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January 24, 2003
Mortgage rates have stayed just about the same in the last week -- 5.875% for low-fee 30-year deals -- but the rest of the financial world is moving.
The stock market has let go from its first-week-of-New-Year exuberance, down 600 Dow points from the top, 400 this week, 213 today, to 8155 at this writing. This swoon has broken through the "support level" which has held since November, in the recovery from the 7286 low set on October 8. A break through support, like this one, suggests the market is capable of sinking all the way back to the old low.
Usually, a stock market sinking spell translates quickly into lower mortgage rates, as money goes to a fixed rate of return and credit safety. At the moment, money is going to Treasurys, and Treasury yields are falling out from under mortgages'. However, the longer this incipient panic lasts, and the farther down the stock market goes, the more likely that mortgages will reach the 5.75% record set in the four days between last Christmas and New Year's Day.
If that miracle should come to pass, I suggest not waiting for lower. Any market attempt to move below 5.75% would be quickly intercepted by another half-trillion mortgage refinancing applications; over and over in the last two years, we've learned that a new record low becomes a firm floor until the market works off the new refi wave, taking anywhere from two to four months.
This week's thin economic data gave no guide to the present or future, though we learned that housing markets are still doing well. The much-anticipated fourth quarter 2002 corporate earnings reports are arriving about as expected, but with deeply diminished forecasts for 2003.
Prospects for the economy drive the stock market, which in turn for two years has been driving interest rates. However, lately, everyone in the stock market swears that Iraq is driving the stock market, not economics.
Are marketologists using Iraq as an excuse -- cover -- for the ongoing debubblization of corporate America, or is Iraq really the dominant force?
Everybody has their own hunch, but I think the impact of Iraq has changed mightily in the last forty-eight hours.
Until this week, war was a given. Its consequences could not be known, but the drumbeat of mobilization, the call-up of reserves, the fleet movements have all been in plain sight for two months. I don't think anybody has mistaken Mr. Bush for a bluffer. Some ambiguous verdict from the UN inspectors was pending, the UN might or might not vote again, but the US and the UK were going to war in late February or early March. Governments all over the world opposing our action would acquiesce.
The whole situation has changed with France's threat to veto. Russia and China might abstain, but Mr. Putin's opposition to war is as obvious as a half-dozen aircraft carriers steaming to Middle Eastern waters. Mr. Blair's government might not survive a confidence vote if taken today. It's one thing to be short of support, and another to have your allies, historical and new, gathered in angry opposition. Trust has broken.
Mr. Blix will report on Monday, the State of the Union speech will be hurriedly re-written and delivered on Tuesday, and the issue of inspections will remain the delaying tactic it has been. At this moment, it appears the US will offer to extend inspections to the date on which we had planned to go to war anyway.
Markets can deal with bad news. They build it into prices in hours or a few days, and move on. Markets do not do well with chaos: it presents unquantifiable risk.
In this situation, would the bad news be going to war alone? Or backing down, the laughingstock of the whole Middle East, perhaps never to intervene there again? No one to blame but ourselves. But, which outcome would prove worse?
Mobilized and unsupported... the markets don't like that at all.
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