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December 19, 2003
Mortgage rates have fallen to their post-June low, a hair under 5.75% for low-fee, thirty-year-fixed packages, as always in lock-step with the 10-year T-note, which traded as low as 4.12% today, a half-percent below its highest 2004 yield.
Declines like this in long-term rates are usually associated with some new sign of economic weakness, or panic at some new danger in the real world. Neither was the case this week: the economic data were uniformly positive, and although the Saddam rally in stocks didn't survive Monday morning, the world is a safer place than it was with Rip Van Hussein on the loose.
Job creation is still elusive, but layoffs are in sustained decline: new claims for unemployment insurance fell to 353,000 in the latest week, the lowest figure since January 2001.
New hiring is a crucial early-warning signal for a Fed rate hike, but the percent of industrial capacity in use is just as important. Capacity utilization below 75% reflects a profound excess and strong counter-inflation force; a reading over 80% is an inflation precursor and makes the Fed jumpy. The fraction in use popped up in November, above 75% for the first time since the recession, and the .9% gain was the largest single-month rise since October 1999 (when the Fed was tightening...).
The news that caused the nose-over in rates, or at least the first part: November CPI. The "core" rate declined by .1% -- the first monthly decline since November 1982, at the end of the worst recession since WWII -- to the lowest 12-month rate of change since 1963. The potential for "an unwelcome decline in inflation" may be in the Fed's rearview mirror, but a 1.1% annual core CPI is an astounding achievement.
The inflation numbers are so good that many in the bond market have begun to take seriously the Fed's hints about policy: the Fed might just stay at 1.00% all the way through 2004. So long as the Fed funds rate stays there -- no matter how worried some are about the inflation potential in the budget and trade deficits and the falling dollar -- long-term rates can't rise much. We tried that in the late summer panic, but that sell-off only made sense if the Fed was about to tighten, campaign-style. If the Fed stays put, the 3.00%-plus spread between the cost of money and the 10-year T-note will keep the "carry trade" in business, and long rates down.
Overriding advice for 2004: do not expect the Fed to stay put because of the election. It would like to be invisible by late summer, but it will do what it thinks it should, election or no... just ask Jimmy Carter and Dubya's daddy.
Before we get too carried away with Christmas cheer and the prospect for rapid, high-earning, and non-inflationary economic growth, there is still a world out there.
Howard Dean's we're-no-safer line is ridiculous (further repetition can cost him his lead), but it does beg this question: "We are safer without Saddam, but what might we have done instead that would have made us safer yet?"
We now know that Saddam was not the threat advertised beforehand, but even if he had been, the greater threat by far lay in Palestine. The United States is the focus of attack by Islamic radicals for one reason: the perception that we have unfairly favored Israel over Palestinians. We are no closer to resolution -- separation, whatever -- in Palestine than we were last Christmas.
We are not engaged in a "war against terrorism", as terrorism is a tactic, not an end. We are engaged in a war for civilization, Western civilization -- despite common disregard for dead European guys. As we preach democracy and now try to teach it, and as far political wings would beat in a Dean-Bush race, bear in mind one thought about democracy: there is nothing to it but the will among the people that no majority shall oppress a minority, and no minority shall oppress a majority.
Nothin' else to it. Merry!, Happy!, and so on; back January 2.
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