Premier Mortgage Group

Mortgage interest rates increased this past week as the market expects inflation to increase as a result of QE2.  The Fed will purchase $600 billion in mostly intermediate term Treasury notes over the next several months as a result of QE2.  Initially, markets thought that the Fed intended to keep rates low as a result of these purchases but markets increasingly believe that the Fed intends to stimulate inflation, which erodes the value of fixed income investments such as mortgages.  Economic data was mixed.  Economic data stronger than expected included October Retail Sales, the November Philadelphia Fed Business Index, and weekly jobless claims.  Economic data weaker than expected included the New York Empire State Manufacturing Index, October Industrial Production, October Housing Starts, and October Building Permits.  Inflation data continues to be tame.  The October Consumer Price Index was up just 0.2%.  Year over year, CPI increased just 1.2%, the lowest increase on record.

The Dow Jones Industrial Average is currently at 11,174, down slightly on the week.  Crude oil futures are currently trading at $81.30 per barrel, down about $3 per barrel on the week.  The Dollar strengthened versus the Euro and Yen on the week.

Next week look toward Tuesday’s second look at Q3 GDP and Existing Home Sales and Wednesday’s Durable Good Orders as potential market moving events.  All markets are closed on Thursday for the Thanksgiving Day holiday.

The formation and execution of economic policy this week entered a new level of chaos, complete with good news, bad news, and silly news.

The best news: two different Federal-deficit study groups came up with the same basic solutions: cap spending and revenue at a sensible level of GDP, broaden the tax base by cutting special exceptions, and cut tax rates. Spending: in Alan Simpson’s line, “Harpoon every whale in the ocean.” The people are way ahead of political leadership, the average American eager to implement any deal like these two.

Then, the chaotic: QE2 for now is a complete and counterproductive bust: 10-year T-notes have blown near 3.00%, and mortgages to 4.50%. Only a handful of people think they understand QE, and the more Perfesser Bernanke has talked about “raising the inflation rate,” the more he has spooked the bond market.

Trader-think: If this guy is printing money to buy bonds and push inflation back up to 2.00%, what am I doing buying 10-year bonds at 2.50%? What if his calculations have a little oops-a-daisy, and he over-does it? On the other hand, this mad scientist’s QE might work and rescue the economy… I bought all these bonds out of fear of deflation and double-dip, not because we’d be saved. If he wants to buy, I’m selling.

The economy: we’re right back where we were last winter, quarreling over every speck of data, optimists finding recovery, pessimists not, but it’s clear to all that the double-dip risk is on hold. Retail sales outperformed, rising 1.2% versus the .7% forecast (incentive-pushed autos), but industrial production was flat in October.

Core CPI was also flat, the year-over-year 0.6% “inflation” the lowest measured since stats began in 1957. At a rate so low, many sectors of the economy are forced to pay back debt with dollars more expensive than the ones they borrowed, a crushing deflationary weight, but the hardheads think zero inflation is cool.

The foreclosure-document affair has taken a very good turn. State attorneys general now no longer preoccupied with re-election are backing away from all of their EEK! and Villains!! Digging by the entire US news media has failed to find a supply of people wrongly foreclosed upon, nor can they find loans foreclosed by the wrong bank.

Lying in court is a bad thing and will be punished, and procedures will be tightened, but the show has now morphed into an attack on the pre-foreclosure process and loan “mitigation.” Hooray! Servicers and the Treasury trumpet hundreds of thousands of workouts, but we are filing 3.5 million foreclosures each year, completing two million, and another five million loans are in hopeless delinquency. Everybody out here knows that lost souls asking loan servicers for help will get slow, contradictory, and forgetful treatment from uncaring and ill-trained personnel. Still: “Your payments have to be late before we can talk to you.” Grrrrr…. “We’ll suspend foreclosure until our mitigation decision.” Three months later, with no notice, you learn that they dropped the gavel.

National housing policy: “Stand quietly in line in front of that steamroller.” Anger is rising, and civil disobedience is near. This week in Denver, a 50-year-old man told the evicting sheriff to go away, and was then taken from his foreclosed home in handcuffs by a SWAT team. I don’t think the country will accept that kind of scene for long.

Back to the Fed. The Republican leadership in the House and Senate this week delivered to the Fed a formal demand to stop QE2 (best I know, nothing like that has happened before), and they are joined by plenty of confused citizens of both parties. A nicely dressed group of reactionary economists made the same demand, but that’s old hat. Their basic theory: don’t do something, just sit there. Good heavens… doing things is risky. Exactly the same voices objected to FDR and his relentless tries of remedy after remedy, but FDR made clear an overriding priority: the economy.

The Fed is the only agency of government to have acted effectively in this emergency, with innovation and courage. Although the emergency is clearly not over, the forces of ignorance are trying to shut it down. Don’t join them. Please.

Mortgage interest rates increased this past week despite the Fed announcing last week that it would purchase $600 billion in Treasuries over the next several months.  Markets are concerned that the Fed may purchase intermediate term 3 year, 5 year, and 7 year notes instead of longer dated 10 year notes and 30 year bonds which would be more likely to help mortgage rates.  Markets are also concerned that the quantitative easing move is mainly directed toward weakening the Dollar in order to improve exports.  Economic data of note included weekly jobless claims which dropped more than expected.  The September Trade Deficit was less than expected on slightly stronger exports.  The Treasury reported a budged deficit of $140.4 billion in October, the 35th consecutive month of deficit spending.  Also, the Treasury auctioned $72 billion in 3 year notes, 10 year notes, and 30 year bonds.  The auctions were met with mixed demand.

The Dow Jones Industrial Average is currently at 11,147, down about 300 points on the week.  Crude oil futures are currently trading at just under $85 per barrel, down about $2 per barrel on the week.  The Dollar strengthened versus both the Yen and Euro on the week.

Next week look toward Monday’s Retail Sales, Tuesday’s Producer Price Index (PPI) and Industrial Production, Wednesday’s Consumer Price Index (CPI) and Housing Starts, and Thursday’s Philadelphia Fed Business Index as potential market moving events.

The immediate aftermath of the QE2 announcement has not gone well: mortgages rose to their two-month highs near 4.25%, and the yield of 30-year T-bonds exploded from 3.93% to 4.32%. QE2 has an immediate problem: Treasury yields are stone low because the whole world ran to our paper for safety, and now the Fed proposes to make that paper unsafe by printing cash to finance it. However, it is early: the Fed has yet to buy the first QE2 Treasurys, and the event will go better than the news.

Economic data… during my Irish mother’s long-ago visit to the Emerald Isle, the best forecast for weather called for a “bright interval,” and our economy had the same in October. Even the grumpy NFIB survey of small business improved, though more reconciled to lousy conditions than truly better. New unemployment filings touched a 2010 low at 435,000 last week, more running out of people to lay off than hiring.

QE is incomprehensible to the average citizen, and misunderstood by many finance people; even more do not want to understand. A common-sense guidepost: Sarah Palin said this week that she just knows that QE2 is the wrong thing to do.

We could engrave her total knowledge of monetary policy on the head of a pin and not mar its shiny surface.

The policy errors that made the Great Depression great have been the life’s work of Ben Bernanke: during the financial collapse from 1930-1932 the authorities tried to balance the Federal budget, and maintained a tightwad Fed. This time we mobilized fiscal stimulus and active central banks, but the underlying hazards — asset deflation, capital shortage, and credit freeze — are still in place, and sovereign borrowing capacity is exhausted, not the case in the ’30s. This emergency is not over, maybe not by half. And from here to Europe fiscal support is turning to deep austerity, and suicidal disciplinarians are trying to shut down the central banks.

One Fed governor who voted for QE2 waited five whole days before shoving Perfesser Bernanke under the bus. Kevin Warsh lauded “reallocation” of capital and labor (the benefits of foreclosure and unemployment), and deleveraging as “prudence to be celebrated” (credit is bad for all of you). Instead of QE2, he advocated “pro-growth policies,” reform of the tax code and regulation, presumably to be achieved in time to help this crisis by the arrival of little green men on the White House lawn.

For a splendid tale of successful QE in 1933, and longer sidebar, visit certified no-illusions old-timer Paul Kasriel at www.northerntrust.com, “The Econtrarian.”

At the G-20 meetings, China and Germany decried QE2 as an unfair manipulation of the dollar to weakness, and intervention in free trade. John Dillinger and Pretty Boy Floyd might have had similar objections to giving pistols to bank guards.

Perfesser Bernanke needs help to explain QE — ordinarily the job of the Treasury Secretary, and Timid Timmy is not up to it, all-think and no-hit. Or the President, but he is still trying to get the plate number of last Tuesday’s dump truck.

The Perfesser is about to get help from the same quarter as last spring: Europe is coming unglued (again), now Ireland’s turn, and US Treasurys will be safe harbor.

Ireland did a brave thing when its real estate bubble blew: it guaranteed all bank claims. However, a 32% of GDP budget deficit this year, bank losses deepening as real estate dominoes fall under the weight of austerity, and Ireland has had it. It has some cash, but its bonds are wastepaper (see Morgan Kelly, University College Dublin).

Europe says aid is available, but Germany sets the conditions: loans that would save Germany’s banks from Irish default, but crushing balances and high rates that would prevent Irish recovery. Indentured servitude. Until you learn to behave like proper Germans, you will be an object lesson to the others not to misbehave again.

The others may draw unintended conclusions from this offer of serfdom. Tough Ireland might lead the way: better to default, issue New Irish Pounds; go back to spuds, cabbage and Guinness, and independence.

Mortgage interest rates improved slightly this past week despite generally stronger than expected economic data.  Today’s employment report for October showed non-farm payroll gains of 151k on expectations that 60k jobs would be added.  September and August non-farm payrolls were revised upward by 110k.  The unemployment rate remained unchanged at 9.6%.  Other reports better than expected included September Construction Spending, the October ISM Manufacturing Index, the October ISM Services Sector Index, and September Factory Orders.  Weekly jobless claims, though, increased more than expected, up 20k on expectations that they would be up only 11k.  Also of note, the Fed announced at the conclusion of its FOMC meeting that it will purchase $600 billion in Treasuries over the next six to eight months to help support low interest rates.

The Dow Jones Industrial Average is currently at 11,415, up about 300 points on the week.  Crude oil futures are currently trading at just over $86 per barrel, up almost $5 per barrel on the week.  The Dollar weakened versus the Euro and strengthened versus the Yen on the week.

Next week look toward Wednesday’s International Trade and weekly jobless claims along with Friday’s Consumer Sentiment Index as potential market moving events.

The Fed’s QE2 announcement was so perfectly pre-leaked that credit markets did not move on the fact (exception: 30-year Treasurys, see below). Other knees jerked: the dollar fell and commodities rose, presuming inflation from QE money-printing.

The reaction to QE2 thus far is off the point: “It’s the economy, stupid!”

The economy in October actually showed some signs of life — not health, but an end to summer’s downtrend. Payrolls picked up 151,000 jobs (details were not so “strong”); the twin ISM October surveys beat the prior month and forecasts: manufacturing to 56.9 from 54.4 and the service-sector to 54.3 from 53.2. Industrial production jumped 2.1% in September, and autos to a 12-million annual pace, gently better all year.

Housing is still deteriorating. The brand-new guide to underwriters at MGIC covering 73 metro areas found 27 “stable,” all the rest “weak or soft.” Of the stable, 12 are softening, leaving only one metro area in five truly steady.

The Fed said that it would buy $600 billion in Treasurys, mostly 3- to 10-year, about $75 billion per month through June 2011. Given an estimated  $1.3 trillion annual deficit, $110 billion per month, and given that only one-third of that borrowing is in maturities three years or longer, maybe $30 billion monthly, the Fed will shrink the supply of long Treasurys at a pace 2.5 times the rate of new issuance.

Contrary to misinformation from a lot of should-know-betters, the printed-money payment for these bonds will not lie inert as bank reserves. This cash will land in civilian wallets, the equivalent of pitching C-notes out of helicopters crisscrossing the US. Doubt “Helicopter Ben” at your peril; he meant exactly what he said back in 2002.

The Fed will also buy another $35 billion of long Treasurys per month to replace MBS as they are refied off the Fed’s balance sheet. That operation is neutral to the total supply of bonds in the system, but certainly will reduce the supply of Treasurys, driving investors to buy riskier IOUs and adding to the supply of private credit. Long-to-intermediate rates for everything (Treasurys, corporates, munis…) are going to stay down or drop. Perversely, mortgages may not fall, as the Fed swaps out of MBS.

The Fed said it would “adjust the program as needed,” but offered no specific targets that would guide its calibration — neither interest-rate, economic, nor inflation.

Hunches: the Fed is late, should never have stopped QE1, and the new program is the smallest and slowest option considered. If it does not open bank and securitized (“shadow”) credit channels, QE2 will have little economic effect.

The one QE2 surprise: only 4% of the Fed’s buys will be in the “17-30 year range,” and there the Fed may have tipped its hand and told us what to watch. If 30-year T-bonds — pure market, no QE2 effect — rise in yield, they will signal future inflation and overdone QE. Upon the QE2 announcement, yields on 30s soared from 3.89% to 4.08%, but that was momentary panic among those who had bet the Fed would buy wads of 30s. If 30-T yields fall as QE2 develops, that will signal QE2 too little and too slow, deflation still a risk and the economy not recovering. Watch 30s every day.

As a political centrist, positioned to annoy partisans of either wing, this election was deeply satisfying. Hell hath no fury like a centrist scorned, and those of us who voted for Mr. Obama and felt deceived by a wacko Leftie in centrist drag were thirsty for retribution. The ghost of James Madison is thrilled to see bums thrown out of a House that seemed gerrymandered into nothing but safe seats, in the largest reversal by either party in 50 years.

The victors had better get one thing straight before they siddown: Put the nation’s business — living within its means and competitive in the world — ahead of partisan posturing. You’re dealing with a center in a foul mood, just itching to throw your sorry asses out two years from now if you don’t behave. We are annoyed and itching to repeat that process until the survivors get the message, their parties immaterial.