|
January 10, 2003
The news early this morning was the perfect catalyst for a new decline in mortgage rates, perhaps all the way back down to the Christmas-New Year's record low at 5.75%. The Labor Department announced the surprise loss of 101,000 jobs in December, and a revised, deeper, 88,000-job loss in November, and... mortgage rates are a tad higher than they were yesterday, settling at about 6.00% with the lowest fees.
The financial markets have homilies for all situations; they are not any more definitive than horoscopes, but useful for descriptive effect. The old saws ideal for today: "Don't fight the tape" and "A market which doesn't improve on good news is destined to do worse." The first warns against arguing that a market is wrong and should have gone the other way; the second says that you may be right about the good news being good, but warns that you've missed something contrary and more powerful.
If the credit markets can shrug off today's job data, as they have, it's wise to take the reaction seriously. For the time being, don't play for new lows in mortgages, or even a return to high-fives: cover up, play it safe.
The shrug-off is based on a new consensus in the credit markets: the weak economy and war risks that made it a good idea to buy super-safe and long-term mortgages and Treasurys are now overwhelmed by other forces which make it a good idea to sell those securities. In no particular order, those forces are as follows:
1. The economy is going to recover some year, and this might be the one; hence, job losses are dismissed as a "lagging indicator," which they have been in prior recession-recovery cycles.
2. Fear of corporate creditworthiness has abated, and money is flowing from Treasurys and mortgages to corporate bonds -- $26 billion this week alone.
3. The Fed's historic announcement on November 19 still captivates the bond market: the Fed is willing to print any amount of money necessary to head off the threat of deflation. Therefore, while inflation may not ignite, the bond-buying impetus from the threat of deflation has itself been removed -- "reflation" is presumed inevitable.
4. Gold has soared, a confirmation of reflation to many people.
5. The dollar is sinking, likewise a reflation signal, and a threat to foreign owners of US bonds, who may dump holdings to escape the risk of further dollar declines.
6. The increasing probability and proximity of war with Iraq no longer pushes money to Treasurys and mortgages for safety, or at least not any more money. There are limits to anxiety; war with Iraq is not cause for panic (yet, or maybe ever).
7. The stock market has found a new reason for optimism. Year-to-date 2003, the market has risen more than 2% -- in only ten days! A 2% gain is a better annual performance than 2000, 2001, or 2002; is a better rate of return than any money market investment; and if in the whole rest of the year the market made it to a 5% gain... why, it would outperform the whole Treasury market! Sell bonds, buy stocks!
I don't want to disagree with the credit markets (don't fight that tape), and do stick with the advice to play it safe for now (economic recoveries do appear without advance notice). However, I think the new market beliefs listed above require a lot of supporting evidence which they do not yet have. At a minimum, they require new evidence stronger than the stark, grim pile evidence to the contrary we already have on hand.
In the next couple of weeks, corporate earnings results and forecasts are likely to be the most important new data.
|
