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September 20, 2002
Freddie Mac's mortgage-rate survey this week found 6.05% plus .7% fee, a new record low for the series. In real-time, intra-day terms, rates reached this level for a few hours on September 5; this time it's been three days, looking more like a way-station for another decline later in the fall than a transient low.
The causes of the continuing downtrend: lousy economics and war. It was easy to detect the predominant force. Rates fell on Monday, as talking heads made it clear all weekend that the 9/11 observance and Mr. Bush's fine UN speech had steamrolled Congress into authorizing military action, quick; UN, allies, or no.
Then, late Monday, scrolling across market CRTs: "...Iraq agrees to inspectors...." Every bond and mortgage trading desk snapped to alert. "Peace!?"
"Damn."
Bonds bought for safety were sold, then and through Tuesday morning, until realization gradually came through: we're going into Iraq, no matter what.
Profiteering on economic distress the last two years has not been the proudest work of my life, though helping families to re-work their finances, and doing it well, has been good duty. However, our current status as war profiteers makes me queasy. As consumers consider refinancing tactics -- whether to break a rate lock for a lower deal, or embark on a rapid succession of "no cost" refis for little rate gain, or how much urgency to inflict -- consider also the source of our newest good fortune.
War may be predominant, but deteriorating economics also pushed rates down.
The consumer is still in play: a few small declines in new housing starts mask very strong sales and an increase in new permits for construction -- hopefully including four-car garages, or curbs will be clogged with millions of brand-new cars.
Business is in trouble: industrial production dropped .3% in August versus expectations for a .2% gain, and in excess of 400,000 people are filing new claims for unemployment insurance each week.
Overall, it's impossible to find the new locomotive which will pull the economy to healthy growth. Technology has yet to find bottom, let alone forward traction: EDS, the second-largest computer services company (behind IBM), dumped its sales and earnings forecast, saying corporate spending "Came to a screeching halt two months ago." EDS stock dropped 45% in one day. Cisco's orders are off 30%... Oracle revised forward sales from increasing to declining... Morgan Stanley, J.P. Morgan Chase, Knight Ridder, McDonald's, all have weakening earnings... McDonald's....
Ford Motor Company is a good illustration of the palsy afflicting business. In the last five years, total corporate debt doubled from $2 trillion to $3.9 trillion, the borrowing based on an economic boom which we now know to have been inauthentic. Stock in Ford has a total market value of about $19 billion. Its cash on hand is $24 billion. Why would the company be worth less than its cash, to say nothing of its plants, franchise, and future profits? Because it owes $146 billion, and at auction its creditors come in ahead of its stockholders.
A lot of people want you to think the "inauthentic" experience of the late '90s was the fault of Kozlowski, Ebbers, and the Enron Pirates. Not so. This is a global business problem: too much debt and too much capacity, as reflected in global stock markets. Enron is not at fault in Britain, France, Germany, Italy, Netherlands, or Spain, where 2002 stock markets are down 22%, 30%, 35%, 21%, 32%, and 23%; nor in Australia, China, Hong Kong, or Taiwan, down 2%, 14%, 17%, and 18%; nor in Argentina, Brazil, Chile, Mexico, and Canada, down 65%, 54%, 25%, 20%, and 19%. (There are bright spots. All four: Russia, Indonesia, South Korea, and New Zealand, up 26%, 20%, 10%, and 12%).
We will get out of this predicament, but it will take time, free of bad accidents.
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