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September 7, 2001
Last Friday's lows -- for both interest rates and economic gloom -- have deepened. Borrowers can find thirty-year loans in the sixes without origination fee, and rates are about even with the 1998 bottom.
Optimists had a big Tuesday, as the National Association of Purchasing Management index for manufacturing unexpectedly bounced off the floor in August, rising from 43.6 to 47.9, and the new orders component rose from 46.3 to 53.1. (In all NAPM reports, values above 50 reflect economic growth, and those beneath indicate contraction; values below 44 are recession conditions.)
All the recovery-any-minute, better-buy-stocks-now types interpreted the NAPM rebound as confirmation that inventories had been cut enough, and a healthy stream of new orders was restored.
Reality intervened yesterday and today, as the service-sector NAPM (as a portion of the economy, perhaps triple the size of the manufacturing sector) plunged from 48.9 in July to 45.5 in August. This morning's news that payrolls shrank another 113,000 jobs and unemployment jumped from 4.5% to 4.9% has money pouring from stocks to bonds and mortgages.
The stock market will soon test its springtime lows, and is a fair bet to flunk.
I shouldn't make too much fun of the economic optimists (too much fun cannot be made of the equity pushers). There has been a rational, historical basis for believing that strong intervention by the Fed would soon cause a normal economic bottom followed by a normal economic recovery -- normal in the sense of all seven recessions since 1945.
This near-recession, recessionette... whatever... is different. The Fed didn't cause it and can't quickly stop it: we are dealing with the aftershocks of a classically burst bubble, not seen here since 1929.
Inflation hawks at the Fed, who clearly interfered with Mr. Greenspan's intention this summer to cut rates deeper and faster, must now admit error. I assume the Fed will cut from 3.50% to 3.00% by October, with an inter-meeting cut this month possible, and two-something likely before year-end (for the first time since 1962).
Short-term rates will follow, but mortgage rates will be propped by new waves of refinances.
For reasonable recapture of closing costs, borrowers must reduce their interest rates by about one percent. In 1998 rates prevailed near 7.00% for most of the year, and we refinanced every creditworthy mortgage above 8.00%; thus far in 2001, we have done so again. As rates drift into the sixes, an opportunity window will open for tens of millions of borrowers with rates 7.50-7.875%.
However, after the market digests those loans, more Fed easing and a delayed recovery will exert more downward pressure.
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