Investors have survived another week of wacky business antics, violent market swings and general malaise domestically. However, I want to diverge from my normal within-boundaries commentary and discuss our friends on the other side of the globe: The Chinese. Why should we be so concerned with an emerging economy half a world away? Because they have historically loved our mortgage-backed securities and we have historically loved to buy their affordable imports. We buy their goods, they buy our debt. This maintains the currency imbalance that keeps Chinese goods so cheap for Americans and keeps China’s manufacturing sector growing and happy. Everybody wins. Right?
Maybe not so much anymore. Times have changed since our recent economic derailing. With an ailing dollar, Chinese imports are being driven higher and higher in price, consequently decreasing our demand and their revenues. This is an unacceptable scenario, as China has a massive generation entering the job force as we speak. They need jobs for all those hungry young workers, or else they will find themselves in a state of rapidly growing unemployment.
The other fun little fact that most people seem to skip over is the enormous appetite China has had for our mortgage-backed securities and their comparable lack of any substantial valuation write-downs. You see, in America we owned up to our balance sheet woes pretty darn quickly. As such, we became the front car on the economic rollercoaster that’s headed south and we’re dragging the world down with us. However, this early purging is placing us in a unique position to bounce back quickly and capitalize on international weakness that will doubtlessly linger well beyond our own set of problems. China, however, hasn’t really owned up to the massive drop in value that their cumulative asset pool has suffered over the past year.
So here’s my worry. Let’s say China slows down their purchasing of our mortgage debt (which they have started to do). That means less demand for mortgage-backed securities. With less demand, an over-supply will develop. In an attempt to encourage investors to eat up all this excess inventory, the return-on-investment (also known as the mortgage rate) will have to go up to engender more interest. That means bigger rates for even well-qualified borrowers.
I’ve been wrong before and I may be totally wrong here. But I would bet that China is one massive time-bomb waiting to go off. And with their burgeoning political alliance with Brazil, India and Russia, that pending explosion could wreak some serious havoc internationally.
On the local front, the Consumer Price Index, the Fed’s favorite measure of inflation, came in at a surprisingly tame 3.9% annualized growth which is the lowest it’s been since October of last year. Mind you, that number is still well outside of the Fed’s ‘comfort range’. It implies that higher food costs have yet to find their way into consumer prices.
Ben Bernanke stated in his May 13th speech that there is “still a ways to go” in our economic slowdown despite a stabilizing of financial markets. As such, he is calling for banks to remain vigilant in raising capital in order to alleviate stress in the financial system.
The Senate is also inching closer to expanding a governmental program to insure hundreds of billions of dollars in refinanced mortgages. This would be a huge step to providing some relief to the rising foreclosure epidemic plaguing our country and could bolster home prices if successful. Here’s hoping.
Tuesday, May 13, 2008
Tuesday, May 6, 2008
The end of a Fed Cycle
For all his aggressive responses to our current credit crisis, Ben Bernanke certainly does like to end with a light touch. The Fed Funds Rate and the Discount Rate both received a 1/4 point cut on April 30th. This was what most experts predicted. Since rate cuts really take about 6 months to be felt by the economy, the Fed didn’t want to be overly forceful after a recent series of robust rate cuts that haven’t been absorbed yet.
However, our country’s economic unwinding seems to still be playing out. Pending home sales data came in -1.0% from February’s data to an reach an all-time low. Consumer confidence hit a 26 year low a couple of weeks ago. Gross Domestic Product for the 1st quarter of 2008 came in at a positive but meager +0.6% annual rate of growth. Crude oil recently hit a new intra-day high of $123.79/barrel based mainly on increased demand, which scares the living daylights out of consumers and businesses.
Additionally, these rising worries about an international food crisis are creating food-based inflation, adding fuel to an already growing inflationary fire. Kansas City Fed President Thomas Hoenig stated today that “inflationary pressures now stand at unacceptably high levels.”
So, Ben and his crew of Fed Governors cut rates but stated in no uncertain terms that the balance between the risk of negative growth and inflationary pressures had about evened out. So, unless something pretty darn big and catastrophic happens in the next 8 weeks, I would guess that the Fed is about done cutting rates. They wanted to signal that their loose monetary policy would probably stop loosening in an attempt to put some more international confidence in the greenback and slow the growth of inflation.
So that’s it, Wall Street. This is about as good as the Fed’s gonna make it for you. Enjoy it, because I doubt it’s going to last this way for very long.
Fannie Mae was the subject of much attention when they posted a quarterly loss in earnings and hinted at a potential liquidity problem due to the massive spike in loan defaults. As a result, they sought a capital infusion of 6 billion dollars to even things out and provide a good buffer of liquid assets. Lots of people get worried about the solvency of our secondary mortgage market when things like this happen. But think about it. The Fed bailed out Bear Stearns. Don’t you think they would want to bail out Fannie Mae if it came down to it?
With all of this going on, mortgage rates have been staying in a pretty steady range for the past week. If we see a drop in commodity prices like gold and oil or an increase in the value of the dollar relative to other currencies, mortgage rates should benefit. However, inflation and fear of mortgage-backed securities still pressure rates higher.
As a final note, the 1st wave of the tax rebate checks have already been distributed, and more are on their way. While economists are split as to the ultimate impact of these checks on consumer spending, we’re sure to see at least a small sugar-high of spending reflected in the 2nd quarter GDP figures. I find it very interesting how those numbers will come out smack in the middle of the presidential election season. Convenient, but not altogether surprising.
However, our country’s economic unwinding seems to still be playing out. Pending home sales data came in -1.0% from February’s data to an reach an all-time low. Consumer confidence hit a 26 year low a couple of weeks ago. Gross Domestic Product for the 1st quarter of 2008 came in at a positive but meager +0.6% annual rate of growth. Crude oil recently hit a new intra-day high of $123.79/barrel based mainly on increased demand, which scares the living daylights out of consumers and businesses.
Additionally, these rising worries about an international food crisis are creating food-based inflation, adding fuel to an already growing inflationary fire. Kansas City Fed President Thomas Hoenig stated today that “inflationary pressures now stand at unacceptably high levels.”
So, Ben and his crew of Fed Governors cut rates but stated in no uncertain terms that the balance between the risk of negative growth and inflationary pressures had about evened out. So, unless something pretty darn big and catastrophic happens in the next 8 weeks, I would guess that the Fed is about done cutting rates. They wanted to signal that their loose monetary policy would probably stop loosening in an attempt to put some more international confidence in the greenback and slow the growth of inflation.
So that’s it, Wall Street. This is about as good as the Fed’s gonna make it for you. Enjoy it, because I doubt it’s going to last this way for very long.
Fannie Mae was the subject of much attention when they posted a quarterly loss in earnings and hinted at a potential liquidity problem due to the massive spike in loan defaults. As a result, they sought a capital infusion of 6 billion dollars to even things out and provide a good buffer of liquid assets. Lots of people get worried about the solvency of our secondary mortgage market when things like this happen. But think about it. The Fed bailed out Bear Stearns. Don’t you think they would want to bail out Fannie Mae if it came down to it?
With all of this going on, mortgage rates have been staying in a pretty steady range for the past week. If we see a drop in commodity prices like gold and oil or an increase in the value of the dollar relative to other currencies, mortgage rates should benefit. However, inflation and fear of mortgage-backed securities still pressure rates higher.
As a final note, the 1st wave of the tax rebate checks have already been distributed, and more are on their way. While economists are split as to the ultimate impact of these checks on consumer spending, we’re sure to see at least a small sugar-high of spending reflected in the 2nd quarter GDP figures. I find it very interesting how those numbers will come out smack in the middle of the presidential election season. Convenient, but not altogether surprising.
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