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September 29, 1989
Mortgage rates rose a bit this week as a result of governmental intervention in the value of the dollar. The rise is probably a random shot in the ribs, not an indication of a pounding to come.
Economic data continue to be contradictory. Machine Tool Orders, supposedly depressed by a toostrong dollar, jumped 18.8% in August. This morning's Leading Economic Indicators rose less than expected at .3%, but the bond market is weak in perverse reaction. Durable Goods Orders rose a robust 3.8% in August, but underlying data suggest spreading weakness in manufacturing.
Dollar exchange value management does not inspire faith in either government or economics. The Reaganauts belived in letting the dollar's value be "set by the markets." So, when Paul Volker raised interest rates in order to fight inflation, the dollar became a very attractive investment, and joined interest rates in the stratosphere. Reagan's "dollar standing tall" was an unmatched catastrophe for American manufacturing and labor, as American products were priced out of all foreign markets.
The Bcubed (Bush, Baker, Brady) team took charge at the end of the Reagan term, and tried to repair damage by driving the dollar down. Some dollarbashing was a good idea, helping exports, but was overdone to the point of crash and renewed inflation.
Of course, the renewed inflation last year caused the Fed to tighten again early this year, and the higher interest rates drove the dollar up "too high." (Does this pattern seem familiar?) So, on Monday, our guys talked everybody else into selling dollars, which hammered the bond market.
The "stable dollar" people don't know at what level to stabilize the dollar, and the "floating exchange" believers don't know how to manage the resulting chaos in all economic enterprises. We'll figure it out someday. But, for now it's like two teams of doctors managing an infection, one beliving in leeches, and the other in purging, neither knowing what a microbe is.
I still think rates are headed down a bit in the next month or two, but the immediate future is a 5050 proposition. Employment data next Friday, October 6 will be the next opportunity for clarity.
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