Premier Mortgage Group

A run of good economic data continued this week, maintaining the upward pressure on long-term interest rates that began in November.

The National Association of Realtors reported a 3.5% increase in pending sales in November, although still 9% below 2009. New claims for unemployment insurance fell to the best level since 2008, a little more than 400,000 weekly. The Chicago purchasing managers’ survey of manufacturing (“ISM”) jumped in December, possibly indicating growing strength in the national numbers due on Monday. On the weak side: the leading measure of consumer confidence slid in December, and the October Case/Shiller report of home prices was weaker than any expected.

Respectable forecasters (notably Goldman Sachs) have upped their GDP forecasts for 2011 from the 2.5%-3.0% range to 3.5%+. If so, and if there is pull-through to job creation, then mortgage rates are in for a rough time. Supply/demand factors are not helpful to us: the Fed’s QE2 seems a bust, and the Fed is allowing its MBS portfolio to run off (not re-buying as loans prepay), and Fannie and Freddie will begin a gradual reduction in their holdings in 2011 (10% per year forward).

However, right there the forecasts by stock-market and business economists diverge from those of us in housing and credit. It is extremely difficult to imagine a strong, general recovery while mortgage rates rise and housing continues to deteriorate, creating new financial-market losses, and credit remains nearly non-existent except for the largest corporate borrowers.

Which group turns out to be correct… that will tell the tale of mortgage rates in 2011.

While looking into each new year, I recite the mantra of this blog’s patron saint, Peter Drucker: “Nobody can predict the future. The idea is to keep a firm grasp of the present.”

The present today is slipperier to evaluate than usual for an odd reason: it is so similar to the turn of last year. Hardly anything has changed. Interest rates are the same, near 5.00% for mortgages, near 3.50% for 10-year Treasurys, both expected to rise last year as now. The lack of employment is the same, and so the dearth of tax revenue (our “thing to watch” at last New Year). The economy was then expected to accelerate in a recovery assumed to be underway, making the Fed’s QE1 and home-purchase tax-credits unnecessary, both to expire in spring 2010.

Those expectations were wrong, of course (and not found here), but are no impediment to forecasters today, who see the same acceleration underway. The economy is doing a little better now than in summer, but there is no new fuel for the domestic economy. In fact, compared to one year ago, headwinds are a bit stronger: the big stimulus of 2009 has washed out, leaving state and local budgets exposed; and housing is clearly in worse shape, and it is without any prospect for helpful policy intervention.

Other than non-recovery, the only two specific economic surprises in 2010: Europe fell into currency crisis, and Left-wing Democrats suffered an epic rout.

This peculiar stability begs a different kind of forecast. Sometimes an absence of visible change properly reflects an absence of underlying tension (1950s, mid-1980s to late 1990s…), and other times unsustainable trends are accumulating tension at, near, or past their breaking points but not yet broken. This forecast must also depart from the normal US-centric approach; economic globalization is happening at a pace beyond comprehension.

There are three large-scale unsustainables in play today, and all three will rupture; however, they are so very large that each could continue to build tension for years ahead. Stephen Hawking: “Time is what keeps everything from happening all at once.” Nevertheless, we have felt foreshocks from all three, and all are linked: Europe’s currency failure, US fiscal irresolution, and China’s trade manipulation and hyperbolic growth.

Europe. You can get in a nasty fight and called a racist for saying that culture matters; for denying Jared Diamond’s insistence (“Guns, Germs, and Steel”) that we are all the same people, that only geography, resources, and power matter; and get in bad trouble for arguing that national and regional cultures are durable over centuries.

We mediate the relative economics of cultures via currencies. The dreamy, one-world pretense of gold has never worked for more than a few decades, and then only among the richest nations, and then ended badly.

The currencies of the most productive cultures inevitably rise in value. They sell more things to others, and receive payment; as they receive payment, those who buy are less able to pay. They either buy less, or pay with currency debased in one way or another, worth less, and by that means buy less. That devaluation allows the weak to sell their own exports. Millennia-old truths.

The euro was an attempt at cultural unity where none existed. In one short decade the euro has become deutsche gelt, a continental prison that will not allow economic adjustment. The hyper-productive Germans run export surpluses inside Europe and out, euro-gelt pouring in, to be recycled as loans to the buyers of those exports. Payments on those loans must be made in euro-gelt, which the weak have no way to earn; their exports are locked into euro-gelt prices. To be competitive, the cost of their labor must deflate, and with it their domestic assets (homes, stocks), and their ability to make payments on loans foreign and domestic.

Europe has two ways out: true union or breakup. Germany could switch to a consumer economy and become a net importer from the rest of the euro-zone, and all 16 nations could surrender sovereignty and form one treasury, one parliament, one tax code, and one welfare system.

Ain’t gonna happen. Culture is durable.

Meanwhile, tension is building. Club Med cannot conceivably make payments on its current debt, and must reduce the balances owed by some form of default. Their IOUs are held by the banks of the rich, who are deep into pretense that these loans will be good. Everywhere in Europe a silent calculus is measuring the cost of continuing pretense versus breakup.

The moment of breakup will be painful, but will be mightily cleansing — just as all shifts from the fantastic to the rational. The longer that Europe waits, the more expensive and disruptive breakup will be.

US Deficit. Our last two Presidents have been the only ones in modern times to campaign to the center and attempt to govern from a wing. Both parties have focused on their extreme “bases” in a malignant Roveism. Very odd. This country has had only one durable base: the center.

In the two months since the wing-wipeout, both parties have come to their senses, competing for the center. The Left lost the seats this time, but the Right heard the warning. Our government has gotten more done in two lame-duck months than the rest of the Obama administration and a lot of the prior put together: tax-bracket extension, partial FICA suspension, sustained long-term unemployment benefits, ratified START, and repealed don’t-ask-don’t-tell.

Congress-wise Joe Biden was sent up to the Hill to cut the deals, and in brutal signal did not inform his party’s Left until after it was over. We have not enjoyed competence of that kind — both parties — since Bill Clinton cut the budget-balancing deal in ’93, trading pay-go spending discipline for tax increases.

Except for the Clinton moment, the US budget has been out of control since 1963. The entire country is worried about deficits to the point of economic paralysis, terrified for ourselves and our children. Everyone in the center understands that neither the Palin nor Pelosi wings will decide the terms, and knows that nobody will be happy with the specific sacrifices, and knows the end result of fiscal discipline is absolutely necessary.

When the people are moving, politicians elbow each other to follow.

China. The all-time black box. Churchill called Soviet Russia “A riddle wrapped in a mystery inside an enigma….” China is so big and growing so fast that China itself cannot know what is happening to it.

Back to principles of trade and currencies. If you run a big trade surplus, sooner or later your currency will rise in value. You may deny, distort, contort, and delay, but sooner or later, upward revaluation is going to happen. Next, your avoidance maneuvers will have domestic consequences: you must put your wealth somewhere that it will not affect your currency, which makes you bubble-prone (see Japan). Also, if you peg your currency to another, you will import the other’s monetary policy: in this case, super-easy Fed policy brings to China overheating and inflation (note the reverse in Europe, in which German-driven tight monetary policy is crushing Club Med). Your certain-to-fail peg begets speculation, everyone trying to buy yuan-denominated assets to hold for the day that the yuan soars. That anticipatory scramble reinforces the bubble and inflation pressures.

Reports from China all through 2010 describe a wage-price spiral underway. Two laws and lessons, there: we have nothing to fear from inflation here because our wages are suppressed by foreign labor competition. China has nothing to suppress its wages. Second: once a capitalist economy enters a wage-price spiral, nothing will stop it except a recession. The longer you let inflation run without the pain, the worse the ultimate discomfort; but you can run it for a long time (see US, 1968-1980). China’s growth has been compounding at annual rates in excess of 10% for 20 years, the curve steepening beyond capacity some unknowable time ago.

I have no idea which of these three unsustainables will burst in 2011, if any, or all three. Each has a great deal of momentum behind it. See Japan, again: its unsustainable condition has run for 20 years, but will run on — in 2011 spending $1.1 trillion versus $490 billion in tax revenue, borrowing 96% of the rest from itself. The three instabilities described here are more immediate than Japan. When one does break, the whole globe will feel the consequence, which will be to slow the world economy and suppress inflation.

Beyond that suppression, resolution to these three over-stressed trends will be very good news indeed. Past them, we can look forward to the next stage of global commerce, and nothing in economic history has held so much promise for the standard of living and well-being of mankind.

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Mortgage interest rates increased again this past week as economic data was mostly better than expected.  Reports stronger than expected included November Retail Sales, the December Empire State Manufacturing Index, November Industrial Production and Capacity Utilization, weekly jobless claims, and the Philadelphia Fed Business Index.  The November Producer Price Index (PPI), a measure of wholesale prices, increased more than expected, up 0.8% on expectations of an increase of 0.5%.  The November Consumer Price Index (CPI) increased 0.1%, slightly less than expected.  Housing data, though, did not meet expectations.  November Housing Starts were up 3.9% on expectations that starts would be up 4.8%.  November Building Permits were down 4.0% on expectations that they would be up 2.5%.

The Dow Jones Industrial Average is currently at 11,472, up over 100 points on the week.  Crude Oil futures are currently trading at $87.86 per barrel, down slightly on the week.  The Dollar strengthened versus both the Yen and Euro on the week.

Next week look toward Wednesday’s final look at Q3 GDP and Existing Home Sales and Thursday’s Durable Goods Orders and Personal Income and Outlays as potential market moving events.  All markets are closed next Friday in observance of Christmas.

The bond-market blowup seems to have topped: 10-year T-notes touched 3.60%, and low-fee mortgages 5.125%. Each has rocketed one full percent in one month.

In some ways this explosion makes sense, but in others it’s been downright weird.    The sensible: we were way overdue for a technical correction from the straight-line drop in rates from April to August. Markets that decline in straight lines rebound in straight lines.

An economy under-performing in spring and summer led to thoughts of double-dip, and now the economy is performing better than forecasts, concentrated in retail sales, up 1.2% in November, and October revised to plus 1.7%; and in manufacturing, November production up .4%. A pop in export volume is a good hint for the “why” in manufacturing; the big-business types are happy, their global engines humming. Even the small-biz NFIB survey is an inch above two-year bottom. New claims for unemployment insurance have held lower in the last two months, 420,000 weekly.

These are legitimate improvements, consistent with an economy sputtering along just above stall-speed. Gain a little growth altitude, rates up; lose a little, back down.

The dividing line between reasonable and weird has been the reaction to two government stimuli: the tax-rate extensions and QE2. These have given bond investors a case of eye-bulging, screaming bejabbers: conviction that the US economy is now strongly self-sustaining, accelerating into 4% GDP growth and certain inflation.

When measuring economic stimulus, consider a water faucet. If water is trickling forth, so it will until you turn the handle. This “tax-cut extension” was an increase in after-tax income ten years ago that has flowed on at the same rate ever since, the economy completely adapted to it by 2004. New stimulus would require turning the handle; this extension has no force of impact at all.

QE2 frightened everyone except us central-bank junkies. All civilians saw it correctly as money-printing, but cannot be convinced that it’s necessary and non-inflationary money-printing. Perfesser Bernanke went on “60 Minutes” to try, and made it worse.

QE2 is a big thing: the Fed is buying the equivalent of all net Treasury borrowing through April. More powerful, it is buying long-dated paper at a rate at least 2.5 times new issuance. To get this interest-rate volcano going, existing holders of long Treasurys have had to sell at a rate far faster than the Fed is buying, enough to overwhelm market buyers, too. An all-out skedaddle, a true and unseemly panic.

Another marker: the Fed met on Tuesday, and its post-meeting press release confirmed standing policy. The bond market fell apart, again. What were these sellers expecting? QE2 stoppage? In the absence of pre-meeting hints, inconceivable. The market seemed frightened just to be reminded what the Fed is up to.

Financial market people do all they can to ignore housing, hoping that one day it will just go away. On current trend, it might. This notion of consumer-based economic acceleration is fatally incompatible with all four home-price gauges reporting new declines (CoreLogic, Zillow, FHFA, Case-Shiller); and new declines in unit sales, possibly no net absorption of inventory at all. A 1% increase in mortgage rates is not helpful.

On actual economic-inflation grounds, this bond rout does not make sense.

However, another reason does make sense. Or could. The great background fear has been that Treasury borrowing would at last overwhelm the world’s willingness to lend. Treasurys traded in markets today: $9.3 trillion (www.treasurydirect.gov; BTW, China holds less than 10%), and was only $5 trillion when the crisis began in July 2007. We will try to borrow another $1.2 trillion or so each year ahead (the tax-bracket extension does matter, there). An end to our borrowing ability would appear first in the world’s refusal to buy or hold our long-term paper, and that is what is happening. Maybe correlation and not cause, but a foretaste. The Ghost of Christmas Future.

Nothing on this earth matters more than a US fiscal Big Fix.

Mortgage interest rates increased again this past week as Congress moved closer to extending the Bush Tax cuts, cutting the payroll taxes by 2.0%, and continuing the emergency unemployment payments for another year.  It is estimated that this will increase the deficit by $700 billion, adding supply pressure to the bond markets.  Also of note, the Treasury auctioned $66 billion in 3 Year Notes, 10 Year Notes, and 30 Year Bonds this past week which was met with mixed demand from the markets.  Economic data generally surpassed expectations.  October Consumer Credit, weekly jobless claims, the October Trade Deficit, and the University of Michigan Consumer Sentiment Index were all better than expected.  Also of note, November Import Prices increased by 1.3% and Export Prices increased by 3.2%.

The Dow Jones Industrial Average is currently at 11,390, up slightly on the week.  Crude oil futures are currently trading at $87.69 per barrel, down almost $2 per barrel on the week.  The Dollar strengthened versus both the Euro and Yen on the week.

Next week look toward Tuesday’s Producer Price Index and Retail Sales, Wednesday’s Consumer Price Index and Industrial Production, and Thursday’s Housing Starts and Philadelphia Fed Manufacturing Index as potential market moving events.  Also, the Fed’s FOMC meeting concludes on Tuesday.  The market expects that the Fed Funds rate will be left unchanged.

Another week, another public-policy adventure — but the political theater is nothing compared to the hysterics in the bond market.

The 10-year T-note in the three days after November 12 leaped from the 2.50% area of the prior three months to 2.96%. This week, again in three days, the 10-year shot to 3.27%. A three-quarter percent jump in less than one month is a big deal, especially as mortgages have done the same, jabbing a hole in housing’s life raft.

The first leg of the jump was routine and natural: bonds were overbought in expectation of a double-dip recession, and in hopes that the Fed’s QE2 would force rates down. This week’s second jump was the direct result of the tax-cut extension deal, which re-ignited a blazing mental furball of deficits, inflation, money-printing, and we’reallgoingtohellintensecondsorless.

How much of this is justifiable concern, how much is handwringing, and how much is markets having a lucrative time running cattle back and forth… all of that begins and ends with the economy, stupid.

Which is gong nowhere. In an economic version of the movie, Groundhog Day, we’re right back where we were last year, the choir insisting that we’re in recovery. We are not. We are growing at an achingly slow and fragile pace, but not recovering: not jobs, not housing, not households. That soggy mass cannot kindle inflation.

But what about the stimulus from this new tax-cut deal? It is gratifying to see Mr. Obama move to the center, although meeting on the poor ground of competitive giveaway: If you guys want to give money to rich folks, then I get to give some to my team. Nothing in this temporary deal is an impediment to the long-term Big Fix that we so desperately need, and for which prospects are rising.

The essence of this week’s deal: the Pelosi and Palin wings have suddenly moved from gridlock anchors to irrelevant margins. Both lost this week. Parties that can make a big deal with each other will make more deals. To the genuine credit of both parties, the estate tax festering for ten years also got fixed this week, and on fair terms.

However, contrary to the panic in the bond market, there is no serious stimulus in the tax-cut/payroll/jobless benefits package! Everything is as-has-been. Yes, we’ll borrow another $750 billion over two years, but we were going to do most of that anyway. The only new element, the 2% cut in payroll tax, will be mostly saved, not spent, just like all of the mini-checks-in-the-mail since Jimmy Carter’s first fifty bucks in ‘77. The real stimulus enacted in 2009 is now washing out, especially support for state and local budgets. As austerity really hits there, we may see half a million people laid off in the next year, and large scale contraction in pension and benefit promises.

This surge in long rates does more to undermine recovery than the tax-cut deal will do to help. That problem is driving the Fed nuts: it has tried for three years to get long-term rates low enough to stimulate asset recovery (not inflation), but the whole herky-jerky decline from a 5.25% 10-year in 2007 has trailed the economy. Still does.

External forces have helped us, economic heat in Asia and Northern Europe: our exports are up, pulling manufacturing, and some 65% of the S&P500’s gorgeous earnings are from overseas. However, in Europe, all roads lead to slowdown, whether austerity in Club Med, or default, or euro currency break-up doesn’t matter. The hyper-productive North is enjoying a grossly undervalued euro temporarily, delivered only by Club Med pain and market panic. Inevitably a much more expensive currency and exports lie ahead for Germany and its immediate neighbors.

Asia has great growth momentum and long-term prospects, but its currency manipulations are near an end as inevitable as Europe’s, Asian domestic inflation rising out of control right now. Asia will slow itself down or markets will do the work.

There will be a day for self-sustaining recovery here, and inflation risk, but this is still not that day.

Mortgage interest rates increased this past week on generally stronger than expected economic data.  Economic data stronger than expected included the November Chicago Purchasing Managers Index, November Consumer Confidence, the November ADP Private Jobs Estimate, the November ISM Manufacturing Index, October Construction Spending, and October Pending Home Sales.  Pending Home Sales increased 10.5% on expectations that sales would be unchanged.  Year over year, though, pending home sales are down 20.5%.  The ADP Private Jobs Estimate showed that 93k jobs were added on estimates of 58k new jobs.  Today’s November Non-Farm Payrolls report, though, showed only 39k new jobs on expectations of 140k jobs created.  In the private sector 50k jobs were created on expectations of 145k new jobs.  The unemployment rate was also weaker than expected, increasing to 9.8%.

The Dow Jones Industrial Average is currently at 11,338, up about 240 points on the week.  Crude oil futures are currently trading at over $88 per barrel, up over $4 per barrel on the week.  The Dollar weakened versus both the Yen and Euro on the week.

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

The unsettling rise in long-term rates has stopped for the moment, economic optimism colliding today with a simply awful employment report for November. The 10-year T-note has stalled just short of 3.00% (from 2.50% centerline, August to mid-November), and mortgages have risen almost to 4.75%.

Some aspects of this rate rise have made sense, one has not, and one is trouble. The straight-line drop in the T-note from 3.99% on April 5 to 2.47% on August 31 was overdue for a classic, technical, one-third counter-move, and that’s what it’s done. As a matter of economic fundamentals, April-August was a time of double-dip expectation, but GDP has held the 2.5% area, and most data (all but housing) have shown some improvement. Third, the Fed’s QE2 caused more dumping of bonds than it is buying.

Making no sense to me: no bond rally in reaction to today’s job report. A piddling 39,000 new jobs versus 200,000+ in forecasts, unemployment up to 9.8%, nine million people still sentenced to “involuntary” part-time work, two years running.

Trouble: The prospect of sovereign defaults all through Club Med, and euro-reversal to local currencies seems to have infected our bonds as well, calling into question the strength of the sovereign guarantee of the US Treasury. Long-term rates are higher here not merely for reasons of recovering economy and inflation risk, but credit risk.

In normal times, economic tides wash in and out of financial markets, refreshing some waders and drowning others. Well-regulated markets are able to moderate and transmit economic change, and economies rarely need rescue by public policy.

Today, everything depends on public policy. Markets are still far from able to stand alone, and have become poor indicators of actual conditions.

Public policy itself is changing and wobbly. Keynesian stimulus is done. Only government-guaranteed credit is widely available but even that inadequate supply is questioned by new arrivals in Congress. Private credit markets are open only to the largest corporate borrowers, and overall credit continues to shrink.

Soon, two new public-policy decisions will say more about how the economy fares than markets will. One looks good and the other scary, but in both cases I’m in the minority: we may make a realistic run at the structural federal deficit, and we may greatly limit the powers of the Federal Reserve.

Nothing would help the American economy more than a deficit fix. Upward pressure on interest rates would cease, an easy Fed could offset austerity without inflation worry, a sound dollar would reassure the whole world, and perhaps most important, responsible management of our affairs would ease the American mind.

The people are miles ahead of those pretending to lead. Those worthies still show every misbehavior that got us into this hole, quibbling their way to inaction. If the President, or in his absence the Congress, offers a budget fix that is real and makes everyone mad about something, the country is in a “Hell yes!” mood. Just do it.

The Fed faces multi-partisan assault, taking new heat this week after revealing the massive extent of its ’08-’09 rescue. Its rescue of us. Lefties say that the Fed should not have saved those bad banks and corporations, in an epic odd-coupling with the know-nothing Right who want nobody saved. An Op-Ed in today’s WSJ argues against any Fed at all on grounds that it has usurped the fiscal powers of Congress.

Madness… if your house is on fire, you need a fire brigade in minutes, not months.

Another large group of Fed wing-clippers has its own insane certainty. Since government is Bad, and markets are Good, and the Fed is government, salvation lies in unleashing the power of markets and chaining the Fed to mechanical rules. Those so-arguing include many of those saved by Fed intervention, and not one will acknowledge that we are still trying to survive the most extraordinary market failure in human history, one which might only have been prevented by a more active Fed.

I do hate to depend on public policy, but here we are.