The following is the view of Hurricane Katrina as seen by the average ghoul in and near the bond market. For that, I apologize.
Katrina has caused a nosedive in Treasury rates, a reconsideration of the state of the economy and the Federal Reserve’s intentions, but so far has taken mortgage rates down only about an eighth of a percent from last week, near 5.625 percent.
Traditional economic indicators aren’t worth much now: anything pre-Katrina is Jurassic Park; anything post-disaster will be garbled for months. Pre-Katrina there was already an argument about the economy, and the bond market by last week had priced-in not only an end to Fed tightening, but an economic slowdown next year and probable Fed reversal. Federal Reserve Chief Alan Greenspan and others very much disagreed.
The financial markets vacuum up information and in real time build it into market prices. Perhaps the best indication of the effects of Katrina on the economy, including the effects of unfolding energy-supply disruption, is the change in market prices in the last week.
Treasury yields collapsed under three forces. First, panic: money races to safety in panic, and Treasurys are the first haven. One sign that panic is predominant over economics occurs when Treasurys break lower without follow-through in mortgages. That’s what we’ve got.
The second force is the expectation that the Fed will stop its previously relentless rate hikes. The Fed funds futures market says so, wiping out any probability of increases later this year. Confirming reduced Fed-fear: the Fed-sensitive 2-year T-note has fallen twice as far (to 3.71 percent) as the 10-year (to 4.02 percent).
The third force pushing down Treasury rates is the expectation that Katrina will tip over an economy already weakened by high-energy prices and the Fed.
Katrina’s economic impact is first on energy distribution, second on economic disruption local to the Gulf, and third in emotional shock. That last is in play and is completely unquantifiable: human civilization – for any of us, all of us – is only as durable as food and drinking water, and it is terrible to see it broken.
Market prices say that fears for the energy supply are way overblown. This week, every bright, ambitious, and rapacious young ghoul in finance has worked to discover the state of energy distribution. Kids who knew nothing of gasoline except its scent are now experts on cracking towers. Oil is the same price it was pre-Katrina. Natural gas and gasoline are up, but likely temporarily because high prices will produce unexpected conservation, and American prices, the highest in the world, will suck in refined product from all over the world.
There will be scattered local economic drags (gas lines), but our extraordinary, decentralized, ad hoc, don’t-ask-just-fix-it economy is adapting quickly.
Four and a half million people lived in the disaster counties from Lake Charles to Mobile. Their situation is horrific, but of little economic consequence to the nation, says the stock market, unchanged since Katrina.
Which leaves the Fed. President Bush met Greenspan on Thursday (oh, to have been a fly on that wall!). The President should never suggest that the Fed lay off; but if in extremis he feels that he must, then the chairman must comply. Nobody is talking.
Asked or not, it would be very foolish for the Fed to tighten at its Sept. 20 meeting. It should watch the economy along with everyone else. After that, into October, I suspect that we will revert to conditions pre-Katrina, with the Fed tightening until housing slows, tightening longer if inflation appears. Better to profiteer on today’s rate declines, and not wait for lower ones, hoping for worse for the country.
I think the nation comes through just fine, and will get full value from a very loud call to wake up.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
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