Dearth of meaningful economic data sets stage for big market movement in either direction

Optimists cling to hopes that consumers have deleveraged and are borrowing again

Here in the U.S., market participants are fidgeting and annoyed by the weather distortion of incoming data.

Three housing reports of January-February activity were of course weak, but meaningless. The same can be said of snapshots of manufacturing activity in New York and Philly-Fed.

Flintlock image via Shutterstock.
Flintlock image via Shutterstock.

The longer we go without good information, the larger the market movement when the ear muffs and fogged goggles come off.

On Wednesday afternoon the Fed released minutes of its January meeting, and this line stopped hearts for a couple of hours: “A few participants raised the possibility that it might be appropriate to increase the federal funds rate relatively soon.”

By nightfall, everyone understood that “the few” were presidents of regional Feds (Plosser, George, Fisher) — not in the majority, and the dimmest group in modern memory.

Wednesday’s sale of WhatsApp — 55 employees, $8 million invested in the startup, negligible revenue — for $19 billion begs the old question: If I had paid attention in school, might I have amounted to something?

Dominant public commentary has the economy doing steadily better, and those thinkers seized on the New York Fed’s quarterly report of consumer credit. Deleveraging complete! Consumers borrowing again!

The longer we go without good information, the larger the market movement when the ear muffs and fogged goggles come off."

I am not one of the bears, just an agnostic made skeptical by the drumbeat of failed optimism in the last five years. And grumpy about poor analysis.

The growth in consumer credit is in three places.

Car loans, in which the subprime share has tripled from 2009, back over $150 billion per year. People will default on mortgages before the car, and cars are easier to repo than houses.

Then student loans, balances doubling in the same five years, in the aggregate over $1 trillion, but inherently defensive. Tuition has risen like nothing except the cost of health care, and every student loan borrower by definition does not have the money nor an asset to secure with a better loan (any mortgage is better — lower rate, longer term, deductible).

The third category: Mortgage balances grew by a hair in the first quarter since 2008 Doomsday. However, the $9.5 trillion outstanding is a high-variety laundry basket.

Deleveraging? The $1.5 trillion reduction in outstanding mortgages has been due entirely to foreclosure, not reflective of households still with loans. In the refi frenzies past, some estimates had almost half of refis switching from 30- to 15-year terms. That is legitimate deleveraging, a steady reduction of principal owed.

The minor increase in net-new loans is not sufficient to fund healthy housing markets, and tens of millions of households are still underwater, or credit-wrecked altogether.

Until we get some springtime data, the economic-growth argument is a standoff. The 10-year Treasury note’s hold near 2.75 percent says it’s wary, if not about overall growth underway, certainly the persistent flirt with deflation.

Overseas, Japan’s last-ditch money-printing is not going as expected. In the last three months of 2013, Japan’s economy grew 0.3 percent, one-tenth the forecast. Its trade has swung to huge deficit, $25 billion last month, which ordinarily would require foreign financing to balance accounts.

Since no one outside will buy rice-paper Japanese government bonds, the Bank of Japan must print to finance, which should drive the yen to new lows, helping Japan’s exports at the expense of everybody else.

Japan in the next month plans another large fiscal stimulus simultaneous with a contrary increase in sales taxes from 5 percent to 8 percent. The world’s third-largest economy in counterproductive chaos is more than unsettling.

In China, just three things: The HSBC index of its manufacturing, kin to our PMI indices, at 48.3 fell further into contraction in a seven-month slide. Forecasters still call for a 7 percent GDP increase this year. Third, despite emphasis in limiting credit, the People’s Bank of China said credit in January had risen at an 18 percent annual pace.

Kiev is a two-day drive from Sochi, the all-time Potemkin village. Ukraine is aflame because Tsar Vladimir saw in its economic weakness a chance to snatch back an escaped province.

In the old days, dangerous for us all. Now, the toothless decadence of both Russia and Europe leaves it a shabby, bloody, shadow-play of empires gone.

Lou Barnes is a mortgage broker based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.


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