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Mortgage rates are about the
same as they have been, 6.25% for basic conforming.
All other markets are in
frantic action, a perfect mirror of the struggle between two groups for
accurate perception of the economy. One crowd is plugged into the global
economy, technology, and stock-market optimism; to them, business has
never been better. The second crowd is the bond/bank bunch: we weren’t
there at the time, but things look a lot like the run in to the 1930s.
Both are correct. However,
only one will stay correct. Camp One strength may pull us through, or not.
The struggle has been on since
August, and today was the best yet. In the single datum most important to
markets each month, October payrolls grew by 160,000, a big, surprising,
Camp One victory. Economic strength should relieve the anxiety driving
money to bonds, and on the way out, drive interest rates up. Not today! A
whole new wave of Crowd Two panic overtook the markets, but mostly limited
to short-term rates: in classic panic, 90-day T-bills fell .25% this
morning, down below 3.60%.
Civilians are justified in asking what the hell is going on, and who -- if
anyone -- is in charge. The last 48 hours say that nobody is in charge,
and hell to pay.
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The Fed’s statement after last
Wednesday’s meeting must have made sense to the Governors at the time, but
in today’s light is an absurd document. “...Strains in financial markets
have eased somewhat...” Uh-huh: the next day the stock market dropped 2.6%
of value, and the day after that the world ran to cash.
Misinformation abounds: the
Fed did NOT cut its rate to 4.50% unnecessarily, just because the markets
wanted it to; the Fed spends its life disappointing markets. The Fed cut
to put a net under the economy in case Camp Two is right. The Fed’s
closing sentence, “...After this action, the upside risks to inflation
roughly balance the downside risks to growth” seems more a reflection of
Fed Governors broken into Camps One and Two than an accurate statement of
risk. Sure there’s inflation risk out there, $96 oil and all, but the Camp
Two risks are entirely deflationary.
That “balanced” line is
supposed to mean no cuts ahead. Yet, the short-Treasury market has plunged
a full percent below the Fed. Anticipation of more cuts? Some, but mostly
fear that credit loss is running out of control.
The triggers for the stock
plunge and the new flight to quality were these events since the Fed’s
meeting:
© 2008 - Economic Notes is published weekly by the Economics Department of
Universal Lending Corporation. |
* A brilliant piece by Greg Ip
in the WSJ described the Fed’s efforts in August to figure out what was
happening to the financial system and revealed that the Fed did intercede
with Countrywide’s creditors in August to prevent a fire-sale of
collateral. Apparently one of several interventions; there is no control,
just a heap of band-aids.
* This Thursday item triggered
the stock dive: Citibank’s capital may be so impaired, deep loss
recognition ahead, SIV maneuver failing, that it will suspend its
dividend, and its CEO may not survive this weekend.
* The deepest stock losses
were those exposed to Camp Two risks. Companies that sell credit risk
insurance on bonds (AMBAC, MBIA, ACA...) and on mortgages (PMI, HMGIC)
have now lost as much as 2/3rds of their value. Second stage effect: those
who bought insurance now feel at risk. And they are.
* Friday, November 2nd’s WSJ
reveals that Merrill has been hiding credit losses by fraudulently
“parking” losing deals by the billion with hedge funds.
With a nod to Camp One friends (pull us through, guys!), we think the last
week makes it clear that credit losses are systemic and too large to
recognize. It is too late for daylight, proper valuation, and workout. It
is firewall time, on the way to bailout.
The good news: lower mortgage rates will put a mattress under Bubble Zone
housing, and help housing in the rest of the country to lead a recovery.
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