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June 6, 2003
Now three weeks and one day in the same spot: low-fee thirty-year mortgage money is 5.25%.
The ten-year T-note has tested the top of its range at 3.45%, and this week tried lower at 3.25%. Both faded quickly: the 3.35% center is a rock.
The Question of the Week from civilians: "I hear Greenspan will cut rates again... can we get a better rate than we have now, or should we wait altogether?" The temptation to disbelieve the facts is extreme even among veteran professionals.
Nevertheless, the facts: first, the market for mortgage-backed securities is hopelessly clogged by this newest wave of refinances. Second, a .25% cut in the overnight Fed funds rate at the Fed's June 24-25 meeting is already built in to bond- market pricing. If the Fed does not execute the cut, it won't hurt much, as Mr. Greenspan's extraordinary verbal offensive will hold sway. However, the jawbone cuts two ways: any retreat in Mr. Greenspan's words -- a rate cut and a switch from "bias-to-weakness" to "balanced-risks", for example -- duck.
He gave us his state of the economy at mid-week: "The economy did weaken in March and April, and the data for May to date suggest that it's stabilized. We have not seen any major impetus to a pickup."
"Stabilized" refers to most components of the economy, except employment, still very weak, and the stock market. The exuberance in the latter indicator may be trying to tell us something, but it's hard to tell what.
The Fed is doing everything in its power to keep this "soft spot" from turning into something dangerous. It wants to boost the real economy, real businesses, especially to induce new capital spending and hiring. It has hosed cash all over the place, but it is in the nature of an incipient "liquidity trap" that you can't make businesses borrow if they perceive nothing worthwhile to do with the loan proceeds.
For all the Fed's titanic effort, it is getting a re-dressing of business balance sheets by corporate bond issuance, but no spending increase. It has created recurrent waves of refinancing by homeowners, propping consumer spending, but we are in sight of the last of that. These super-low rates have helped business profitability, as has the drop in the dollar, but that... is it.
Alan Greenspan is hot, but he can't create an economic locomotive from thin air. There is no un-tapped well of demand out there to be unleashed. There is no foreign help: Japan is a wreck, Europe is self-entangled, and Asia sells but won't buy.
So, funny things begin to happen to the ocean money slopping around out there. For a while, the holders of money earning practically nothing figure it's a temporary phenomenon. Then they start to look for yield. They begin to buy stuff they wouldn't otherwise buy.
This week, money market fund assets fell by $6 billion; where might the cash have gone, blazing a trail for the other $2 trillion? Junk bond funds pulled in the third-most cash ever, as investors accepted lousy credits for theoretical yield. The Dow has gained 3% in a week, now up 8.5% for the year, all since March. The S&P 500 may not hold 1,000 today, but it's up 4.5% for the week, and 12.5% for the year. The silly damn Nasdaq is up 5% this week, 23% for the year, without any evidence of better tech-spending fundamentals, just hope that stuff will wear out and someday need to be replaced.
There is a pleasant wealth effect, no doubt. Some options that were in the trash are in the money. It's easier for corporations to raise equity money. Other than those plausible positive effects on the real economy, in what way do we benefit if the Fed's cash bypasses reality on the way to a paper asset re-bubble?
Deflation fighting may include an unintended consequence speed bump or two.
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