Mortgage rates stayed near 6.25 percent this week, but gradually improved in the face of upward pressure from all news.
January economic data have been red hot, but so was the weather, and we really can’t tell the extent of distortion by the warmth. The employment gain, the best month for retail sales in five years, the surge in new-home starts and construction permits, today’s wholesale “core” prices up by double the Fed’s target — that combination should have pushed long-term rates to new highs.
Did not. The 10-year T-note approached the highs of last November, a now-crucial 4.68 percent, and fell back, by this morning all the way to 4.51 percent.
The whole world of finance paused for Fed Chairman Bernanke’s first command performance on Wednesday, ready to buy, sell or hide on any hint of policy change. From the early-morning Web-posting of his remarks, to the end of Congressional questioning, the bond market stayed unchanged. Not a flicker.
The Perfesser (with apologies to the ghost of Casey Stengel) said, “Substantial progress has been made in removing monetary policy accommodation”, which everyone understands to mean that more progress must be made. The Fed will go to 4.75 percent on March 28, and absent an economic slowdown, to 5 percent on May 10.
He got high marks for technical performance, but his scores for style were shaky. The Perfesser has argued for a more open Fed; so far, his idea of openness is “Tell ’em nothin’.” His answers to questioning were universally described as blunt. He dodged nearly all politically sensitive questions — a pleasure to some, but this guy is after all the nation’s appointed economic conscience.
We have sense enough not to elect him, because we know that we can’t be trusted, and Congress has given to him power that it knows that it can’t be trusted with. A new Fed chairman has not a friend in the world, and it’s a good idea to make some, quickly. There is only one way: demonstrate that you are the smartest guy in the room, and the one with the best intentions. For my money, Bernanke didn’t get that done. He was, well… The Perfesser, and in one stark moment, the kind of professor that I never cared for. He was asked about the inverted yield curve, and replied: “The inverted yield curve is not signaling a slowdown.” No explanation, elucidation, condition, or approximation. It is so because I say so.
Since his testimony, the bond rally has deepened the inversion.
Last week I got more e-mail return fire than ever in response to this sentence: “The Fed is already on the edge of bursting a housing bubble where there was not one in the first place.” Most were certain that there is a bubble, Fed or no Fed, but many were confused.
Try this picture. A drunk comes running down the street past a cop. He hasn’t done anything wrong, he’s just running for the sheer exuberance of it. Cops tend to chase running drunks, and this one does. The drunk is thrilled at the competition. After a while the drunk begins to run out of gas, staggering to a stop just as the frustrated cop catches up and gives him a shove from behind. Faceplant.
The Perfesser says housing will slow gently and not interfere with 3.5 percent economic growth this year and next. The same guy who intends 5 percent Fed funds, meaning 8 percent prime, 8 percent-plus HELOCS, 9 percent construction money, ARMs to 7.5 percent-plus.
Paul McCulley, bond-market-giant PIMCO’s Fed-watcher, wrote last week that “Weakness in residential property activity self-feeds” and that we are in for a cyclical “wicked turn” in the economy, and “unconventional property-market weakness.”
The Perfesser has lost the class, and he’s only taught one.
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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