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October 11, 2002
On Wednesday, mortgage rates inched to a new low, a hair under 6.00% even on the lowest-fee deals, taken there by the stock market. That day, stocks reached a new level of despair: the Dow closing at 7,286, and the S&P 500 48.6% below its all-time high, set only thirty months ago.
How time flies.
In the last 48 hours, stocks have regained more almost 500 Dow points, ignoring everything -- war and economy -- and pulled the 10-year T-note from 3.57% to 3.79%, and mortgages back to 6.125%. In a situation where stocks rule mortgages... may as well study stocks before reality.
No market goes straight up or straight down for long before "correcting" (the now-hideous Wall Street euphemism for shirt-loss). Even the greatest booms and grisliest crashes are characterized by chart-pattern "shoulders," relative flat spots in the long-term trend. In the worst two years in American market history, 1930-1932, the Dow lost 86% of its value. However, that contained panic (an orderly liquidation, like this one) was interrupted by seven large rallies, each averaging a 24% gain.
Until proved otherwise -- by a price-bottom lasting a year or more, or a sea-change in economic fundamentals -- I assume rallies like this week's are temporary affairs having temporary effect on mortgage rates.
The fundamentals at the moment make a V-shaped recovery in stocks, rates, or the economy... inconceivable. War news this week was just that. Absent an Iraqi surrender, by or without Mr. Hussein, we are going to war within four months.
There was one, single piece of good economic news: "only" 384,000 people filed new claims for unemployment insurance last week, down from 400,000-plus the last two months, possibly a miraculous trend-shift, but not supported by any other data.
Retail sales are sliding badly, overall September sales down 1.2%, indicating the consumer is fading from the game. The consumer confidence numbers for early October are awful: faith in current conditions fell to a ten-year low at 92.9 (from 95.8 in September), and confidence in the future sank to 72.4 (from 79.9) -- both results about five points below forecast.
If the worry-warts are right about an impending double-dip, what should be done about it? This is an election year; surely there are proposals for government action?
Surely. The Democrats want to stimulate the consumer by awarding Mr. Bush's rich-guy tax cuts to low- and middle-income people, and grant a payroll-tax holiday until year-end (low-income folk don't have much income tax to cut, and rich guys have already paid their '02 FICA). The Republicans want more of their kind of cut, this time on capital gains and dividends, trying to get business investment going.
These aren't bad ideas, but they won't work. Neither the consumer nor business needs a traditional "jump start," as idling in neutral is not the problem.
We're strangling in a Japan Collar: businesses carry crushing debt loads, and stores of consumer savings have evaporated. This is a balance-sheet problem defying traditional government stimulus. Consumers are reducing spending in order to restore lost savings, and businesses cannot reduce their debt costs by refinancing -- let alone borrow for new capital spending.
The rates businesses must pay are going up: Ford Motor Company bonds paying 7¼% this week fell in price to yield over 9%. Even businesses with good credit must pay record spreads over Treasurys. We can wait, as consumers drift to the sidelines, hoping the economy will grow its way out of the corporate debt load, or get some serious government spending underway. S&L-bailout style: debt guarantees, debt-for-stock swaps -- whatever it takes. Soon.
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