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September 24, 1999
After last week's brief trip to 90-day lows near 7.75%, mortgage rates this week were once again headed north of 8.00% -- "briskly", as suggested here last week. However, the return trip to the highs was interrupted by a stock market cave-in, as cash sloshed from equities to bonds and mortgages. 30-year Treasurys have fallen under 6.00%, and mortgages are right back to the 7.75-ish lows. The stock market's irrepressible run has been the high-octane fuel for a too-hot economy. If this equity slide is for real -- Dow under 10,000 -- then the Fed's pre-emptive act will stop dead it its tracks. In a list of central banking mistakes, the only one worse than missing an inflation problem is accidental tightening into a bursting bubble (90's Japan and post-1929 America are the gruesome examples).
Why is the stock market sagging? The immediate cause for Thursday's abrupt breakdown: Microsoft's president, Steven Ballmer, said "There's such an overvaluation of technology stocks that it's absurd -- and I'd put our company's stock in that category." Further, he said a "gold rush" mentality "is a bad thing for the long-term health of the economy." That line hit the stock market as though every trader's screen suddenly went blank, flashing that nifty little yellow Microsoft triangle: THIS MARKET HAS ATTEMPTED AN ILLEGAL OPERATION AND WILL BE SHUT DOWN! Cynics suggest Mr. Ballmer was just trying to drive down the value of Microsoft stock in advance of losing its anti-trust case. Maybe so, but I doubt it; and anything that's a bad thing for the long term health of the economy is terrific for bonds and mortgages.
Another "reason" for soggy stocks is the much-trumpeted "falling dollar". Don't believe it. The dollar has fallen versus the yen, but versus other currencies it is holding reasonable value, and is up almost 10% this year versus the euro. The yen is Japan's problem. There is a perpetual excess of foreign currency in Japanese hands, paid by purchasers of Japan's exports, and an equally extreme shortage of yen in foreign hands because Japan imports so little from everyone else. As Japan is trying so hard to export its way out of trouble, the yen has risen 40% in value in nine months. Whenever the yen gets as strong as today's 104/buck -- anything stronger than 115 -- Japanese exporters can't make money, and Japan demands that the rest of the world help it to drive down the value of the yen. Incredibly, the world often accommodates. Allies... stability, all that rot. However, given an American trade deficit pushing $300 billion this year, the yen is on its own, and so is the barely-recovering Japanese economy.
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