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September 12, 2003
Every expert in the land testified all through July and August that five-something fixed-rate mortgages would not be back until the next recession, and probably not so soon as that... maybe not for another forty-five years, the time it took to get down to five-something.
They're baaaaack. A short-term lock for a big Fannie (sorry), thirty-year fixed, good credit loan: 5.875%, no points, no "origination fee."
Until we get some resolution to the "recovery" debate, assume that any visit to the fives is a transient opportunity to lock. In this case, job-hunting mortgage bankers nationwide are racing back to the office to find the files and lock the rates of the refi boat-missers, and this lock volume alone should by Monday drive rates into the sixes. Beyond the lost-flotilla bounce, any real evidence of durable economic expansion would put us right back at risk of a rate explosion.
This drop in long-term rates, no matter how short the visit, is one of the bond market's great lessons about the relative importance of different worries. (The bond market does nothing except worry, though the subject and extent do shift.)
Age-old question: Which is more powerful, the upward rate pressure from a soon-to-be unprecedented federal deficit, or the downward pressure from news that the economy is weaker than optimists claim?
Column "B", clear as day. Long-term rates began a steady fall one week ago today on news that job losses are continuing. Sunday night, Mr. Bush announced a $90 billion Iraqistan package; part of that figure had been expected, but the aggregate deficit assumption went from $475 billion to maybe $525. In the collision, no contest: the weak-economy threat overpowered the deficit, and rates fell more.
Some economic hopefuls theorized that since everyone knows that the economy is entering a spectacular expansion, bonds must be worried about something else, like a terrorist attack on the 9/11 anniversary. Never mind that in two years, terrorists haven't blown up so much as a phone booth here.
The 9/11 theory collapsed on 9/12, as the bond rally continued this morning. Why? Sub-par economic data. Keep it simple... Ockham's Razor: simplicity of hypothesis: aggregate GDP is screaming, but the real economy is enjoying only a modest up-shift. New claims for unemployment insurance rose for the fifth-straight week, now all the way back to 422,000, and "continuing claims" by the long-term unemployed are in a similar trend. The U of Michigan consumer confidence number for September slid again -- not bad, but back down in the high 80s, hardly consistent with an economy gathering authentic steam. The 9/12 surprise: August retail sales were one-half the consensus forecast.
A major hint that something very different from a normal recession recovery is going on: in prior recessions, if you got laid off, you got re-hired in a standard, lagging pattern. A study by the New York Fed says that in this one, you don't get re-hired; you have to change careers, often in an income downdraft, savings depleted.
Meanwhile, the leadership of corporate America is AWOL. Dick Grasso, door mouse of the New York Stock Exchange, was caught running off with $180 million in deferred compensation for eight years of service. He instantly conceded $48 million, like Willie Sutton tossing one cash-packed satchel at the cops, hoping to get away with the other three. Every director of the NYSE (save one, a kitten in a roomful of rocking chairs) is a person whose employer Grasso was supposed to regulate.
Nobody knows if they were trying to buy Grasso, or had been intimidated into over-paying him, or were trying to pony up their own compensation, or just didn't give a damn. The mantra of the Bubble boards lives on: scam, skim, and nap.
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