In the absence of useful economic news, begin with a little political-money stuff, then remembrance of the 10th anniversary of the beginning of the credit disaster, the advent of QE, and now its reversal, RQE.

Nobody can handicap the DPRK/Trump engagement. But to say it doesn’t matter... bull byproduct. Ray Dalio, billionaire founder and top dog of Bridgewater, the world’s largest hedge fund, who very rarely comments on investments or politics: “The emerging risks appear more political than economic, which makes them especially challenging to price in.” But then he described them: “Two confrontational, nationalistic, and militaristic leaders playing chicken with each other” and “the odds of Congress failing to raise the debt ceiling rising.” Dalio then advised all to expand their holdings of gold.

The DPRK/tweet effect has been clear in real time, the stock market cracking, bond yields falling close to the lows of the last year, and gold rising.

The biggest political event of the week got lost in DPRK noise. Trump’s assault on McConnell makes more dangerous the debt-limit vote in September. Be as even-handed as possible: each political party has a road-rage wing -- angry and irrational with its own set of fantasy-facts. The Republicans hold the congressional majority, but their minority ragers demand accommodation. The recurrent debt-limit issues in the House finally forced John Boehner to leave in exasperation, replaced by empty-suit accommodator Paul Ryan. Now Republicans control the Senate as well, and McConnell is as boxed as Boehner.

McConnell will need as many Democrats to pass the debt limit as Republicans. The ragers in each party will demand hostages: mutually exclusive riders to the limit bill.

The security team is obviously well-along in an effort to encapsulate the president. There is no comparable team or effort in domestic affairs. The Republican right (just like the Democratic “progressives”) is self-enraptured, unable to process that two-thirds of the nation is opposed. The harder the ragers in each party try, the more opposition rises.

There is a lot riding on McConnell’s skill, head-and-shoulders above Ryan’s. If the debt limit increase fails, Dalio again: “...Leading to a technical default, a temporary government shutdown, and increased loss of faith in the effectiveness of our political system.”

Now look back on a superb reaction to crisis by US leadership. Yes, the Fed, SEC, FDIC, Comptroller, Treasury all had missed the rise of the crisis, and it took 18 months after the explosion to fully react, but react we did and with extraordinary success.

The greatest bank run of all time began in late July 2007 -- a wholesale run, banks on banks, not old folks in lines out front. The Fed reacted, injecting cash and trimming the cost of money, but did not perceive the systemic meltdown underway. From a Fed funds crest at 5.25% in July 2007, Bernanke had cut to 4.25% by year-end (the onset of recession by retrospective technical measure). In January 2008 he saw the greater magnitude of trouble, and in panicked steps by February 6 cut to 3.00%.

Bernanke’s book on the Great Depression identifies the key marker of any economic disaster: yields on ultra-safe Treasurys fall and fall, while yields on everything else rise, markets locking up altogether.

In July 2007, typical 30-fixed mortgages were 6.70%, and the benchmark 10-year Treasury traded at 5.16% -- the spread of 1.50% a reasonable historical one. By October mortgages were down to 6.38%, but Treasurys were falling faster, to 4.68%, spread opening to 1.70%. In March of 2008 Bear Stearns failed in a Fed-assisted collapse, briefly reassuring to markets thinking a firewall might be in place. But then 10s nosedived to 3.34%, safety-buyers in mass, mortgages to 5.97%, the spread now blown open to 2.63%.

The Fed cut its rate in May to 2.00%. In false security, 10s by June 2009 rose to 4.25%, but so did mortgages, up to 6.32%, and typical loan fees had doubled. By late summer most of us in markets felt the ground moving again: Treasurys in August fell again to 3.79%, but mortgages rose to 6.48%, the spread opening to 2.70%, mortgage markets closing altogether, housing collapsing.

Then heaven-help-us September... the Treasury seized Fannie and Freddie on the 6th, Lehman took bankruptcy on the 15th, and the Fed set another firewall, over $100 billion in guarantees to AIG. 10s fell to 3.47%, mortgages at last down to 6.04%, but the spread still oceanic. TARP passed on October 3, 10s up to 3.99% in hope of a lasting firewall. Not: by November 24, 10s were down to 3.35%, mortgages 6.09% but nobody applying.

At Thanksgiving... salvation. Bernanke announced that the Fed would buy long-term Treasurys and mortgages, the Fed for the first time ahead of the curve of disaster. 10s kerplunked to 2.08% in two weeks. Mortgages took longer, to 5.29% in December -- spread 3.20%!! -- then down to 5.00% and below. As fear faded and QE took hold, 10s by summer rose back to 3.91%, and the spread down toward 2.00%, mortgage markets functioning.

Skip forward ten years. It’s till easy to find idiots and crazies who think the Fed should have let everything go -- the “Austrian” creationists and right-side ragers.

The Fed has since it stopped QE buying in 2014 owned a surplus $1 trillion in Treasurys, but has already bled off the long-term ones. In the immense global market for Treasuries ($14.4 trillion), letting these extras run off is likely not a big deal.

But the Fed also owns $1.6 trillion in MBS, one-quarter of that market. The Fed will confirm in September the beginning of RQE, the monthly rundown at the outset to be $4 billion. In a time of tepid borrower demand, hence few new MBS, and huge global demand for high-quality IOUs, nothing to worry about. The Fed does intend to increase the runoff to $20 billion monthly, $240 billion annually, 15% of its QE holding now, and that might push rates up a bit.

Of all the things to worry about today, don’t add RQE to the list. The Fed and all in markets will watch the Treasury/MBS spread, and if it begins damaging widening, then the Fed will stop or slow the rundown. If you’re worried today, look back at that 2007-2009 story and consider what we can do if only one man in the whole government is on his “A” game.

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US 10-year T-note in the last year. The recent downtrend partly reflects inflation failing to rise, but don’t underestimate the political influence:

The NFIB’s monthly survey confirms its post-election pattern. NFIB members are heavily right-side Republican. After the election its optimism survey exploded upward as never before in its 45-year survey history. And without any economic foundation: the second chart, by components shows that nothing has changed in actual business, as in every actual-condition NFIB survey since:

The next charts illustrate the trip down memory lane in the copy above, 2007-2009. First the Fed funds rate, then the 10-year, then mortgages (Freddie Mac’s survey).

The Impact of a Market Without the Libor Index

The Libor index will be phased out over the next 5 years after allegations surfaced of bankers manipulating it. This will have the largest impact on adjustable rate mortgage loans (ARMs).

Our very own Lou Barnes had this to say on the subject: "In a fairly short amount of time, no one is going to know how to compute what the next payment is going to be and that's why it's important."

ARMs currently account for over 13% of the market, $1.3 trillion in outstanding mortgages, and many expect those number to increase if interest rates climb higher. If the Libor index is not available, most ARM contracts allow the investor to select a new index.

While that could seem troubling to have a slew of ARMs out there, all adjusting to different indexes, that doesn’t appear to be what the industry wants. Fannie and Freddie are both monitoring the situation closely and a survey of industry professionals shows they would prefer a mandate from regulators.

Investors are also on board with uniformity. “They [investors] don't want to deal with mortgage pools where the underlying loans react differently to Libor's disappearance”, Mr. Barnes added.

Whatever comes out of this, you can rest assured that we will keep you appraised of any changes and if you have any concerned clients currently with an ARM, please reach out and we will see how we can help.

Rates Flat on Soft Inflation Data

Mortgage interest rates were mostly flat on the week as inflation data was weaker than expected.  The July Consumer Price Index (CPI) was up only 0.1% on expectations that it would be up 0.2%.  Year over year, CPI is up just 1.7%, below the Fed’s 2% target.  The July Producer Price Index (PPI) was down 0.1% on expectations that it would be up 0.1%.  Year over year, PPI is up 1.9%.  The softer inflation data may call into question the Fed’s tapering of its balance sheet starting in September.  Other economic data was mixed.  Economic data stronger than expected included the June JOLTS Job Openings, the first look at Q2 Productivity, and June Wholesale Inventories.  Economic data weaker than expected included June Consumer Credit, the first look at Q2 Unit Labor Costs, and weekly jobless claims.  The Treasury auctioned $62 billion of 3 Year Notes, 10 Year Notes, and 30 Year Bonds which were met with mixed demand.  Geopolitical tensions have increased with North Korea which has supported the bond market.

 The Dow Jones Industrial Average is currently at 21,872, down over 200 points on the week.  The crude oil spot price is currently at $48.21 per barrel, down over $1 per barrel on the week.  The Dollar weakened versus the Yen and Euro on the week.

 Next week look toward Tuesday’s Retail Sales, Empire State Manufacturing Survey, Import and Export Prices, Business Inventories, and Housing Market Index, Wednesday’s Housing Starts and FOMC Minutes, Thursday’s Jobless Claims, Philadelphia Fed Business Outlook Survey, and Industrial Production, and Friday’s Consumer Sentiment Index as potential market moving events.



Rates Improve Slightly Despite July Jobs Report

Mortgage interest rates improved slightly on the week despite today’s stronger than expected employment report for July.  July Non-Farm Jobs were up 209k on expectations that they would be up 180k.  July Private Jobs were up 205k on expectations that they would be up 175k.  The unemployment rate remained at 4.3% as expected and Average Hourly Earnings increased 0.3% as expected.  The stronger than expected jobs report makes it more likely that the Fed will begin reducing its balance sheet in September by not reinvesting principal payments.  Other data was mixed.  Economic data stronger than expected included June NAR Pending Home Sales, the July ISM Manufacturing Index, July ADP Private Jobs, weekly jobless claims, June Factory Orders, and the June U.S. Trade Deficit.  Economic data weaker than expected included the July Chicago Purchasing Managers Index, June Personal Income, June Construction Spending, July Auto and Truck Sales, and the July ISM Services Sector Index.  The Bank of England kept interest rates low and cut its forecast for growth and wages.


The Dow Jones Industrial Average is currently at 22,042, up over 200 points on the week.  The crude oil spot price is currently at $49.23 per barrel, down slightly on the week.  The Dollar strengthened versus the Euro and Yen on the week.


Next week look toward Monday’s Consumer Credit, Tuesday’s NFIB Small Business Optimism Index, Wednesday’s Wholesale Trade, Thursday’s Jobless Claims and Producer Price Index (PPI), and Friday’s Consumer Price Index (CPI) as potential market moving events. 


This week’s news is mostly a tale of misinformation. But first, some reliable data.

July payrolls released this morning grew by 209,000, enough to stop cold a decline in mortgage and other long-term rates. Also roughly double the monthly gain which would stabilize the unemployment rate at today’s 4.3% -- either stop hiring, or add more people to the work force, or the rate of unemployment will continue to fall, presumably below zero, and with who-knows-what consequences for wages and inflation. The payroll data also showed average hourly earnings increasing just as they have been, 2.5% year-over-year.

The twin ISM surveys of purchasing managers have been excellent predictors of the overall economy. The July figures: manufacturing cooled slightly from red-hot, to 56.3 from 57.8, and the service sector more so, to 53.9 from 56.9 but healthy and consistent with GDP growing a bit above the Fed’s 2% estimate.

Trailing data from June were not quite so bright, and Q2 GDP may be revised down a little. Construction spending fell 1.3% in June, although still up 1.6% year-over-year. Personal income and spending were statistically unchanged, and a Fed-favorite inflation measure continued to tail, “core PCE” up only .1% in the month, year over year 1.4%.

Now the entertainment. Begin in a kindly way with the poor devils in markets and media who are talking about a “falling dollar” as though it’s important. Currencies are one of the very few financial creatures which trade only in relation to each other. The dollar has fallen versus the euro, from $1.05/euro in the last two years to $1.18 early this week. The decline has been caused by six months of Eurozone GDP growth higher than in the US (2.3% annualized), and anticipation of the ECB’s taper of emergency ease. Three years ago the euro was closer to long-term equilibrium at $1.40, which begs the question, rising to $1.18, who is still weak?

Another pattern: the dollar has fallen since last winter because the Fed looks less aggressive now than then. Higher rates expected here, global money flows here; lower and flows out. Last: The WSJ dollar index is exactly the same today as it was one year ago (86.37 today vs. 86.86).

Shift to another market: stocks. “New record high” is the recent the daily chatter, and the silly thing really has gained 12% in the last year. I am personally grateful, and up is better than down. But I don’t know anyone with a solid theory, except that corporate earnings are good, and US multi-nationals are well-managed and very attractive. We do not send secret police to drag away the CEOs of major corporations who have violated Party policy by borrowing too many yuan to invest overseas to escape from the Party.

The most entertaining stock market analysis (and unintended humor) I’ve seen this week: Jeremy Grantham’s GMO Quarterly Letter. He says that stock investors and markets have not behaved the way he knows they should behave.

The Fed, oh my. Vice Chair Stanley Fischer gave an important speech on Monday which addressed the Fed’s leading challenge: “The Low Level of Global Real Interest Rates.” Are they low, or new normal? Should they rise, will they rise, or might we have to push them? Or will recovering economies and employment and wages reintroduce inflation and do the rate-lifting? Why are they so low, so persistently so, and all over the world at the same time?

Fischer is brilliant, arguably the most-experienced central banker ever, and has always demonstrated fine judgment. His speech is thorough, carefully thought-out, well-presented, and... no answers. It is very much worth reading, as it illustrates Yellen’s problem: do we pre-empt a potentially overheating job market, or continue imperceptible tightening, or stop? 

It may not be Yellen’s problem for long. Speculation has ex-Goldman Gary Cohn, presently Director of the National Economic Council in the lead as her successor. He would be far better than several others, but is still questionable. This morning Cohn was the designated White House bugler taking credit for the excellent job numbers (all administrations do that). But he continued to speak, auditioning for the Fed job: big-talk determination to ramp GDP growth to 3% -- which nobody knows how to do. His boss has indicated preference for a “low interest rate” Fed chair, common to all presidents, not just to real estate developers.

Last on the Fed front, 91-year-old Alan Greenspan this week gave one of his standard Tales From The Crypt interviews: “The real problem is that when the bond-market bubble collapses, long-term interest rates will rise. We are moving into a... stagflation not seen since the 1970s.”

With all respect due to the Fed chair who allowed the worst credit disaster of all time, three things: first, if long-term rates rise suddenly, we will have a recession and then they will fall. Second: if you have evidence of stagflation -- any ‘flation of any kind -- tell us where we can go to see it. Third, please never speak in public without first apologizing, and then conclude by apologizing.

The US 10-year T-note in the last year. For a while this week it looked as though it might make a run at the 2.15% bottom in June, but the payroll numbers ended that:

The US 2-year T-note has been unmoved by everything, essentially the same Fed forecast since mid-June: don’t bother us until the Fed begins its balance sheet bleed in September:

The Atlanta Fed has posted its first tentative hint for Q3, a burst to 3.7% annualized growth. That likely won’t last, but the Tracker is the best week-to-week GDP forecaster we’ve ever had.

The ECRI is dead-center Goldilocks:

What Impacts Mortgage Rates?

It's the middle of summer and the market remains strong. Interest rates have been holding in the low 4s and, as you know, the strong seller’s market continues.

The Federal Reserve has increased the Prime Rate (Fed Funds Rate +3%) 4 times in the last year and a half. These have been the first changes to the Prime Rate that we have seen in nearly ten years so it can naturally lead to a lot of confusion. I often get calls from clients looking to buy a home concerned of how these changes will impact mortgage rates and their purchasing power.

While it may seem logical that increasing the Prime Rate will cause mortgage interest rates to be higher, there isn’t necessarily a direct correlation. Below outlines the impact from changes to the Prime Rate and the major causes of mortgage rate fluctuations.

Changes to the Prime Rate impact:

  • Credit cards
  • Student loan debt
  • Rates for home equity lines of credit

Mortgage interest rates are impacted by:

  • Inflation
  • Economic growth
  • The Bond Market

While economic growth has been strong recently with second-quarter GDP up 2.6%, inflation has remained low and US Treasury rates are higher than overseas treasuries causing money to flow into our bond market. This all has led to 30-year mortgage rates holding around 4%.


Events are moving fast, this account timestamped mid-afternoon Friday.

The economic news is excellent. The other news is not.

The first estimate of second-quarter GDP arrived this morning, plus 2.6% annualized. Q1 was revised down from 1.4% to 1.2%. Add the two quarter results together, divide by two, and we have 1.8% annualized growth in the first half. Nothing wrong with that, especially if the rest of the year follows Q2 upward. And add a little Kentucky windage: there is a mountain of evidence that Q1 GDP has been under-reported in each of the last several years. Thus the economy is very close to the Fed’s 2% growth forecast.

Inflation is still under-performing, but hardly bad news. There is no repeat of the fearful prospect of deflation in 2001-2002, or 2008-2012. Core inflation in 2016 was revised down from 1.6% to 1.5%, and is running close to that in 2017. With inflation so low it’s impossible to expect wages to be growing steeply, and they are not. The Employment Cost Index, a very broad gauge including benefits is running 2.4% year-over-year. A net after-inflation annual gain of 1% is hardly exciting, but it’s real money.

A caution to all: an economic time like this, in which central banks and markets seem distant from normal patterns, and all cyclical road markers are painted over is an invitation to creative analysis. Not necessarily deceitful, but distorted. A new analysis from Seeking Alpha, a respected outfit announces a slowing housing market and deteriorating overall economy. Its advice to avoid stocks of homebuilders may be wise (I have no idea), but the analysis itself is sixteen pages of distortion. No need to read the copy, just look at the pictures here -- a succession of economic charts, each one marked-up by the author as a dangerous downtrend. See for yourself -- each chart is truly flat, wobbling across baseline, trendless and exactly what we should see in a 2% economy.

New and good economic news today... and markets are dead. Stocks wandered upwards early in the week on strong earnings news and a benign Fed meeting. With 34% of S&P 500 stocks reporting, 78 percent have beaten expectations on the bottom line and 73 percent have topped on sales. Today markets are as unchanged as unchanged gets. A new North Korean missile test this morning indicated enough range to reach anywhere in the US, and still no change in markets.

It is summer, this weekend is lease-turnover in the Hamptons, bigshots headed to their half-million-for-August rentals, so maybe that’s it. Can’t be bothered to trade while rounding up the nannies and the helicopter.

But there is more to it than that. This week began with the president’s daily effort to bully Sessions from office. Then on Tuesday, of 52 Republicans in the senate, nine voted against McConnell’s secret Obamacare repeal-and-replace, and seven voted against complete repeal. More senators would have voted against both measures, but as they were already dead, senators instead voted “aye” to seek cover from angry bases at home. Also on Tuesday the president spoke to the Boy Scout quadrennial jamboree, turning it into a Nuremburg rally for which the chief of scouts yesterday apologized to all scouts and the nation. On Wednesday without consultation with congress, cabinet or military chiefs came another tweet, banning transgender people from the military.

Yesterday, holy cow... the new White House director of communications, Scaramucci, revisited the flight of Icarus to the sun, an entire career burnt out in four days. Then in the senate last night into wee hours, despite presidential bullying of Alaska’s Lisa Murkowski and the veep’s wheedling and McConnell’s alleged parliamentary skill, played out the spectacle of aimless voting on Obamacare and the ultimate demise of “skinny repeal.” John McCain with perhaps months to live put the wooden stake into the proceedings. 

Also yesterday, more importantly, Republican senators (Sasse, Graham, Grassley...) flipped from their grim and silent tolerance of the president to make clear that they will not tolerate the removal of Sessions or Mueller, nor allow the Justice Department to be highjacked to Trump’s personal benefit. 

The Republican break with the president is underway. The NYT’s token Republican on its Op-Ed pages opened his column this way:

“Donald Trump’s campaign against his attorney general, Jeff Sessions, in which he is seemingly attempting to insult and humiliate and tweet-shame Sessions into resignation, is an insanely stupid exercise. It is a multitiered tower of political idiocy, a sublime monument to the moronic, a gaudy, gleaming, Ozymandian folly that leaves many of the president’s prior efforts in its shade.”

Depending on the president’s near-future behavior, the way is clear for the next step in this drama. A delegation of congressional Republican leadership will visit the White House to tell the president to enter mothballs. To execute his remaining term in low and remote profile. Or else. After this week, the necessary votes for the 25th Amendment are in place, held back by the deep hope among even opponents of the president that such an act can be avoided.

But I can’t end with that -- must find some humor. Douthat’s column included this sentence: “Trying to defenestrate Sessions... will make things worse....” 

“Defenestrate?” While I tried to stay awake in 10th grade European history, the prof touched on “the defenestration of Prague,” and yanked us all to curious attention. In a bit of Bohemian hobby, in 1419, 1483, and finally 1618 (the famous one) attendees at meetings in Prague who annoyed and then enraged the majority were summarily tossed out the top window. 

Real estate note to usage: the window treatment of any building is known as “fenestration.” Defenestration does not mean to remove the windows, but to launch a disagreeable person out of a window.

Happily in 1618 the three men flung into involuntary flight survived the 70-foot fall by landing on a conveniently located dung heap. 

In Washington DC soon such flights may be common. To a few, wish the fortunate 1618 outcome.

The 10-year US T-note, stuck in range, growing grass:

There is a lot of noise in the recent CPI inflation chart (note that the Fed’s preferred “PCE core” has run about a half-percent lower, well below its 2% target). The Fed will stay on track, announcing the trim of its balance sheet in September, and another rate hike in December unless new inflation data say that down has become a trend:

A woodcut of the 1618 defenestration. The Bohemians were on to something:

The New Town Hall as it is today, the top window the point of exit in 1419:

And the Chancellery as it is today, the launching pad in 1618, the dark pillar to the right a monument to the occasion:

Rates Increase Slightly on Mixed Economic Data

Mortgage interest rates increased slightly on the week on mixed economic data.  Economic data stronger than expected included the July Consumer Confidence Index, June Durable Goods Orders, the June U.S. Trade Deficit, and the University of Michigan Consumer Sentiment Index.  Economic data weaker than expected included June Existing Home Sales, the May FHFA House Price Index, the May Case Shiller Home Price Index, June New Home Sales, weekly jobless claims, the Q2 price index, and the Q2 employment cost index.  The first look at Q2 GDP was in line with expectations, up 2.6%.  As expected, the Fed left the Fed Funds rate unchanged after its FOMC meeting.  The Fed indicated that inflation is unlikely to reach its 2.0% target for the medium term.  The Treasury auctioned $88 billion of 2 Year Notes, 5 Year Notes, and 7 Year Notes, which were met with strong demand. 


The Dow Jones Industrial Average is currently at 21,780, up about 200 points on the week.  The crude oil spot price is currently at $49.69 per barrel, up over $4 per barrel on the week.  The Dollar weakened versus the Euro and Yen on the week.


Next week look toward Monday’s Chicago Purchasing Managers Index and Pending Home Sales Index, Tuesday’s Personal Income and Outlays, ISM Manufacturing Index, and Construction Spending, Wednesday’s ADP Employment Report, Thursday’s Jobless Claims, Factory Orders, and ISM Services Sector Index, and Friday’s employment report for July and International Trade as potential market moving events.