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March 19, 2004
Mortgages reached the mortgage-rate low for the week (and the year) immediately following the Fed's meeting on Tuesday. Since then, low-fee, 30-year rates have drifted up from 5.25% toward 5.50%.
The Fed's post-meeting statement was slightly less optimistic than in January, and its repeated mention of "patient" intentions has pushed the threat of a rise in the 1.00% overnight cost of money out into 2005. The "carry trade" -- borrowing short to buy long bonds -- is dangerous, but the 2.75% spread between overnight and 10-year T-notes is lucrative, and the tether holding mortgage rates in the fives.
I can't imagine mortgage rates going lower unless we get some news of a general economic slowdown -- heresy to the talking heads on all the financial shows, but not to the Fed. When it says that risks to the economy are balanced, as is the risk of an "unwelcome fall in inflation", the Fed means exactly what it says.
So, how do we square the Fed's concerns with the 20% explosion in commodity prices, gold at $412/oz, oil at $38/bbl, gasoline about to hit two bucks, core producer prices rising at a 3%-plus annual rate, and dollar weakness pushing up prices of imported goods, notably European-made autos, up 1.5% in a single whack?
Roughly 70% (and rising) of all American business costs are labor costs. Real estate, utilities, interest, and materials comprise the rest. Contrary to political noise, manufacturing output in the United States is greater in volume and value than ever, but it is more efficient and uses less physical materials than ever (as an example, compare the CD carrying Microsoft's newest software to a '57 Chevy). Businesses can absorb huge increases in the cost of materials because materials are a fraction of the non-labor, 30% portion of total cost. Meanwhile, the cost of labor, especially expressed as "unit labor cost", has been falling at a rate approaching 5% per year.
At some point, the sustained rise in energy costs may become inflationary, but in recent years it has acted more like a tax. At some point, the labor economics will change, too. However, the political focus on foreign out-sourcing is misplaced (and in the case of "Benedict Arnold CEOs", an asinine deception); we in-source vastly more jobs than export, and it seems likely that much of our shortage of employment is due to domestic IT-based efficiencies for now out-pacing IT-based job creation.
The newest job data are still confounding. New claims for unemployment insurance last week fell to a three-year low, now down to the 335,000 range. Yet, a new study says that the fraction of college-educated 25-to-35-year-olds with jobs is the lowest level of employment in thirty years. For now, for whatever reason, new employment is limited to low-wage jobs, those adding the least impetus to inflation.
I should know better, but I can't stay out of the War of Spanish Appeasement.
The condemnation of Spain by Bush & Co. and others who should know better is a willful misconstruction. There is nothing cowardly in a disagreement about the means of fighting an adversary. In 1914, French infantry doctrine asserted the irresistible force of offensive spirit (élan!) and the bayonet; in 1917, two million dead later, the French army mutinied, still ready to fight and defend, but no longer to die stupidly. Spain and the rest of Old Europe are fully willing to support UN- or NATO-sanctioned military action, as they have and continue to in Afghanistan.
European opinion is near-unanimous that the invasion of Iraq made terrorism worse, not better; and that the threat of a rogue superpower acting unilaterally was worse than any posed by Iraq. We will learn in a decade or two who had the better argument. In the meantime, those howling, "Appeasement!" might consider that a year into this venture, one key member of the Coalition has voted itself out, and not one new nation has discovered the wisdom of the invasion and joined up.
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