Mortgage Market Updates

News of a 467,000-job loss in June, one-third worse than forecast, is hurting stocks but no help to long rates: the 10-year is stuck at 3.50%, mortgages just under 5.50%.

Green Shooters say the payroll weakness was magnified by temporary auto-plant closings, and they point to signs of bottom in auto sales and housing prices, and see optimism in the June ISM-manufacturing survey crawling uphill.

Overall car and truck sales did have their least-bad month since last September, but still dropped 28% from last June. At an annual rate of sales near 10 million, temporary closings will become permanent, GM and Chrysler survival in doubt. Even if payroll-loss forecasts had been correct near 325,000, the figure would have been worse than the bottom of the 2001-2002 recession. Some inventory pipeline-filling is underway, May factory orders up 1.2%, but the ISM’s 44.8 is still five points into contraction.

New data support the Agent Orangers’ L-shaped non-recovery. The gradual rise in consumer confidence sagged in June, to 49.3 from 54.9 in May. Case-Shiller home prices did mark a bottom, but minus 18.1% year-over-year versus minus 18.7% is thin cheer. Applications for purchase mortgages fell at the end of June; refis are down 80%.

The credit panic has stopped. However, the public-policy panic is still underway, in a new stage: fibrillation at disappointing data, flinching from contingencies.

After the extraordinary measures taken last winter it was appropriate to give them several months to work. The Fed has been the hero in its dozens of interventions to stop runs on money-markets and commercial paper, to secure bank funding, and in the most expansive monetary policy ever, including outright purchase of $800 billion-worth of Treasurys and MBS so far this year. The authorities have failed to restore credit, still garroted by a banking system allowed to shrink. The stimulus has been a flop, if not a waste, a deeply anxious public saving most of the money.

If Perfesser Bernanke could today erase the term “green shoot” from the English language, he would. Another month of “L” data like this, and government will spring back into action. May the Saints preserve us.

Barack Obama is a good and charming man. He and his people have done extraordinarily well in foreign policy, and setting an open and inclusive tone at home. He has governed to the left of his campaign, but not far. All of his interventions in the financial world have turned away from nationalization (some de facto was inevitable, the automakers, Citi, BoA) and have emphasized public-private partnership.

That demonstrated competence makes his blind spot all the more unaccountable. Thus far Mr. Obama has absolutely refused to face the nation’s budget. His big social plans -- Obamacare and cap-and-trade -- have been hostage to a fiscal black hole from the get-go, but he has stuck to belief in a normal, cyclical economic recovery, and recovery in tax revenue. Mr. Obama is a good poker player, but he looks uneasy now, aware that he is overplaying his hand. He must know that he will soon face cries for more borrowing-spending stimulus from his own party, risking more harm than good.

Bill Clinton faced a smaller version of the same problem in his first year. He lurched left, pushing social “investments,” and then his Treasury Secretary, Robert Rubin, warned him: spend and borrow too much, and long-term rates will rise and choke your economy and your tax revenue. To Clinton’s great credit, he embraced discipline, cut a deal with Republicans, and produced the best fiscal performance since Eisenhower.

Mr. Geithner looks more bureaucrat than actor, and so today’s warning to the President comes directly from the bond market. Housing and the economy desperately need lower long-term rates, beyond the Fed’s power to deliver. Today’s awful data should have pushed rates lower, but the effect was completely canceled by the prospect of another wave of long-term Treasury borrowing next week.

If Mr. Obama will vow spending the nation can afford, and borrowing limits like any family, and put his people to work on credible plans, the bond market will listen. Fast.

Economic Notes is published weekly by the Economics Department of Crestline Mortgage a division of Universal Lending Corporation as a service to Colorado Real Estate professionals. © 2009, all rights reserved.

Long-term interest rates fell in dramatic fashion late last week, the 10-year T-note to 3.51%, and low-fee mortgages to 5.25%.

Inflation freaks and dollar bears caved in, no data supporting their theories. Green Shooters were confounded by a rise in new claims for unemployment insurance to 627,000, halfway back to the April peak, and their hopes do not square with Warren Buffet’s description of the economy as “a wreck.”

The most important catalyst for the bond rally: the European Central Bank loaned half a trillion euros in one whack to Euro-zone banks, at a cost of 1% for one year -- unmistakable commitment to low rates for a long time. That ECB action gave context to our Fed’s “extended period” language, and blew up the silly talk of a Fed rate hike.

Low rates are good news, but they are low because we’re still in trouble.

Public commentary on “housing bottom” is still detached from reality, a peculiar thing three and a half years after housing began its bubble deflation. This shortage of good thinking is unique to housing: analysts within the industry have historically been tilted to blind optimism, and those outside persist in fruitless application of financial-market models to a market that obeys different rules.

Thus we hear that all will be okay when prices stop falling, and prices will stabilize when inventory has been sold off, aided by newly affordable prices and pent-up demand far exceeding diminished new construction. That “market clearing” equation works for stocks and bonds, but not housing -- not in a widespread market failure.

Stable home prices will not repair housing (or the economy), or even stop foreclosures. Bet a bundle on GM stock, lose it all, then cry and start over. Buy a house with prudent down payment and qualification in a market later falling 25%, 30%, 40%, you’ve not only lost your investment but are still looking up at a mortgage balance far in excess of new market value.

Nobody knows how many Bubble Zone households are marooned in negative equity that they cannot conceivably repay. Zillow has begun a multi-month study to try to pin down the number, likely to be in the ten- to twenty-million household range. Maybe more. In Las Vegas, where prices have fallen 50% from the 2006 peak, analysts think that 80% of all mortgaged households are under water. We asked a broker friend there an all-time stupid question: What will these people do? He said, “Walk.”

Not since Okies rode the rails to anywhere else have we faced so many households with savings wiped out, credit ruined, and shut from future home purchase. Assertions of improving or stabilizing inventory do not consider these millions of homes not on the market, the owners unable to move even to take a better job. Or any job.

The pent-up-demand concept fails on other grounds. In hard times household formation slows and even runs negative, people doubling-up, kids coming home. We won’t get good data for years, but the immigration portion of population growth is slowing with the economy, illegals from one million annually could drop to net flat. The supply side also fails: as Americans stretch the lives of their autos, same for our houses -- and we can economically stretch the life of a house a hell of a lot longer than a car.

New sales data shows a housing freeze spreading to decent-economy zones. The pattern is the same in all: the bottom half of markets by price are okay, even auction conditions for re-sold foreclosures, the top half... dead. In no-bubble Seattle, sparkling global-linked tech economy: YTD unit sales off 34%, dollar volume off 43%.

Foreclosures cannot abate, nor households regain footing until prices begin to rise. Stability won’t do it. “Increased affordability” is a bad joke, as loan-qualifying restrictions more than offset price and rate decline -- and there lies the way out!

There is only one way for prices to rise: credit availability must return to the sound standards of the 1990s and long before. Today’s credit panic is every bit as destructive as the idiocy of 2002-2006. Someone in authority will notice, and then we’ll heal.

Economic Notes is published weekly by the Economics Department of Crestline Mortgage a division of Universal Lending Corporation as a service to Colorado Real Estate professionals. © 2009, all rights reserved.

Long-term rates dipped briefly this week on shaky economic data, the 10-year Treasury to 3.59% and mortgages to 5.375%, but ran right back up in the shadow of another $104 billion in new Treasury borrowing next week.

Optimists tried to find a housing bottom in modest rises in starts and new permits, but the reports were garbled by apartment overweight, and the reality is the same: new home construction is steady 77% below the 2005 total. Inflation may come, but not now, CPI +.1% in May, no way to rise with industrial capacity utilization at a new-record low 68.3% (health = 80%+), and production off another 1.1%.

Leading indicators put in a second-straight solid increase, +1.2% for May, but the internal components are suspect. One is the rise in long-term rates; in normal times a healthy precursor, but today has undercut purchase-mortgage applications and collapsed refis. All surveys show modest increases in confidence, but all is relative: a shift from panic to anxiety is better, but is not “confidence.”

At this stage, neither authorities, traders, nor civilians can confirm an economic bottom forming, let alone the extent and slope of recovery ahead. Fiscal and monetary stimulus deployed... now we wait. We’ll know soon, this summer.

The strange and circular tale of the Bond Vigilantes defines this moment, and includes backhanded good news -- at least for inflation.

The term was coined in 1984 by economist Ed Yardeni to describe then brand-new self-protective behavior by bond investors. For city folk, and those too young to know cowboy movies, vigilantes form a civil-defense “posse,” either rounded up by the sheriff, or a self-organized mob as dangerous to civilization as the bad guys they would catch and drag to a necktie party.

Prior to 1981, the bond market was a very small and sleepy place. Federal deficits became chronic after 1963, but were dinky even during Vietnam. Most Treasurys were the rolled-over remnant from WWII. Even giant businesses were financed by banks, not bonds. Muni bonds were a tiny market, mostly for infrastructure funding as local governments stayed in fiscal balance. Mortgage securitization had hardly begun, home loans held in S&Ls. Bonds were physical pieces of paper, awkward and slow to trade.

Thus as inflation ramped steadily from the ‘60s through ‘70s, holders of lower rate bonds suffered great losses. Increased deficits were no more responsible for inflation then than now: inflation came from a tardy and timid Fed, two oil shocks, and from a weird regulatory hangover from the Depression. Bank deposits had an interest-rate ceiling until 1979, 5.25% versus inflation finally twice that level, and the low deposit costs held down mortgage rates which in turn inflated real estate.

This experience created deep conviction: debtors including government can inflate their way out of trouble, and commodities and real estate are investors’ safe harbor.

The great divide in 1981 has been misunderstood ever since, concealed by the following 20 years of falling inflation and increasing fiscal discipline. In 1981 the Federal deficit exploded: a terrible recession cut revenue, and we cut taxes while ramping defense spending. As the Treasury for the first time in peacetime filled the budget hole with massive sales of paper, everyone at a bond desk saw rates rise.

Bond owners suddenly great in number and mass sold holdings in self-defense and refused to buy, raising rates and bringing caution to government. Today, those fearful of inflation, or an effort to debase national debt, completely miss the pre-emptive effect of the Bond Vigilantes. Any nation trying such a thing will quickly face ruinous long-term interest rates. We think the Vigilantes’ excessive fear today is already aborting bottom, and assuring low inflation, but it will take time for them to see.

If that first necktie party goes home, there is another one waiting, rope over branch right now. Inflation or no inflation, if you intend to sell too many Treasurys, the posse’s willingness to buy will diminish in proportion, the demand for rate reward rising to ruin.

Economic Notes is published weekly by the Economics Department of Crestline Mortgage a division of Universal Lending Corporation as a service to Colorado Real Estate professionals. © 2009, all rights reserved.

Interest rates stabilized at the conclusion of $65 billion in new Treasury borrowing this week, mostly by sales of long-term bonds.

“Stability” is a relative term: all long-term rates have risen roughly one percent in just six weeks, and a further run-up will undercut any economic recovery. The question is whether current prospects for recovery justify this rate-surge, or is this surge already unsustainable? If the latter, what’s the chance for a reversal, especially in mortgages?

In today’s epic divergence in economic outlook, you found what you wanted in new data. May retail sales rose .5% -- some say presaging positive GDP, others weak-as-ever, flat after extracting a spike in gasoline prices. New claims for unemployment insurance fell close to 600,000 last week, down from the 668,000 peak in early April but almost triple anything resembling job growth.

The damage to long-term rates was entirely pushed by Treasurys -- for whatever reasons (broken markets, inflation-dollar-commodity-oil fear), more borrowing than the market could absorb. At the current deficit pace, the Treasury must repeat this week’s damage-doing borrowing, $65 billion every 12 days, most of it piling up in short-term debt that must be rolled. And rolled, and rolled, and rolled....

The Fed’s effort to control mortgage rates has succeeded beautifully, in the sense of restoring a proper spread between mortgages and Treasurys. Historically, a retail mortgage rate should be about 1.70% above the 10-year T-note; all through 2008 the spread ran 2.50% to 3.00%+. Today’s spread is about 1.80%.

There are $10 trillion in US 1st mortgages outstanding, $5.5 trillion of those Ginnie-Fannie-Freddie “Agency” MBS, which the Fed began to buy on January 5. The market for the other $4.5 trillion is dead as a hammer, and there has been no net growth in total 1st mortgages since summer 2007. Of that Agency $5.5 trillion, Fannie and Freddie own $1.5 trillion -- portfolios embalmed, replacing loans as they are refied, foreclosed, or prepaid by sale, zero-growth. Of the remaining $4 trillion, by the end of this year the Fed will have bought $1.2 trillion. Thus spread has been restored in a market with essentially no private buyers (for that matter, few buyers for any IOUs).

Those so convinced of recovery might consider: to maintain any functioning mortgage market, the Fed has had to buy 12% of all outstanding loans, a portfolio that took Fannie and Freddie 75 years to accumulate. Only the Treasury yield-surge could push mortgages to a marginally affordable 5.75% -- certainly not borrowing demand.

Angry voice in back of room: “Hell man, that’s only a half-percent above the fifty-year low in 2003!” True. However, housing recovery depends on a big peak-to-trough drop, and all recession-recoveries have required a housing recovery (and autos... heh-heh). In the recovery from the 1973-74 recession, mortgages fell from 10% peak back to 8.5% (the decline greatly magnified by rising inflation); 1979-82, from 18% to 10%; 1991-93, from 9.50% to 6.75%; and from 2000-03, 8.50% to 5.25%.

This time, from 6.50% 2004-08 to 5.75% ain’t gonna cut it, especially with the most severe tightening of credit standards ever seen.

Mortgage rates will not come down unless Treasury yields do, and they are beyond Fed control. It is possible that the economy has entered a normal, cyclical recovery that will create loan demand at these and higher rates, but that is the least likely scenario. As is the inflation-dollar-commodity-oil camp, itself dependent on substantial recovery.

In scenario two, if this interlude reveals itself as a false recovery in the next 30-90 days, most likely to us, the severity of anxiety will set the boundary of rate decline. Fear would take us back to the fours, merely soggy-bottom perhaps to 5.00%.

Scenario three is the truly confounding one. Greenspan’s Conundrum was the 2004 refusal of long rates to rise with a tightening Fed. Now we may be entering Bernanke’s Conundrum, long rates rising despite all-time Fed ease, pushed by excessive Treasury borrowing. The only remedy: cut Federal spending. Now, in mid-recession.

Economic Notes is published weekly by the Economics Department of Crestline Mortgage a division of Universal Lending Corporation as a service to Colorado Real Estate professionals. © 2009, all rights reserved.

The economic optimists are still in charge of markets, rates and stocks still rising. However, the divergence is widening between them and those worried about credit and latent weakness. It may take a month or two to figure whose stubbornness has merit.

Markets first, then new economic data.

The 10-year T-note has jumped to 3.85% this morning, the highest since last fall, and even 2-year Treasurys rose in yield today in belief that a Fed rate-hike has come closer. Mortgages have gone right along to 5.625% with lowest fees, the highest since the Fed announced its intentions to buy at Thanksgiving. A 1.00% rate-rise in two weeks has stopped refinance activity altogether, and purchase markets also suffer.

Stocks have now recovered all 2009 losses, and the Dow’s press up on 9,000 has retraced one-third of its overall collapse. A mechanical pattern typical of all major moves either up or down, these retracements also typically have little predictive value. Worriers are convinced that this move is an all-time “dead-cat bounce.”

Optimists think oil touching $70/bbl confirms their position, but that market carries a sulfuric whiff of speculative fiddling. There is no increase in global demand, and the world is awash in supply overshoot -- it won’t last for more than a few years, but is deep and broad. Not even speculation can move natural gas, trading under $4.00 today. Industrial commodities have retraced like the stock market, but the whole agricultural sector is flat-on-bottom -- one old friend says that Memorial Day retail sales of beef were the worst ever measured. National health kick, or budget beans?

The first week of each month brings the most important data. Today’s rise in rates and stocks immediately followed news that payrolls contracted by “only” 345,000 jobs in May, down a quarter-million from the 1st quarter monthly average. However, unemployment jumped another .5% to 9.4%, new claims for unemployment insurance are steady at 625,000 weekly, and only continuing claims flattened. Possibly some people are going back to work, but only at lesser pay. The overall job picture is awful.

The twin ISM reports by inventory managers excited the optimists. Manufacturing rose from 40.1 to 42.8, technically close to recession-end level (actual growth lies at 50.0), but the juice was in the components: new orders to 51.1, and prices-paid from 32.0 to 43.5 produced a delighted “Eek!!” from inflationists. Wednesday’s service-sector survey (70%+ of the economy) was tepid, to 44.0 from 43.7, and optimists ignored employment components in both surveys still mired in the 30s.

The optimists, centered in the stock market and joined by the inflation-fearful, see a normal, cyclical recovery building, in which jobs are the last to recover and inflation follows. It may be on the weak side, but there will be no more Bears, Lehmans, AIGs, Chryslers, or GMs. With all the big dominoes down, there is no reason to buy Treasurys for safety at no-earn yields. Housing can fend for itself -- those silly people deserve this lesson, after all. Even Bernanke says, “...Housing has shown some signs of bottoming.”

The worried, mostly credit people joined by non-stock-market economists, see an extremely atypical situation: a balance-sheet recession still deteriorating. Asset values have fallen or collapsed versus debt outstanding, leaving households and banks with negative equity and little access to credit. Without credit, there is no way to stop the asset-liquidation spiral. The cyclical turn is an illusion, merely temporary stability among big institutions while Main Street continues to erode.

The worst illusion: the rise in Treasury yields is mistaken by optimists for a sign of health, when in reality excessive Federal borrowing cannot be absorbed by a still-shrinking and decapitalized financial world. Last week, Fed Vice-Chair Donald Kohn gave a careful warning about deficit-spending benefits at risk to higher long-term rates.

This week, Perfesser Bernanke: “A relapse in the financial sector could cause the incipient recovery to stall.” A new shut-off in mortgage credit looks like a relapse to us.

Economic Notes is published weekly by the Economics Department of Crestline Mortgage a division of Universal Lending Corporation as a service to Colorado Real Estate professionals. © 2009, all rights reserved.

The explosion in long-term interest rates is abating today, but the warning from markets remains stark and bleak.

In one week the 10-year T-note blew from the 3.20s to 3.70s, now 3.50% but far from the 2.50-3.00% range Thanksgiving-April. An origination fee bought a 4-something mortgage until Wednesday, then 5.25% at the top, back toward 5.00% now.

Optimists and worrywarts found what they wished in economic data. Conference Board consumer confidence rose from the 25.3 pit in February to 54.9 in May; however, a normal-growth economy has a 100-125 confidence reading. Orders for durable goods jumped 1.9% in April, but only offset the downward revision for March. New unemployment claims held 623,000 -- off the 663,000 peak in early April, but no good.

Sales of existing and new homes stayed flat in April, at record lows. “A” quality loan delinquencies rose to 8.9%; all indicators for foreclosures are rising; modification programs are still small-number, and of those, re-defaults run 25%-60%. Low-priced homes in every market get auction-style attention; however, foreclosures at 50% of resales tells you everything you need to know about the non-foreclosure fraction. Unstable, not bottom, not bottoming. Higher rates make bottom impossible. Even before this week’s rate-wreck there was still no up-tick in purchase-loan applications.

There are four reasons for the bust in long-term Treasurys:

1. In this ultimate Keynesian spasm, too many Treasurys are coming to market. Not so much the $2 trillion this year, or even the $1.5 trillion next year, but the flat refusal by the Obamanauts to adopt fiscal discipline in the out-years. On current “plan” our debt will soar from 45% of GDP to 75% in 2013, still ramping open-ended.

2. Everyone knows that inflation is a sure thing. The odds are 10:1 against, but there’s nothing like last-war certainty. Breaking that fear will take time. The Fed could get us to Weimar or Zimbabwe by printing currency and dropping it in stacks on street corners, but in utterly broken credit conditions invented money is struggling slowly from the Fed to the corner, evaporating on the way.

3. The Green Shooters are equally certain that economic bottom has passed, and recovery has arrived. These people will change their minds sooner than inflationators.

4. The Fed at “0%-.25%” cost of money should anchor long Treasurys. Borrow at no cost, lever 8:1, a 2.50% 10-year pays a fantastic return, enough to offset damage in future reckoning. However, all of the bank-repair efforts have descended to black comedy: pretense, gaming, and deferral. The financial system is still loaded with bad assets and short capital -- no loans, no leverage of Treasurys, MBS, or anything else.

One quick corrective: mortgage demand collapsed on Wednesday. 70% of applications had been for refinance, and above 5.00% demand is zero. Another possible nearby corrective: a load of Agent Orange economic data next week.

The nightmare corrective: historians will study this Keynesian Limit the same way we have studied FDR's balanced-budget error in ’36. If government over-borrows in a super-Keynesian attempt to stimulate aggregate demand, and long-term rates rise, at what point will higher rates choke off the benefit of stimulus? Answer: Wednesday.

The 1936 national debt had all the magnitude of an accounting error. The flinch from borrowing then was hair-shirt ignorance. When debt ran to 140% of GDP in WWII, it was soaked up by a nation on rationing, War Bond rallies, and nothing to buy on Iwo.

From California to oblivious Obamanauts, markets demand fiscal discipline. Until it is adopted, the high-wire hazard from spending cuts notwithstanding, each new auction of Treasury paper will be Russian Roulette.

The good news: spending limits might work, and well. “Aggregate demand” was the problem in the ‘30s, but not now. This is a balance-sheet catastrophe, debts in excess of assets. Solve the financial problem by modest borrowing, capital forbearance and guarantees, get credit going, and we can crawl out of this.

Economic Notes is published weekly by the Economics Department of Crestline Mortgage a division of Universal Lending Corporation as a service to Colorado Real Estate professionals. © 2009, all rights reserved.

This week marked the first of several collisions ahead between markets and US plans to borrow. Treasury yields have soared, but mortgages are holding in the fours.

New data failed to reinforce either the Green Shooters or the Agent Orangers, as prior historical guides are unreliable in a brand-new predicament.

Leading indicators rose 1.0%, the first gain in seven months. However, Orangers note that .44% of the boost came from a suspect rocket by stocks; another .28% from the jump in long-term Treasury rates, more likely to be destructive than helpful; and .27% from consumer attitudes improving from desperate to merely miserable.

The Shooters are adaptable. Tuesday’s release of new housing starts and building permits was supposed to show housing bottom, and stocks rose in anticipation. The actual numbers, down 13% and 3.3%, were the worst ever measured, but good news! Less construction must mean less supply, therefore housing bottom. Stocks rose.

The Fed’s staff produces the best forecast available. State secrets until a few years ago, these forecasts are public just three weeks after each Fed meeting. The minutes of April 28-29 (www.federalreserve.org) were badly mis-read upon release this week: media and Street sources initially reported the Fed “considering” an increase in its purchases of Treasurys, and Treasury rates fell. The same crew also reported the Fed had altered its forecast to the downside.

Wrong and wrong. There was no debate on increased purchases; merely unanimous decision to wait-to-see. Then, there are two forecasts at Fed meetings: one by the twelve regional Feds, and another by the staff, historically by far the more accurate of the two. The regional banks cut their forecast, but the staff boosted its outlook: “Real GDP to edge higher in the second half... Fiscal stimulus... Bottoming of housing... Turn in the inventory cycle... Gradual recovery of financial markets.”

Markets figured it out: an improving economy and no Fed support for Treasurys...? Sell. The 10-year T-note blew to 3.44% from the high-twos of fall-winter.

Mortgages are holding because the Fed is executing a $1.25 trillion buy, more than 10% of outstanding mortgages. This operation has successful impact because there has been no net increase in loans outstanding since 2007 (refis are a wash, and purchase of a foreclosure results in net decrease). Here we sit, mortgages roughly 4.75%, only 1.30% above the 10-year, the lowest spread in memory. If Treasurys continue to blow up, can mortgages stay put, the spread ever-narrower? Dunno. Never tried this before.

A steepening yield curve (long rates rising far above short) is supposed to forecast good times. Not when low rates and unprecedented Federal borrowing are required to get out of an asset-deflation spiral. Absolutely not.

Given new-cash Treasury borrowing of at least $1.8 trillion this year, the Fed may not have the power to suppress those yields. The Obama people appear oblivious to the market damage done by their failure to address “out-year” deficits. Geithner’s plaintive promise today to get deficit growth back to 3% per year just made things worse. We’re going to run our debt from 44% of GDP to 75% in depression-prevention, and then grow it 3% per year, when we will be lucky to have GDP growing as fast? When interest rates normalize, interest on debt so great as that will wreck the budget.

The elephant in the room since Lehman September: without blowing up rates, can we and Europe borrow as much as we must? We have borrowed and spent our way to premature prosperity for 50 years, and now must exhaust our emergency borrowing reserve. None will remain to cushion entitlement promises to aging Boomers. We cannot inflate our way out of debt because rates will rise and abort recovery. We may be aborting right now, rates rising and the Treasury crowding out lesser borrowers and capital raisers. Tax our way out? Ahhh... no.

We can grow our way out of debt trouble, but only by limiting spending. Somebody please Twitter the President before markets reach him by bullhorn.

Economic Notes is published weekly by the Economics Department of Crestline Mortgage a division of Universal Lending Corporation as a service to Colorado Real Estate professionals. © 2009, all rights reserved.

Three battles are underway: Treasury borrowing versus interest rates, slower economic decline versus bottom, and banks versus everybody else.

Total Treasury new-cash borrowings this week and next: $171 billion, a tad high (the 2009 two-week average: $75 billion). The Fed on March 18 said it would buy $300 billion in Treasurys this year, many thought in an effort to control Treasury interest rates, specifically holding the 10-year under 3.00%. Not so: the 10-year is trading 3.16% today. One-quarter of the $300 billion has already been spent, the purpose to get cash in the economy around broken banks, not to rig Treasury rates.

The Treasury market is too big and too important to the world, and the Fed already has the other credit markets on life support. The longer you keep a patient on a ventilator, the harder to get him off, and we have a whole ward on vents.

The good news: mortgage rates have not risen in tandem, holding high fours. The Fed’s $1.25 trillion effort to push down mortgage rates is working because rollover refis don’t require new money, and even purchase loans are a wash versus payoff and foreclosure drains. Fannie, Freddie, and Ginnie already either own or guarantee half the outstanding $10 trillion -- and they are on the vent for good.

The April ISM survey does show a slower rate of decline: 40.1 versus 36.3 in March and cycle-bottom 32.9 in December. However, the ISM data show only changes in the rate of change. Any reading under 41.5 is deep recession, growth begins way up at 50, and a shift from free-fall to rolling downhill should not be confused with stability.

Another key indicator of cycle turn: new claims for unemployment insurance. Down a hair to 631,000 last week, they are holding below the early-April top at 668,000.

The precise location and timing of bottom does not matter. The important things: how solid the floor, and the shape of the recovery. The stock market yahoos all have out the “vee” charts, and we believe they are dead wrong on one cycle-marker: the lag between Fed-on-the-gas and economic acceleration. In cycles going back to WWII, the lag has been six to nine months, and theoretically the Fed put pedal to metal in September, eight months ago. However, this time the linkage is busted: no matter how hard the Fed hits the throttle, nothing is coming out of the fuel pump -- no credit.

Banks of all sizes have been on the run since fall: stripped of mortgage refis (banks just processing loans on the way to the Fed’s balance sheet), the Treasury says that October to February bank lending contracted almost 40%. Credit contraction entered a whole new stage about six weeks ago, pullback heaviest from 2nd mortgages (now 85% LTV max, at best), commercial real estate loans, and credit for consumers.

We had thought that the retreat by smaller banks was caused by make-my-day examiners, and one corrected us this week. “We’re not stupid; we know the economy needs credit -- these guys are shutting down on their own and blaming us.”

Mr. Obama’s sharp criticism of Chrysler’s senior secured lenders would be inappropriate in ordinary times. These are not ordinary. BofA’s stockholders at last removed Ken Lewis as chairman, but the board and new chairman are still cronies and hacks. The bank stress test is delayed again, the administration in obvious indecision about what to do with the results, the plans for toxic assets a faceplant. Meanwhile, bankers are elbowing women and children from the lifeboats. The administration seems to know it must insist on civic priorities for bankers, and doesn’t want to run the institutions, but it still hasn’t figured out how to get the bankers in the game.

Here’s the choice. You can let the bankers sail away, shrink credit, raise rates, and gradually accumulate adequate capital, and hope the Fed’s ventilator holds for another year or two or three. Or you can get over your fear of the reaction among the women and children and declare an emergency, which everyone already knows this is.

There’s a lot riding on your learning curve, Mr. Obama. So far, not so good.

Economic Notes is published weekly by the Economics Department of Crestline Mortgage a division of Universal Lending Corporation as a service to Colorado Real Estate professionals. © 2009, all rights reserved.

Another week of odd calm... at its heart a void of information from government. The economy is on life support, but the intentions of the physicians are unclear.

In the data details, nothing new: mortgage rates still rattle in a very narrow, high-four range, held so low only by the Fed’s massive buying. The stock market has shown some buoyancy, holding its ranges, Dow 8000 and S&P 850.

That optimistic trading is based on hopes that the economy will follow prior cycles: new weekly claims for unemployment insurance may have hit cycle-top at 665,000 in early April, and history says recessions end two months after that top. Historically, we’re overdue for an inventory pop -- new orders to replenish excessively depleted pipelines. Historically, we should soon begin to feel the stimulus spending.

Stocks reacted well to news of a slight decline in March sales of new and existing homes, and apparent drops in unsold inventories. However, there is still no increase in applications for purchase mortgages. Inventories are down because of foreclosure moratoria, and many millions of owners who think it unwise to try to sell -- best evidenced by a sharp drop in the number of Americans moving from one home to another, today about one-third below the numbers in the ‘80s and ‘90s.

The void... Secretary Geithner this week testified to Congress and delivered three speeches, all posted at www.ustreas.gov. He was commendably combative before Congress, but neither there nor in 25 pages of text did he describe the administration’s plans. He has always acknowledged urgency, the continuing dysfunction in credit markets, but dissembles about results, metrics to measure results, and intentions. The TALF program, central to renewing credit, fell dead flat at rollout; yet Geithner claimed its pathetic $1.4 billion opening was “relatively good for an early program.”

Mr. Obama last week at Georgetown offered a definitive economic speech in the style of an FDR fireside chat. His intentions are good, but as a policy document, or rhetoric to reassure the nation... an awful, ten-page fireside filibuster.

The peculiar calm in markets this week was in part due the usual late-month wait for fresh data early in the next. However, hanging over everything has been and will be: the results of the stress tests on banks. Apparently the bankers are being advised now, and leaks should appear shortly. Today’s release of the test parameters is black comedy, tell-‘em-nuthin’, a lousy harbinger of public results due on May 4th.

Everyone from parents to Presidents struggles with what to keep secret, how and when, and what to make public, how and when. Should I sit on this, for fear of alarming the audience? Or do I do more harm by trying to conceal things they already know and fear? Do I dare reveal my uncertainty about what to do in an emergency?

Normal people suddenly seated in government chairs become secrecy freaks. Classify everything “secret,” even the things the enemy already knows: no fate is worse than embarrassment. Secrecy is bureaucratic power: I know and you don’t.

The Fed’s special secret hell: if you knew what we’re doing, then you’d act based on us rather than on market and economic forces, which would distort markets and the economy, which we are trying to adjust, manipulate and manage. Have a nice day.

We are now two administrations and two years into tap-dancing around the insolvency of the banking system, and the devastating consequences of inadequate credit. The cautious IMF this week said US and European banks require $1.85 trillion to restore capital to the levels of 1995. The nation is scared, fully aware of deep trouble, and it is far past time for the authorities to speak plainly: what we’re trying, how and when we’ll know if it’s working, and our contingencies.

One public entity came clean, and we think tipped a card or two in the Fed’s hand. The Bank of Canada cut its overnight rate to match ours, .25%, and in unprecedented fashion said it would keep its rate there at least until June 2010. You don’t say that if you think you’re at economic bottom, nor without the company of the American Fed.

Economic Notes is published weekly by the Economics Department of Crestline Mortgage a division of Universal Lending Corporation as a service to Colorado Real Estate professionals. © 2009, all rights reserved.

The Fed has succeeded in holding down Treasury and mortgage rates, but that is the only clear accomplishment by government so far this year.

A grand debate began last week between those who see Perfesser Bernanke’s “green shoots” and those who don’t. The Fed’s “beige book” summary described a “moderation in the pace of decline... some sectors stabilizing at a low level.” The Shooters pointed to better-than-expected bank earnings, slightly improved consumer confidence, a possible turn in unemployment claims, and flattening ISM surveys.

The no-bottom counter-data: the small-business NFIB survey hit second-worst in its 35-year history (not by coincidence, the 2Q’80 worst was the only credit crunch comparable to this in modern times). Industrial production fell 1.5% in March, and capacity in use dropped to 69.3%, the lowest measured in the 60-year series.

We think the Shooters are spinning. They have no case -- not yet.

The mechanics of bottom are slippery. A claimed “reduction in the rate of decline,” is often sophistry. Example: home sales have fallen from 7 million to 4.5 million. We will not fall another 2.5 million, hence a lesser rate of decline, but a silly observation in the face of foreclosures rising toward one million. Another: auto sales have fallen from 16 million to 9 million, and will not fall another 7 million, but soon ahead lies the bankruptcy of the majority of US-owned production and associated layoffs.

“Stabilizing at a low level” (we read the whole beige book, and the details do not support the summary) happens at some point in every recession. However, at this moment stability is illusion: more and more businesses are running at revenue below sustainability, unable to cover fixed costs, downsizing dominoes just beginning.

The key to all of this, of course, known to every Main Street businessperson and consumer, is CREDIT. Availability continues to contract sharply. The smaller the bank, the more demented threats by examiners against making loans; the larger the bank, the faster its CEO is running from government capital and pressure to make loans.

The entire commercial banking system is quickly curling into fetal position around remaining capital. If we make no loans, we won’t have new bad ones, and won’t need capital. We’ll raise our rates, sit with immense net-interest margins, and grow our own capital slowly -- anything but take government capital and surrender control.

Jamie Dimon, CEO of JPMorganChase, the most self-satisfied human in banking, without any embarrassment or awareness yesterday provided the low point in the crisis thus far. Dimon called his TARP capital “A scarlet letter, the TARP baby... We could pay it back tomorrow.” Would he participate in the Fed’s flagship PPIP effort to auction and clear bad assets? “No. We manage our own assets.”

In all public appearances, this Dimon creature has insisted that Chase is making lots of loans and satisfying the few qualified borrowers extant. Uh-huh. Sure. The Treasury reported that the 21 largest banks reduced lending across all categories by 2.2% in February; that reduction would have been far, far larger without the spike in mortgage refis, which are not bank loans, just “conduit” processing off into the Fed’s purchases.

Worse, everywhere: bankers un-making loans. A new FICO study found that 11% of Americans, good-credit performers on their loans, have had lines cut or closed. The NFIB says 28% of small firms have had lines cut, and 69% face worse terms. Ask your friends, and they’ll tell you the top closer of lines, arbitrary and blind... Chase.

There is a fight on for control of the banking system. We are losing. In a first-class national emergency, one without credit then without bottom, the first duty of banks is to provide adequate credit. That’s why we have guaranteed their liabilities since 1933.

We can theoretically limp along until banks restore capital internally, and then re-bloated crawl out to offer loans to whatever borrowers remain. However, we don’t know what’s worse: the risk of such a passive strategy, or the awful sense of moral soil at allowing the likes of Jamie Dimon to raise his finger to the nation.

Economic Notes is published weekly by the Economics Department of Crestline Mortgage a division of Universal Lending Corporation as a service to Colorado Real Estate professionals. © 2009, all rights reserved.