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| August 11th, 2017 | Comments Off on MORTGAGE CREDIT NEWS BY LOUIS S. BARNES

In the absence of useful economic news, begin with a little political-money stuff, then remembrance of the 10th anniversary of the beginning of the credit disaster, the advent of QE, and now its reversal, RQE.

Nobody can handicap the DPRK/Trump engagement. But to say it doesn’t matter… bull byproduct. Ray Dalio, billionaire founder and top dog of Bridgewater, the world’s largest hedge fund, who very rarely comments on investments or politics: “The emerging risks appear more political than economic, which makes them especially challenging to price in.” But then he described them: “Two confrontational, nationalistic, and militaristic leaders playing chicken with each other” and “the odds of Congress failing to raise the debt ceiling rising.” Dalio then advised all to expand their holdings of gold.

The DPRK/tweet effect has been clear in real time, the stock market cracking, bond yields falling close to the lows of the last year, and gold rising.

The biggest political event of the week got lost in DPRK noise. Trump’s assault on McConnell makes more dangerous the debt-limit vote in September. Be as even-handed as possible: each political party has a road-rage wing — angry and irrational with its own set of fantasy-facts. The Republicans hold the congressional majority, but their minority ragers demand accommodation. The recurrent debt-limit issues in the House finally forced John Boehner to leave in exasperation, replaced by empty-suit accommodator Paul Ryan. Now Republicans control the Senate as well, and McConnell is as boxed as Boehner.

McConnell will need as many Democrats to pass the debt limit as Republicans. The ragers in each party will demand hostages: mutually exclusive riders to the limit bill.

The security team is obviously well-along in an effort to encapsulate the president. There is no comparable team or effort in domestic affairs. The Republican right (just like the Democratic “progressives”) is self-enraptured, unable to process that two-thirds of the nation is opposed. The harder the ragers in each party try, the more opposition rises.

There is a lot riding on McConnell’s skill, head-and-shoulders above Ryan’s. If the debt limit increase fails, Dalio again: “…Leading to a technical default, a temporary government shutdown, and increased loss of faith in the effectiveness of our political system.”

Now look back on a superb reaction to crisis by US leadership. Yes, the Fed, SEC, FDIC, Comptroller, Treasury all had missed the rise of the crisis, and it took 18 months after the explosion to fully react, but react we did and with extraordinary success.

The greatest bank run of all time began in late July 2007 — a wholesale run, banks on banks, not old folks in lines out front. The Fed reacted, injecting cash and trimming the cost of money, but did not perceive the systemic meltdown underway. From a Fed funds crest at 5.25% in July 2007, Bernanke had cut to 4.25% by year-end (the onset of recession by retrospective technical measure). In January 2008 he saw the greater magnitude of trouble, and in panicked steps by February 6 cut to 3.00%.

Bernanke’s book on the Great Depression identifies the key marker of any economic disaster: yields on ultra-safe Treasurys fall and fall, while yields on everything else rise, markets locking up altogether.

In July 2007, typical 30-fixed mortgages were 6.70%, and the benchmark 10-year Treasury traded at 5.16% — the spread of 1.50% a reasonable historical one. By October mortgages were down to 6.38%, but Treasurys were falling faster, to 4.68%, spread opening to 1.70%. In March of 2008 Bear Stearns failed in a Fed-assisted collapse, briefly reassuring to markets thinking a firewall might be in place. But then 10s nosedived to 3.34%, safety-buyers in mass, mortgages to 5.97%, the spread now blown open to 2.63%.

The Fed cut its rate in May to 2.00%. In false security, 10s by June 2009 rose to 4.25%, but so did mortgages, up to 6.32%, and typical loan fees had doubled. By late summer most of us in markets felt the ground moving again: Treasurys in August fell again to 3.79%, but mortgages rose to 6.48%, the spread opening to 2.70%, mortgage markets closing altogether, housing collapsing.

Then heaven-help-us September… the Treasury seized Fannie and Freddie on the 6th, Lehman took bankruptcy on the 15th, and the Fed set another firewall, over $100 billion in guarantees to AIG. 10s fell to 3.47%, mortgages at last down to 6.04%, but the spread still oceanic. TARP passed on October 3, 10s up to 3.99% in hope of a lasting firewall. Not: by November 24, 10s were down to 3.35%, mortgages 6.09% but nobody applying.

At Thanksgiving… salvation. Bernanke announced that the Fed would buy long-term Treasurys and mortgages, the Fed for the first time ahead of the curve of disaster. 10s kerplunked to 2.08% in two weeks. Mortgages took longer, to 5.29% in December — spread 3.20%!! — then down to 5.00% and below. As fear faded and QE took hold, 10s by summer rose back to 3.91%, and the spread down toward 2.00%, mortgage markets functioning.

Skip forward ten years. It’s till easy to find idiots and crazies who think the Fed should have let everything go — the “Austrian” creationists and right-side ragers.

The Fed has since it stopped QE buying in 2014 owned a surplus $1 trillion in Treasurys, but has already bled off the long-term ones. In the immense global market for Treasuries ($14.4 trillion), letting these extras run off is likely not a big deal.

But the Fed also owns $1.6 trillion in MBS, one-quarter of that market. The Fed will confirm in September the beginning of RQE, the monthly rundown at the outset to be $4 billion. In a time of tepid borrower demand, hence few new MBS, and huge global demand for high-quality IOUs, nothing to worry about. The Fed does intend to increase the runoff to $20 billion monthly, $240 billion annually, 15% of its QE holding now, and that might push rates up a bit.

Of all the things to worry about today, don’t add RQE to the list. The Fed and all in markets will watch the Treasury/MBS spread, and if it begins damaging widening, then the Fed will stop or slow the rundown.
If you’re worried today, look back at that 2007-2009 story and consider what we can do if only one man in the whole government is on his “A” game.

———- ———-

US 10-year T-note in the last year. The recent downtrend partly reflects inflation failing to rise, but don’t underestimate the political influence:

The NFIB’s monthly survey confirms its post-election pattern. NFIB members are heavily right-side Republican. After the election its optimism survey exploded upward as never before in its 45-year survey history. And without any economic foundation: the second chart, by components shows that nothing has changed in actual business, as in every actual-condition NFIB survey since:

The next charts illustrate the trip down memory lane in the copy above, 2007-2009. First the Fed funds rate, then the 10-year, then mortgages (Freddie Mac’s survey).

Credit News by Lou Barnes – December 2, 2016

| December 2nd, 2016 | Comments Off on Credit News by Lou Barnes – December 2, 2016

The interest-rate fever has broken for the moment. The 10-year T-note touched a two-year high yesterday at 2.45%, mortgages 4.25%. Both improved a bit today despite news which should have pushed them higher: good November jobs, ISM manufacturing index to an 18-month high, and an improbable OPEC deal and oil $50+.

We may get a pause at these levels, even improve a bit more, but the overall move up is not over. We might be rescued by a new mess in Europe or China or Japan, but there is no predicting or waiting for those.

Why did the bond market blow up on the day after the election? It’s possible to argue (weakly) that the move was already underway and the election triggered the next step. But, a straight-line 10-year run from 1.85% to 2.45%…? That’s the election.

And the Fed. Embedded in this bond wreck is a sudden repricing of the Fed’s intentions. Again, it’s possible to argue (weakly) that the bond market had defied the Fed for four years, and got caught. However, we now have a better set of fingerprints, both from the market and Trump: the election did this, and has more to do.

The first fingerprint, dramatic in the charts below: the 2-year T-note has also blown up. 2s are the best Fed weathervane. If you’re trading 2s and get wrong the trend in the overnight cost of money, you won’t be trading 2s for long. “Domino’s” on the roof of your car. On election-eve, 2s traded 0.80%; yesterday, 1.15%.

Pre-election many thought the Fed would tighten gradually, but that foreign buyers and a dim global economy would hold long-term bonds down — “yield curve flattening,” the spread between 2s and 10s narrowing. Not. The whole curve has jumped, and steepened, a forecast of both a faster-farther Fed and inflation.

Treasury Secretary-designate Steve Mnuchin — “Munchkin,” now and forevermore — is another Goldman escapee, who ran their MBS desk. His entire focus is pushing growth to “3%-4%.” And he’s going to privatize Fannie and Freddie.

All economies have speed limits. Add labor-force growth to productivity, and you get the rate of non-inflationary GDP growth. In our case roughly 1% plus 1% equals 2%. Push tax cuts or spending, and any excess growth just adds to inflation. To raise the speed limit, raise productivity and/or immigration. Raising productivity is a long and hard mission involving education and carefully targeted investment in a world drowning in excess investment. Immigration? With these guys in charge?

If the new administration intends to push growth at double capacity, the Fed must react, come faster-farther. That theory matches market fingerprints.

The cruel aspect: these stimulus plans are unlikely to boost growth much. Regulatory relief will be nice, but not “USA Unchained.” Lower corporate tax rates and repatriation of old earnings will not goose investment unless there are profitable opportunities — and those prospects have been so poor that companies have borrowed oodles of cash just to buy-back their own stock. Banks will not gush loans just because Dodd-Frank gets clipped. Banks will be more profitable, but lending requires borrowers with reason to borrow. Wing-nut financial theologies like privatizing Fannie will hurt. Voucherizing ObamaCare will frighten households, as will the threat to Medicare.

Poor prospects for stimulus or not, the Fed will have to pre-empt the potential hazard from the binge. Brace for tweets threatening Yellen.

All of that said, Trump has one asset which might break all of the rules for the better. Action! Do things. The presidency has been inert since Clinton’s first term, twenty long years, and The Donald will hit the ground in a whirlwind like none since the two Roosevelts and Reagan. He already has: the Carrier jobs deal is technically a waste, just a subsidy of the “saved” jobs by consumers and Indiana, foolishness the same whether pushed by Democrats and unions or the Tea Pots. Far better: retraining and outplacement, which adds to productivity.

But the theater! Carrier was a tremendous inspiration for the nation. Sometimes theater beats bean-counting. No matter how crazy he is, action feeds good spirits.

———- ———-

The 2-year T-note in the last 90 days. Something in the election forced instant re-pricing of the Fed’s intentions:

The 10-year T-note, five years back. There is no substantial technical “chart support” here except the double-top at the end of 2013. We are at risk for another half-percent increase, and soon:

Of course, “it’s the economy, stupid.” The Chicago Fed’s national index has been slipping for two years:

The Atlanta Fed’s spooky-relaible GDP tracker is all over the place in the 4th quarter. Growth may already be up-trending, 2.5%+, which would require quicker Fed action even without Trump stimulus:

The ECRI until it’s first-ever false-recession call in 2011 had been the most-reliable indicator for 45 years. I am suspicious of its red-hot value now:


Credit News by Lou Barnes – November 18, 2016

| November 18th, 2016 | Comments Off on Credit News by Lou Barnes – November 18, 2016

The US 10-year T-note is rising in yield again, now 2.35%, up a half-percent since election day. Mortgages are rising accordingly, close to 4.125%.

Did Donald Trump do that? We have some recent experience with black swan events, but not with a bird sporting an orange comb-over.

Part One: A global move up in long-term bond yields began in summer. The low for Japan’s 10-year on July 27 was -0.29% (note minus signs); on US election day it had risen to -0.064%. The German 10-year bottomed at -0.19% on July 8; by election day it had risen to 0.21% — almost as big an increase as the US 10-year after election day. Donald Trump had nothing to do with that. Since election day those two bonds have moved little and ours caught up.

That global rise was caused by the ECB and BOJ both confirming intent to push inflation up, continuing to buy IOUs from the market, but will cease pushing down long-term rates. Each central bank runs QE of $80 billion per month, but buying short-term paper. The BOJ will hold its 10-year at 0%, but the ECB has made no commitment to hold down long-term yields. The Club Med bellwethers, Portugal-Spain-Italy also saw their bond yields jump a half-percent before our election. The era of Japanese and German yields falling and ratcheting down the US 10-year has ended.

Part Two: The Fed. For four years the US bond market has defied the Fed’s hold-us-back threats and gotten away with it. In bonds and baseball, you can look really stupid if you get caught leaning.

US core PCE inflation is still running about 1.7%. Why would anyone buy US 10s at the rate of inflation? As above, if you thought foreign central banks would go ever-deeper negative. Or if you thought that some new economic nosedive here or overseas would push us into deflation or widespread debt default.

You got away with it while the Fed held the cost of money to 0.25% from 2008 until last December’s first hike to .50%. And you got away with betting the Fed would delay the second hike, and that the future slope of hikes would be excruciatingly low. Suddenly you’re behind: the Fed will go to .75% on December 14th, and authentic signs of wage growth mean that the Fed is an even-money bet to hike .25% every 90 days in 2017. That would put the Fed funds rate at 1.75%, and a really dumb idea to own 10-year bonds at 1.75%.

Part One and a bit of Part Two were coincident with the election, not caused by it.

Part Three is all The Donald. But, before sailing into that, the rules: Trump’s character issues are off limits. In the best American tradition, he gets a clean slate and should be evaluated on what he does now.

Markets don’t like uncertainty. We know that. But, holders of bonds especially will trade to protect themsleves from policies hurtful to them. The term, “Bond Vigilantes” dates to the 1980s — any government adopting inflationary policy will be punished by Vigilante selling, raising yields until they break the policy. An entire generation of bond-investing retirees were ruined by irresponsible US policy in the 1970s and early ‘80s, but there were too few bonds outstanding for rising yields to force policy reversal. Bill Clinton was the first to acknowledge that his spending dreams were limited by the Vigilantes, and his acceptance of discipline led to the splendid 1990s.

Trump’s plans as advertised in the election campaign are absurd. The Fed has good reason to believe that the non-inflationary US GDP speed limit is 2%. Try to force faster growth and the Fed and Vigilantes will shut you down. Try to replace Yellen & Co with agreeable money printers, and the Vigilantes alone will wreck you.

Will long-term rates continue to rise? We can hope for temporary downward corrections and a low cycle-top if Trump offers strong support for Yellen, and for budget discipline. Without that, this is going to get uglier. The housing market is the most vulnerable to the Vigilantes. We can tolerate mortgages rising through the fours, but crest 5.00% and the posse will shoot their man right out of his saddle.

———- ———-

The US 10-year T-note in the last year. Our bottom coincided with the Germany-Japan one, and just accelerated after election day:

The US 2-year T-note in the last two years, which captures the false alarm one year ago when 2s began to price-in a series of Fed hikes. Now it’s not a false alarm.

Wages are not moving much, yet, but it sure looks as though a long bottom was set, 2008-2014, and a new trend is underway to which the Fed must react — not abort, but remove stimulus.


Credit News by Lou Barnes – November 11, 2016

| November 11th, 2016 | Comments Off on Credit News by Lou Barnes – November 11, 2016

Now put all of the other stuff aside, and consider the wreck in the bond market. Ignore stocks. In this circumstance they have neither predictive nor economic power. The signals and economic effects are all in bonds.

On the morning of Election Day, the 10-year T-note traded 1.83%. The day after: it opened at 1.95% and closed the day at 2.07%. Thursday: 2.15%, the highest since January. Today, a holiday. Thank heavens. Mortgages have barely held 4.00%.

The two obvious questions: Did Trump’s election really do this? And how far does it have to run? Quick answer to the latter: in the “Taper Tantrum” after Bernanke announced the end to QE, the 10-year ran from 1.60% to 3.00% in a straight line.

An upward move in long-term rates began this June, after the 10-year’s 1.37% revisit to the all-time low. The move up has been gradual, but steepening. Everyone saw the bearish signs, but with little inflation, a non-accelerating economy, the Fed arguing about a single .25% rate hike, and the world a mess, what’s to worry? The bond market had been defiant of all Fed threats for four years, and gotten away with it.

But, back there in late summer when “President Trump” was an unthinkably bad joke (not in all of the US, as we have learned, but in global markets) — something else was up. The BOJ and ECB in different ways but simultaneously acknowledged that a near-decade of zero-percent rates had failed to ignite global economies, and that the experiment with negative rates had been a counterproductive bust.

The last resort of the central banks: punt to fiscal stimulus. Spend and borrow and the central banks will monetize (more). Encourage inflation to rise (less in the US), and higher rates, and bet the spending will boost economies more than higher rates hurt.

We have tried this before. The epic precursor was Reagan’s first year, the first modern experiment with “supply side” tax cuts and massive deficits. That “voodoo” idiocy occupied the rest of Reagan and all the way to Clinton with tax increases to repair the damage. We voodooed again in Dubya’s first year, and ever since have pasted together tax increases in trade for spending ceilings.

Each time the economy got more temporary growth from spending than it lost from higher rates, but this world is different. This world is drowning in overcapacity and faces unprecedented global aging. I don’t know anything beneficial in higher inflation or rates. New spending (no matter on what) will tend to wash right out of the patient.

It’s going to happen, though. Trump’s election was a catalyst for a tectonic move already underway. Global markets look like ours, rates and commodity prices spiking.

But, why? Little in US politics has changed. Trump got the same number of votes as Romney, but was elected because the Obama majority in 2012 did not turn out for Hillary. Sure, some who voted for Trump had not voted for Romney, and vice-versa, but quibbling. Congress has the same balance — and imbalance among Republicans.

Two things changed on Tuesday (economic things). First, Mr. Trump is a do-er. We have not had a do-er since Bill Clinton, and before that, Ron Reagan. Dubya was a foreign policy do-er, unfortunately. Obama never discovered the difference between thinking and talking about thinking, and doing. Markets for fifteen years have been in a comfortable and predictable cocoon of gridlock. On Tuesday we set a new pool table, and broke the racked balls with a howitzer.

Limiting the extent of change ahead: Mr. Trump will soon discover how hard it is to get anything done (Jack Kennedy’s lament). And another difficulty: before he’s inaugurated, someone will show to him the real budget numbers, the un-funded out-year explosion in entitlement spending which will confine any tax cuts or new spending.

The second change: Trump brings with him sudden and fantastic uncertainty about the Fed. Yellen, Vice Chair Fischer, and supporting governor Tarullo have barely a year left in their terms. Of seven governor seats, two have been empty because of Senate obstruction. Thus in a year Trump will install five of the seven. And their plans…?

Every aspect of this is disturbing to bonds, and that means SELL.

———- ———-

The 10-year T-note in the last week. Cause and effect are impossible to deny:

The 10-year in the last year. Note that this week it blew right through five months of solid support in springtime at 1.85%:

The 10-year five years back. Note the all-time low in 2012, and then the Taper Tantrum. We did fall back down out of that tree, but nearly touched 5.00% for mortgages, and it required time, a slow US economy, and the deepening mess overseas:

The 2-year T-note is the best of all Fed predictors. Its relatively calm reaction this week is the one indicator that the bond market is overdone:

Credit News by Lou Barnes – November 4, 2016

| November 4th, 2016 | Comments Off on Credit News by Lou Barnes – November 4, 2016

Long-term rates have dropped to a two-week low, the 10-year T-note to 1.77% and mortgages again close to 3.50%.

Pushing down on those rates: Tuesday anxiety. No avoiding it. Oh, oil has crashed back to $44/bbl, removing inflation fear. Five minutes at $50/bbl and the world tried to sell all at once. Today’s job data supports a Fed hike in December, but that’s priced-in. The hikes after that are not.

Tuesday. A Democrat hosting an election-night party told the NYTimes he would have on duty a licensed mental health professional, in case of the unthinkable. Meaning no offense to Trump supporters, the narrowing in this week’s polls have global financial markets in the silent-screaming bejabbers.

Trump has made it through two weeks without a suicidal moment, leaving Clinton exposed. Cigar-store Indians are more exciting. “Wooden” is an insult to trees.

Many in the US fear Clinton, and more Obama-ism. Perhaps with reason. Trump-fear is different, little to do with policy. All other Trump negatives aside, he seems to think he’s running to be our Putin. Trump has always been ultra-litigious, misusing the legal system to his benefit; and sees our President as a giver of orders, blind to separation of powers. That’s the stuff of constitutional crisis, his greatest risk.

Back away, a long, long way away.

In 1920 Cyril Hume re-told an old China fable as a short story, “The Shout.” A new census revealed to the Emperor that his subjects counted in the hundreds of millions. Impressed by their numbers (and his own importance) he gave the order that at noon on a given day every one of his subjects would simultaneously shout his greatness. The sound would shake the world, cause hurricanes, and uproot forests and cities!

On the day at the appointed time the Emperor and his courtiers ascended a plateau to hear the roar but to be safe from the damage. As the last grains of sand fell through the Emperor’s hourglass, he looked at the fair Chinese valley below him.

Then, “high and thin and very clear came the voice of a shepherd boy on the slope below, ‘Long live His S’rene Highness Th’emprer-a China!’ Far down in the valley, a sheep bleated. A bee droned heavily past the Emperor’s ear, circled his head, and winged swiftly away into the bright air, his buzzing growing thinner, thinner. One of the courtiers laughed suddenly. Then the whole court broke into roars of uncontrolled merriment.” The enraged Emperor threatened all with death.

Few of us are as important as we think of others or ourselves.

This week’s Fed meeting concluded with no action, but two regional presidents dissented (again), insisting on immediate rate-hikes. Ms. George, Ms. Messer… you have been heard, your point made in private. Grandstanding detracts, always.

One definition of political extremism: to demand action which will never attract a majority, and if denied inflict paralysis on everyone. Both political wings are guilty; the Left defending entitlement overreach and rapid social change, the Right attempting to roll back eighty years of progress, to a world which never was.

FDR attempted to pack the Supreme Court while Democrats held a near-absolute Congressional majority, and his own party objected. Republicans have a new solution: un-pack the Court. Refuse new nominees until all are dead. Then no problem.

In the grand scheme, Trump and Clinton will pass into history faster than we imagine, and doing less harm. Either will have the same opportunity: speak sharply to both partisan wings. If we intend to have a nation we must suppress our extremes.

If Tuesday brings Trump, a bad day for markets. Perhaps very bad. Then markets will watch his transition team and appointees. Reagan was a shock to the system, but a few superb subordinates quickly quieted anxiety (and quieted the poor ones). Trump has never been seen in the company of people like the Bakers, James and Howard.

The same watch for Clinton, but without the explosion. Will it be more down-the-nose, professorial condescension, and futile Left-pressing? Or deals across the aisle?

———- ———-

The 10-year T-note in the last year. Depending on Tuesday it may take months for the real trend to reveal itself, but given the condition of the outside world, neither the Fed nor 10s are likely to go very far:

The 2-year T-note if ready for a December hike:

The Atlanta Fed GDP Tracker is starting out hot for the 4th quarter, just as it for the 3rd before fainting:

The usually reliable ECRI has at last nosed over, but still describes an economy stronger than it probably is:

The link to the full text of “The Shout” follows. By the way, the author also wrote the screenplay for the 1956 sci-fi masterpiece, “Forbidden Planet.”

Click here for "The Shout"

Credit News by Lou Barnes – October 28, 2016

| October 28th, 2016 | Comments Off on Credit News by Lou Barnes – October 28, 2016

Long-term interest rates rose this week, pushed by two forces: first — ick — some good economic news, the bane of all in the bond market, and second by policy change underway at the ECB and BOJ.

The definitive 10-year T-note has reached a ticklish spot, 1.85%, low-fee mortgages just above 3.50%. If 10s break above 1.90%, the next stop is 2.25% and mortgages about 4.00%.

Good news pushes rates up for fear of inflation and Fed tightening. The “good” this week is thin (hence my belief in the role of foreign central banks, addressed below), but good is here: 3rd quarter US GDP jumping 2.9% is splattered all over web headlines this morning, but wildly exaggerated. If we strip out all the weird parts of a massive report — a big build of inventories, soybean exports(!), shaky housing, healthy business spending but the weakest by consumers in a year — the real figure is about 2%. Perhaps most important, the Fed-favorite “core personal consumption expenditure” measure of inflation slipped from 1.8% annualized in the 2nd quarter to 1.7%.

The central banks. For years our 10-year T-note has followed the 10-year bonds of Germany and Japan, which have fallen in yield as the ECB and BOJ have bought them all, creating negative interest rates. “Bought them all” — actually, more than all: the BOJ has bought Japan’s debt at double the rate of issuance; and since Germany has a balanced budget, issuing no net-new bonds, and the ECB’s QE must include each EU nation’s bonds pro-rata to GDP, the ECB must pry German bonds from existing holders.

Both of these central banks have acknowledged in the last two months the failure of negative interest rate policy, “NIRP,” and have diminished bond-buying in their zones. Thus yields on those bonds have risen and pushed ours up: German 10s today are positive 0.169%, and Japan’s are barely negative at 0.045%. Both have risen the roughly quarter-percent which ours have gained.

NIRP and its cousin, ZIRP (“Z” for zero) have been opposed by a Wall Street passel of stuck pigs, squealing at the harm done to their investment clients and cash savers (nevermind the benefit to stocks), and blaming our non-recovery on the Fed because rates are too low. Right. And I suppose pigs get fat from not eating.

However, NIRP and ZIRP have harmed banks and especially insurance companies. This harm is gradual sandpapering, not near-term critical. If N-ZIRP were producing economic benefit — forcing banks to lend and consumers to spend — the ECB and BOJ should continue. But there is no evident benefit.

To back away from bond-buying does have evident risk. One of the counters to people so critical of central banks since 2008: you don’t like the result, but how bad would it have been without QE? Just because N-ZIRP does not seem to have helped does not mean its removal will help.

If the ECB and BOJ are departing QE, what’s next? (Cue crickets.)

Next appears to be to punt. We’ve tried all that we can. Nobody likes the last thing we tried. So we need help from other arms of government. Fiscal stimulus! Spending!! All of the Lefties drool at that. Infrastructure! Pork barrel goodies — useless, but goodies — for every political locale, US and Europe. It’s worked so well in Japan and China that they should do more and we should join them. Uh-huh.

Of course there is no more money to spend. Idiots think that because rates are so low that governments can sell an infinite quantity of bonds. The only buyer for that kind of operation: the central banks. More QE, just without N-ZIRP. Hope that new spending will create sustainable economic growth fast enough that tax revenue will rise enough to pay interest on all the debt, old and new. And that no one will notice the heaps of debt already too big to be serviced by any conceivable new revenue.

As you might imagine, this line of stimulus thought is disturbing to bond investors. No matter how the central banks accommodate new pork, investors can lose faith in the end game. Pigs get fat, and hogs are bacon.


The 10-year T-note is now in up-trend. Chart “support” in the 1.85%-1.90% February-June range is clear. Break through that going up… no support for a long way up:


The 2-year T-note is gradually giving in to the prospect of sustained tightening after the likely .25% in December:


This is the Chicago Fed’s national economic index, a pain to read but the tail since 2014 is easy to find. The main thing: no acceleration worthy of Fed interception:


Some market-watchers are having fun at the expense of the Atlanta Fed and its GDP Tracker predicting a 2.1% 3rd quarter versus the 2.9% actual today from the Department of Commerce. Trust the Tracker:


Credit News by Lou Barnes – October 21, 2016

| October 21st, 2016 | Comments Off on Credit News by Lou Barnes – October 21, 2016

Long-term rates slid suspiciously this week — still in-range, but an up-trend based on Fed threats has stopped dead.

Markets got little new data to chew on, core CPI if anything dipping (up only 0.1% in September), housing starts and sales continuing a slow-ish pattern. Many in markets mention a trading pause caused by politics, an intake of breath waiting for the conclusion of this strange year. Anxiety that The Donald might actually be elected is now gone altogether but replaced by concern that the Democrats might sweep Congress. For whatever reason, strangely quiet.

In the cacophony of market “analysis” out there, I cannot too-strongly recommend reading the Fed’s own commentary. Not from its regional banks, but the Chair, the Vice Chair, and Governors. This week Vice-Chair Stanley Fischer delivered a beauty, which among other things should embarrass the regional hawk-flock into silence.

Fischer described his use of the Fed’s massive econometric model (FRB/US, “FER-bus”) to isolate the economic variables responsible for our underperforming economy, and to quantify the effect of each variable. Fischer knows as well as anyone the limitations of the model, has no illusions, but as shaky as it has been in overall economic prediction, it does have utility in isolating variables.

Along the way in the discussion of slow-variables, Fischer laid out the whole debate inside the Fed. And the high-probability conclusion.

Fischer found four elements of drag: a slower economy is itself a source of future drag; then demography, workforce and aging; lower investment; and last a slower outside world. How to quantify, and translate into Fed policy? Central to Fed thinking is the “long-term real equilibrium rate of interest, known as r* — “r-star.” Previous to the last few years, r* was thought to be about 4% — 2% for the real cost of money plus 2% for the Fed’s inflation target. r* is higher when the economy is naturally hotter or inflationary, lower in times like these.

Everyone at the Fed would like to “normalize” rates. The argument is about the location of normal. The hawks have grudgingly knocked their r* value down to about 3.5% (shown in the quarterly scattergram, “the damned little dots”), while the group near the Chair sees a value no higher than 2.50%.

FRB/US provided a numeric value to each of the components of drag, minus 1.20% for slow, minus 0.75% for demographics, minus 0.60% for investment shortfall, and minus 0.30% for overseas conditions — and Fischer acknowledged the probability of overlap and tried to adjust for it. Total: 2.85%.

If we begin with 4% as r* and then haircut it by 2.85%, we get 1.15% as the target for the neutral Fed policy rate. The Fed is in a band now of .25%-.50%. Fisher was asked a couple of weeks ago to compare the risks of not tightening enough from accommodative policy to over-tightening. Now we know the basis for the soft smile which accompanied his answer: “We’re not that accommodative now.”

On Fischer’s math, the Fed has only about .75% worth of hikes ahead to reach normal — normal for current-era conditions. That feels right. The hawks argument is based on inertia (normal must be where it used to be), mis-thinking that tightening is what central banks are supposed to do, and misunderstanding central banking as a form of sadism. We’ll soon see if any hawk has a rebuttal to Fischer.

Meanwhile, the world overseas continues to support Fischer (I think its effects are buried in the general-drag minus-1.20% in addition to the isolated minus-0.30%). China reported its most-recent quarterly GDP growth: a 6.7% gain. How odd. Exactly the same as in each of the prior two quarters. We have a fair idea where Japan’s economy is, really, and Europe’s. Of China we know only that its growth is fanciful, and dependent on unsustainable credit and subsidy.

Hunch: the recent rise in mortgage and other long-term rates is not a trend-changer, and is as likely to reverse as to continue upward.


The 10-year T-note in the last year. Holding under 1.85% is important:


The 2-year T-note is consistent with Fischer, little or no Fed ahead, far into 2017:


I had not noticed the deepening weakness in the apartment market. Maybe just over-building, maybe an economic indicator, but either way will undercut the housing market and the future economy:


The best that can be said about Q3 GDP: the Atlanta forecast did not fall (more) this week:


The ECRI has a fabulous track record going back to the 1960s, save one false call of recession in 2011. And maybe now, saying the economy is in full-scale boom. When a other forecast should we question?


The Mars Reconnaissance Orbiter took this shot of the final resting place of Europe’s Schiaparelli $1.5-billion Mars lander. In the emlargement on the righthand side, below, the lower red circle surrounds the lander’s parachute. The upper one marks the one thing we know for sure: when the retro-rocket fails on a half-ton lander, you get a very big hole in the ground, visible from space. The same is going to happen to one of the forecasts above:


Credit News by Lou Barnes – October 14, 2016

| October 14th, 2016 | Comments Off on Credit News by Lou Barnes – October 14, 2016

Long-term rates stayed in their new range this week, only about 0.20% above the July-September one. New economic data do not show acceleration in the US economy, not in any element. Maybe slowing, but certainly not accelerating.

Nevertheless, more rate-hike smoke is drifting near the Fed.

Remember on pool day at elementary school following schoolmates up the ladder to the high board, the first in front of you disappearing over the end, usually the class daredevils? And then your turn, walking out onto the plank and looking down? The sudden visceral desire to drop to your knees and crawl back to the ladder?

Several years later, climbing the north face of Quandary Peak on a lark, hung over from the campsite party, climbing un-roped and wandering on un-marked route came the sudden thought… what are we doing up here, wherever we are? Better to down-climb, always more dangerous than even ill-advised ascent? Or press on?

Central bankers all over the world are re-deploying, all except our Fed still confronted with weak economies beyond self-sustenance. They have no choice but to proceed with extreme measures, although forced to switch to new ones.

Here, the US economy is okay, and some old-reliable signs flash signals that extreme ease is overdone. Hence a crisis of confidence among lesser Fedders. Eek! Retreat in whatever direction we came from. Raise rates because… because.

At a Boston conference today, Boston Fed prez Rosengren and Chair Yellen spoke, Rosengren for frightened kids everywhere. He’s discovered bubbling in commercial real estate. Debt in that market in the last year has grown by 3.8%. No debt, no bubble. He finds “puzzles” in a very low rate of inflation, very low interest rates, slow growth, and low unemployment, and concludes that the Fed should raise the cost of money. Okay, man — panic will take you wherever it will, but don’t call it reason.

Chair Yellen delivered a masterpiece. The first section is a well-nigh tongue in cheek discussion of circularity in supply versus demand, neither today behaving as used to. The second section in her understated way demolished those who think they understand what is happening:

“The influence of labor market conditions on inflation in recent years seems to be weaker than had been commonly thought prior to the financial crisis. Although inflation fell during the recession, the decline was quite modest given how high unemployment rose; likewise, wages and prices rose comparatively little as the labor market gradually recovered. Whether this reduction in sensitivity was somehow caused by the recession or instead pre-dated it and was merely revealed under extreme conditions is unclear. Either way, the underlying cause is unknown.”

The standard position of the Chair is to indicate understanding of the economy, but complexity beyond anyone but the Chair and hence no point in further explanation. This rhetorical approach has been politically protective of the Fed, and also — all Yellen predecessors have been guys — ego-protective. Leave it to the first female chair, her physical stature as anti-imposing as Yoda: when we don’t know, say that we don’t know. And when we don’t, it’s also a silly damned idea to panic in any direction.

Then this compact thought: “One additional area where more study is needed –the effects of changes in U.S. monetary policy on financial and economic conditions in the rest of the world and the ways in which those foreign effects can feed back to influence conditions here at home.” The outside world is in unprecedented trouble. If we don’t know the result of our actions, then be reluctant to act.

Other than the clutch of regional-Fed presidents arguing for higher rates, the leading voices in favor are investment managers. How to justify my 1% annual fee when bonds pay 2%? And when I’ve been wrong to avoid stocks? Blame the Fed. Rates should be higher! The Fed has manipulated up stocks, rates down, and hurt savers.

Quite true, but wrong. It’s the job of any central bank to manipulate asset values. And not one recession or slow patch anywhere ever was fixed by higher interest rates.


10-year T-note in the last year. So long as it holds below 1.90%, nothing has changed:


The 2-year T-note is the best Fed predictor, and has obviously channeled Yellen. 2s are reasonably ready for a .25% hike in December, followed by nothing:


The NFIB small-business survey… off-peak and stalled:


Today’s retail sales report for September looks just like the long-term chart. Up 0.6% in September, but August revised down 0.3%, if anything, sagging:


The Atlanta Fed GDP tracker is flashing a warning, its current value for the 3rd quarter is just half the estimate of 90 days ago. US GDP in all of 2016 may grow less than 1.5%:


Global trade is the indicator which bond markets are really watching. The chart below is for export-heavy Singapore, exports in a 4.1% free-fall in the last quarter. I don’t have a good chart for China, but its exports dropped 2.8% in August alone, year-over-year down 10%; and imports year-over-year fell 1.9% — the August figure so poor that it reversed an import gain in the prior eleven months:


Credit News by Lou Barnes – October 7, 2016

| October 7th, 2016 | Comments Off on Credit News by Lou Barnes – October 7, 2016

Long term rates are rising, the 10-year T-note this week at 1.74% the highest since a June spike, and the sustained February-May range 1.70%-1.95%.

So far the consequences to mortgages are minor, maybe not even headed toward 3.75% from the long rest at 3.50%. Why long-term rates have risen is going to take some explaining, and theorizing.

First, the rise has nothing to do with the election. Markets are still anxious about that, but odds have lengthened against Mr. Trump.

There are two separate interest-rate threads, and in many ways two different economic worlds. One path is traditional (painfully) and Fed-centric, assuming the Fed has embarked on a lengthy rate-hiking mission, albeit super-gradual. If not pre-emptive, and not leaning into the economy now, at least pre-positioning for higher rates later if wage growth does up-shift inflation. Along this trail also lies worry that a super-easy Fed has created financial bubbles in stocks, bonds, and maybe houses.

The second path is not parallel, not even in the same dimension: it is global. In this view the Fed’s future hikes will be imperceptible — if the Fed hikes in December, as likely, that will make it .25% per year. The rise in long-term rates in the last few weeks traces to the BOJ and ECB, not the Fed. Both of those central banks have acknowledged the failure of negative rates, as a policy tool more hurtful than helpful. Both intend to continue QE, but in short-term paper, hoping that encouraging long-term rates to rise a bit will do no harm.

I am thoroughly on the global path and so must disclose, and be careful to maintain critical thinking. Evidence in favor of path two is big: the German 10-year is now above zero, 0.024%; Japan’s just below zero (-0.062%) — the rise in both neatly correspond to the rise in the US 10-year. That linkage is likely to hold no matter what the Fed does until the relationship between the economies changes.

The IMF this week dropped its global-growth forecast again, a continuous down-staircase, by another .2% to 1.6%. That is below global stall-speed. Almost any significant shock could tilt several economies into recession with no clear way out. One potential shock: ill-advised tightening by the Fed.

The traditionalists’ retort: the labor force grew in 2016 by three million people, roughly double population growth, and there is a limit to finding new workers without paying them more than they add to productivity — the classic prescription for inflation. Globalists’ riposte: new workers are coming out of the woodwork, especially aged 50+ as they discover that “retirement” is a quaint concept from the 20th Century. And if the supply of new workers does falter, there is no evidence that employers will over-pay in a hyper-competitive world, and instead just slow their hiring.

Global forces exerting slowing pressure: first, unprecedented demographic aging. Second: although “globalization” has been the great engine of global growth in the last 25 years, it has also been the great engine of worker dislocation and extremely uneven from nation to nation. The whole world is now politically in a state of backlash, trying to stop damage while winners try to hang on to advantage, and the result is anti-trade momentum everywhere.

Chair Yellen is doing fine, although it’s hard to look like her imperial predecessors while doing nothing. As my Buddhist friends will testify, inaction is action. And in a land of overheated policy blabbing, inaction is the hardest of all policies to defend.

Yellen may not wish to use her power to cork the noisy-hawk minority at the Fed, all of whom deny the outside world. This minority are all regional Fed presidents — Mester, George, and Lacker joined by the previously sensible Rosengren (and occasionally by the nitwit fringe, Williams, Kashkari, and Bullard). They are not one-tenth as wise or important as they think, and would do the markets and nation a service by private disagreement and public silence.

If the global view is right, the rise in long-term rates does not have far to go.




The US 10-year T-note in the last year. Market technicians point to the very substantial chart support just north of where we are now. The chart also suggests an equal chance for fizzled rise and re-test of the low — and it would not take much bad news:


The US 2-year T-note is the Fed telltale. It has grudgingly built in one .25% hike by year-end, but nothing in 2017:


The Atlanta Fed Tracker. At best the traditionalists at the Fed foresee “stagflation” — the return of inflation in a still-stagnant economy. There is no evidence of GDP takeoff, just another false stretch of optimism:


The ECRI is the one respected forecaster showing an accelerating economy. Respected for its long-term calls, but recently more suspect than respected: its 2011 recession call was awful, and the acceleration in its current measure is without foundation. Except… except… ECRI may be overweighting the stock market — the hawks’ bubble fear — but stocks tend to correct, Fed or no Fed:


Credit News by Lou Barnes – September 30, 2016

| September 30th, 2016 | Comments Off on Credit News by Lou Barnes – September 30, 2016

Last week the 10-year T-note returned to its July to early-September range, 1.50%-1.60% and holding mortgages near 3.50%. Today the market is testing the top, and next Friday’s job data will be definitive.

Helping rates to stay down: more negative data from August, personal income slow, spending flat; core PCE inflation 1.7% year-over-year and decelerating, August rising only 0.1%.

Global bond yields are back below zero, German 10s minus 0.118%, Japan’s minus 0.075%. If the BOJ intends to keep its week-old promise to continue its $80 billion per month easing but hold JGB 10s at 0%, the only way to push the yield back up to 0% is to sell some of the bonds it owns, or stop buying — either way a monetary tightening. The BOJ is cornered, off into fantasy-based policy.

German yields fell in part because of Deutsche Bank woes. “Schadenfreude” is the German word for enjoying the difficulties of someone else, and to have a German bank in trouble is delightful, especially in Greece, Italy, Portugal, and Spain. Germany has insisted that any nation with bank trouble should fix it, and without Euro or government help, enforcing the “bail-in” concept across the continent.

In cutesy bail-in, with no “out”-side help, repair is accomplished by wiping out not just the stockholders, but bond holders and uninsured depositors. Oblivious Merkel stuck to that principle last week, and by yesterday a nifty little run began on D-Bank, institutional counterparties going elsewhere. D-Bank’s stock has lost 90% of its value in eight years, and can neither be restructured nor bailed without government help. However, there is no real threat of contagion, US banks thoroughly run-proofed.

Here in the States there is an election underway, but impossible to write about without offending half or more of readers. So leave the candidates out, and write about  an issue which apparently will offend everyone. Both candidates are opposed to global trade deals, and global trade itself as it has been conducted in the last 20 years.

The benefits of trade are clear as far back as archaeology goes. And as insuppressible and dislocating. Imagine out on a steppe somewhere ten or thirty thousand years ago that your band made accidental contact with another, and your new acquaintances included a flint-knapper producing points much better than your guy, and willing to trade for game and fur. With better points you’ll hunt (and live) better, have the wherewithal to trade, but your knapper is in for a career change.

The fall of Rome was marked all over Europe by declines in pottery and livestock. As it became unsafe to trade high-quality specialized production, every locale had to produce everything it needed, whether good at it or not.

Five hundred years ago north Europeans developed the modern trading art: sell our specialized goods in trade for yours, and focus on better and better specialization, thus higher value-added by our people and greater wealth. In extreme form, sell manufactured goods in exchange for raw materials.

The temptation to cheat has always been overwhelming. The easiest: slap a tax on any imports which compete with domestic production. Protect those producers with “protectionism,” which of course begets retaliation. The 20th Century Asian invention is today in constant use, “non-tariff barriers,” in which imports are suppressed by everything from bureaucrats to moral suasion — or by goons, often high-ranking.

Trade benefits both parties. Some protection must be given to poorly developed nations which have neither monetary nor social capital to compete on a level field. And of course dislocated domestic workers and businesses must be helped. The last 60 years has been marked by very successful trade deals — all elaborate, and all negotiated in secret because the horse-trading of specializations cannot survive politicking by minority but powerful interest-groups.

The uncomfortable news: those opposed to global trade need not worry, as global trade is contracting (charts below). But do worry about the economic consequences.


The 10-year T-note just barely holding last week’s improvement, chart back one year:


The 2-year T-note still says that nobody in the market believes the Fed’s threats to “normalize” the cost of money to 3.00%:


Since the 1990 opening of China and fall of the Iron Curtain, global trade has risen at a multiple of GDP growth. That ratio indicates a vast increase in trade of specializations. If you’re good at something, you and your workers are in clover; if not, ouch. During that same period, global businesses have sustained unprecedented profit margins which have fed directly in to stock market valuations. This engine of global wealth is faltering now not because of politics here or anywhere, but predatory over-production and under-consumption especially in China and Germany. Cheating always wrecks the cheater, too:


This chart is global container shipping volume. Trouble:


This chart (IMF) identifies the guilty. “Managed trade” is polite for cheating. Note China’s sharp reduction in imports at the end of 2014, continuing. Its exports have slid, too, but imports far faster. Germany is an arch-manager, and as its exports began to fall simultaneous with China’s import-reduction, Germany began to compress its imports also. Korea likewise is counter-managing its imports down. (Note: The UK is in a very different situation, trade deficit growing because of safe-harbor cash pouring into the place and increasing demand for imports.):


Slowing trade forces a slower global economy, IMF and WTO forecast barely 2% growth ahead. A protectionist trade war is already underway.