|
Psychology on the Street
changed completely last week, to economic optimism and concern for
inflation, and assumption that the Fed is done with rate cuts or will be
shortly. Low-fee, fixed mortgages were 6.375%, jumping with all interest
rates, long and short. The Fed-forecasting 2-year T-note soared from 1.70%
to 2.24%.
Last week, “credit” appeared
only in sentences including this clause: “The worst is over.” The worst
probably is over for write-downs of the abysmal “structured securities” of
the 2001-2007 era.
However, euphoria at that
prospect masks these things: the financial system is still too busted to
function properly, credit is extremely scarce and expensive, the system is
terribly vulnerable to recession-cycle credit loss ahead, and inflation
here, there, and everywhere is forcing global economic slowdown.
The loopy reply from the stock
market: Business is great! Earnings are down but are headed up! Global
trade will fix everything!
Let the data talk. The opening
line in the Fed’s April beige book: “Reports from the twelve Federal
Reserve Districts indicate that economic conditions have weakened....” In
the Fed’s lexicon, a slow economy is “mixed,” one turning sour is “soft,”
and one in trouble has weakened. The Fed does not use the term lightly.
Retail sales were .1% positive because of higher gasoline prices (ick);
industrial production upticked a .3% hair, capacity in use hanging at 80%
stall-speed.
NEXT ISSUE
PREVIOUS ISSUE
2008 ISSUES
2007 ISSUES
RETURN HOME |
New claims for unemployment
insurance are also at an edge, about 375,000 weekly; extended claims
rising near 3 million signal recession. CPI was okay: overall .3%, core
.2%.
The Street’s party rests on
good results at IBM, Google, and Caterpillar, and coulda-been-worse
financials: Merrill wrote down only $6.6 billion, Citi only $16 billion.
Only.
Give the financials this: despite the huge write-downs consuming most of
the new capital raised by the two firms, their losses net of write-down
were $1.96 billion and $5.11 billion, respectively, which means their
current operations are making good money. In time they will re-capitalize
themselves. In time for the economy?
The commentariat this week,
even informed non-spinners, has announced “relaxing” of the Crunch,
“normalization” beginning. They are partly correct, but not the part that
matters to the economy. The Bear Stearns lesson is sinking in: no large
institution will be allowed to fail, here or in Europe or anywhere.
Central banks will not allow
it. So, big money fearful of that event has stopped its panicked buying of
Treasurys (even gold), begun to unload, and up rates have gone.
Nevermind that they were
worried about the wrong thing. The Crunch is still full-on: the spread
between retail mortgages and the 10-year Treasury is still 2.50%, at least
.80% out of line.
© 2008 - Economic Notes is published weekly by the Economics Department of
Universal Lending Corporation. |
Fixed-rates in the mid-sixes
intercept housing recovery, eliminate the benefit of payment-reducing
refis to crimped household budgets, and makes ARM-escape impossible. The
Jumbo market is still completely broken, and the new mini-Jumbos are a
high-priced joke. Issuance of securitized credit of all kinds is at
standstill.
In the broad credit markets,
Libor is the global mark for all short-term borrowing. The WSJ last week
discovered the Libor-setting British Bankers’ Association had for months
conspired to understate the wildly high true cost: three-month dollar
Libor is 2.91% on Friday (really) versus 90-day T-bills at 1.43%, five
times a normal .3% spread.
The Treasury/Libor spread
(called the “TED” spread for ancient reasons, Treasury/Eurodollar) has
always been considered a default-risk measure: ultra-safe Treasurys versus
unsecured bank-to-bank loans. We know now that no one need fear a major
institutional failure, and so the heart of the Crunch is coming clear:
Libor is high-cost because loans are scarce. Same for mortgages. Pure
supply/demand.
How can loans be scarce with
the Fed hosing loans into banks? Because system captial is impaired. There
isn’t enough capital to support current loans outstanding, let alone new
ones.
How the economy makes it
through a slow, grinding recapitalization without adequate credit...
that’s the question. That part of the worst is not over at all.
|
