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September 13, 2002
Before falling anew today, mortgage rates rose this week, peaking above 6.25% on the 9/11 anniversary, as relief at the absence of terrorist reprise released fearful money pent up in bonds and mortgages.
That's all there was for optimism -- one day, relief at not being hit. The next day, most people watched Mr. Bush speak at the UN, but us wrong-end-of-the-telescope types tuned in Mr. Greenspan's speech to the Senate, saw the stock market let go again, big, and found no relief at all in the economic data, or the two speeches.
Low-fee deals are again approaching six percent flat.
It's tough to handicap the market effects of war with Iraq, or for that matter, of backing away from it, but that's what the markets are doing right now: laying odds. We don't know whether, or when, or with what allies, or with what degree of UN or domestic authorization -- and those are the uncertainties before the shooting starts. Mr. Bush did not say "or else" in his demand for UN action, but he didn't have to.
Reluctance in Congress to vote for war seems to reflect the same among the people. Senior Republican senators (Lott, Lugar, Hegal, Warner...) all say similar things about the need to fully explain to the people the need for war -- an explanation implicitly not yet full. However, reluctance cuts two ways, and each day the thought of casting a "no" vote seems to have become more difficult.
I assume the uncertainty premium will grow in the financial markets, hurting stocks and helping bonds and mortgages. Further assumptions: the UN will sign off or not before Halloween; following that vote, either way, Mr. Bush will try to force a Congressional vote before the election. Whether before or after, Mr. Bush will get the okay to proceed in time to take advantage of the December-March weather window.
An outbreak of peace news -- Iraq accepts inspectors -- would likely reverse the risk premium, helping stocks and hurting mortgages and bonds. A favorable UN vote and/or being joined by significant allies might do the same thing; but, if we are headed for war, the markets won't relax until we know how it goes.
Mr. Greenspan delivered his second odd and defensive speech in two weeks. In the first, at a conference of central bankers, he insisted that he could not have identified the stock market bubble in advance, and even if he had, there was nothing he could have done about it. In his speech on the 12th, he defended his support for tax cuts, and recommended that Congress regain restraint on spending to eliminate the budget deficit -- the same advice Herbert Hoover gave the country in 1930.
In neither speech did Mr. Greenspan mention the current state of the economy. However, in the interval, several presidents of regional Federal Reserve Banks sang in chorus, Rosie Scenario leading: recovery may be bumpy, but 3.0%-3.5% GDP growth is just around the corner.
The new data beg to differ. The Fed's own "beige book" is a pre-recessionary read: "...little or no growth in employment... wages reported to be flat... slow and uneven growth... moving sideways...." New claims for unemployment insurance (data released as the Chairman spoke) rose for the fourth week in five, to the highest level in two months. September consumer confidence fell to the worst reading since November '01. Retail sales rose a surprising .8% in August, but half the gain came from zero-interest-financed car sales.
The Rosie jawbone from the lesser Feds sounds hollow, and they may as well stop. The Fed's bias-to-weakness last month told us all we needed to know: they've done what they can, and we're going to have to get out of this on our own. While we go to war.
It won't happen quick, but the stage is set for a mortgage slide to the high fives.
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