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July 13, 1990
Mortgage discounts are falling this morning, driven down by rumors of a big bank in trouble, and a pleasant smoke cloud from Chairman Greenspan.
The limited economic data released this week do not justify improved rates. Retail Sales gained .5%, the first plus in four months. The Producer Price Index gained only .2%, as expected, but up .6% without food and energy prices.
When a big bank is in trouble, or rumored to be, money floods into Tbills (a "flight to quality"), and rates fall fast. Such a rate movement is always temporary, and a short term locking opportunity.
Imagine, if you can, a Mad Hatter's Tea Party conducted in an oily smokescreen from Alan, not Alice.
Greenspan has been under growing political pressure to identify and solve a profound shortage of credit to real estate and corporate borrowers a credit crunch.
The Chairman has for months denied that there was any such thing as a credit crunch. Have some tea?
Three weeks ago, the Chairman agreed to study a credit crunch which he had just said was imaginary. What tea?
Two weeks ago, the Fed eased its grip on bank reserves for the first time since February. The next week, the Fed leaked word that it wasn't going to ease, as the economy was doing better. Have some tea, please.
This week the Chairman was cornered by Senators who reminded him that this is an election year. The Senators said that if they became unemployed because voters couldn't get loans, the Chairman might join the Senators in looking for work. Two lumps, erŠ cubes, Mr. Chairman?
Yesterday, looking like a distinguished, elderly rabbit, complete with pocket watch, the Chairman said: if there is a credit crunch, we didn't start it; but it is such a bad crunch that we may have to ease to offset it (I'm late! I'm late!). A new bag, Mr. Chairman?
So, the crunch that isn't, still isn't, but is bad; the easing that is (that wasn't) now may be. More tea? Stripped of fog and tea leaves, there are only two events which will give us single digit mortgages in the short run: the economy rolling off a cliff, or a serious deficit reduction agreement. Neither is likely before Labor Day. More likely is a bond market frightened by excessive election year easing.
If you can get 10% with less than one point, take it. For now, single digits at par are a matter of good luck, not good judgement.
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