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September 14, 2001
Bond market types are known as the "ghouls" of the markets because of their fondness for bad economic news. Ghoulish it is, to talk about money so soon after 911 Day, but money markets will soon measure events which are a lot more important than money.
The first of these: We are at war, but to what degree?
At the re-opening of the bond market Thursday, Treasury yields fell in the traditional flight-to-quality at the onset of any conflict. Two-year maturities traded at 2.98%, under 3.00% for the first time since 1958.
Mortgage rates are unchanged, propped by the tens of millions of people poised to refinance if rates fall so much as a quarter percent. Mortgage operations continued, within the emotional limits of staffs. We were unable to lock rates on Tuesday and Wednesday; the absence of overnight delivery has delayed approvals and closings; and, to the surprise of many buyers expecting to close, money market funds require a stock market operation to convert to cash.
Everybody expects a big rate cut from the Fed, maybe as much as a full percentage point, maybe as soon as the stock market re-opens on Monday. The state of the economy is opaque, as all data collected before 911 Day are meaningless. However, at least a temporary contraction in GDP is inevitable, if only because of a partially locked-down and thoroughly stunned society.
To what degree are we at war? If we get very, very lucky... if 911 Day was the work of a group like Bin Laden's alone, then we are not so much at war. However, if it turns out that state support was given -- Syria, Iraq, Iran -- then we may be as much at war as we have ever been.
Either way, defense spending will increase on everything from internal security to hardware. Hyper-expensive gadgets like the B-2 bomber were Cold War relics a week ago, but may come in very handy next week. As crack-brained as it seems to me, many will see 911 Day as new reason to blow a bundle on missile defense.
The budget is as changed as the New York skyline.
Leftist propaganda to the contrary, no event causes more financial harm than war. In eight hundred years of recorded market history, wartime borrowing and spending has resulted in inflation and rising interest rates, every time.
The firm Cantor Fitzgerald has for a quarter-century maintained the inside Treasury market, the dealer-to-dealer trading which underlies all the money in the world. The "Cantor screen" has been the utterly trustworthy rock in that unruly and mutually suspicious cyber-market swirl.
Of the 750 Cantor staff at work on Tuesday in its home offices, World Trade Center One, floors 101, 103, 104, and 105, none has been found.
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