Premier Mortgage Group

Mortgage interest rates improved this past week as markets continue to focus on Europe.  Political parties in Greece failed to form a coalition government again, leaving the austerity measures and future aid in doubt.  As a result there is increasing concern that Greece will default on its sovereign debt and leave the EU.  Markets are also concerned that this could increase the likelihood of default in Spain, Portugal, and Ireland.  German Chancellor Angela Merkel’s political party suffered additional election losses, which may lessen the likelihood of additional German funding of future bailouts.  As a result, money continues to flow into Treasuries in a flight to safety trade.  The 10 Year Treasury Note is currently yielding 1.709%, down over 13 basis points on the week.  Economic data was generally positive or in line with expectations.  However, the May Philadelphia Fed Business Index was much weaker than expected.  The FOMC Minutes from the April 25 meeting were released which left open the possibility of another round of quantitative easing.

The Dow Jones Industrial Average is currently at 12,397, down over 400 points on the week.  Crude oil spot prices are currently at $92.31 per barrel, down over $3 per barrel on the week.  The Dollar strengthened versus the Euro and weakened versus the Yen on the week.

Next week look toward Tuesday’s Existing Home Sales, Wednesday’s New Home Sales, and Thursday’s Durable Goods Orders and jobless claims as potential market moving events.

The few spatters of economic data this week did not change the plod-along US outlook. Meanwhile the priority story (Europe) was obscured by the media’s demented focus on the Facebook IPO and the blown trade at Chase.

Today markets are on exhausted hold, hoping for some miracle at this weekend’s G-8 meeting. German 10-year bunds hit all-time-low yields on successive days this week, the bottom at 1.41% while Spanish and Italian equivalents reached 6.38% and 5.91%,respectively. Inflation and deflation camps have been in balanced argument ever since Lehman, as have dollar-fearful and dollar-safe-haveners, but Europe has now tilted the show to deflation: gold has dropped from 1790 to 1590. Those still fearing inflation ran to dollar-denominated inflation-protected Treasurys (TIPS), driving the newest auction to a negative 0.391% yield. Yup, below zero: lose money to be ready for a 1970s replay. It’s been forty years, but you never can be too prepared.

The G-8 gathering will be only seven (Czar Vladimir is busy): unstable Italy; stable for the moment Japan, UK, and France, none in a position to help anybody else; Germany (“Vee vil hit yu mit zis ztick until yu agree to hit yorzelf”); and the US and Canada (“Europe is a rich continent able to solve its own problems”). A new flurry of can-kicking may follow, but European markets are poised to implode before the next Greek election on June 17. Reversing the euro to local currencies would be briefly chaotic, and slow the global economy, but it is the one way to rationalize the economies involved. If Europe had done so two years ago the losses would have been far less than today, or will be tomorrow. The US 10-year fell to its all-time low, 1.70%.

There are some things to be learned from the Chase pratfall. The Left-side media are ascendant: “EEK! Bankers Found Gambling!” The Right-side doesn’t get it (ever): “Private Sector Hurt By Government.” Both wrong, of course.

The great post-Bubble fable holds that we can easily return to the safe banking of yore by removing profiteering bankers and their profits. Wrong three times. The fable rests on memory of US banking from 1933 to roughly 1973, but this period was extremely atypical. The sound regulation and deposit insurance of ’33 was followed by a time of such overwhelming US/dollar dominance that banks struggled to lose money. Banks ever since have been in and out of systemic trouble just as ever before.

Modern economies (since, um… Rome) cannot grow without credit and banks. That means somebody has to bear the risk of monetary alchemy: depositors of all kinds require instantly available cash and a return on that cash, but to earn the return banks must run the risk of credit and illiquid investment. It is possible to run a (nearly) risk-free bank, and we have: the hyper-capitalized silk-stocking affairs who catered to the rich, who wanted only safety and did not care about return, and which provided little credit to the economy. Leaving the 99% out in the cold, as did the great, private, merchant banks, from Rothchilds to the old Wall Street partnerships. Real, beneficial banks must take risks that will go unpredictably bad. Always.

Chase’s blown trade was not a hedge. It was crafted to look like one, in defiance of the spirit behind the misbegotten rigidity of the proposed “Volcker Rule.” De-risking spirit is important today, while we are in post-Bubble hysterics, over-tightening credit, and every dumb-assed trick re-ignites the hysterics. However, this trade did not threaten Chase, even at an ultimate $4 or $5 billion loss, nor did it bring systemic risk, nor was it done in the dark. Chase’s directors knew, and the on-site Fed team knew (all big banks since 2008 have had on-site Fed teams).

Perfect punishment is underway. Arrogant Jamie Dimon has a lot less to be arrogant about, and of course should resign. Even if he is not forced out (he has not the grace to do so un-prodded), his day is done, and a warning to the others. There will never be a way to de-risk banks in accordance with the post-Bubble fable; we will have to live with the risk, cycle in, cycle out, one bank after another. The worst error is to build an ever-thicker rulebook, instead of looking for ever-better people.

Mortgage interest rates improved slightly on the week as turmoil in Europe continues.  Greece and France voted out the leadership that agreed to the recent austerity plans leaving those plans in question and increasing fears that Greece may default on its sovereign debt.  Economic data was limited.  Of note, the US trade deficit was larger than expected.  Weekly jobless claims fell slightly and the University of Michigan Consumer Sentiment Index increased to its highest level since January of 2008.  March Consumer Credit had its largest increase since November of 2001.  The Treasury reported its first monthly surplus since September of 2008.  Also, the Treasury auctioned $72 billion in 3 Year Notes, 10 Year Notes, and 30 Year Bonds.  The auctions were met with strong demand.  The auction yield on the 10 Year Notes was the lowest on record.

The Dow Jones Industrial Average is currently at 12,908, down about 130 points on the week.  Crude oil spot prices are currently at $95.93 per barrel, down over $2 per barrel on the week.  The Dollar strengthened versus the Euro and Yen on the week.

Next week look toward Tuesday’s Consumer Price Index (CPI) and Retail Sales, Wednesday’s Housing Starts and Industrial Production, and Thursday’s jobless claims and Philadelphia Fed Survey as potential market moving events.  Also, the Fed releases the minutes from its last FOMC Meeting on Tuesday.

In the absence of any meaningful economic data or market changes, Europe holds the stage. If this were burlesque — and of course it is — the audience yelling, “The hook! The hook!”, the impresario with the shepherd’s crook would long since have yanked Europe by the neck off-stage and dumped it in the alley.

Why, oh why is this dragging on, the euro such an obvious and total failure? Three reasons. Somebody who has kicked a can for years cannot be convinced that one day he will meet his wall. Second, this elaborate denial is a European specialty, today with less fatal consequences than 1900-1914 and 1933-1939, but the same show.

Third: culture. (Not that #1 and #2 were not.)

A lot of people from academia to commerce today are trying to understand changes in national and global leadership. The comfortable and predictable post-WW II and Cold War and post-Cold War structures have weakened and shifted greatly since 2000, and it is not at all clear what form of stability — or if — will replace the old.

Culture is a dangerous thing to talk about. The concept is easily twisted into racism, or the notion of “cultural Darwinism” (since I am superior, I can and should do to you as I please). Yet, any understanding of government and civilization must begin with who we are — our “nature.” Modern biology and genetics roil in nurture-versus- nature argument and discovery. Although those hardest of sciences can see the durable interplay of genes and environment, they and all of us are still just guessing at the rules and full impact on societies.

Ian Morris’ new “Why the West Rules — For Now” is a great read and starting place. It begins the human nature discussion a couple of hundred thousand years ago in a comparative history of East and West, and has a striking insight about Europe. Gifted with physical riches, Europe has for as long as we can detect received massive and violent migrations from the East. Morris suggests that Europe has survived because of unique geography — a collection of defensible peninsulae — which has also led to several unique and durable cultures in those natural forts. However, in his conclusion he flinches from culture as determinant, and defaults to Jared Diamond’s insistence that we are all the same people everywhere, and nothing matters but geography.

Francis Fukuyama’s newest, volume one of “Origins of Political Order” is a great study, beating to death all of the various structures of government, but hardly touching the natures of the governed peoples, and how those different natures complicate government. When we talk about government, types and options, we are really talking about civilization and its progress, a thought lost on those who oppose government. Steven Pinker’s newest, “Better Angels of Our Nature,” describes the profound decline in violence in human society, perhaps the greatest achievement of our civilizations.

Fukuyama does get to “legitimacy” as central to government, but solely on a tidy line of thought. Robert Caro’s newest on LBJ gets to a center of human nature with which we are all uncomfortable: power. Which individuals have power, what groups have it, how they got it, defend it, use it, lose it… that raw, elemental conflict is at the heart of civilization and attempts at government. And at the heart of culture. Durable and different in nation-states everywhere.

The euro has failed because to succeed would require three-quarters of Europe suddenly to behave as Germans for the first time in the industrial age. More: each local, cultural power structure must surrender its authority, and while doing so must inflict a falling standard of living on its own people. Further: the new supra-national power center in Brussels, enforced by Germany, would operate without any democratic legitimacy. Which leaves nothing but German enforcement.

Europe may stagger for quite a while longer, the euro “surviving” as abject failure solely because all fear worse if it were abandoned. The local economies will settle the fate of the local power structures. Beyond the global economics of the thing, the prospect of “failed states” and martial law is… um… daunting.

Mortgage interest rates improved slightly on the week as today’s employment report for April was weaker than expected.  April non-farm payrolls increased by 115k on expectations that they would increase by 162k.  Non-farm private payrolls increased by 130k on expectations that they would increase by 167k.  The unemployment rate fell to 8.1% from 8.2% but the participation rate fell to 63.6%, its lowest level since December of 1981.  The participation rate is a measure of the share of working-age people in the labor force.  In Europe, the jobless rate in the 17-nation Euro currency area increased to 10.9%, its highest level since April of 1997.  Other economic data weaker than expected included March Personal Income, the April Chicago Purchasing Managers Index, March Construction Spending, and the April ISM Services Sector Index.  Economic data stronger than expected included March Personal Spending, the April ISM Manufacturing Index, March Factory Orders, and weekly jobless claims.

The Dow Jones Industrial Average is currently at 13,083, down over 140 points on the week.  Crude oil spot prices are currently at $100.64 per barrel, down about $4 per barrel on the week.  The Dollar weakened versus the Yen and strengthened versus the Euro on the week.

Next week look toward Thursday’s International Trade and jobless claims along with Friday’s Producer Price Index (PPI) as potential market moving events.

On the first Friday of each month comes the elephant: fresh jobs data from the immediately prior month. No other indicator — maybe not all others combined — has the power of payrolls to move other markets, to describe the economy and the prospects for inflation, and to alter the course of public policy.

The headline is “non-farm payrolls,” today’s report a meager April gain of 115,000 jobs, about the same as March, but only half the figure in the three prior months, gains that made us think we were at last getting somewhere.

One generic problem with elephants, especially at close range: shades of grey. Another: estimating size. The inherent inaccuracy in each non-farm payroll report is a couple of hundred thousand jobs. All of the reports in the last six months have lain inside that range of error. Another element writ on wrinkled grey: everybody seems to understand that the official unemployment rate fails to describe anything useful.

So, watch other things: wages last month rose by $0.01 per hour, one whole cent, 1.8% year over year. A sustained increase in inflation is impossible without a wage spiral. Same for GDP. The average workweek in April — unchanged. The percent of the 24-54 age cohort at work is stuck at early-’80s levels, about 7,000,000 below the 2000 peak. Of those at work, another 8,000,000 are part-time because they can’t find full time, the U-6 measure at 14.5%, improved a bit in prior months, stalled in April. Demand for labor has improved, but remains very, very thin.

10-year T-notes today at 1.87% have cracked long-term resistance at 1.90%, bets going down that the Fed will ease again. Not until core inflation fades back below 2.00%, but the odds are up. Stocks are having a hard time despite Fed prospects, and today’s sinking-before-Fed is out of prior pattern. There is little follow-through in mortgages, a ten-day drift near 4.00% anticipating today’s going-nowhere report.

A story follows, typical of our overall predicament. Charlie Rose on the topic of fiscal hazard on successive nights interviewed Paul Krugman and senator Tom Coburn, R-OK. Krugman has debased his profession and his Nobel by pushing inflation as the free-money solution. The surprises were from Coburn, widely regarded as a nut case, who opened by saying, “Of course the wealthy should pay more.”

After 30 minutes as the soul of reason (one of many in Congress in both parties now acknowledging the need for Bowles-Simpson’s harpoon-all-whales), Coburn returned to his native, anti-government soaps, announcing that “Everything after 1929 was because the Fed did too much.” To which Rose nodded and replied with a Krugman line: “The Depression ended only because of war spending.”

Americans have always been able to select media tilted to their preference, but it’s a hell of a lot easier now. Every big city used to have newspapers offering competitive political leaning and fibbing, but nothing like the instantly available Fox and MSNBC, and acres of websites ginning up partisan lies. Thus citizens — even those trying hard to stay informed — are at risk to “silo” their information and corrupt their perspective.

Coburn and Rose were perfect examples, repeating silo fables. After 1929 the Fed did nothing as the US banking system collapsed, the primary factor making the Depression Great. And it remained inert. Deposit insurance, reflation via gold price, and Federal lending agencies combined by 1935 to restore GDP to the 1929 level. Coburn, bright and adaptable on the fiscal issue, is a captive parroting the Right’s endless effort to discredit the New Deal. His own jailer!

The Depression did double dip, but because of fiscal zeal, trying to balance the budget too soon, too fast. We didn’t know any better, then. We adopted Social Security, but raised taxes to fund it for three years before paying any benefits. The Depression ended because if state spending, but not ours, Europe’s, on war orders placed with our factories, not some free-money spigot from the Treasury.

Soapbox: It is the duty of each of us to stay out of silos, listen to the other side, and snopes everything we think we like.

With thanks and full credit to Bill McBride’s www.calculatedriskblog.com:

On the surface all is quiet. Since the first week of April the 10-year T-note has not traded above 2.05% or below 1.93%. 1.95% this morning. Thrill-a-minute. Low-fee mortgages have been 4.00% for three weeks (depending on down payment and credit.) The Dow has had 100-point days, but is just yo-yo-ing below the 13,200 top.

In widely scattered patches of exuberance, innately good housing markets are turning — not bottoming, turning. In attractive places with scarce land, in-migration, good economies (global, IT, government, healthcare…), and looking back at their distress curves, the dead-drop in listings last year has resulted now in competing offers and modest increases in price. However, do not confuse these places with the rest.

New data are disquieting, but nothing scary. March orders for durable goods fell hard, down 4.2% even excluding volatile categories, and the multi-year chart shows gentle but unmistakable weakening. New weekly claims for unemployment insurance have departed the 350,000 range for 385,000, but historically it’s a jagged chart, not necessarily marking trend-change. Q1’12 GDP arrived at 2.2% annualized versus the 2.5-3.0% forecast, but consumers came in on target, plus 2.9%. The one figure in the GDP report that hinted at sub-surface conditions: the Fed’s favorite inflation measure, the “personal consumption expenditure core deflator” jumped from 1.2% in Q4’11 to 2.2% in the first 90 days this year. That’s “core,” excluding the gasoline pop.

Enter the Fed’s post-meeting comments. Lost in misunderstanding Fed politics (the distracting regional-Fed country-hawk bird-brains), and in suspended hopes for QE3, and in a meaningless collection of long-range forecasts, and in guessing at what the Fed will do after 2014…, lost was this: “Inflation has picked up somewhat….”

Then Perfesser Bernanke was asked about new stimulus, including the Fed’s interest in inducing higher inflation, the darling proposal of Paul Krugman and his loyal propeller-heads. “That would be very reckless.”

Thank you. As hammered at here last week, the Fed has neither the intention nor capacity to inflate-away our debt burden. Nor in the presence of 2%+ core PCE will the Fed even embark on something as mild as QE3.

Here in the US a frozen Fed is not so bad. The greatest single strength of the US economy is its adaptability, based on national acceptance of Schumpeter’s “creative destruction,” no matter what pain it brings. With the possible exception of German-hive collective adjustment, no other economy on Earth approaches US tolerance for the pain of changing course. We do get on with it, and today’s improvements in labor, manufacturing, exports, and housing — no matter how tepid — are testimony.

Elsewhere, disturbance on the surface understates the roiling trouble deep below. Only 90 days ago, Frau Merkel seemed to have dragooned the rest of Europe into a new austerity treaty. This austerity has not even begun (Spain and Italy have already extended deadlines), but non-German economies have fallen out from under forecasts. Euro-zone PMI (just like ours, the descendent of the “purchasing managers’” survey) went negative in March at 49.1, deeper to 47.4 in April.

We used to refer to the European “periphery.” Now it’s just Germany and non-Germany. Even the Dutch government collapsed last week under budget and recession pressure, and the next president of France will not be seen in Merkel’s lap. The non-Germans groveled last winter, desperate for German-allowed ECB bailouts. Now, like so many excessive borrowers who have discovered that they own the bank, Europe is refusing austerity and demanding growth measures.

However, welded to the euro while in desperate need to devalue, there are no growth measures available except for the ECB to take on even more junk sovereign paper and/or reflate in the same manner Bernanke called “reckless.” The ECB and the Bank of Japan are near the end of their supply of cans to kick, one thing clear: hope like hell that US inflation subsides, so that the Fed can prevent a US stall while worst comes to worst elsewhere.

Mortgage interest rates were mostly flat on the week on mixed economic data.  Economic data stronger than expected included March Retail Sales, February Business Inventories, March Building Permits, and March Leading Economic Indicators.  Economic data weaker than expected included the April Empire State Manufacturing Index, the April NAHB Housing Index, March Housing Starts, March Industrial Production, weekly jobless claims, March Existing Home Sales, and the April Philadelphia Fed Business Index. Spainis still in the news facing austerity cuts to reduce its budget deficit.  There is increased speculation that the Fed will implement a third round of quantitative easing.  Markets will be closely watching the FOMC announcement next Wednesday for any hit of another round of easing.  On a positive note, the IMF increased its forecast for global economic growth this year and for 2013.

The Dow Jones Industrial Average is currently at 13,063, down slightly on the week.  Crude oil spot prices are currently at $103.58 per barrel, up slightly on the week.  The Dollar weakened versus the Euro and strengthened versus the Yen on the week.

Next week look toward Tuesday’s New Home Sales, Wednesday’s Durable Goods Orders and FOMC announcement, Thursday’s jobless claims, and Friday’s first look at Q1 GDP as potential market moving events.

Long-term interest rates have stabilized safely in the Fed-controlled zone,10-year T-notes 2.00% and mortgages 4.00%. Stocks and other markets hope for QE3, perhaps as early as next week’s Fed meeting, but that move will likely wait for either weaker global economic data, or inflation falling toward deflation, or both.

US data is softening — not anywhere near a new double-dip conversation, but not accelerating to self-sustenance, either. March retail sales did okay, up .8%, but the housing recovery ballyhooed since winter has been exposed as a promotional feature: new starts fell 5.8% in March, new permits rose (but nobody gets a paycheck for one of those), and sales of existing homes fell 2.6%. One theory: diminished inventories of listings have crimped sales. Uh-huh. “Saudis Buy, Destroy Science For 200MPG Cars!”

Inventories are down, but prices in many markets are firming, and the combination encourages sales. Local is local, but Colorado Front Range listings year-over-year are down 40% and sales are up at least 15%. In an unquantifiable development, beneficial for the moment, some 5.5 million distressed homes sit in formaldehyde, embalmed by new state and federal impediments to foreclosure and sale. This inventory is concentrated in Sand States. Instead of rapidly selling and clearing these markets, it may be a long-term benefit to convert them into National Sacrifice Zones… park rangers, tours, T-shirts, postcards and all.

While we all wait on the Fed, and to see if Club Med peoples will overthrow their ICU physicians, intent on hooking patients to more maintenance machinery while standing on their oxygen hoses, a moment for — BOO! — inflation.

The financial Right and many long-cycle thinkers (who still don’t understand the 1970s) are certain that the Fed’s QE inevitably will cause inflation, executing the perpetual conspiracy of government to inflate away debt. Meanwhile the Left says economic recovery would be easy if only the Fed would induce 4% or 5% inflation.

In simplest terms, a central bank’s job in a too-hot economy is to drive interest rates far enough above inflation to cool it off; and in a too-cold economy, far enough below to warm it up. The Fed’s normal tool is the ultra-short-term, “Fed funds” rate; however, at 0% since 2008, and core inflation at 2%, the Fed can’t get “far enough below” to induce recovery. Standard far-enough models today say the Fed should be 6%-8% below zero. Short-rate policy frustrated, the Fed has instead in the last three years pulled long-term rates below inflation: that’s been a partial effect of QE, assisted by the Fed’s commitment to keep the Fed funds rate close to zero at least through 2014, and as of last September further assisted by “Operation Twist,” letting short-term Treasurys run off its balance sheet and buying long-term ones.

Hence the 10-year T-note at 2%, at least 1% below CPI, when its yield in an ordinary economy should be 2% above. To have that effect, the Fed has had to buy all new long-term Treasurys — some argue more than the new issuance.

The economy depends on a lot more IOUs than Treasurys. Suppose markets saw the Fed allow or induce an inflation run-up. If the Fed continued to buy long Treasurys, those rates could stay under control. However, other long paper — corporates, munis, mortgages — would begin to roar in yield and soon become unsalable at all.

The Fed for the moment has the “yield curve” under control. Partly because of its low-rate assurances and purchases, but every bit as important because it promises to keep inflation in bounds. Both Right and Left are wrong. In the debt-soaked modern world, completely unlike the 1970s, owners of IOUs will defend themsleves. By selling. At the first whiff of tolerated inflation, fists will pound on Mr. Sell Button, and rising rates will choke the inflation that would rob IOUs of value. Deflation and default ensue.

Losing control of the yield curve is the ultimate nightmare. That is what has happened to Club Med. One day you can sell only short paper, and later even that only at a discount, no matter what the central bank does. Inflation is neither help nor direct hazard; the hazard is failure to live within means, all else is consequence.

Not a normal market: this picture is a Fed-controlled 10-year.

The Fed watches lots of things. However, QE1, QE2, and Twist came in response to the two dips of PCE to 1%. The drop underway I think is too shallow for the Fed to QE3, but the danger in Europe (and possibly China) may be grave enough for premature trigger.

Mortgage interest rates improved slightly this past week as China’s economy appears to be slowing and Europe’s debt crisis persists. In China, first quarter GDP and imports were weaker than expected. In Europe, Spain’s 10 year note yield spread over Germany’s 10 year note yield increased to its largest level since late November as Spain struggles to cut expenses. Also, the European Central Bank’s financing for Portuguese lenders rose to a record level in March. Portugal will receive 78 billion euros in aid from the International Monetary Fund and the European Union. Economic data this past week was limited. News of note included Thursday’s weekly jobless claims which increased 13k on expectations that they would fall by 2k. The University of Michigan Consumer Sentiment Index was weaker than expected. The March Consumer Price Index was in line with expectations. Also of note, the Treasury auctioned $66 billion in 3 Year Notes, 10 Year Notes, and 30 Year Bonds, which was met with mixed demand from markets.

The Dow Jones Industrial Average is currently at 12,913, down about 150 points on the week. Crude oil spot prices are currently at $103.41 per barrel, up slightly on the week. The Dollar weakened versus the Yen and strengthened versus the Euro on the week.

Next week look toward Monday’s Retail Sales, Tuesday’s Housing Starts and Industrial Production, and Thursday’s jobless claims, Existing Home Sales, and Philadelphia Fed Survey as potential market moving events.