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August 31, 1990
Last week's panic broke on Monday, and we are back in a "normal" warfear bond market, swinging to and fro on rumor, and on each tick in oil prices.
Personal Incomes held up alright, gaining .6% in July, but Factory Orders crawled up only 1.6%. New Home Sales skidded 2.3%, and Median Home Prices plunged 4.7%. Leading Indicators were unchanged in July.
Measures of consumer confidence may be the best recessionpredicting data available. All such surveys show a confidence crash in August; if it persists, the recession has arrived.
Note also Monday's $27 crater in Gold prices, the biggest oneday drop since 1983. Gold's behaviour says inflation isn't the worry, here. War fear drove up the price temporarily (and will again), but there is recession and deflation nearby.
The Fed is still hunkered in its bunker, but did find time to study the credit crunch that isn't a credit crunch. The Fed is master of the foggy fairytale, but has outdone itself this time. This credit crunch has become the Cheshire Cat of American finance.
"There is no evidence that credit is being denied to creditworthy borrowers," sayeth the Fed. Of course not. But the regulators' notion of who is creditworthy is a much shorter list than a year ago. Nothing here but the cat's smile hanging above the bank.
Fedites concede that a weakening economy is causing justifiable caution by lenders. So, why won't you ease? "The economy is still growing," they say. Now there are just the cat's stripes suspended in midair.
The crunch is very real, particularly in real estate. The only exception has been single family loans. So far.
The supply of Fannie, Freddie, VA, and FHA loans will stay good, even in a deep recession. Their rigid underwriting standards will protect lenders. But the more forgiving ARMs and Low Docs may get scarce.
ARMs are the most vulnerable. They are such a poor fiancial deal that lenders have had to induce borrowers with the easiest underwriting of all mortgages. Half of the stillhealthy S&Ls are California ARM freaks, protected only by rising home prices. In a recession, and the first lousy market in California in 40 years, Saddam Hussein's health looks better than the ARM pushers'.
The bond market is betting recession. Any data showing surprise postKuwait economic health will take mortgages to 11% in a heartbeat. Consider locking before the September 7 employment report.
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