $9 trillion in outstanding home mortgages, not including 2nds and Helocs (about $1 trillion). Of those 1st mortgages, the Fed now owns $1.7 trillion — 19%. It also owns $2.4 trillion in Treasurys, also about 20% of that market, but in normal times has owned half that much. Prior to 2008 the Fed had never bought mortgages.
Please ignore all the yammering about the Fed’s balance sheet and inflation, debasement, exit… all of that. Very silly. Do give some thought to our inability to re-design our system of mortgage lending. Since 2008 the Fed has been it, and for 70 years prior government agencies were it, and the “private sector” has neither the interest or capacity to be it.
Long-term rates have stabilized, mortgages just under 4.50%, but markets are rattled and it’s hard to tell exactly who or what is doing the shaking.
The Fed has everybody uneasy, simultaneously saying it may raise the cost of money faster than markets think, but is not in a hurry, but will do something next year, which draws ever-closer.
The stock market hit a li’l’ air pocket, but it’s very difficult for stocks to “correct” deeply, as so many have forecast. If you sell, where will you go? Cash pays nothing and bonds are vulnerable.
Bill Gross, greatest bond trader of all time, has left Pimco for far-smaller Janus, apparently one sunrise ahead of a firing squad. Age is kind to some of us, not to others. The bond market fears that Pimco will dump Gross’ bloated holdings.
Economic data are okay, but for the umpteenth month not accelerating. Housing is flat, sales of existing homes not increasing in August, and FHFA home price data for July a 0.1% gain, the year-over-year down to 4.4% continuing to decline .5%/month.
The yen and euro continue precipitous declines versus the dollar, the former 109.37/dollar, the latter now $1.268. Low inflation for us, but rapid, large and sustained one-way moves in currencies are not good for anybody.
Our air assault on ISIS includes the first combat missions of the F-22 Raptor, at last a soft target without anti-aircraft capability. Nine years in hangars because of deficiencies, $67 billion for only 188 buzzards. In a similar achievement, a Bloomberg study puts the cost of the Obamacare website at $2 billion.
Back to markets. As the aftermath of the Great Recession still unfolds, we have been confronted with all sorts of frights and warnings. Prudence and exhaustion have advised turning down the volume and proceeding with something productive. I do not mean the following to be another scare-story, just marking the passing of an era.
Bye-bye QE. Quantitative easing. The Fed buying Treasurys and MBS to inject credit directly into the economy around a broken banking system, and to keep long-term rates low. QE1 worked beautifully, QE2 less so, and QE3 possibly unnecessary. Exactly two years ago, QE3 began its buys, $80 billion per month, until the Fed began to taper only a little more than a year later. Markets were terrified last fall, wondering who would pick up the $80 billion monthly tab.
Turned out not to be a problem, but I don’t know anyone certain as to why it has been so easy to find buyers for US paper at rates lower than the first “taper tantrum,” and Fed rate hikes in prospect. The biggest help: foreign economic weakness and ultra-low yields overseas. One key propellant in this “rising dollar”: huge moves out of foreign bonds into ours.
A related question has been, how will the US economy and markets do when the Fed stops mainlining $80 billion monthly in cash heroin? The principal answer has been revived bank lending. Total bank credit, the Fed’s weekly H-8, has this year run at a 9% annual growth rate, replacing the QE credit add. Until last month. Since mid-August H-8 has actually declined slightly. Watch that. An anomaly? Temporary? Banks at last wilting under over-regulation?
The sheer mass Of QE is something. The US has $9 trillion in outstanding home mortgages, not including 2nds and Helocs (about $1 trillion). Of those 1st mortgages, the Fed now owns $1.7 trillion — 19%. It also owns $2.4 trillion in Treasurys, also about 20% of that market, but in normal times has owned half that much. Prior to 2008 the Fed had never bought mortgages.
Please ignore all the yammering about the Fed’s balance sheet and inflation, debasement, exit… all of that. Very silly. Do give some thought to our inability to re-design our system of mortgage lending. Since 2008 the Fed has been it, and for 70 years prior government agencies were it, and the “private sector” has neither the interest or capacity to be it.
Friday, September 19, 2014
Capital Markets Update
By Louis S. Barnes Friday, September 19, 2014
Mortgage interest rates improved slightly this past week as the Federal Reserve Bank left the Fed Funds rate unchanged at the conclusion of its FOMC meeting. The language of the FOMC statement was left unchanged as well indicating that it will leave the Fed Funds rate at its current level for a considerable time. Economic data was mixed. Economic data stronger than expected included the Fed New York Empire State Manufacturing Index, the Q2 Current Account Balance, the September NAHB Housing Market Index, and weekly jobless claims. Economic data weaker than expected included August Industrial Production, August Capacity Utilization, August Housing Starts, August Building Permits, the September Philadelphia Fed Business Index, and August Leading Economic Indicators. Industrial Production had its first decline in seven months. Inflation data was tame with both the Producer Price Index (PPI) and the Consumer Price Index (CPI) up less than 2.0% on a year over year basis. In China, the central bank will add more stimulus to its five largest banks to increase economic growth.
The Dow Jones Industrial Average is currently at 17,301, up over 300 points on the week. The crude oil spot price is currently at $91.98 per barrel, down slightly on the week. The Dollar strengthened versus the Euro and Yen on the week.
Next week look toward Monday’s Existing Home Sales, Wednesday’s New Home Sales, Thursday’s Durable Goods Orders and Jobless Claims, and Friday’s final look at Q2 GDP and Consumer Sentiment Index as potential market moving events.
Mortgage interest rates improved slightly this past week as the Federal Reserve Bank left the Fed Funds rate unchanged at the conclusion of its FOMC meeting. The language of the FOMC statement was left unchanged as well indicating that it will leave the Fed Funds rate at its current level for a considerable time. Economic data was mixed. Economic data stronger than expected included the Fed New York Empire State Manufacturing Index, the Q2 Current Account Balance, the September NAHB Housing Market Index, and weekly jobless claims. Economic data weaker than expected included August Industrial Production, August Capacity Utilization, August Housing Starts, August Building Permits, the September Philadelphia Fed Business Index, and August Leading Economic Indicators. Industrial Production had its first decline in seven months. Inflation data was tame with both the Producer Price Index (PPI) and the Consumer Price Index (CPI) up less than 2.0% on a year over year basis. In China, the central bank will add more stimulus to its five largest banks to increase economic growth.
The Dow Jones Industrial Average is currently at 17,301, up over 300 points on the week. The crude oil spot price is currently at $91.98 per barrel, down slightly on the week. The Dollar strengthened versus the Euro and Yen on the week.
Next week look toward Monday’s Existing Home Sales, Wednesday’s New Home Sales, Thursday’s Durable Goods Orders and Jobless Claims, and Friday’s final look at Q2 GDP and Consumer Sentiment Index as potential market moving events.
Friday, September 12, 2014
Capital Markets Update
By Louis S. Barnes Friday, September 12, 2014
In the backwards world of bonds and mortgages, in which good news is bad, good news pushed up long-term rates this week.
US data may encourage the Fed to accelerate the end of ZIRP (zero interest rate policy), at its meeting next week, possibly, maybe, perhaps, tentatively pre-hinting a rate hike by removing “for a considerable period” from its post-meeting statement.
Continuing this good-news issue (the only one each year), threats of war have receded. Czar Vladimir will continue to make trouble, but Russian troops are not headed for Kiev, instead pulling out of Ukraine after preserving the pretense of separatist rebellion. ISIS… more wise old heads say this 8th Century mob is a local threat in a locality beyond redemption. Newtonian physics are in play: the more dangerous either of these bad actors, the more resistance will gather against them.
US economic data have been seen for years through two lenses: worrywarts fear that we are in a protracted period of stagnation defiant of remedy, and optimists have thought recovery is protracted but underway. The optimists had a good week. Retail sales picked up .6% in August and both July and June were revised up (although auto sales are driving the show, pushed way ahead of natural demand by trash credit and giveaway discounts). The NFIB survey of small business is now in a steady up-trend (annoying to its far-right, anti-government chief economist, fighting his own data).
Behind that happy US foreground lies the Fed and the world, and that background scenery is without precedent. I don’t know of a time in the modern era when US conditions have been so different from the rest of the world, the UK excepted. As healthy as the US is becoming, and as stable because of extraordinary efforts by the Fed to de-risk the financial system, the rest of the world is deteriorating and unstable.
Just this week Brazil’s credit was downgraded near junk, caught in slowdown, inflation, and weak demand for exports. Venezuela has joined Argentina stumbling toward default. Japan’s GDP contracted at a 7.1% pace in the 2nd quarter, fading under the weight of a national sales tax taken from 5% to 8% to cut its deficit (fifty percent of spending); the slide so bad that new stimulus spending is under discussion. A bad trap, no evident escape from the austerity-stimulus circle. Europe is in a similar situation.
The benefits to us, big ones, flow through currencies and weakening foreign demand for commodities. The euro touched $1.40 in April, now $1.29; the yen one year ago traded 96 to the buck, now 107. A similar devaluation by China would mightily annoy the US (last month’s China trade surplus with the US: $49 billion), but China trades too much with Japan and Europe to tolerate an appreciating yuan versus euro and yen.
Everything we import, oil to sneakers, will tend to get cheaper. In dollar terms oil is already down 10%, gasoline prices falling. Our trade deficit will rise, and must be financed, but money is cheap thanks to the panicked policies at the ECB, BOJ, and intermittently the PBOC. Our exports become more expensive, but in total are only about 12% of our economy (over 50% in Germany).
In this circumstance it is impossible for inflation to rise to dangerous ground. The kindling is soaking wet, and the match — rising wages — nowhere in sight.
So why would the Fed consider a rate-warning next week? There are reasons for the Fed to act other than prices. In the fall of 2008 the Fed embarked on a completely unprecedented rescue which took hold in just a few months, the means an explicit intention to cause financial assets and homes to rise in value. Worked, too! Now the Fed must be concerned that these assets not bubble, not be vulnerable to more significant tightening in a real recovery.
Hunch: long-term rates are not headed far. The spread to foreign equivalents is too wide, US bonds too attractive, the US deficit under control.
Another good news hunch. China has sent a battalion of People’s Liberation Army infantry to Sudan as UN peacekeepers, the first-ever unit so large. To protect its own people and business venture there, but Chinese engagement is a hopeful thing.
In the backwards world of bonds and mortgages, in which good news is bad, good news pushed up long-term rates this week.
US data may encourage the Fed to accelerate the end of ZIRP (zero interest rate policy), at its meeting next week, possibly, maybe, perhaps, tentatively pre-hinting a rate hike by removing “for a considerable period” from its post-meeting statement.
Continuing this good-news issue (the only one each year), threats of war have receded. Czar Vladimir will continue to make trouble, but Russian troops are not headed for Kiev, instead pulling out of Ukraine after preserving the pretense of separatist rebellion. ISIS… more wise old heads say this 8th Century mob is a local threat in a locality beyond redemption. Newtonian physics are in play: the more dangerous either of these bad actors, the more resistance will gather against them.
US economic data have been seen for years through two lenses: worrywarts fear that we are in a protracted period of stagnation defiant of remedy, and optimists have thought recovery is protracted but underway. The optimists had a good week. Retail sales picked up .6% in August and both July and June were revised up (although auto sales are driving the show, pushed way ahead of natural demand by trash credit and giveaway discounts). The NFIB survey of small business is now in a steady up-trend (annoying to its far-right, anti-government chief economist, fighting his own data).
Behind that happy US foreground lies the Fed and the world, and that background scenery is without precedent. I don’t know of a time in the modern era when US conditions have been so different from the rest of the world, the UK excepted. As healthy as the US is becoming, and as stable because of extraordinary efforts by the Fed to de-risk the financial system, the rest of the world is deteriorating and unstable.
Just this week Brazil’s credit was downgraded near junk, caught in slowdown, inflation, and weak demand for exports. Venezuela has joined Argentina stumbling toward default. Japan’s GDP contracted at a 7.1% pace in the 2nd quarter, fading under the weight of a national sales tax taken from 5% to 8% to cut its deficit (fifty percent of spending); the slide so bad that new stimulus spending is under discussion. A bad trap, no evident escape from the austerity-stimulus circle. Europe is in a similar situation.
The benefits to us, big ones, flow through currencies and weakening foreign demand for commodities. The euro touched $1.40 in April, now $1.29; the yen one year ago traded 96 to the buck, now 107. A similar devaluation by China would mightily annoy the US (last month’s China trade surplus with the US: $49 billion), but China trades too much with Japan and Europe to tolerate an appreciating yuan versus euro and yen.
Everything we import, oil to sneakers, will tend to get cheaper. In dollar terms oil is already down 10%, gasoline prices falling. Our trade deficit will rise, and must be financed, but money is cheap thanks to the panicked policies at the ECB, BOJ, and intermittently the PBOC. Our exports become more expensive, but in total are only about 12% of our economy (over 50% in Germany).
In this circumstance it is impossible for inflation to rise to dangerous ground. The kindling is soaking wet, and the match — rising wages — nowhere in sight.
So why would the Fed consider a rate-warning next week? There are reasons for the Fed to act other than prices. In the fall of 2008 the Fed embarked on a completely unprecedented rescue which took hold in just a few months, the means an explicit intention to cause financial assets and homes to rise in value. Worked, too! Now the Fed must be concerned that these assets not bubble, not be vulnerable to more significant tightening in a real recovery.
Hunch: long-term rates are not headed far. The spread to foreign equivalents is too wide, US bonds too attractive, the US deficit under control.
Another good news hunch. China has sent a battalion of People’s Liberation Army infantry to Sudan as UN peacekeepers, the first-ever unit so large. To protect its own people and business venture there, but Chinese engagement is a hopeful thing.
Friday, September 5, 2014
Capital Markets Update
By Louis S. Barnes Friday, September 5, 2014
The gap in economic performance between the US and overseas is widening, holding US rates down. However, the data brings as many questions as answers.
By historical comparison, the twin ISM surveys rising in August to 59.0 (manufacturing), and 59.6 (services) have reached inflationary overheating. But this is 2014, not history, and the tidy cyclical patterns of the 50 years after WW II no longer apply. Yet some patterns must apply, especially this one: at some point of US economic growth and shrinking pool of labor, wages must rise. Right? Nothing new might happen in a globalized world, like substitution of overseas labor. Right.
Long-term rates were poised to rise today on an August payroll report expected to surge since the ISMs did. But payrolls did not perform, rising only 142,000, a little more than half the forecast. The cyclical boys, wrong ever since 2009 (and longer) have dismissed the payroll report as an aberration. Could be.
But the aberrant sword cuts two ways: August wages jumped out of stagnation to a 3% annualized increase. So long as we’re in the land of “should be,” here is the Fed’s greatest fear: that the job market is already too tight, tight enough to drive wages up faster than gains in productivity, the certain prescription for inflation. Adding to that concern this week: an elaborate Fed staff study says that the decline in the workforce is structural, old folks and the low-skilled leaving for good, the labor pool not responsive to the higher wages in a good recovery (BTW: I don’t believe that conclusion for a second; better jobs and wages and citizen workers will come out of the US woodwork).
A dart-throw into middle-ground: the hot economic stats feel sugar high. Auto sales are running stronger than real absorption can support, now a 17.5-million-annual pace, fueled by trash lending and giveaway discounts and pulling future demand forward. The stock market is now an unsustainable propellant. Bank credit is roaring along at a 9.5% annual pace, sustainability unclear. And if everything is so rosy, why is housing not attending the cyclical party?
No question, the US economy is doing better, but low-slope. New question: what effect will a slowing outside world have on the US? The answer lies in a loopy game of rock-paper-scissors, trying to figure out which forces are stronger than others.
The most important element in US strength in the last few years: cheap energy, more responsible for the US manufacturing rebound than any other element, US business electricity one-third the cost in Germany. That’s a durable boost here, which will last so long as current extraction technology is economic at today’s energy prices.
The US economy is less dependent on exports than any. Slowing overseas appetite for our stuff thus does less harm to us than anywhere.
Weakness overseas is so deep, central banks in such extreme action that super-low yielding US bonds and MBS look like all-time cheap deals. Perversely — very — when the Fed finally does begin to tighten it may have to force up short-term rates more than it usually would versus US economic activity because market-driven long-term rates will stay down. (Or the unthinkable… the Fed will begin to sell its bond and MBS trove.)
If you’re in trouble, as the outside world is, and heavily reliant on exports, as all of our overseas competitors are, you devalue your currency. The ECB’s tiptoe into QE this week will have as little (or less) effect than the Fed’s QE3. QE1 here at the end of 2008 was miraculous, knocking down long-term rates. Since then, both here and in Europe long-term rates are already dead low, QE ineffective — except to weaken currency. The euro dropped below $1.30 on the ECB news, and going lower.
Others will follow, must follow, including Japan and China. The effect is deflationary here, prices of imported goods falling, and the devaluers exporting their wage structure and unemployment along with the goods.
Overseas weakness will limit any inflation threat, and not abort US recovery. But our recovery still doesn’t amount to much. Watch wages and housing. True acceleration lies there.
The gap in economic performance between the US and overseas is widening, holding US rates down. However, the data brings as many questions as answers.
By historical comparison, the twin ISM surveys rising in August to 59.0 (manufacturing), and 59.6 (services) have reached inflationary overheating. But this is 2014, not history, and the tidy cyclical patterns of the 50 years after WW II no longer apply. Yet some patterns must apply, especially this one: at some point of US economic growth and shrinking pool of labor, wages must rise. Right? Nothing new might happen in a globalized world, like substitution of overseas labor. Right.
Long-term rates were poised to rise today on an August payroll report expected to surge since the ISMs did. But payrolls did not perform, rising only 142,000, a little more than half the forecast. The cyclical boys, wrong ever since 2009 (and longer) have dismissed the payroll report as an aberration. Could be.
But the aberrant sword cuts two ways: August wages jumped out of stagnation to a 3% annualized increase. So long as we’re in the land of “should be,” here is the Fed’s greatest fear: that the job market is already too tight, tight enough to drive wages up faster than gains in productivity, the certain prescription for inflation. Adding to that concern this week: an elaborate Fed staff study says that the decline in the workforce is structural, old folks and the low-skilled leaving for good, the labor pool not responsive to the higher wages in a good recovery (BTW: I don’t believe that conclusion for a second; better jobs and wages and citizen workers will come out of the US woodwork).
A dart-throw into middle-ground: the hot economic stats feel sugar high. Auto sales are running stronger than real absorption can support, now a 17.5-million-annual pace, fueled by trash lending and giveaway discounts and pulling future demand forward. The stock market is now an unsustainable propellant. Bank credit is roaring along at a 9.5% annual pace, sustainability unclear. And if everything is so rosy, why is housing not attending the cyclical party?
No question, the US economy is doing better, but low-slope. New question: what effect will a slowing outside world have on the US? The answer lies in a loopy game of rock-paper-scissors, trying to figure out which forces are stronger than others.
The most important element in US strength in the last few years: cheap energy, more responsible for the US manufacturing rebound than any other element, US business electricity one-third the cost in Germany. That’s a durable boost here, which will last so long as current extraction technology is economic at today’s energy prices.
The US economy is less dependent on exports than any. Slowing overseas appetite for our stuff thus does less harm to us than anywhere.
Weakness overseas is so deep, central banks in such extreme action that super-low yielding US bonds and MBS look like all-time cheap deals. Perversely — very — when the Fed finally does begin to tighten it may have to force up short-term rates more than it usually would versus US economic activity because market-driven long-term rates will stay down. (Or the unthinkable… the Fed will begin to sell its bond and MBS trove.)
If you’re in trouble, as the outside world is, and heavily reliant on exports, as all of our overseas competitors are, you devalue your currency. The ECB’s tiptoe into QE this week will have as little (or less) effect than the Fed’s QE3. QE1 here at the end of 2008 was miraculous, knocking down long-term rates. Since then, both here and in Europe long-term rates are already dead low, QE ineffective — except to weaken currency. The euro dropped below $1.30 on the ECB news, and going lower.
Others will follow, must follow, including Japan and China. The effect is deflationary here, prices of imported goods falling, and the devaluers exporting their wage structure and unemployment along with the goods.
Overseas weakness will limit any inflation threat, and not abort US recovery. But our recovery still doesn’t amount to much. Watch wages and housing. True acceleration lies there.
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