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October 24, 2002
Mortgage rates have stayed where they were at the end of last week: Freddie's survey is about right at "6.31% plus .6% fee."
Mortgages will likely stay at or above 6.25% until the volume-choked mortgage market clears its throat. An economic Heimlich in the form of some really bad data would speed the process, but resolution to unbalanced positions could take a couple of months. Someday, of course, good news will mean that rates have bottomed, and it's possible that the six-flat of September '02 will stand for another forty years. Certainly, everybody in the stock market hopes so, as do several people at the Fed.
I wish so, too, and would gladly trade refinance profiteering for a recovered economy, but the data do not describe a rate-bottom recovery.
The 1,100-Dow-point surge is still in place near 8,300, but shaky, and a long way below the top of the last rally: 9,000 in August was the latest in a series of descending tops, and the current stock market rally has little meaning until and unless it closes above that prior top.
The market might have extended its rally on news of the sniper arrest, but did not. It might have rallied on the report of fewer new claims for unemployment insurance, but did not. Stocks might have found relief and rally in news that our attack on Iraq might be delayed way into next year, but did not.
Disagreements about the state of the economy are a perpetual background noise in the markets. However, the arguments are usually about how strong the economy is during expansion: too hot, inflationary, or sustainable? Or how weak during a recession: how far down, how long going down, how much help from the Fed to turn things around?
You'll rarely hear the poles-apart disagreement prevailing today: are we in a nascent recovery, or headed into recession?
A part of the problem (maybe the whole problem) is that the downturn that began in 2000 is different from all those since the 1928-1938 episode. All the more recent ones, one way or another, were aspects of the cycle we all grew up with: expansion turns to overheating and an inflation threat, followed by inflation-cooling recession, Fed easing, and strong recovery.
This time the only inflation was in financial assets, and pressure on general prices has been downward, even at the peak of the economic expansion. In the last year, the Fed has been its easiest since the 1930s, and recovery is still in question.
Those who saw early the differences in this downturn have been right in their forecasts all the way through. The traditionalists, believing in post-Depression expansion-contraction and Fed cycles, have been dead wrong.
Those in the first group had best remind ourselves often that stopped-clock accuracy has its weaknesses: the stopped-clockers in the second group could luck their way into accuracy any day, now.
The recovery-at-hand versus no-it-ain't debate has been missing a key player: Alan Greenspan. The Fed Chairman is supposed it keep it corked in the months preceding an election: say nothing and do nothing for fear of the appearance of candidate or party bias. The Chairman has succeeded, but should have passed the cork: William McDonough, the otherwise able president of the New York Fed, last week accused senior executives of being out of touch with Main Street, and "competing with each other about who can be more gloomy."
Unfortunate remarks, soon contradicted by the Fed's own "beige book:" the economy is "sluggish," retail sales "weak" nationally, and labor markets "lackluster."
The Fed meets the day after Election Day, and we will see about the difference between cheerleading by frustrated optimists, and reality.
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