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August 16, 1996
This week brought no further sign of slowdown, and long term rates gave up a little of their gains: mortgages are back to 8.25% at "zero and zero."
There is no great strength in the new data, but no particular weakness, either. Housing starts fell 1.3%, but remained at a very high historical level, and way above last year. Same thing with retail sales and industrial production: .1% gains are hardly sign of a boom, but the base levels were strong.
There are several fields in which an ability to predict the future would come in handy. Some would lead to a more comfortable life, like weather forecasting; others, a more lucrative one. Cards, dice, ponies, and bonds come to mind.
Bond traders spend all day every day trying to predict the future, or fleecing some genius who has some sure fire method of doing so. Since there is no direct method of any merit for predicting future interest rates, traders focus on the indirect.
The working equation in the financial markets holds that long term rates rise in a fast economy, and fall in a slow one. The Fed, inflation, the deficit, trade balance, dollar valueŠ all that other stuff is peripheral to the central, fast-slow assumption.
Every trader is a shade tree economist; no doctorate, but a good, seat of the pants operator believing that it is possible to predict the future rate of economic growth, and hence place winning bets on bonds.
The utter failure of those with or without doctorates to produce accurate economic forecasts does not trouble the trading profession in the slightest. However, this week brought new evidence of the forecasting difficulty.
The "index of leading economic indicators" has been a crucial tea leaf each month for a generation. Its publisher, the Conference Board, this week finally admitted that the index has for some time not been an indicator of much of anything. The index has eleven components; of them, four have been outright "poor" performers, and another four only "fair." The other three getting "good" ratings may have performed well only by random accident.
For non-trading civilians who wish to make a good decision about when to lock an interest rate, the best strategy is to keep a firm grasp of the present and its relationship to the past, and not get lost in efforts to predict the future.
For example, right now nobody has a good read on the fast-slow outcome for the rest of this year. However, we do know the following: mortgage rates are the lowest in four months, and the total elapsed time in the last 25 years that mortgage rates have been lower than they are today is less than three years.
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