Freddie Mac on Thursday announced a new six-month low for mortgages, 5.64 percent plus .7 percent fee, and the news was true when Freddie took its survey early this week.

The world has since moved on. A modest decline in oil prices on Wednesday caused the 10-year T-note to depart the 3.98-3.99 percent range for a test of the 4.11 percent recent top, but everything has settled down today. Oil is $51/bbl, the Dow is stuck at ten grand, and the 10-year is 4.05 percent, which is holding mortgages near 5.75 percent – all while the world waits for several shoes to drop.

Freddie Mac on Thursday announced a new six-month low for mortgages, 5.64 percent plus .7 percent fee, and the news was true when Freddie took its survey early this week.

The world has since moved on. A modest decline in oil prices on Wednesday caused the 10-year T-note to depart the 3.98-3.99 percent range for a test of the 4.11 percent recent top, but everything has settled down today. Oil is $51/bbl, the Dow is stuck at ten grand, and the 10-year is 4.05 percent, which is holding mortgages near 5.75 percent – all while the world waits for several shoes to drop.

First among the footwear: that election thing. Contrary to widespread opinion, I bet we will know the winner within a half-hour after the California polls close and the networks release exit polling from eastern and central time zones. A further bet: rather fewer judges will be interested in pleadings to intervene in irregularities real and imagined. A sure thing: the identity of the winner won’t move the financial markets, at least not in a way anyone can prove.

The big boot falling to the front of the markets’ stage is the economy. The first estimate of 3rd quarter GDP arrived this morning at a 3.7 percent growth rate, together with declining inflation (barely 1 percent) and improved but slim growth in wages. Even if you imagine adding back the .75 percent of potential GDP growth shaved by high energy prices, the economy would still not be hot enough to add many jobs – and that with the enormous stimulus of a 50-year low in interest rates, a $450-billion cash budget deficit, and tax rates the lowest as a percent of GDP in sixty years.

As more time passes with 4 percent center-line GDP growth but weak jobs, I think we have to look beyond energy prices as the culprit. Markets have been trading on oil, oil, oil, and more oil, but our overall performance suggests that the competitiveness of American labor in global markets has deteriorated, and maybe continuously.

Lesser footwear on the way down: October jobs data will land on the Friday after the election, and the following Wednesday the Fed will meet to raise the cost of money from 1.75 percent to 2 percent. It will then hint at its plans for further moves upward, or the absence of same, as early as its December meeting. The bond market is unprepared for anything much beyond 2 percent.

Happy economic surprises by Inauguration Day? The Chief will be on his own.

Then, there is Iraq. There is not going to be a civil war; there is a civil war now. Markets know that we will shortly engage in the worst combat of the war, re-taking Sunni capitals, trying to dress the place for a Jan. 31 election. One saving grace: Sunni Iraq (and much of the rest) is so dangerous that there won’t be any media around to cover the carnage.

Congress will soon be asked for another $70 billion to fight the war – within weeks if Bush is re-elected, within months if John Kerry. There is only one, 1,500-man Iraqi battalion (mostly Kurdish militia veterans) capable of defending itself and limited offensive operations. Those who say that there were not or have not been enough American troops sent to Iraq miss one point: we do not have any more to send. One might as well demand that a moat be dug around the place so that we could better use our naval superiority.

I don’t pretend to know how the end-game will play out, or when, but I suspect that the election has masked the real events on the ground, deferred decisions, and concealed actual options under consideration. Neither Bush’s asserted infallibility nor Kerry’s “plan” has begun to prepare Americans for what lies close ahead.

However, the cold and cynical markets don’t flinch from anything, and are aware of what is coming – and playing things safe before Iraq hits the fan is one key reason the 10-year is still 4.05 percent.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.

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