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February 24, 2003
Late this week, mortgage rates reached and held the 5.75% historical low.
The financial markets remain in the paralytic grip of uncertainty, and more than a little fear. In perfect evidence this morning, the stock market had a rally underway when a gasoline barge blew up in New York harbor, which touched off panicked selling, lasting until authorities confirmed a non-terrorism accident.
It's a good thing that businesses in general are handling threats of war and terrorism better than the financial markets. Otherwise, the economy would have collapsed into a puddle by now. Instead, it is hanging in surprisingly well. There were signs of weakness this week, but nothing to indicate a new slide to recession: claims for unemployment insurance rose, but no farther than the average of last fall, and home sales are still strong. The producer and consumer price reports were a mish-mash of statistical quirks, and the index of leading economic indicators fell only a tenth of a percent. The only disturbing data: an unsustainable surge in the trade deficit to $44 billion in a single month.
Specific fear of the instant of outbreak of war has changed. Several serious professionals are saying the stock market may improve and rates rise when war begins, merely from relief of uncertainty. Maybe, but I doubt it. The same people say the maximum moment of market stress will arrive when the US advises inspectors and non-combatants to leave Iraq, which might be so, but joins in the prevailing overconfidence that the military aspect of the war will be a cake-walk.
I hope the war goes better than the preliminaries.
A year ago, Mr. Bush announced our desire for "regime change" in Iraq. By last summer, foreign and domestic opposition forced a terminology change in favor of "disarming" Iraq. Resolution 1441 was a unanimous statement of Security Council intent to disarm Iraq; however, this intention has been incrementally abandoned by all on Council save the US and Britain. The inspectors' role was at first to verify that Iraq was disarming; then shifted to investigation and discovery of illegal armaments which Iraq is still hiding, and now has morphed into an open-ended "containment" of Iraq, on the theory that Iraq can't do anything bad if Blix is on the prowl.
Agree or not with the wisdom of the parties involved, the harder the US pushes for war coalition, the faster the rest of the world backs away, anger rising on both sides. Tony Blair and a handful of small nations aside, this is a coalition of the un-willing and the bought-and-paid-for (assuming Turkey stays bought). If the new US-Britain resolution fails at the UN, there may be more fallout, and certainly more risk in the enterprise.
Investors and traders are trying to find reassuring parallels in market responses to other wars and crises: the last Gulf War, the beginning of World War II, the Cuban Missile Crisis... and there aren't any. This is new. A nation with military and economic power relative to the rest of the world greater than that of Rome is about to go to war against the objection of most of the rest of the world. It might be exactly the right thing to do, but we have no experience with it.
The waiting is bad, but the war and aftermath will almost certainly be tougher. Last time, the war began with 43 days of nosecone-video war; this time, there may be no air-preparation lag at all between the initial cruise-and-stealth volley and the fastest and wildest blitzkrieg of all time, the 300-mile armored race from Kuwait to Baghdad... who knows what waiting there.
We are advising clients to expect an end to these months of market paralysis, and re-introduction of volatility -- true up-down volatility, with short-term swings in mortgage rates of a half-percent or more. Uncertainty paralysis is going to give way to sure-knowledge movement, some surprisingly pleasant (I hope), some not.
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