Premier Mortgage Group

Mortgage interest rates improved slightly on the week as Q1 GDP was up just 1.8%.  Toward the end of February and early March, markets were expecting Q1 GDP to increase by 3.0%.  Other economic data was for the most part either in line with expectations or slightly stronger than expected.  March New Home Sales, April Consumer Confidence, March Durable Goods Orders, and Pending Home Sales for March were slightly stronger than expected.  March Personal Income and Spending, the April Chicago Purchasing Managers Index, and the University of Michigan Consumer Sentiment Index were in line with expectations.  Weekly jobless claims, though, were weaker than expected, up by 25k claims on expectations that claims would drop by 13k.  Also of note, the Treasury auctioned $99 billion in 2 Year, 5 Year, and 7 Year Notes, which was met with mixed demand.

The Dow Jones Industrial Average is currently at 12,800, up almost 300 points on the week.  Crude oil futures are currently trading at just over $113 per barrel, up slightly on the week.  The Dollar weakened versus both the Euro and Yen on the week.  As expected, the Fed left the Fed Funds rate unchanged at the conclusion of its FOMC meeting on Wednesday.

Next week look toward Monday’s ISM Manufacturing Index, Thursday’s weekly jobless claims, and Friday’s employment report for April as potential market moving events.

We have a truly splendid outbreak of spring fever in the markets and media, the infected running about in circles, yelling “Inflation! Money-printing! Dollar crashing!”

Before rounding them up, a moment for the economy: inbound data are on the weak side. 1^st quarter GDP, expected everywhere (until March) to be in excess of 4% growth, maybe 5%, arrived at 1.8%. Net of distortions, probably closer to 2.5%, but not going anywhere, certainly not fast enough to absorb labor or houses. Orders for durable goods did rise 1.2% in March, manufacturing continuing as the one bright spot.

Case/Shiller found falling home prices in February (Again. Duh.). The surprise of most concern is the rise in people filing new claims for unemployment insurance. At the peak of optimism last winter, weekly filings fell into the 380,000 range; last week were 429,000, the recent average above 400,000 for the first time in two months.

Okay, get out the butterfly nets, soothing voices, straightjackets, and a quart of whatever they used to give to Pat Nixon.

Principles and facts sometimes quiet the disturbed: any inflation problem will cause a jump in long-term Treasury yields. Instead, the 10-year T-note this week dipped to 3.31%; excepting Tsunami Day (“3/11″) as low as any since mid-December.

Second, you cannot have an inflation problem without rising wages. If people don’t have the money to pay higher prices, they won’t buy much of the stuff that got more expensive. In next Friday’s job data, expect wages to be flat for a fifth-straight month.

Third, there is an inflation problem — several of them, full-go wage-price spirals — not one of them here. China, India, Brazil, Russia, even parts of Europe, all “overheating,” meaning economic growth faster than capacity, all in the serious stages of inflation that everywhere previously have required a recession to stop.

“But GOLD, man! Don’t you SEE it?! $1,545!! FIFTEEN HUNDRED BUCKS!! Going straight up… are you BLIND!?! SILVER $47.50… time to melt all that crap we got at the wedding… inflationinflationINFLATION!!”

Better to rent “One Flew Over the Cuckoo’s Nest.” There is nothing to do with these people but shoot ‘em up with thorazine. At $1,545, gold is at last closing on that all-time money loser, $895 on April 25, 1980. In constant dollars that was $2,167.

Gold does not mean anything. Just a pretty, scarce, and emotional commodity.

Dollar principles are harder. First: the price of gold is the price of a thing; the price of a dollar is measured in other currencies, themselves relative to each other. Therefore, any time the booby-hatch begins this dollar-falling hollering, pinch yourself. Fall from what, relative to what? Beware of charts beginning at prior highs — in mathematic inevitability, they must show subsequent decline.

We have fallen versus the yen, now 81/buck. Which is very good news. The yen’s strength is a self-welded prison of deflation. We have fallen versus the commodity exporters — Australia and Brazil — themselves overheated by China’s insatiable appetite, and deeply vulnerable to any China slowdown. We have “fallen” versus the euro (now $1.48), but the dollar is still stronger than the euro-top in the summer of 2008, pre-Lehman ($1.59). The dollar has had no meaningful slide versus China’s yuan or Russia’s ruble, and has gained versus Swiss franc and Canadian loonie.

All of the nations whose currencies have risen recently, previously succeeded in devaluing versus us in the pit of the financial crisis, which cheapened their exports, and helped them to recover. Relative processes tend to self-correct, recurrently.

Last currency principle: the primary mover is interest-rate differential. Earn more there than here, money goes there. In Teutonic blockheadedness, the European Central Bank has begun to raise its cost of money, assuring the collapse of Club Med. Our cost of money is still zero, where it will remain until someone here decides to help housing. The day that Greece goes down, you won’t want to hold euros.

Some day we’ll have dollar trouble, but this day belongs to the Mad Hatter.

Notes to chart: The dollar has gradually declined ever since WW II, as it should have, the rest of the world gaining relative strength. The two huge runs up in value were bad things for us an the world: the early ’80s double-digit interest rates, fighting inflation, pulled cash to the dollar; and the 1997-2004 succession of Asian currency crisis, recession, and 9/11 did the same. The weakness since 2008 traces to suicidal strength in the yen, and a 0% Fed fighting deflation; when we finally recover and the Fed normalizes, the dollar will return to its 80-90 index value on the chart. The we’ll see how we do versus thenew world’s largest economy, China, and how it does versus us.

Mortgage interest rates were mostly flat on the week on mixed economic data.  Economic reports stronger than expected included March Building Permits, March Existing Home Sales, and March Leading Economic Indicators.  March Existing Home Sales increased by 3.7% on expectations that they would increase by 2.5%.  Economic reports weaker than expected included March Housing Starts, weekly jobless claims, and the April Philadelphia Fed Business Index.  The Philadelphia Fed Business Index fell to 18.5 on expectations that it would fall to 32.9.  Also of note, S&P downgraded US debt from stable to negative.  S&P did not change, though, the AAA credit rating of US debt.

All markets are closed today for Good Friday.  The Dow Jones Industrial Average closed out the week at 12,506, up about 160 points on the week.  Crude oil futures closed at $112.29 per barrel, up slightly under $3 per barrel on the week.  The Dollar weakened versus both the Euro and Yen on the week.  The Dollar fell to its lowest level versus the Euro in the past 16 months.

Next week look toward Monday’s New Home Sales, Tuesday’s Consumer Confidence, Wednesday’s Durable Goods Orders, Thursday’s first look at Q1 GDP, weekly jobless claims, and the Pending Home Sales Index, and Friday’s Personal Income and Outlays as potential market moving events.  Also, the Fed’s FOMC meeting concludes on Wednesday.  Markets expect the Fed to leave the Fed Funds rate unchanged.

It has been a quiet week in the markets, shortened by Good Friday. Oh, S&P created a tempest with its threat to the AAA rating of Treasurys, but as the week wore on, more and more people asked, “How would they know?”

Stocks regained all losses, but Treasury bond yields stayed low, the 10-year 3.39%, mortgages under 5.00%. Bill Gross, famously dumping all of PIMCO’s Treasurys last month, has lost money on the trade. A Federal budget deal is now likely; Europe is in trouble (again, Greek 2-year bonds paying 22%), and domestic data is weakening.

Sales of new and existing homes are flat, but distressed inventory is rising; and the FHFA found that home prices fell 1.0% in January and another 1.6% in February.

The fascinating thing about housing, now: it’s no longer news. It’s so yesterday, boring. For seven months, media attention has focused on ForeclosureGate, loan servicers allegedly foreclosing on innocent homeowners. The reality is clear now, as then: the servicers have mistreated borrowers by inattention, and have run around  antique local-level foreclosure procedures. Servicers will be fined, and newly regulated.

Media have found a handful of wrongly foreclosed families, but that preoccupation has missed wisdom attributed to Uncle Joe Stalin (if he didn’t say it, he should have): “The death of a man is a tragedy; the death of a million is a statistic.” The search for human-interest has abandoned the real victims: another two million households will be foreclosed this year, 11 million underwater — and government help is going… gone.

Imagine if in 1937 FDR had said, “I see one-third of a nation ill-clothed, ill-housed, and ill-fed… but if we wait long enough, they’ll get over it.” Everybody understands the basics: more houses for sale than buyers. However, even those in pain often don’t believe me when I say that credit is too tight and too scarce. Today, two examples.

Fannie, Freddie, and FHA are the only remaining significant sources of mortgages, and they are frantically trying never to make another bad loan. One cause of default is fraudulent borrower documents. Early in the 1990s, minutes after the invention of  desktop publishing, the first borrower fabricated tax returns showing more income than the ones filed at the IRS. Minutes after that, FF&F required form 4506T, to pull transcripts from the IRS. For a while we actually checked, but so few fraudulent returns were found that the signed 4506T became a threat, but not an immediate act.

Since 2009 — as never before — every borrower must bring tax returns (not just the self-employed), and we must run a 4506T every time. May a merciful Almighty save us this time of year, when the IRS could not find its behind with the help of a proctologist. Transcript delays have run six, even eight weeks.

How many fraudulent returns and defaulted loans are we really preventing? In a billion dollars of loans through here, I know of one case of fraud (a CPA applicant!), hundreds of innocent but odd 1040s questioned with red-hot tongs, and thousands of delays. Think FF&F are tracking cost/benefit? Uh-uh. Just tighten, baby, tighten.

Second example: the Dodd-Frank Qualifying Residential Mortgage, qualifying for capital exemption in securitization. QRMs will require 20% down to buy, 25% equity to refi, forbid 2^nd mortgages… a belt tightened right through the backbone. An FHFA study (April 14 www.fhfa.gov) found annual rates of 90-day delinquency pre-bubble (1997-2003) clustered between 2.50% and 3.00% for all loans — which is why FF&F charge to securitize loans, or require mortgage insurance. QRM-equivalent defaults ranged 0.31% to 0.55%, but were barely 20% of all loans.

By 2009, standards had so greatly tightened that all new purchase loans had a 0.30% default rate, and the QRM fraction 0.07%. No one need fear the wind-down of government supported lending: it’s already done — although the 80% of supply, non-QRM loans are going to be expensive and scarce. This self-defeating political backlash against FF&F has turned them into insurance companies offering hurricane coverage, but only for homes 200 miles from an ocean.

Mortgage interest rates improved this past week despite mixed economic data.  Economic data better than expected included the April New York Empire State Manufacturing Index, March Industrial Production and Capacity Utilization, and the University of Michigan Consumer Sentiment Index.  Reports weaker than expected included weekly jobless claims, which increased 27k on expectations that claims would increase by only 3k.  The IMF lowered their growth forecast for the US economy in 2011 from 3.0% to 2.8% and the National Federation of Independent Business reported a decrease in optimism in the small business sector.  Also of note, the Treasury auctioned $66 billion in 3 Year Notes, 10 Year Notes, and 30 Year Bonds which was met by the markets with mixed demand.

The Dow Jones Industrial Average is currently at 12,316, down about 60 points on the week.  Crude oil futures are currently trading at just over $109 per barrel, up almost $2 per barrel on the week.  The Dollar strengthened slightly versus the Euro and weakened versus the Yen on the week.

Next week look toward Tuesday’s Housing Starts, Wednesday’s Existing Home Sales, and Thursday’s weekly jobless claims and Philadelphia Fed Manufacturing Index as potential market moving events.  All markets are closed next Friday for Good Friday.

Inflation fears this week abruptly gave way to concern for the economy, long-term rates and stocks dipping accordingly. Overriding all financial news: the miraculous outbreak of an authentic effort to repair the nation’s finances.

One at a time. By the end of last week, inflation worry-warts had begun to expect Fed tightening this year. On Monday, Vice Chair Janet Yellen and NYFed Prez Bill Dudley blew them up altogether. Fed tightening now is inconceivable.

Forecasters have called for 4%-plus GDP growth, but a crowd is elbowing for the exit, revising suddenly as low as 1.5%. March retail sales were soggy, a .4% gain and only .1% ex-gasoline. New claims for unemployment insurance spiked 27,000 to 412,000 last week, the highest in two months. The NFIB survey of small business in March retreated from all gains since last October, in sharp contradiction to the Fed’s Beige Book, happy-talk fairy tales from inflation-hawk regional-Feds.

The one bright spot has been manufacturing: March industrial production beat estimates, gaining .8%, and capacity-in-use up to 77.4% is the highest since Lehman.

The benchmark for any US deficit fix is The National Commission on Fiscal Responsibility and Reform, aka Bowles-Simpson, released on November 10, 2008 (www.fiscalcommission.gov). The summary should be memorized by every student and adult, and worshiped as no documents beyond the Federalist Papers, Declaration, and Constitution. NCFRR does suggest what to do, but its fairness, humanity, wisdom, and principles are a durable guide to how to do it.

Aside from the ideal structures of taxation and spending priority, NCFRR has one crucial insight and discipline: we must settle on the size of government as measured by percent of GDP. We must no longer tolerate in ourselves the Right’s perpetual dodge of taxation, starving revenue from necessary spending; nor can we tolerate the Left’s perpetual burglary, committing future spending without revenue.

NCFRR suggests 21% of GDP, revenue and spending in approximate balance — 21%  the baseline for spending ever since WWII. I don’t care, give or take a couple of points. Go much lower and government will become a cold and pinched vision of Calvin Coolidge. Go much higher and we’ll be lost in  bureaucratic bloat, inefficiency, and confiscatory redistribution.

Small imbalances are okay, deficits in the 1%-2% range (each percent is about $150 billion). Today’s spending is 24% of GDP, in the early stages of un-funded entitlement explosion headed above 30%. Tax revenue today is 15% of GDP.

Big hole. However, revenue has been suppressed about 3% by the Great Recession.

From my usual centrist perspective, designed to annoy everybody, of the two deficit-fixes, Ryan’s and Obama’s, which is closest to wisdom and compromise solution?

Ryan earns praise for tax reform, removing tax goodies in favor of low brackets, and for trying to cap healthcare cost (really, the entire future entitlement problem). It is on the short side of 21%, a safety net with holes. It fails on two other grounds: no additional revenue except by GDP growth, and no cuts in defense.

Obama’s proposal is harder to figure because his behavior has been so odd. He ignored the NCFRR report when released, then dismissed it in his State of the Union, then in February brought an as-is budget, and since refused to engage the matter. Then Wednesday, a hurried, no-detail proposal in a peculiarly timed 1:30PM speech.

He had this key line: “If we truly believe in a progressive vision of our society, we have the obligation to prove that we can afford our commitments.”

No, sir. Not that way. That is the old, corrupt way. Henceforth we cannot make commitments until we have agreed on what we can afford.

The most important thing: there is going to be a deal. The electorate is exhausted with living beyond its means. To the consternation of financial hyenas now salivating at the prospect of US default… ain’t gonna happen. As markets process the news of many fewer new Treasurys ahead, great benefits from sacrifice will accrue.

Year-to-year comparisons for the 1st quarter, 2010 vs. 2011. Source: BARA

Mortgage interest rates increased this past week despite limited new economic data.  Of note, the March ISM Services Sector Index was reported at 57.3, weaker than the 59.5 expected.  Weekly jobless claims fell by 10k on expectations that they would fall by 2k.  February Consumer Credit increased by $7.62 billion on expectations that it would increase by $2.5 billion.  Revolving credit fell by $2.71 billion, though, indicating that consumer spending may be falling.  Other news of note included China and the European Central Bank increasing interest rates by 0.25% on inflation concerns.  There is increasing belief that the Federal Reserve will increase short term interest rates later this year.  Also, the Treasury will auction $32 billion in 3 Year Notes, $21 billion in 10 Year Notes and $13 billion in 30 Year Bonds next week.

The Dow Jones Industrial Average is currently at 12,395, up almost 20 points on the week.  Crude oil futures are currently trading at just under $112 per barrel, up almost $4 per barrel on the week.  The Dollar weakened versus the Euro and strengthened versus the Yen on the week.

Next week look toward Tuesday’s International Trade, Wednesday’s Retail Sales, Thursday’s Producer Price Index (PPI) and weekly jobless claims, and Friday’s Consumer Price Index (CPI) and Industrial Production as potential market moving events.

Financial markets are on sharp edges despite the absence of significant economic data. This shutdown foolishness holds media center-stage, but that’s not what’s on the minds of markets. One thing there towers over all: we’re either entering a spate of global inflation, central banks late to the party, or we’re not.

The 10-year T-note is out of bounds, up at 3.60%, taking mortgages above 5.00%. Japan and Libya forgotten, oil is $111/bbl, gold $1468/oz, and silver $40/oz. That gold price is more than double the cost of new production, and silver easily quadruple — the sign that “momentum” traders are chasing each others’ tails. If we are ramping to global inflation, those tails are a good catch.

If this episode is a replay of the summer of 2008, the momentum boys are going to end up with a mouthful of fur and look really, really silly.

Limits on an inflation outbreak have been thought to be the following. The US is more in recession than recovery, wages not growing at all while rising costs of energy, food, and health insurance keep consumers on the ropes. All still true.

Europe was supposed to be on the edge of a new Club Med debt meltdown. Instead, the new Irish government says all-okay-we’ll-pay, Portugal will be bailed and accept the same vow of perpetual poverty not going well in Greece, and nobody wants to know what’s under Spanish covers. Is Europe really okay after all, or is the ECB tightening a suicidal sop to the Germans? Whether they’re okay or not, if they can kick the can far enough, European growth adds to global heat and possible inflation.

In the emerging nations, so long as they maintained undervalued currencies, then inflation was inevitable — but was supposed to be confined there. As they were forced to raise domestic interest rates, their currencies would at last rise and slow them down. Brazil’s real has broken upward, almost 10% in two weeks, maybe a trend-setter. However, early in a general revaluation of emerging currencies, all their exports would rise in price, adding inflation fuel, the long-run slowing over the horizon.

I’m going to stick with Plan A: the US economy is far too weak for global inflation to get going. Perfesser Bernanke is right: here, cost increases are transient, shifting US patterns of consumption instead of raising the general price level.

A good friend and smart money runner (Gary Beels) gives his clients this inflation reminder: when ‘Boomers were kids in the ‘50s, first class postage was three cents (went to four in ’58). The 15-fold increase to today’s $.44 is not far off the 12-times increase in CPI since ‘55. However… today we can send letters at zero marginal cost and instant delivery. In ’55 a “long-distance call” to Grandma on Sunday cost three bucks in those dollars, nearly forty of today’s — but today, that call costs nothing.

Inflation bites into economic growth in strange ways, different times. In Colorado the cost of health insurance has risen more than 10% in each of the last ten years. Murder. Gasoline is weirdest of all: 1955’s 25-cents-per-gallon gas in today’s dollars cost three bucks, then fell steadily in real terms until 1997. We feel pain today because the cost has doubled since ’97 versus incomes unchanged for most citizens.

Shutdown. Congress first began to balk at increasing the debt limit back in ’82, and voting then took on kabuki charade until Gingrich’s shutdown try in ’95. Worries for US bankruptcy then were minor, and Bill Clinton left Newt and his buddies without their shoes. Today the debt threat is real, and frightened people will support dumb things.

A temporary shutdown is not dangerous. The hazard lies in righteousness.

Our fiscal gulf is too big to bridge even if either party were granted its every wish. No conceivable taxation of Republicans by Democrats, nor Republican cuts of spending on Democrats will get it done. Neither party nor the President will deal with the cost of health care. Yet all have deep conviction of their moral superiority over the others.

Next week we mark the 150^th anniversary of Fort Sumter. That was the last time this country was divided by such great moral certainty, and contempt for our fellows.

Mortgage interest rates increased slightly this past week on mixed economic data.  Today’s employment report for March showed that non-farm payrolls increased by 216k on expectations that they would increase by 185k.  Non-farm private payrolls increased by 203k, in line with expectations.  The unemployment rate fell to 8.8% on expectations that it would remain unchanged at 8.9%.  February Personal Income increased 0.3%, in line with expectations, and February Personal Spending increased 0.7% on expectations that it would increase by 0.5%.  January Pending Home Sales increased 2.1% on expectations that sales would increase 0.3%.  Year over year, though, pending home sales fell by 8.2%.  The Chicago Purchasing Managers index was stronger than expected.  Economic data weaker than expected included March Consumer Confidence, February Factory Orders, the March ISM Manufacturing Index, and February Construction Spending.

The Dow Jones Industrial Average is currently at 12,400, up 180 points on the week.  Crude oil futures are currently trading at $107.53, up almost $2 per barrel on the week.  The Dollar weakened versus the Euro and strengthened versus the Yen on the week.

Next week look toward Tuesday’s ISM Services Sector Index and Thursday’s weekly jobless claims as potential market moving events.  Also, on Tuesday, the Fed releases the minutes from its March FOMC meeting.