Friday, July 20, 2012
Capital Markets Update
By Louis S. Barnes Friday, July 20th, 2012
It is high summer, a scorcher, even mad dogs looking for shade. It's supposed to be a nothing-happening time. However, the anxious suspense in markets is as high and hot as the sun.
Everyone knows that the US economy has lost momentum. Perfesser Bernanke on Tuesday twice in one page used "decelerated," followed by "…the generally disappointing tone of recently incoming data." Everyone expects that the Fed will do something, but nobody knows what or when, possibly not the Chairman.
Bernanke vaguely mentioned use of the Fed's balance sheet, "QE3' the shorthand, but no one outside the Fed can tell if action is held up by internal politics (resistance by the regional-Fed hardheads), or by doubts of QE effectiveness, or by desire to keep powder dry for something more troublesome than a slow patch.
The primary purpose of QE has been to knock down long-term rates, but markets have already done that, the 10-year T-note to 1.46%, and mortgages to 3.50% (if someone answers the phone). The secondary purpose has been to encourage risk-taking by investors and lubricate lending, but credit is choked by regulation and post-Bubble over-reaction. Bernanke: "…Prospective homebuyers cannot obtain mortgages due to tight lending standards." In the Fed's most-recent meeting minutes, the only group agreement in 12 pages was the plaintive wish for new ideas to help the economy.
The Fed should hold something in reserve to meet two contingencies: a failure to defer the fiscal cliff now five months away, and/or a euro collapse. The fiscal cliff is actually nearer by. We are only three months from election. Mr. Obama has been unable to make a deal with the current Congress; whether he is re-elected or the lamest of ducks, Congress will remain the same until January.
Europe is like watching the Liar on Saturday Night Live. Day after day after day after day leadership says everything is fine, going according to plan. Right. This week Finland's short-term sovereigns went to negative yield, and Spain's 10s rose to 7.20%. Marker: for the moment French debt is still receiving flight-to-quality cash, its 5-year down to 0.86%. When markets realize that French banks, budget, economy, and trade deficit are in sum no better shape than Italy, and French yields begin to rise….
On to something understandable: US housing. For once, NAR has properly explained the drop in June sales of existing homes, down 5.4% from May, up 4.5% from June 2011. The primary reason: a scarcity of the cheapest distressed inventory, the darling of cash-paying investors. Listed inventory is down 24% versus last year.
Does this pattern mean anything? For the economy, or housing in general?
No. Not yet.
Listed inventory is merely apparent supply. The shadow supply lies off-shore like ocean swells not yet formed into waves. The most deeply distressed inventory, not yet seized in foreclosure, let alone listed, seems to be down from 4.5 million homes to 4.0 but replenished by constant inflow of new delinquency in shaky-economy feedback.
Some especially favored local markets like mine in Boulder, like Saudi Dakota, and as in any IT paradise are doing remarkably well. The rest of the country… how can the inventory/sales ratio fall so far and prices not rise? Because we still have at least 15% of homes under water versus mortgage, most owners still making payments; many new sales merely recognizing the pre-existing loss, hardly encouraging to sellers or buyers.
Supply/demand thinking by finance types when the Bubble blew was wrong then and still is. Prices crashed far below "clearing prices" and resulted in more sellers and fewer buyers; now it will take quite a while to work off immense but latent inventory.
Media also focus on sales of new homes. Although rising a little, they are not particularly useful, except to the stock prices of builders. The GDP contribution of new construction even in good times is low-single digit. For a better economy we need home prices to rise to repair household balance sheets, and every percentage point will mean fewer homes under water. And for that, as ever since 2007, we need credit.
It is high summer, a scorcher, even mad dogs looking for shade. It's supposed to be a nothing-happening time. However, the anxious suspense in markets is as high and hot as the sun.
Everyone knows that the US economy has lost momentum. Perfesser Bernanke on Tuesday twice in one page used "decelerated," followed by "…the generally disappointing tone of recently incoming data." Everyone expects that the Fed will do something, but nobody knows what or when, possibly not the Chairman.
Bernanke vaguely mentioned use of the Fed's balance sheet, "QE3' the shorthand, but no one outside the Fed can tell if action is held up by internal politics (resistance by the regional-Fed hardheads), or by doubts of QE effectiveness, or by desire to keep powder dry for something more troublesome than a slow patch.
The primary purpose of QE has been to knock down long-term rates, but markets have already done that, the 10-year T-note to 1.46%, and mortgages to 3.50% (if someone answers the phone). The secondary purpose has been to encourage risk-taking by investors and lubricate lending, but credit is choked by regulation and post-Bubble over-reaction. Bernanke: "…Prospective homebuyers cannot obtain mortgages due to tight lending standards." In the Fed's most-recent meeting minutes, the only group agreement in 12 pages was the plaintive wish for new ideas to help the economy.
The Fed should hold something in reserve to meet two contingencies: a failure to defer the fiscal cliff now five months away, and/or a euro collapse. The fiscal cliff is actually nearer by. We are only three months from election. Mr. Obama has been unable to make a deal with the current Congress; whether he is re-elected or the lamest of ducks, Congress will remain the same until January.
Europe is like watching the Liar on Saturday Night Live. Day after day after day after day leadership says everything is fine, going according to plan. Right. This week Finland's short-term sovereigns went to negative yield, and Spain's 10s rose to 7.20%. Marker: for the moment French debt is still receiving flight-to-quality cash, its 5-year down to 0.86%. When markets realize that French banks, budget, economy, and trade deficit are in sum no better shape than Italy, and French yields begin to rise….
On to something understandable: US housing. For once, NAR has properly explained the drop in June sales of existing homes, down 5.4% from May, up 4.5% from June 2011. The primary reason: a scarcity of the cheapest distressed inventory, the darling of cash-paying investors. Listed inventory is down 24% versus last year.
Does this pattern mean anything? For the economy, or housing in general?
No. Not yet.
Listed inventory is merely apparent supply. The shadow supply lies off-shore like ocean swells not yet formed into waves. The most deeply distressed inventory, not yet seized in foreclosure, let alone listed, seems to be down from 4.5 million homes to 4.0 but replenished by constant inflow of new delinquency in shaky-economy feedback.
Some especially favored local markets like mine in Boulder, like Saudi Dakota, and as in any IT paradise are doing remarkably well. The rest of the country… how can the inventory/sales ratio fall so far and prices not rise? Because we still have at least 15% of homes under water versus mortgage, most owners still making payments; many new sales merely recognizing the pre-existing loss, hardly encouraging to sellers or buyers.
Supply/demand thinking by finance types when the Bubble blew was wrong then and still is. Prices crashed far below "clearing prices" and resulted in more sellers and fewer buyers; now it will take quite a while to work off immense but latent inventory.
Media also focus on sales of new homes. Although rising a little, they are not particularly useful, except to the stock prices of builders. The GDP contribution of new construction even in good times is low-single digit. For a better economy we need home prices to rise to repair household balance sheets, and every percentage point will mean fewer homes under water. And for that, as ever since 2007, we need credit.
Friday, July 13, 2012
Capital Markets Update
By Louis S. Barnes Friday, July 14th, 2012
Mid-summer is known in the news biz as “silly season.” In the absence of real news, headlines run “MAN BITES DOG.” It’s a little early this year, but it got hot early. The usual time is on the cusp of July to August, when Europe shuts down for a month’s vacation; this year Europe may shut down somewhat later, for longer.
Only one piece of hard economic data this week: the small-business surveyor NFIB dumped three points of index-optimism in June. That’s a lot for a single month, but the overall index value is still in the middle of the chatter back to 2010. The T-R/UofM measure of consumer confidence fell in July versus expected gain. Confidence measures are among the softest of data, but usually rise when gasoline falls — not so now.
Then the sillies….
The US Treasury auctioned $21 billion in new 10-year notes at an all-time record-low yield 1.46%. There were 3.5 times as many bids as bonds, and 45% of the bids were “direct,” non-competitive, often from overseas (we don’t care what yield we get, just give us the bonds), both measures of volume double normal.
Yields on short-term government bonds issued by Germany, Denmark, and Switzerland touched new-record negative returns, investors paying interest to borrowers to keep money someplace safe from the euro collapse.
The Swiss are trying desperately to hold down the value of the franc, pushed up by safety buyers. As the franc rises the Swiss feel rich, prices falling on any product or commodity sold in another currency; yet the franc rise threatens to put Switzerland out of business. Midas knew about that. The standard strategy to weaken an over-strong currency: print wads of its own and buy the other currencies. The Swiss now hold foreign exchange equal to 65% of Swiss GDP, upward pressure on the franc unrelieved.
Spain’s new Rajoy government, confronted by depression, announced a new package of $100 billion in spending cuts and tax increases. Spain’s banks as of the end of June now owe the ECB $411 billion, about 30% of Spain’s falling GDP, secured by trusty Spanish collateral.
Bank regulators in the US and Europe are focused on Libor irregularities in 2008.
Has anyone seen US Treasury Secretary Tim Geithner?
President Obama said yesterday that he had been too focused on policy and had not delivered enough inspiring speeches. The crusty CEO of one of my first employers: “Mr. Barnes, here we value people who do things, not people who talk about doing things.” Mitt Romney is trapped in Nixon’s Law: “To be a Republican President, one must campaign far enough to the Right to be nominated, and then move far enough to the center to be elected.” Mr. Romney will deliver his acceptance speech to the Republican convention on August 30 (counting the hours, aren’t we…). If he has any centrist thought, and says it before August 30, the fruitcake half of that convention will walk out on him before he gets there. This week the new Consumer Financial Protection Bureau released its first project. Not quite 1100 pages to explain its re-crafting of the 3-page Good Faith Estimate, which had been re-done in 2010, that a totally incomprehensible three pages to replace the previous one-page document which everyone had understood for the preceding 40 years. The new one will be better, but still on the same trail (visual: dim bloodhound following scent of hambone tied to merry-go-round while real perps depart scene). Consumer protectors are just certain that there is nothing to getting a mortgage beyond getting the best price. And that no banker should be paid for skill, or varying difficulty of application, and that a banker’s sound financial counseling has no value. An alternate approach to mortgage shopping: ask simple questions. How long have you been making loans? Do you have a resume? References? While making eye contact: Can I trust you to look after me? Why? How will you do it? What skills do you have to offer me that others do not have?
Dream on. Silly season.
Mid-summer is known in the news biz as “silly season.” In the absence of real news, headlines run “MAN BITES DOG.” It’s a little early this year, but it got hot early. The usual time is on the cusp of July to August, when Europe shuts down for a month’s vacation; this year Europe may shut down somewhat later, for longer.
Only one piece of hard economic data this week: the small-business surveyor NFIB dumped three points of index-optimism in June. That’s a lot for a single month, but the overall index value is still in the middle of the chatter back to 2010. The T-R/UofM measure of consumer confidence fell in July versus expected gain. Confidence measures are among the softest of data, but usually rise when gasoline falls — not so now.
Then the sillies….
The US Treasury auctioned $21 billion in new 10-year notes at an all-time record-low yield 1.46%. There were 3.5 times as many bids as bonds, and 45% of the bids were “direct,” non-competitive, often from overseas (we don’t care what yield we get, just give us the bonds), both measures of volume double normal.
Yields on short-term government bonds issued by Germany, Denmark, and Switzerland touched new-record negative returns, investors paying interest to borrowers to keep money someplace safe from the euro collapse.
The Swiss are trying desperately to hold down the value of the franc, pushed up by safety buyers. As the franc rises the Swiss feel rich, prices falling on any product or commodity sold in another currency; yet the franc rise threatens to put Switzerland out of business. Midas knew about that. The standard strategy to weaken an over-strong currency: print wads of its own and buy the other currencies. The Swiss now hold foreign exchange equal to 65% of Swiss GDP, upward pressure on the franc unrelieved.
Spain’s new Rajoy government, confronted by depression, announced a new package of $100 billion in spending cuts and tax increases. Spain’s banks as of the end of June now owe the ECB $411 billion, about 30% of Spain’s falling GDP, secured by trusty Spanish collateral.
Bank regulators in the US and Europe are focused on Libor irregularities in 2008.
Has anyone seen US Treasury Secretary Tim Geithner?
President Obama said yesterday that he had been too focused on policy and had not delivered enough inspiring speeches. The crusty CEO of one of my first employers: “Mr. Barnes, here we value people who do things, not people who talk about doing things.” Mitt Romney is trapped in Nixon’s Law: “To be a Republican President, one must campaign far enough to the Right to be nominated, and then move far enough to the center to be elected.” Mr. Romney will deliver his acceptance speech to the Republican convention on August 30 (counting the hours, aren’t we…). If he has any centrist thought, and says it before August 30, the fruitcake half of that convention will walk out on him before he gets there. This week the new Consumer Financial Protection Bureau released its first project. Not quite 1100 pages to explain its re-crafting of the 3-page Good Faith Estimate, which had been re-done in 2010, that a totally incomprehensible three pages to replace the previous one-page document which everyone had understood for the preceding 40 years. The new one will be better, but still on the same trail (visual: dim bloodhound following scent of hambone tied to merry-go-round while real perps depart scene). Consumer protectors are just certain that there is nothing to getting a mortgage beyond getting the best price. And that no banker should be paid for skill, or varying difficulty of application, and that a banker’s sound financial counseling has no value. An alternate approach to mortgage shopping: ask simple questions. How long have you been making loans? Do you have a resume? References? While making eye contact: Can I trust you to look after me? Why? How will you do it? What skills do you have to offer me that others do not have?
Dream on. Silly season.
Friday, July 6, 2012
Capital Markets Update
By Louis S. Barnes Friday, July 6th, 2012
First some data, then Libor. Tempest or titillation? The effects from global markets to your adjustable-rate mortgage — earth-shaking? Or teapot-tilting?
June jobs data are as-was in May and April: 75,000 new jobs, poor, but afloat! The June ISM data is more concerning, overall to 49.7 from 53.5, and “internals” crashing: new orders down 12.3 to 47.8, and prices of raw materials collapsed another 10.5 to 37 (inflation risk is zero). For comparison, China and all of Europe are lower in the 40s, Spain below the 44 marking serious recession.
Libor. London Inter-Bank Offered Rate, complied by the British Bankers Association since 1986. Compiled by survey, not independently verifiable market benchmark, posted at 11AM GMT each day in maturities overnight to one year and in 10 currencies.
All floating-rate IOUs are tied to an index of some kind, the chatter on trading floors all day every day “over” — over US Treasurys, British gilts, German Bunds, over Libor. Nobody knows how many hundred trillion dollars’ worth of securities are tied to Libor.
The first US ARMs appeared in volume in 1980, most commonly tied to COFI, 1-year Treasurys, and Libor, each plus a spread, aka “margin.” COFI was the average cost of a deposit to an S&L in CA, AZ, and NV (only). Yes, the rate you paid to an S&L was determined in part by the rates that it decided to pay its depositors. Margins ran from over 3.00% to below 2.00%. COFI loans were a Bubble casualty, finished by Lehman.
The Treasury stopped selling 1-year T-bills in 2001 because we were in budget surplus (what a thought…), and before it began again in 2008 the index value in your mortgage adjustment was inferred by statistical artifact (CMT). Fannie margins for this most-common index have been 2.75%. However, the Fed at 0% since 2008 has pulled the 1-year down to 0.19%, farther than ever imagined, and T-bill-tied ARMs are scarce.
If you have a one-month, three-month, six-month, or one-year Libor ARM, you pay 2.25% over the equivalent Libor maturity. The 0.50% difference between margins over Libor and T-bills reflect the ’80s-’90s spread between bills and Libor. Not now! One-year Libor is 1.069% today, plus margin a “pay rate” of 3.319 versus a T-bill-tied 2.94%.
Every ARM promissory note contains a provision for a replacement index (un-named) if the one in the note becomes “unavailable.”
Back to the tempest. Apparently between 2005 and 2010 bankers surveyed by the BBA began to fib on the low side. To what effect — magnitude — nobody seems to know, but in an index measured to three decimal places, not much. But, a hell of a lot of money moves by each one-thousandth. Some motivation to fib was ordinary cheating, but some was self-protective, not wanting to tell a panicked world how much your bank had to pay for funding.
Everyone in the market knew that Libor was somewhere between inexact and imaginary, and banker-determined; regulators knew that the BBA survey had “irregularities”; and the financial press routinely ran stories about Libor rigging. Everybody-does-it is a poor defense, but deep inside inexact markets everybody must stick a wet finger into the wind and announce velocity.
Everybody does something else: everyone wants precision in life beyond our ability to have it. Thus we live in constant, comfortable, and fabricated illusion, and we are enraged when our self-deceptions are exposed.
To have rigged Libor was a Bad Thing. The downside rig did cause losses in some heavily structured finance — “inverse-floaters” — hurting those who tried to outsmart future interest-rate probabilities.
To have rigged Libor was a Bad Thing. The downside rig did cause losses in some heavily structured finance — “inverse-floaters” — hurting those who tried to outsmart future interest-rate probabilities.
To have rigged Libor during the greatest bank run of all time, every financial institution and the system itself facing panicked suspicion… that was a Stupid Thing. The stupid should resign forthwith.
However, relative to our current predicament and bad deeds private and public, this Libor thing is whitecaps in a thimble. A microscopic storm has morphed into yet another hysterical witch-hunt. Be damned careful. There are good witches and bad ones, and when the bad ones are loose you’ll wish you hadn’t dropped a house on your good one.
Friday, June 29, 2012
Capital Markets Update
By Louis S. Barnes Friday, June 29th, 2012
Reading media reports of economics is usually an exercise in decoding political bias and trying to find the center of things. Today we’re in enough trouble that to understand “news” we must also strip away hope and pessimism.
Big week for all of that.
First thing first: the US has lost some forward momentum, but is not entering recession. Consumer spending did not rise at all in May, dead flat, but orders for new durable goods doubled the forecast. New claims for unemployment insurance are running 385,000 weekly, up 15% from last year’s best run since 2008, but not spiking. There are some flickers from housing, but that’s all (more below). Definitive reports for June come next Monday and Friday, purchasing managers and payrolls.
Europe… we have another “relief rally” underway today (Dow up 220, gold up $55), as yet another Brussels summit has delivered yet more fibs to buy time. However, this time is different. After all prior can-kicking, markets took the bait, believing that Europe intended actual material progress. This time a lot of people (including me) had talked themselves into believing the euro zone was about to pull its own plug, maybe as soon as this weekend. Today’s relief rally does not reflect any belief whatever in European progress; it is instead a cynical, tired, shoulder-slump at the sight of people without the courage to take the Luger to a quiet spot and do the honorable thing.
The tell-tale as always in these last years: the 10-year T-note. The sum-total extent of relief is a rise in yield from 1.57% to 1.65%. Mortgages high-threes, unchanged.
Housing is improving, but in a 17-step program to recovery has reached perhaps stage two. Case-Shiller found a 0.7% rise in prices in April to a level about even with one year ago. The FHFA House Price Index (which I much prefer) found a 3.0% price increase year-over year, essentially all of it in the first four months of 2012, the most recent data from April (housing data suffer terrible lag, especially the accurate stuff).
Today’s greatest mystery: where is the distressed inventory? www.lpsvcs.com has the best data: the number of homes in foreclosure somewhere has not changed in a year. Serious delinquency (90-days late or in foreclosure) has fallen from 7.86% of all homes to 7.37%, a huge swamp draining imperceptibly. Total foreclosure sales were only 66,000 in April versus 4.5 million shadow inventory in terminal distress, outflow not significantly larger than inflow.
For descriptive amusement, visit www.fhfa.gov and scroll to pages 36 and 37 of the HPI, the 20-Best and 20-Worst markets of 303 total MSAs. My home town, very-low-inventory Boulder, CO ranks as the 10th best of all, and we feel like it, although our one-year price gain is only 2.35%, and 5-year plus 1.60%. Bend, OR ranks third-best with 4.85% appreciation last year; however, its overall 5-year result has been minus-43%. The 20-Worst: #4 Las Vegas has lost 60% of value in five years, including 8.79% last year. #16 Atlanta: minus 23% 5-year overall, including 6.33% lost last year.
We have a long way to go before housing will lead the economy up.
Speaking of leading… the economic stories this week and year are dwarfed by events in leadership often responsible for the economic results. The principal reason that housing is unable to lead the economy: there is no public policy. Congress is entertained by gridlock on the subject, the Right hating any federal assistance whatever, and the Left amused by hating all bankers. Mr. Bernanke, the leadership hero of this time, in January orchestrated the finest housing-policy recommendations of the decade and got no response from any other office of government.
Competing theories of leadership: great people appear and then move events; alternately, deeply troubled times call great people forward. Look around the world, and it’s hard to figure by either theory how the supply could be so thin.
Then from nowhere, a man granted high station and for seven years in office amounting to nothing, from that nowhere somehow found greatness. Thank you, John Roberts. Not for saving ObamaCare, but for showing the way beyond partisanship.
Friday, June 22, 2012
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