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May 25, 2007
Two weeks ago, the 10-year T-note traded under 4.65%; yesterday it touched 4.90%. Mortgages -- as always following the 10-year in lockstep -- were trying to break 6.25% going down; now they are trying to hold 6.50% while going up.
The case for holding is poor.
Rates are rising because the global economy is taking off. Thoughts of drag from concerted tightening by central banks, Europe to top out, America to slide near recession on weak housing and manufacturing, Asian exports to be undercut by American weakness... forget all that.
April orders for durable goods ran a 1.5% gain (adjusted), manufacturing perking back. New claims for unemployment insurance are dead low, the job market just fine.
Housing is neither at bottom nor causing a recession. Wall Streeters thought that a 16% leap in sales of new homes in April was good news... they’ll never get it right: the surge is a sign of panicked builders trying to stay in business, building and dumping homes at or below cost, undercutting resales. Sales of existing homes fell another 2.6% in April, and unsold inventories hit a 15-year-record high, 8.4 months’ supply.
Why isn’t housing knocking over the economy? Traditional reasons, lost on The Street: if you don’t have to sell, don’t sell. Live in it. If your value doubled since 2001, and you’ve lost 5%, you still have a 95% gain. The foreclosure pain is confined to late-comers with bad loans -- very painful for them, but confined. So far.
How can mortgage rates rise when demand is falling? Get a grip: annual American mortgage demand is a minor element in global markets for IOUs. They are just electrons, after all, traded 24/7 in competition with every other borrower on the planet. A German 10-year bund today trades at 4.39%, only a half-point under our 10-year. Given lower inflation risks there than here; the euro-zone economy thriving in global trade, as opposed to American export-by-accident, import-by-joyride; and euro-zone political leadership compared to our pack of fools... euro-zone bonds look cheap.
As the global economy heats up, America the laggard, competition is pulling our rates up. Back there, nine years ago, the Committee To Save The World (from the Asian Contagion, Messrs. Rubin, Summers, and Greenspan) warned that the American engine could not pull the world by itself for long, and other nations would need to get in gear. Be careful what you wish for.
There is still plenty of concern that global heat is the result of financial artifice, kids in $10,000 suits running rings around central bankers. But, past a certain point, it doesn’t matter whether the heat is authentic or artifice. This point: the Shanghai stock market has quadrupled in less than two years. Its $2.6 trillion value has risen five-fold, now a greater sum than all bank deposits in China. In the last month there, new stock brokerage accounts have opened at the rate of 300,000 every day.
Central bankers do not like to wake each morning, day after day to discover that every major stock market has set a new high. Nor the creepy sensation that assets and future cash flows are being liquefied by borrowing, the liquidity causing assets to rise further, which... don’t go there.
Our Fed is almost a year into 5.25% sitzkrieg. The ECB is 3.75%, still tightening, putting pressure on our rates (a lot of pressure: given at least a 1% rate/inflation differential, roughly equivalent to ours). The Bank of England is 5.50%, behind its growth/inflation curve and still tightening. China, terrified of the political consequences of a rapid economic slowdown, rides the tiger, increasing risk for everybody else.
As glorious as all this growth is, at this pace it is accident-prone. I have no clue if this phase will end by central-bank catch-up, tripping stock markets as they go by, and shoving property markets from behind; or by central-bank failure, markets running to cliffs. Whichever: rates are going up.
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