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Contrary to the conviction of
deeply confused civilians and reports by lazy news media, mortgage rates
are unchanged, about 5.75% for the lowest-fee 30-year paper.
If you don’t believe us, visit
www.freddiemac.com and its weekly survey. It is unbiased by sales jive,
although it suffers from “survey lag” (early-week data released on
Thursdays always misses real-time reality), and assumes a fractional
origination fee. Last week’s “5.48%” captured the one-day hysterical
bottom when the industry could not log onto rate-lock websites. Last
Thursday’s “5.68% plus .4% origination” is still about right, and all but
identical to the prior week’s “5.69% plus .5%.”
Yet, the media refer
constantly to “dramatically lower mortgage rates.” They are better, but...
drama? Freddie’s average for the whole of 2007 was 6.34%. A half-percent
drop is nice for buyers, and a help to a few refinancers, but no fire
sale.
“How can it be the same...!?!” says the client, after a cumulative 1.25%
cut at the Fed in only eight days? Answers follow.
Brand new January economic
data are not that bad. Says here not bad enough to justify the Fed’s
panic, let alone to anticipate more cuts. Payroll growth slipped to flat
in January (negative 17,000 is within the huge range of error and
revision), unemployment down to 4.9% in a workforce statistical quirk --
soft, but hardly a recession. The purchasing managers reported their first
gain in six months, likewise soft, but with persistent strength in foreign
orders. 4th quarter GDP grew by a mere .6%;
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however, aside from a
temporary drawdown of business inventories grew at 2%.
The Fed’s form is disturbing
to long-term investors. Central banking is not figure skating, but Mr.
Bernanke has departed his predecessor’s 17 years of gradualism for
lurching on the rink. A Fed that will lurch down will lurch up.
Investors bought long
Treasurys and mortgages at these levels 2002-2004 because Mr. Greenspan
said after every meeting into 2006: Excessive monetary stimulus most
likely will be “removed at a measured pace.” Translation: you’re safe for
now, and we’ll give you time to get out before we kill you.
In those late Greenspan years,
deflation was the problem. Today, inflation is rising all over the world.
Australia, 16-year-high 3.8% core; Europe 14-year-high 3.2%; UK 2.6% core;
China 6%-plus, and an economy completely out of control beginning to
export inflation to us. Each time the Fed has lurched to a catch-up ease,
all the way back to August, it has rescued stocks, commodities, oil, gold,
and tanked the dollar.
We have chewed on the Fed for
its inaction and credit-wreck oblivion. However, this situation is NOT a
monetary problem: it is a banking-system near-insolvency that may morph
into a recession, each making the other worse. The crying need for six
months has been transparency of credit loss and bad-asset firewall. Cuts
in the overnight cost of money may intercept recession, but inflation
means that these cuts cannot be maintained or removed at a measured pace.
© 2008 - Economic Notes is published weekly by the Economics Department of
Universal Lending Corporation. |
A central bank chairman must
be prepared for the ultimate sacrifice: no tough inflation problem was
ever solved by slow growth. It takes a recession. It takes higher
unemployment and crushing the commodity spiral. To get long-term rates
down, Mr. Bernanke must get the good out of this slowdown: he must let it
get ugly. Instead he has rescued inflation-pushing markets again and
again.
Two non-Fed forces holding up
mortgage rates: credit fear about Fannie and Freddie has the spread
between mortgages and the all-defining 10-year Treasury (3.57% on the 1st)
over two percent for the first time ever. Second, somebody by accident may
arrive at an effective credit-wreck bailout: the giant bond insurers,
Ambac and MBIA may be resolved in days. If no collapse, then credit fear
will give way to inflation fear.
The Fed’s cuts have had a
dramatic effect on ARM adjustments, and should revise estimates of housing
doom to the better -- also reducing bond-market fear. This month, common
one-year Libor-floating loans will adjust DOWN to 5.125%.
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