Rates popped up about an eighth of a percent last Monday (T-bonds to 4.32 percent, mortgages to 5.875 percent) in response to more Goldilocks data. Pretty good strength, but no dangerous heat.

Rates popped up about an eighth of a percent last Monday (T-bonds to 4.32 percent, mortgages to 5.875 percent) in response to more Goldilocks data. Pretty good strength, but no dangerous heat.

Consumer confidence jumped to its highest level in six months, the survey possibly showing an improvement in the job market, and certainly reflecting pleasure at the drop in gasoline prices. The housing market may be beginning to top out, as sales and starts of new homes are way off, but resales of existing homes are still cooking and the apparent weakness may be a seasonal distortion. Christmas retail sales were softer than merchants hoped, but overall probably OK; the traditional season no longer exists, as discounting moves a lot of dollar volume past the holiday, and no one really knows how to evaluate the displacement of sales to Internet retail.

It is our custom at the New Year to recite Peter Drucker’s wisdom: “Nobody can predict the future; the idea is to have a good grasp of the present.”

Looking into some New Years, it has been possible to trifle with the great man’s warning: in the ’80s and early ’90s, you knew that no matter what else, the Fed was going to lean against inflation; in the late ’90s that the boom phase was likely to roll ahead; and in the ’00s that the post-bubble mire would be sticky (and still is).

At other year-ends, change was at hand: in January 1995, it was clear that the Fed’s year-long tightening had concluded; in January 2000 it was just as clear that the Fed’s modest tightening had done disproportionate damage. A month before New Year’s Day 1990 the Berlin Wall came down; in January 1991 we waited for the offensive against Iraq, just as we did in January 2003. In those years of change you could make book that some old, dominant patterns would not continue, even if the new ones were not yet evident.

2005 feels like a year of change, and just as in so many other ones, the Fed and war are the catalysts.

In 2005 we are going to learn the location of a neutral Fed funds rate. The ascent from an emergency, 1 percent low has been a mechanical affair; now it’s make-or-break time. Last fall, most guesses ran to a quarter point per meeting all the way from 2.25 percent Thursday to 3.5 percent, give or take a half. This week PIMCO, which buys more bonds than anybody except Japan, announced in certain language that the Fed would hike one more .25 percent in either February or March, “stopping this cycle at 2.5 percent” until unemployment fell back into the fours. Wow. If so, good for stocks, mortgages and the economy in general. If not, not good for same, and we’ll know before spring.

(One financial wild-swing prediction: don’t worry about the dollar. There are good and persistent reasons for a weird trade picture, and the main reason the dollar is low has been an emergency-easy Fed, now mostly rectified.)

2005 will also be make-or-break in Iraq. We cannot maintain a substantial force in Iraq for more than another year without expanding the army and Marines by two or three hundred thousand troops; the Reserves and Guard cannot be called up past the two-year statutory limit, and regular troops are approaching rotation exhaustion.

We must this year either find Iraqis who will fight as hard as the “insurgents,” or find the will and the money to mobilize our forces, or retreat in disorder. All prospects for beneficial change in economic policy here (budget, taxes, Social Security) are hostage there. President Bush’s approval rating is back down to 49 percent, by 10-20 points the lowest rating upon re-election of any president since polling began, and 56 percent of the people think that Iraq wasn’t worth the trouble.

I hope and wish a happy new year; changed…pretty sure about that.

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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