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March 21, 2003
Shock and awe hit the bond market today, as low-fee mortgage rates rose above 6.00%. At that, the one-week rise in mortgages is only about a quarter-percent; the market for ten-year T-notes has exploded from 3.56% to 4.10%.
Magnifying today's move is a switch in the psychology of Fridays. On each of the last several Fridays, rates were suppressed as investors bought bonds in over-the-weekend safety plays (bond traders, the ghouls of the markets, of course were hoping something awful would happen before Monday). As of today, nobody dares to own bonds over the weekend, for fear that something wonderful might happen, like Saddam turning up dead on Meet The Press.
The large-scale war-panicked trades, some set last year, began to reverse last Thursday, when war ceased to be a threat and became a certainty. This peculiar phenomenon begs a question or two.
You've sold stock for months because you're afraid of a war; now war is underway, and you still don't know how it will turn out, but you want to buy back all that stock, and then more? Meanwhile, to protect yourself from war, you paid absurd prices to buy mountains, piles, lakes and stacks of gold, bonds, oil, and euros. If you intended to sell before the war started, why buy in the first place?
Don't spend a lot of time on these questions. A great deal of money changed hands, and that is, after all, the purpose of Wall Street. These are the same markets that once had the Nasdaq above 5,000.
The war thus far is going as well as the most optimistic expectations, save in two respects, in which it is going even better. It looks like the opening night shot at Saddam limited his ability to order scorched-earth mischief (whether he was wounded or merely discombobulated), which may be responsible in part for the second beyond-all-hopes success, the seizure without harm of most of Iraq's oil fields and the two main oil terminals. The security of Iraq's oil is one of the few legitimate bases for reversal of war trades.
That's it. That's all we know. As we watch the astounding and historic, real-time broadcasts from the 7th Cavalry racing, now perhaps halfway to Baghdad, it's wise to remember that we're not there yet. The big risks in this thing have always been the reception in the cities, when we try to take over, and after we have; and the reaction in Arab cities outside Iraq. We'll get the first impression when Basrah falls this weekend.
Clients ask by the minute what will happen to markets when "it's over." When Iraq is in hand, and even if peace there is going well, "it" will not be over.
North Korea follows right behind. Collective security in the West is a memory. Global opposition to our attack on Iraq was in largest part due to worry about America's vast power; no matter how complete and clean our victory in Iraq may be, no matter how relieved we are at home, the rest of the world may feel consternation at our willingness and ability with only modest effort to dismember a modern, well-armed nation of 25 million souls.
If we win big, I assume there will be some temporary pop to business conditions, but that's all. The economy remains in a post-bubble condition which needs time to resolve, and will resist any "jump-start", as the Fed's helplessness has shown.
Markets are due for true, up-and-down, down-and-up, whipsaw volatility. The upper boundary to mortgage rates is whatever level would collapse the housing market, something just shy of 7.00%, and the lower end is where we left off the last refinance wave, just under 5.75%. Between a good-news Friday and a bad-news Monday, or vice-versa, mortgages can move a half-percent... and will.
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