Rate Watch #741 Rates Down. Correct Metrics. Fiscal Failure.

Rate Watch #741 Rates Down. Correct Metrics. Fiscal Failure.

September 24, 2010
by Dick Lepre
[email protected]
www.loanmine.com

Product	Rate	Points	Est. APR*
CONFORMING LOAN PRODUCTS (Loans less than $417,000)
30 Year Fixed conforming
	4.125%	1.00	4.28%
	4.375%	0.00	4.45%
15 Year Fixed Conforming
	3.75%	1.00	4.01%
	3.75%	0.00	3.86%
High-balance CONFORMING LOAN PRODUCTS (Loans greater than $417,000 and less than Hi-Balance amount for your county)
30 Yr Fixed Hi-Balance
	4.625%	0	4.70%
	4.375%	1.0	4.51%
15 Yr Fixed Hi-Balance	4.25%	0	4.38%
	3.875%	1	4.15%

* conforming loan limits for 2010 are:

1 unit $417,000
2 units $533,850
3 units $645,300
4 units $801,950

Note that the above table now means something different than it used to. "Conforming" now means "traditional conforming" (<$417,000 for SFR is the new jumbo-conforming which depends on county.) You can find the new High-Balance Conforming limit for your county here. That page says "FHA" but those amounts also pertain to FNMA & FHLMC.

You must not read these as quotes because the rate and price which you will get depends on your precise situation and is affected by, but not limited to, the following factors: credit scores, property type, occupancy, income, value of property, length of time of the rate lock, whether of not values in your area are declining, and cash out (if refinancing).

To apply on-line go to: http://www.loanmine.com/LoanApplication.  Make sure that your pop-up stopper is disabled.

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II) Fundamentals

Forget fundamentals. No one looks at the correct ones any more. We are in serious trouble when we are getting advice from Jon Stewart, Lady Gaga and Steve Colbert but what concerned me more this week was NBER and the Conference Board.

LEI was +0.3%. LEI is so out of touch because it emphasizes manufacturing. This data was really useful 75 years ago. Initial Jobless Claims were 465,000 last week - above consensus and previous. Sales of previously owned homes were up 7.6% in August. U.S. housing starts increased 10.5% in August as multifamily construction jumped 32%.

 

III) The Technicals

The daily is bullish, the weekly is bearish, and the monthly is bullish.

For those who are not longtime readers, the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

Let's make this simple: we are in a massive economic/fiscal crisis and our leaders are clueless. Other than that things are just fine.

V) Huh?

Let me start my saying that what follows below is critical of the job the federal government is doing regarding the economy. This is not a criticism directed at the present administration. I do not believe that this administration is doing a worse or better job than the previous and I do not believe that replacing a lot of people in Congress will make a difference in the outcome regarding fiscal responsibility. We spend a lot of money on government and on government regulation of the economy. The government borrowed $1 trillion and tried to stimulate the economy by increasing government spending but the stimulus did not last. We deserve an understanding of why this failed.

NBER (The National Bureau of Economic Research, the official arbiter of the start and end dates of a recession) says that the recession ended in June 2009. It is a good thing that these folks are not fire lookouts. Government spending with borrowed money caused a blip in GDP in 2009. That stimulus failed to achieve the goal which was to prime the pump and get consumers spending again. I am not arguing against the statement that technically the recession ended. Pointing it out now is the equivalent of a doctor going into the ER to tell a patient who has taken three rounds to the chest that the good news is his test results are just back and that the cold he had six months ago was gone five months ago.

According to Consumer Metrics, discretionary consumer spending started contracting in January 2010 and, while it is still contracting, the rate of contraction is no longer getting worse. As Rick Davis puts it "We founded the Consumer Metrics Institute precisely because we felt that the economic bureaucrats in Washington were out of touch with the economy that most of us live in. They remind us of those patients sitting in wheelchairs in the "memory impaired" wards at nursing homes: with crystal clear recall of 1937 but no clue about what they ate for breakfast. Thank you, NBER, for making our case."

The common thread I see is that institutions such as NBER and the Conference Board use outdated methods of measuring the economy. Data such as Industrial Production, Capacity Utilization are not as important as they were in 1935. The Conference Board's Leading Economic Indicators suffers not merely from being manufacturing heavy but from the assumption that M2 (money supply) should be given the more weight than any other indicator. While that may be true most of the time, it may not be true at present. Money supply is not so important if banks are not willing to lend and consumers are not willing to borrow and/or spend. If expansion of M2 is not stimulating GDP then LEI is not, at present, a reliable leading indicator. I am not suggesting that the Conference Board change the weights. I am saying that people looking at their data must realize that it is a less reliable forecast of GDP than it has been at most times in the past.

Furthermore, the Conference Board's method are outdated. Consumer Metrics measures (in Rick Davis' words) "a particularly volatile subset of "C" (consumer spending) in order to gain signal strength and lead time." A ramp up in manufacturing is a reaction to the perception that consumer spending is going to increase. Inventory build up occurred even as the sensitive part of consumer spending measured by Consumer Metrics was declining. We are going to see a hit to GDP as inventories are corrected to reflect decreased consumer demand. "Build it and they will come" may have been a thesis for a good movie about baseball but it is not the basis for economic sanity.

We cannot run businesses correctly and we can not have government policy effective if we persist in using outdated metrics. This is why I have been persistent in directing attention to Consumer Metrics. This really is a new and modern metric.

Somehow, this week the FOMC seemed to be mildly cognizant that the data is ugly and neither GDP nor jobs are showing any significant growth. The Fed is contemplating more quantitative easing (increase in money supply) when that is not needed. Banks are sitting on piles of money. What is wrong is that the consumer has lost confidence. The consumer is worried about keeping his job and how he is going to pay his debts. The fiscal irresponsibility of government on all levels have left consumers dubious that politicians can do anything right. The Fed may be making the same mistake as the Conference Board in believing that increasing M2 will increase GDP. The flaw is that this assumes a constant value for the consumer's reaction to expanded money supply.

Two things have to happen: 1) the consumer has to regain confidence. The consumer drives the economy. The stimulus which we had last year was misdirected. It did not lead to capital improvements and job creation. The consumer foiled the efforts further by saving instead of spending the extended tax cuts. 2) the government must redirect fiscal policy in three manners a) dramatically reduce Federal government spending. There are entire Departments which we can do without because cannot afford them. b) create meaningful tax incentives to create the jobs of the future and stop cursing the process with notions such as "green jobs." c) pass a fiscal sustainability act such as I have been suggesting all year.

Government is a massive fiscal failure. In regard to our mortgage industry it mandated disaster by demanding that FNMA and FHLMC do subprime and failed to regulate (despite having 115 government regulatory agencies for financial services) private label subprime and Option ARMs. Blaming the mortgage mess on having too few regulators is, in my opinion, laughable. There are too many regulatory entities to do the job correctly not too few. I believe 100% that the banking industry needs regulation. It simply needs to be done correctly. Expanding bureaucracy rewards it for its incompetence.

Monetary economist Steve Hanke blames the Fed's easy money policy for creating the crisis of 2007-2008. While Steve is one of the best monetary economists on the planet, I think that the situation is a bit more complicated. The Fed did not create the FNMA/FHLMC disaster and it was not simply low interest rates which created the housing bubble. It was government mandated bad lending. I agree that low rates helped create bad commercial loans and enabled Option ARMs but I do not believe that they created the subprime mess. If the Fed was going to pursue accommodative monetary policy it would have been a good idea for regulators to understand the consequences and prevent, for example, Option ARMs. The lesson for the future should be that accommodative monetary policy necessitates increased vigilance.

When I talk to some people who have been around for a long time and seen financial crises come and go many of them say something akin to, "Don't worry we have been here before where things looked hopeless and we somehow got out." I am always reminded of the end of the movie "Butch Cassidy and the Sundance Kid." It is on YouTube here. For those of you too young to know or too old to remember the two main characters have always gotten out of tight spots and in the last scene they leave their cave, guns drawn while 100 guys with rifles are about to greet them.

If we somehow think that Keynesian spending or tax increases are going to solve the problem than we are headed for a disaster which has only one solution: mega-quantitative easing, seriously lower dollar value and very serious inflation and high interest rates.

Fiscal disaster is going to occur. For now get yourself a low mortgage rate because investors are so scared that they are mindlessly buying Treasury debt on which they may well take serious losses.

Do not have the illusion that replacing the current bunch of people in Congress will accomplish anything. We need to take part of fiscal policy away from this institution.

It is not the case that the government's intentions are wrong. What is wrong is persisting in using outdated metrics and persisting in believing Keynesian theory. It simply is not 1935 any more.

 

If you have something to add to this discussion please post a comment on the blog.

 

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Dick Lepre
RPM - SF
1400 Van Ness Avenue
San Francisco, CA 94109
DRE License # 01143973
[email protected]
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 244-9383
(866) 488-2051 fax

California Department of Real Estate - real estate broker license #01201643

Comments

[BobW.]

"People do what works" is an important rule in my life. I see much reference to "consumer confidence." I, for one, am quite confident. I am waiting for my investments to get back on track before I start spending big. It is the consumers equivelant to buy low, sell high. If I spend now, I am selling low. Waiting is what works, so that is what people are doing.