Definite signs of a false recovery
Commentary: It's time to curb federal spending
By Lou Barnes, Friday, June 12, 2009.
Flickr image by manitou2121.Interest rates stabilized at the conclusion of $65 billion in new Treasury borrowing this week, mostly by sales of long-term bonds.
"Stability" is a relative term: All long-term rates have risen roughly 1 percent in just six weeks, and a further run-up will undercut any economic recovery. The question is whether current prospects for recovery justify this rate-surge, or is this surge already unsustainable? If the latter, what's the chance for a reversal, especially in mortgages?
In today's epic divergence in economic outlook, you found what you wanted in the new data. May retail sales rose 0.5 percent -- some say presaging positive gross domestic product, others weak-as-ever, flat after extracting a spike in gasoline prices. New claims for unemployment insurance fell close to 600,000 last week, down from the 668,000 peak in early April but almost triple anything resembling job growth.
The damage to long-term rates was entirely pushed by Treasurys -- for whatever reasons (broken markets, inflation-dollar-commodity-oil fear), more borrowing than the market could absorb. At the current deficit pace, the Treasury must repeat this week's damage-doing borrowing, $65 billion every 12 days, most of it piling up in short-term debt that must be rolled. And rolled, and rolled, and rolled ...
The Fed's effort to control mortgage rates has succeeded beautifully, in the sense of restoring a proper spread between mortgages and Treasurys. Historically, a retail mortgage rate should be about 1.7 percent above the 10-year T-note -- all through 2008 the spread ran 2.5 percent to 3 percent-plus above. Today's spread is about 1.8 percent.
There are $10 trillion in U.S. first mortgages outstanding, $5.5 trillion of those Ginnie-Fannie-Freddie "agency" mortgage-backed securities, which the Fed began to buy on Jan. 5. The market for the other $4.5 trillion is dead as a hammer, and there has been no net growth in total first mortgages since summer 2007.
Of that agency $5.5 trillion, Fannie and Freddie own $1.5 trillion -- portfolios embalmed, replacing loans as they are refinanced, foreclosed, or prepaid by sale, zero-growth. Of the remaining $4 trillion, by the end of this year the Fed will have bought $1.2 trillion. Thus spread has been restored in a market with essentially no private buyers (for that matter, few buyers for any IOUs).
Those so convinced of recovery might consider: To maintain any functioning mortgage market, the Fed has had to buy 12 percent of all outstanding loans, a portfolio that took Fannie and Freddie 75 years to accumulate. Only the Treasury yield-surge could push mortgages to a marginally affordable 5.75 percent -- certainly not borrowing demand. ...CONTINUED
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Submitted by Mike Parker on June 12, 2009 - 12:36pm.
Mike Parker
mparker@theblackwatercg.com
Hi, Lou;
I've been reading Inman for a long time and I don't think I have ever seen you take a positive view of anything.
There's a line of study that says some people derive satisfaction from keeping others in a state of uncertainty.
I hope you are happy, because your article is another diatribe of sorts that does not help anyone. Let's get those right winger back in, eh? You know, the people who left us this mess? Maybe they will do better by letting those who have no bread eat cake.
As Roseanne Rosannadana used to say: "It's always something. Either you got a sweat ball hanging on your nose, or you got a bad attitude. You belong in New Jersey!"
Recovery is coming, Lou, whether you like it or not. It's far better to light a single candle than to curse the darkness.
Submitted by Gregory Schreiber on June 12, 2009 - 1:14pm.
Hey Mike,
You usually get more points for addressing the message, rather than the messenger. Lou presented a well reasoned thesis. You responded with an ad hominem attack. As far as diatribes go, "The lady doth protest too much, methinks."
Submitted by William Metzker on June 12, 2009 - 1:50pm.
Lou isn't saying anything more than you can find on Bloomberg. He's just saying it in more detail and with a slant towards the real estate mortgage business so that it makes sense.
The housing crash of the S & L meltdown, roughtly 1988 to 1994, took six years to recover, and maybe a bit more. This crash we're in now is far worse, and to think it will recover in a few months is lunacy. To imagine it will recover because people of good cheer simply want it to and people of dour disposition need to get happy is like waiting for the Second Coming in a karaoke bar.
The recovery signs are mixed, and things could go either way. I know I've been watching the ten-year every day since Oct. 2008, with serious concern and no sense of trend.
But will the Fed quit spending? Hard to say. My guess is yes, after listening to part of the Summers interview this morning. The question, though, is how much of the decrease (if any) will come from will and how much from inertia. We don't know, and neither does anyone else. Ironically enough, the governments of France and Germany are pressuring the U.S. to cut back. Who knows who will listen to whom?
Submitted by Jon Astaris on June 12, 2009 - 1:58pm.
MSNBC and other Ministry of Propaganda lackeys have been spinning every piece of bad economic news into this "recovery" fairy tale, the Wall Street sheisters are only too happy to play along by pumping up the price of oil and commodities, and the sheeple follow as they always always do right into the shearing pen. In a few days/weeks, the exact same speculators will do an abrupt 180 and short everything in sight.
All you need is faith, and the miracle follows like the rabbit out of the hat - that's what in essence Secretary Tim was saying to a sharp group of Chinese economics students the other day (Dollar is strong and will remain strong), and they laughed.
The Japanese and Chinese finance ministers said convincingly that they have absolute faith in the dollar as THE exchange currency, but they hold some 650 and respectively 780 billion of US treasuries, and they have no real choice in the matter. The Feds hold all the cards here, and unless Helicopter Ben and Treasury Tim start pounding the table and foaming at the mouth very soon, the debasing of the dollar will start in earnest. Their song: STOP SPENDING MONEY WE DONT HAVE!!!!! NOW!!!!
Submitted by Jon Astaris on June 12, 2009 - 2:08pm.
Oh well... they'll lose their jobs but at least they'll be judged by history as honest men...
Submitted by Mike P on June 12, 2009 - 9:58pm.
There can still be available solutions to these. Have you heard about Kiva microfinance? Kiva microfinance is moving into the United States. Kiva is a microlender, a type of finance company that does things on the small scale using a type of loans called microloans. Microloans are small loans that are given to people in order to create their own industry or business, usually cottage type industry, and for the most part a lot of microfinance goes on in countries that are stricken with rampant poverty. Venturing into the U.S., where so many can get online loans, isn't the worst of ideas since the recession has hit the finance industry very hard. Microfinance has come into it's own over the last decade, and some charitable cash advances given through Kiva is a worthy cause.