In this housing market any plan is a good plan right? Well maybe. The proverbial "Let's throw money at the problem" may not work here.
Let me start by focusing on what I do like about the Obama Mortgage Bailout Plan. Yes I added a work. The national economist's vary greatly on the number of homes this plan might save or how many homeowners this plan might help. As to not fuss about the size of the plan or benefit, I thought we'd look at the merrits of it soley by each section.
Obama's focus on those individuals who are and have continued to make their mortgage payments is important and it shows that in part, he get's it.
There is a a "Shared Effort to Reduce Monthly Payments" section which allows for a homeowner with current housing payments adding up to 43 percent of his or her monthly income to be reduced to 38 percent. The existing lender (in many cases this would include Fannie Mae or Freddie Mac) would first be responsible for bringing down interest rates so that the borrower’s monthly mortgage payment is no more than 38 percent of his or her income. The challenge here is the large number of Alt-A and Subprime mortgages which have private ownership who many not be as "interested" in reducing their rate of return. Obama's initiative would match further reductions in interest payments dollar-for-dollar with the lender to bring that ratio down to 31 percent. If that borrower had a $220,000 mortgage, that could mean a reduction in monthly payments by more than $400. That reduction won't be in the form of principal reductions more than interest reductions to the end investor. This gracious "temporary" lower interest rate must be kept in place for five years, after which it would gradually be stepped up to the conforming loan rate in place at the time of the modification. The lenders will also be able to bring down monthly payments by reducing the principal owed on the mortgage, with Treasury sharing in the costs.
There a "Pay for Success” Incentives to Servicers: Servicers will receive an up-front fee of $1,000 for each eligible modification meeting guidelines established under this initiative. They will also receive “pay for success” fees -- awarded monthly as long as the borrower stays current on the loan -- of up to $1,000 each year for three years. This is at present servicing levels much more than they recieve today for the loan unless the firm refinances it.
The next one if my favorite and I'll be sure to ask my mortgage servicer about it: The "Incentives to Help Borrowers Stay Current" provision. Here the plan is to provide an extra incentive for borrowers to keep paying on time, the initiative will provide a monthly balance reduction payment that goes straight toward reducing the principal balance of the mortgage loan. As long as a borrower stays current on his or her loan, he or she can get up to $1,000 each year for five years.
This one will surely ake at the mortgage brokers turned loan modification expert, the "Reaching Borrowers Early" section. Here, the goal is to give lenders a little more incentive keep lenders focused on reaching borrowers who are trying their best to stay current on their mortgages, an incentive payment of $500 will be paid to servicers, and an incentive payment of $1,500 will be paid to mortgage holders, if they modify at-risk loans before the borrower falls behind. So homeowners not yet behind but deemed "at- risk"will be prompted to modify and "get there's".
My biggest challenge and the lone reason this Mortgage Plan would have not received my vote (had I one to give) is what I am calling the "rewrite" provision. Here local judges can modify home mortgages without permission of the lender. While this requires congressional approval, the "promoted" and continued judicial interference into existing market-making policies serviously concerns me. How much longer will investors participate in next generation investments deemed "fixed" and "secure" if those investments can be rewritten at the whim of a judge?
Sunday, February 22, 2009
Wednesday, February 4, 2009
Back of the Mountain
I've been buried by mountain of things at work. Much of the economic drivers have taken a backseat to Macro-Economic events. If the President's decision to limit bank executive pay comes to fruition, this could be a VERY interesting development over the next several years. Always follow the money....
This week's economic calendar:
Release Date & Time
Economic Indicator
Consensus Estimate
My Analysis
Mon. Feb. 2, 8:30 a.m. ET
Dec. Personal Income
Spending
PCE Index
-0.4% vs. last -0.2%
-0.9% vs. last -0.6%
Unchanged
Further erosion in the employment sector has taken a toll on personal incomes and the pace of spending. The personal consumption expenditure index, one of the Fed’s favorite measures of inflation pressure at the consumer level, is expected to remain benign. This data is already priced into the fixed income market.
Mon. Feb. 2, 10:00 a.m. ET
Jan. Institute of Supply Mgmt.
32.6 vs. last 32.9
Market participants are well aware that the manufacturing sector is under pressure as last week’s durable goods orders report showed demand has contracted for five consecutive months while inventories continue to rise. This data drew nothing more than a passing glance from investors.
Tue. Feb. 3
Empty
Wed. Feb. 4, 10:00 a.m. ET
Jan. Institute of Supply Mgmt.
Service Index
39.0 vs. last 40.1
This broad barometer of economic activity is expected to show business conditions remained slack in January. Should the actual number fall close to the consensus estimate (a reasonable expectation) the impact of this data on the current level of mortgage interest rates will be negligible.
Thurs. Feb. 5, 8:30 a.m. ET
Initial jobless claims for the week ended 1/31
Down 5,000
Further erosion in the employment sector is broadly anticipated by investors and has already been deeply priced into the current market. Today’s figures will likely draw little more than a passing glance from market participants.
Thurs. Feb. 5, 8:30 a.m. ET
1st estimate Q1 Productivity
Unit Cost
+1.1 vs. last +1.3
+2.9 vs. last +2.8
Declining productivity and rising unit labor cost will likely be slightly unsettling for fixed income investors. Probably not unsettling enough to cause homeowner mortgage rates to move notably higher but enough to make it difficult for rates to make much headway in any effort to move lower.
Thurs. Feb. 5, 10:00 a.m. ET
Dec. Factory Orders
-3.0% vs. last -4.6%
This old stale bit of macro-economic news will likely do nothing more than take up space on this week’s calendar.
Fri. Feb. 6, 8:30 a.m. ET
Jan. Nonfarm Payrolls
Jobless Rate
Average hourly earnings
-524,000
7.5% vs. last 7.2%
+0.2% vs. last +0.3%
Bond investors are keenly aware the labor market has fallen-off-of-a-cliff. A really nasty series of numbers have already been priced into the market here -- which means this report will likely have little, if any meaningful impact on the trend trajectory of interest rates if the actual numbers reasonably approximate the consensus estimate.
This week's economic calendar:
Release Date & Time
Economic Indicator
Consensus Estimate
My Analysis
Mon. Feb. 2, 8:30 a.m. ET
Dec. Personal Income
Spending
PCE Index
-0.4% vs. last -0.2%
-0.9% vs. last -0.6%
Unchanged
Further erosion in the employment sector has taken a toll on personal incomes and the pace of spending. The personal consumption expenditure index, one of the Fed’s favorite measures of inflation pressure at the consumer level, is expected to remain benign. This data is already priced into the fixed income market.
Mon. Feb. 2, 10:00 a.m. ET
Jan. Institute of Supply Mgmt.
32.6 vs. last 32.9
Market participants are well aware that the manufacturing sector is under pressure as last week’s durable goods orders report showed demand has contracted for five consecutive months while inventories continue to rise. This data drew nothing more than a passing glance from investors.
Tue. Feb. 3
Empty
Wed. Feb. 4, 10:00 a.m. ET
Jan. Institute of Supply Mgmt.
Service Index
39.0 vs. last 40.1
This broad barometer of economic activity is expected to show business conditions remained slack in January. Should the actual number fall close to the consensus estimate (a reasonable expectation) the impact of this data on the current level of mortgage interest rates will be negligible.
Thurs. Feb. 5, 8:30 a.m. ET
Initial jobless claims for the week ended 1/31
Down 5,000
Further erosion in the employment sector is broadly anticipated by investors and has already been deeply priced into the current market. Today’s figures will likely draw little more than a passing glance from market participants.
Thurs. Feb. 5, 8:30 a.m. ET
1st estimate Q1 Productivity
Unit Cost
+1.1 vs. last +1.3
+2.9 vs. last +2.8
Declining productivity and rising unit labor cost will likely be slightly unsettling for fixed income investors. Probably not unsettling enough to cause homeowner mortgage rates to move notably higher but enough to make it difficult for rates to make much headway in any effort to move lower.
Thurs. Feb. 5, 10:00 a.m. ET
Dec. Factory Orders
-3.0% vs. last -4.6%
This old stale bit of macro-economic news will likely do nothing more than take up space on this week’s calendar.
Fri. Feb. 6, 8:30 a.m. ET
Jan. Nonfarm Payrolls
Jobless Rate
Average hourly earnings
-524,000
7.5% vs. last 7.2%
+0.2% vs. last +0.3%
Bond investors are keenly aware the labor market has fallen-off-of-a-cliff. A really nasty series of numbers have already been priced into the market here -- which means this report will likely have little, if any meaningful impact on the trend trajectory of interest rates if the actual numbers reasonably approximate the consensus estimate.
Tuesday, January 6, 2009
My Crystal Ball Says 2009' .......
will be rockey and more of the same for banking, finance, and the housing industry. The mortgage industry (which this report will focus mostly on) is realing. New Home Sales appear to be heading south, and that's saying something given the current pace. The National Assocation of Realtors says pending new home sales fell to the lowest level on record in November, falling another 4% to a 82.3 index. Please don't ask me how to disect the index, these are their report(s) not mine. Either way, as in many future report(s) this doesn't bode well for 2009'.
That said, there is some good news which was reported today, the Fed actually made their first purchase of mortgage-backed securities this morning. The total amount of the purchase will not be known until it is announced on Thursday, January 8th. The Fed intends to keep a running tally of its aggregate purchases and will update its figure every Thursday until they’ve spent the allotted $500 billion. It is worth noting that the money the Fed will spend to support the mortgage and housing market is not attached to any debt – the Fed just printed it up.
While this capital solves the near-term problem of providing attractive financing to stimulate home buying – it comes with a price that will be paid later – in the form of higher inflation levels. That is a concern for a different day.
The Fed’s mortgage-backed securities purchases could not have come at a better time. Sure interest rates are at historic low's. I know you have heard that before, but trust me they are!!! Treasury prices have “taken-it-on-the-chin” since Friday as a growing number of investors are pacing the floor and wringing their hands over the massive $1.5 to $2.0 trillion worth of debt Uncle Sam plans to issue to support the financial markets and the economy in general this year.
The Obama administration have made it abundantly clear that the risk of doing too little to re-fire the country’s economic engines poses a greater risk to our collective financial well being than the risk associated with doing too much.
Outside of today's pending home sales report, the central feature on this week’s economic calendar will be Friday’s December nonfarm payroll report. The market has already priced in the expected loss of 485,000 jobs together with the likelihood the national jobless rate ratcheted up to 6.9% from last month’s 6.7% level. Chances are the actual numbers will match or fall within shouting distance of the consensus estimate values. If so, the report’s impact on the trend trajectory of mortgage interest rates will not be large, if it registers at all. In the off-chance the headline December payroll shows a job loss of 470,000 or less and/or the national jobless rates posts a reading of 6.7% or less look for mortgage interest rates to edge fractionally higher. Here's to a brighter 2009'!
Economic Releases
Release Date & Time
Economic Indicator
Consensus Estimate
Analysis
Mon. Jan. 5,
Treasury auction announcement
The Treasury Department will announce the dollar size of the 3- and 10-year note auctions scheduled for Wednesday and Thursday respectively. Big numbers here will likely put some modest upward pressure on mortgage interest rates.
Tue. Jan. 6, 10:00 a.m. ET
Nov. Factory Orders
-2.5% vs. last -5.1%
The erosion in November factory orders will likely go largely unnoticed today. Look for this data to have little, if any direct impact on the trend trajectory of mortgage interest rates.
Tue. Jan. 6, 10:00 a.m. ET
Dec. Institute of Supply Mgmt.
Service Index
37.0 vs. last 37.3
Fixed Income MBS Traders have already priced-in expectations that this index of activity in the service sector slumped to an all-time record low last month. If the consensus estimate proves accurate, the reaction in the mortgage market will likely be limited. In the highly unlikely event this index posts a reading of 38.0 or higher -- look for mortgage interest rates to move fractionally higher as well.
Wed. Jan. 7, 1:00 p.m. ET
Treasury auctions 3-year notes
Most analysts believe this offering and tomorrow’s 10-year note offering will be an excellent early-year gauge of global investors’ perception of risk. Strong demand for both offerings will tend to be supportive of steady to fractionally lower mortgage interest rates. If the yield on the 3-year note climbs above 1.165% and/or the 10-year note posts a yield higher than 2.430% on a closing basis look for mortgage interest rates to creep higher as well.
Thurs. Jan 8, 8:30 a.m. ET
Initial jobless claims for the week ended 1/3
+48,000
Further erosion in the employment sector is broadly anticipated by investors and has already been deeply priced into the current market. Today’s figures will likely draw little more than a passing glance from market participants.
Thurs. Jan. 8, 1:00 p.m. ET
Treasury auctions
10-year notes
Should the 10-year note posts a yield higher than 2.430% -- look for mortgage interest rates to creep higher as well.
Fri. Jan. 9, 8:30 a.m. ET
Dec. Nonfarm Payroll
Jobless Rate
Avg. Hourly Earnings
-500,000
7.0% vs. last 6.7%
+0.2% vs. last +0.4%
This data set will only be a threat to the prospects of steady to fractionally lower mortgage interest rates if the headline number posts a job loss of 470,000 or less and/or if the national jobless rate posts a reading of 6.7% or less. The probabilities are very low that one or both of these conditions will occur.
Fri. Jan. 9, 10:00 a.m. ET
Nov. Wholesale Inventory
-0.8% vs. last -1.1%
There is little doubt that slumping demand has taken a heavy toll on the wholesale inventories – so this report will only measure the degree of weakness. This old, stale bit of macro-economic news will likely draw nothing more than a disinterested glance from mortgage invertors today.
That said, there is some good news which was reported today, the Fed actually made their first purchase of mortgage-backed securities this morning. The total amount of the purchase will not be known until it is announced on Thursday, January 8th. The Fed intends to keep a running tally of its aggregate purchases and will update its figure every Thursday until they’ve spent the allotted $500 billion. It is worth noting that the money the Fed will spend to support the mortgage and housing market is not attached to any debt – the Fed just printed it up.
While this capital solves the near-term problem of providing attractive financing to stimulate home buying – it comes with a price that will be paid later – in the form of higher inflation levels. That is a concern for a different day.
The Fed’s mortgage-backed securities purchases could not have come at a better time. Sure interest rates are at historic low's. I know you have heard that before, but trust me they are!!! Treasury prices have “taken-it-on-the-chin” since Friday as a growing number of investors are pacing the floor and wringing their hands over the massive $1.5 to $2.0 trillion worth of debt Uncle Sam plans to issue to support the financial markets and the economy in general this year.
The Obama administration have made it abundantly clear that the risk of doing too little to re-fire the country’s economic engines poses a greater risk to our collective financial well being than the risk associated with doing too much.
Outside of today's pending home sales report, the central feature on this week’s economic calendar will be Friday’s December nonfarm payroll report. The market has already priced in the expected loss of 485,000 jobs together with the likelihood the national jobless rate ratcheted up to 6.9% from last month’s 6.7% level. Chances are the actual numbers will match or fall within shouting distance of the consensus estimate values. If so, the report’s impact on the trend trajectory of mortgage interest rates will not be large, if it registers at all. In the off-chance the headline December payroll shows a job loss of 470,000 or less and/or the national jobless rates posts a reading of 6.7% or less look for mortgage interest rates to edge fractionally higher. Here's to a brighter 2009'!
Economic Releases
Release Date & Time
Economic Indicator
Consensus Estimate
Analysis
Mon. Jan. 5,
Treasury auction announcement
The Treasury Department will announce the dollar size of the 3- and 10-year note auctions scheduled for Wednesday and Thursday respectively. Big numbers here will likely put some modest upward pressure on mortgage interest rates.
Tue. Jan. 6, 10:00 a.m. ET
Nov. Factory Orders
-2.5% vs. last -5.1%
The erosion in November factory orders will likely go largely unnoticed today. Look for this data to have little, if any direct impact on the trend trajectory of mortgage interest rates.
Tue. Jan. 6, 10:00 a.m. ET
Dec. Institute of Supply Mgmt.
Service Index
37.0 vs. last 37.3
Fixed Income MBS Traders have already priced-in expectations that this index of activity in the service sector slumped to an all-time record low last month. If the consensus estimate proves accurate, the reaction in the mortgage market will likely be limited. In the highly unlikely event this index posts a reading of 38.0 or higher -- look for mortgage interest rates to move fractionally higher as well.
Wed. Jan. 7, 1:00 p.m. ET
Treasury auctions 3-year notes
Most analysts believe this offering and tomorrow’s 10-year note offering will be an excellent early-year gauge of global investors’ perception of risk. Strong demand for both offerings will tend to be supportive of steady to fractionally lower mortgage interest rates. If the yield on the 3-year note climbs above 1.165% and/or the 10-year note posts a yield higher than 2.430% on a closing basis look for mortgage interest rates to creep higher as well.
Thurs. Jan 8, 8:30 a.m. ET
Initial jobless claims for the week ended 1/3
+48,000
Further erosion in the employment sector is broadly anticipated by investors and has already been deeply priced into the current market. Today’s figures will likely draw little more than a passing glance from market participants.
Thurs. Jan. 8, 1:00 p.m. ET
Treasury auctions
10-year notes
Should the 10-year note posts a yield higher than 2.430% -- look for mortgage interest rates to creep higher as well.
Fri. Jan. 9, 8:30 a.m. ET
Dec. Nonfarm Payroll
Jobless Rate
Avg. Hourly Earnings
-500,000
7.0% vs. last 6.7%
+0.2% vs. last +0.4%
This data set will only be a threat to the prospects of steady to fractionally lower mortgage interest rates if the headline number posts a job loss of 470,000 or less and/or if the national jobless rate posts a reading of 6.7% or less. The probabilities are very low that one or both of these conditions will occur.
Fri. Jan. 9, 10:00 a.m. ET
Nov. Wholesale Inventory
-0.8% vs. last -1.1%
There is little doubt that slumping demand has taken a heavy toll on the wholesale inventories – so this report will only measure the degree of weakness. This old, stale bit of macro-economic news will likely draw nothing more than a disinterested glance from mortgage invertors today.
Tuesday, December 23, 2008
Holiday Peak
I hope you and your family finds peace, solice and safe travels over the next 10 days. 2009 looks to be an exciting challenge to just about every industry in the US.
Release Date & Time
Economic Indicator
Consensus Estimate
Analysis
Mon. Dec. 22, 1:00 p.m. ET
Treasury auctions $38 bil. of
2-year notes
Market participants’ desire for maximum asset protection continues to trump their desire for a meaningful return on invested capital as Uncle Sam comes to the market place looking to borrow a record setting $38 billion in the form of 2-year notes. This event will was supportive of steady mortgage interest rates.
Tue. Dec. 23, 8:30 a.m. ET
Final revision Q3
Gross Domestic Product
-0.5% vs. last -0.5%
Look for this data set to do nothing more than take up space on this week’s economic calendar as far as mortgage investors are concerned.
Tue. Dec. 23, 10:00 a.m. ET
Nov. Existing Home Sales
Down 1.6%
Mortgage investors have already “priced-in” expectations for a dismal November existing home sales figure. A reported value that falls anywhere near the consensus estimate will likely have little, if any impact on the trend trajectory of mortgage interest rates today.
Tue. Dec. 23, 10:00 a.m. ET
Nov. New Home Sales
Down 3.0%
Rising unemployment, stock market losses, tight credit underwriting standards and competition from a huge stock of existing homes for sale probably took a toll on the pace of new home sales last month. A number that lands to close to the consensus estimate will likely draw nothing more than a passing glance from mortgage investors. In the unlikely case new home sales post a decline of 2.5% or less – look for “surprised” investors to push mortgage interest rates fractionally higher.
Tues. Dec. 23, 1:00 p.m. ET
Treasury auctions $28 bil. of
5-year notes
Economic uncertainties will likely be strong enough to create decent support for this offering. If so, this event will tend to be supportive of steady mortgage interest rates. A poorly bid 5-year note auction will almost certainly make it difficult for mortgage interest rates to move notably lower today.
Wed. Dec. 24, 8:30 a.m. ET
Initial jobless claims for the week ended 12/20
-4,000
The modest expected decline in the initial jobless claims figure will likely draw nothing more than a passing glance from mortgage investors today.
Wed. Dec. 24, 8:30 a.m. ET
Nov. Personal Income
Spending
Core PCE index
0.0% vs. last +0.3%
-0.7% vs. last -0.1%
0.0% vs. last 0.0%
The most important component of this data series is the core personal consumption expenditure index, the Fed’s favorite measure of inflation pressure at the consumer level. The expected unchanged reading for core PCE will tend to be supportive of steady to fractionally lower mortgage interest rates.
Wed. Dec. 24, 8:30 a.m. ET
Nov. Durable Goods Orders
-3.0% vs. last -6.9%
The modest improvement in this forward looking measure of manufacturing activity will likely be completely overshadowed by the announced month-long plant closing for most of the auto industry. This report will likely have little, if any impact on the direction of mortgage interest rates today.
Wed. Dec. 24, 2:00 p.m. ET
The mortgage market closes early for the Xmas Holiday
Thurs. Dec. 25,
Marry Christmas
Fri. Dec. 26, 2:00 p.m. ET
The CBOT will close early.
Release Date & Time
Economic Indicator
Consensus Estimate
Analysis
Mon. Dec. 22, 1:00 p.m. ET
Treasury auctions $38 bil. of
2-year notes
Market participants’ desire for maximum asset protection continues to trump their desire for a meaningful return on invested capital as Uncle Sam comes to the market place looking to borrow a record setting $38 billion in the form of 2-year notes. This event will was supportive of steady mortgage interest rates.
Tue. Dec. 23, 8:30 a.m. ET
Final revision Q3
Gross Domestic Product
-0.5% vs. last -0.5%
Look for this data set to do nothing more than take up space on this week’s economic calendar as far as mortgage investors are concerned.
Tue. Dec. 23, 10:00 a.m. ET
Nov. Existing Home Sales
Down 1.6%
Mortgage investors have already “priced-in” expectations for a dismal November existing home sales figure. A reported value that falls anywhere near the consensus estimate will likely have little, if any impact on the trend trajectory of mortgage interest rates today.
Tue. Dec. 23, 10:00 a.m. ET
Nov. New Home Sales
Down 3.0%
Rising unemployment, stock market losses, tight credit underwriting standards and competition from a huge stock of existing homes for sale probably took a toll on the pace of new home sales last month. A number that lands to close to the consensus estimate will likely draw nothing more than a passing glance from mortgage investors. In the unlikely case new home sales post a decline of 2.5% or less – look for “surprised” investors to push mortgage interest rates fractionally higher.
Tues. Dec. 23, 1:00 p.m. ET
Treasury auctions $28 bil. of
5-year notes
Economic uncertainties will likely be strong enough to create decent support for this offering. If so, this event will tend to be supportive of steady mortgage interest rates. A poorly bid 5-year note auction will almost certainly make it difficult for mortgage interest rates to move notably lower today.
Wed. Dec. 24, 8:30 a.m. ET
Initial jobless claims for the week ended 12/20
-4,000
The modest expected decline in the initial jobless claims figure will likely draw nothing more than a passing glance from mortgage investors today.
Wed. Dec. 24, 8:30 a.m. ET
Nov. Personal Income
Spending
Core PCE index
0.0% vs. last +0.3%
-0.7% vs. last -0.1%
0.0% vs. last 0.0%
The most important component of this data series is the core personal consumption expenditure index, the Fed’s favorite measure of inflation pressure at the consumer level. The expected unchanged reading for core PCE will tend to be supportive of steady to fractionally lower mortgage interest rates.
Wed. Dec. 24, 8:30 a.m. ET
Nov. Durable Goods Orders
-3.0% vs. last -6.9%
The modest improvement in this forward looking measure of manufacturing activity will likely be completely overshadowed by the announced month-long plant closing for most of the auto industry. This report will likely have little, if any impact on the direction of mortgage interest rates today.
Wed. Dec. 24, 2:00 p.m. ET
The mortgage market closes early for the Xmas Holiday
Thurs. Dec. 25,
Marry Christmas
Fri. Dec. 26, 2:00 p.m. ET
The CBOT will close early.
Thursday, December 11, 2008
US Financial Crisis Circa 2007 - 2010
Did my title grab your attention? I changed it 5 times in an attempt to properly convey my thoughts regarding this Blog.
Last night one of my partners' called me on his way home and during our discussion he stated that it was his opinion the US was in the bottom of it’s current "recession cycle". He has good reason to believe such a trend as we are having one of our best months year to date. But one month (good or bad) doesn't make a Quarter and One Quarter (good or bad) doesn't make a year. While I hastily supported his comment over the phone, selfishly because of statements I had made earlier this year regarding the timing of our rebound, it nonetheless got me thinking.
This morning I started to do a little research on where our country is today, reviewed how we got here and how exactly our government has attempted to fight this present economic slowdown. Time and time again, my research would defer to a lengthy recession which started in the 80’s and in Japan. While our country’s economic infrastructure is quite a bit different I concluded 7 similarities that I would like to share. Additionally, how their government responded is eerily similar to how the US’s.
In Japan mid to late 1980s, you found excess liquidity in the financial system. This caused an asset and stock market bubble. People with spare cash bought assets and shares causing them to rise (in the US this was paid through credit cards and mortgages. In the last 1987, the Japanese monetary authorities worried about inflation doubled interest rates. As the economy stalled, they were then slow to reduce them.
Loan defaults increased because Japanese banks had made a series of bad lending decisions. Sound familiar?
This caused a fall in house and share prices. Hmmm….
Higher interest rates ensued and slumping asset values caused an increase in loan defaults.
The Japanese economic miracle was based on a strong degree of government intervention. See Obama’s Great Works Plan.
When the crisis came, banks were encouraged to continue lending to firms, even if on verge of bankruptcy. In other words, the decision to bailout declining / inefficient firms masked the problem but didn't deal with the underlying issues.
There was a failure to acknowledge the true extent of the problem, hoping asset prices would rebound. Check your 401k value recently?
Inflation expectations fell to negative. Deflation made normal demand side policies ineffective. See US backs bonds at 0% yield.
The Japanese government eventually cut interest rates to 0%. As mentioned above, they increased government spending to try and increase aggregate demand. Unlike the US, there was well documented reluctance to increase money supply because even though Japan had deflation, they held an unwarranted fear of inflation. Here in the US, do you know anyone who would be interested in buying residential mortgages with negative HPA values a 8-15% annually? It’s almost as bad as car loans where you know you are going to lose value month over month on the asset.
Your history lesson for today is that the economic consequences of Japan's crisis were the following:
Longest Bear Market in History (10 years)
Long Period of stagnant Growth
Significant rise in Unemployment. Japan’s unemployment was almost unheard of from the post war period.
Rise in inequality. Issues such as homelessness have become a real problem.
National Debt rose to 180% of GDP.
These findings provided above will not be the first to declare that the systemic risks associated with the current path in which our country’s government decisions to address our problems will do more harm than good. When our government made that fatal decision that certain companies were too large to fail, capitalism (as this country is famous for) died. There are deep rooted discussions which I will save for another time regarding our country's softness as it relates to "Everyone being a winner" and the changing (liberal) attitues within this country.
In closing I am now under the impression that our economic woes will continue throughout all of 2009. Should some of this country's fiscal policies not change there is a very good chance we fall straight into a depression. This is the first time I have the D word and am afraid you may see it in future posts.
This Week’s Remain Economic Figures
Fri. Dec. 12, 8:30 a.m. ET
Nov. Producer Price Index
Core Rate
-2.0% vs. last -2.8%
+0.1% vs. last +0.4%
Falling food and energy prices will continue to limit inflation pressure at the producer level. The notable drop in the core rate (a value that excludes the more volatile food and energy components) will be welcome news for most investors. Look for this data to be supportive of steady mortgage interest rates.
Fri. Dec. 12, 8:30 a.m. ET
Nov. Retail Sales
Ex. Auto
-1.9% vs. last -2.8%
-1.7% vs. last -2.2%
No one will be surprised to see a sharp drop in retail sales as consumers are stressed by meltdown in the labor sector. If the consensus estimate proves accurate, investors will likely consider this data a positive for the prospects of steady to perhaps fractionally lower mortgage interest rates.
Last night one of my partners' called me on his way home and during our discussion he stated that it was his opinion the US was in the bottom of it’s current "recession cycle". He has good reason to believe such a trend as we are having one of our best months year to date. But one month (good or bad) doesn't make a Quarter and One Quarter (good or bad) doesn't make a year. While I hastily supported his comment over the phone, selfishly because of statements I had made earlier this year regarding the timing of our rebound, it nonetheless got me thinking.
This morning I started to do a little research on where our country is today, reviewed how we got here and how exactly our government has attempted to fight this present economic slowdown. Time and time again, my research would defer to a lengthy recession which started in the 80’s and in Japan. While our country’s economic infrastructure is quite a bit different I concluded 7 similarities that I would like to share. Additionally, how their government responded is eerily similar to how the US’s.
In Japan mid to late 1980s, you found excess liquidity in the financial system. This caused an asset and stock market bubble. People with spare cash bought assets and shares causing them to rise (in the US this was paid through credit cards and mortgages. In the last 1987, the Japanese monetary authorities worried about inflation doubled interest rates. As the economy stalled, they were then slow to reduce them.
Loan defaults increased because Japanese banks had made a series of bad lending decisions. Sound familiar?
This caused a fall in house and share prices. Hmmm….
Higher interest rates ensued and slumping asset values caused an increase in loan defaults.
The Japanese economic miracle was based on a strong degree of government intervention. See Obama’s Great Works Plan.
When the crisis came, banks were encouraged to continue lending to firms, even if on verge of bankruptcy. In other words, the decision to bailout declining / inefficient firms masked the problem but didn't deal with the underlying issues.
There was a failure to acknowledge the true extent of the problem, hoping asset prices would rebound. Check your 401k value recently?
Inflation expectations fell to negative. Deflation made normal demand side policies ineffective. See US backs bonds at 0% yield.
The Japanese government eventually cut interest rates to 0%. As mentioned above, they increased government spending to try and increase aggregate demand. Unlike the US, there was well documented reluctance to increase money supply because even though Japan had deflation, they held an unwarranted fear of inflation. Here in the US, do you know anyone who would be interested in buying residential mortgages with negative HPA values a 8-15% annually? It’s almost as bad as car loans where you know you are going to lose value month over month on the asset.
Your history lesson for today is that the economic consequences of Japan's crisis were the following:
Longest Bear Market in History (10 years)
Long Period of stagnant Growth
Significant rise in Unemployment. Japan’s unemployment was almost unheard of from the post war period.
Rise in inequality. Issues such as homelessness have become a real problem.
National Debt rose to 180% of GDP.
These findings provided above will not be the first to declare that the systemic risks associated with the current path in which our country’s government decisions to address our problems will do more harm than good. When our government made that fatal decision that certain companies were too large to fail, capitalism (as this country is famous for) died. There are deep rooted discussions which I will save for another time regarding our country's softness as it relates to "Everyone being a winner" and the changing (liberal) attitues within this country.
In closing I am now under the impression that our economic woes will continue throughout all of 2009. Should some of this country's fiscal policies not change there is a very good chance we fall straight into a depression. This is the first time I have the D word and am afraid you may see it in future posts.
This Week’s Remain Economic Figures
Fri. Dec. 12, 8:30 a.m. ET
Nov. Producer Price Index
Core Rate
-2.0% vs. last -2.8%
+0.1% vs. last +0.4%
Falling food and energy prices will continue to limit inflation pressure at the producer level. The notable drop in the core rate (a value that excludes the more volatile food and energy components) will be welcome news for most investors. Look for this data to be supportive of steady mortgage interest rates.
Fri. Dec. 12, 8:30 a.m. ET
Nov. Retail Sales
Ex. Auto
-1.9% vs. last -2.8%
-1.7% vs. last -2.2%
No one will be surprised to see a sharp drop in retail sales as consumers are stressed by meltdown in the labor sector. If the consensus estimate proves accurate, investors will likely consider this data a positive for the prospects of steady to perhaps fractionally lower mortgage interest rates.
Monday, November 24, 2008
Holiday Focused Week
The next 10 days are fairly busy on the economic front. I'll keep this fairly light.
The Economic Calendar for the week of Monday, November 24th through Monday, December 1st, 2008
Release Date & Time
Economic Indicator
Consensus Estimate
My Analysis
Mon. Nov. 24, 8:30 a.m. ET
Oct. Existing Home Sales -2.5%
Most investors expected sluggish economic growth and an unsettled labor market took a toll on the pace of existing home sales last month. They were right and mortgage fell rates today.
Mon. Nov. 24, 1:00 p.m. ET
Treasury auctions $36 bil. of
2-year notes
Most observers believe demand will be solid for this debt offering from Uncle Sam. If so, this event should prove to be supportive of steady to perhaps fractionally lower mortgage interest rates.
Tue. Nov. 25, 8:30 a.m. ET
2nd estimate Q3
Gross Domestic Product
-0.5% vs. last -0.3%
Previously released economic data strongly suggests economic activity cooled sharply during the quarter. A downward revision to the initial estimate will not likely surprise anyone – rendering this data toothless in terms of its impact on the direction of mortgage interest rates today.
Tue. Nov. 25, 10:00 a.m. ET
Nov. Consumer Confidence
38.0 vs. last 38.0
No one will be surprised to see that gloomy news from the economy, rising joblessness and plunging stock markets have all taken a toll on consumer confidence. This data will likely draw little more than a passing glance from mortgage investors.
Tue. Nov. 25, 1:00 p.m. ET
Treasury auctions $26 bil. of
5-year notes
The majority of analysts believe this offering will be well bid. If so, it will likely have little impact on the trend trajectory of mortgage interest rates. If analysts are proven to be overly optimistic (as I think they likely will be) the yield of these notes will rise -- which will cause mortgage interest rates to move higher as well
Wed. Nov. 26, 8:30 a.m. ET
Oct. Personal Income
Spending
Core PCE Index
+0.1% vs. last +0.2%
-0.9% vs. last -0.3%
0.0 vs. last +0.2%
If the consensus estimate proves accurate, incomes will post their smallest gain in three months while a sharp drop in spending is likely setting retailers up for the worst holiday season in six years. The decline in income and spending combined with the Fed’s favorite measure of inflation at the consumer level, the personal consumption expenditure index, showing that core inflation pressures are nowhere to be seen -- will all likely be viewed as a positive for the prospects of steady mortgage interest rates today.
Wed. Nov. 26, 8:30 a.m. ET
Initial jobless claims for the week ended 11/22
Down 7,000
The modest expected decline in the initial jobless claims figure will likely draw nothing more than a passing glance from mortgage investors today.
Wed. Nov. 26, 8:30 a.m. ET
Oct. Durable Goods
-2.6% vs. last +0.9%
If the consensus estimate proves accurate, look for the news to push stock prices lower creating a “flight-to-quality” in the mortgage market which will be supportive of slightly lower rates.
Wed. Nov. 26, 10:00 a.m. ET
Oct. New Home Sales
-2.17%
The combination of weak economic conditions and tight credit likely restrict the pace of new home sales in October. Look for this data to have little, if any impact on the direction of mortgage interest rates today.
Wed. Nov. 26, 2:00 p.m. ET
All markets closes early
Thurs. Nov. 27
Market closed for the Thanksgiving Holiday. I wish you and your family a safe and enjoyable holiday.
Fri. Nov. 28, 2:00 p.m. ET
Fixed income markets closes early
Mon. Dec. 1, 8:30 a.m. ET
Nov. Institute of Supply Mgmt.
37.6 vs. last 38.9
Everybody knows the manufacturing sector is weak so today’s report will only define the degree of weakness. Look for this data to have little, if any impact on the direction of mortgage interest rates today.
The Economic Calendar for the week of Monday, November 24th through Monday, December 1st, 2008
Release Date & Time
Economic Indicator
Consensus Estimate
My Analysis
Mon. Nov. 24, 8:30 a.m. ET
Oct. Existing Home Sales -2.5%
Most investors expected sluggish economic growth and an unsettled labor market took a toll on the pace of existing home sales last month. They were right and mortgage fell rates today.
Mon. Nov. 24, 1:00 p.m. ET
Treasury auctions $36 bil. of
2-year notes
Most observers believe demand will be solid for this debt offering from Uncle Sam. If so, this event should prove to be supportive of steady to perhaps fractionally lower mortgage interest rates.
Tue. Nov. 25, 8:30 a.m. ET
2nd estimate Q3
Gross Domestic Product
-0.5% vs. last -0.3%
Previously released economic data strongly suggests economic activity cooled sharply during the quarter. A downward revision to the initial estimate will not likely surprise anyone – rendering this data toothless in terms of its impact on the direction of mortgage interest rates today.
Tue. Nov. 25, 10:00 a.m. ET
Nov. Consumer Confidence
38.0 vs. last 38.0
No one will be surprised to see that gloomy news from the economy, rising joblessness and plunging stock markets have all taken a toll on consumer confidence. This data will likely draw little more than a passing glance from mortgage investors.
Tue. Nov. 25, 1:00 p.m. ET
Treasury auctions $26 bil. of
5-year notes
The majority of analysts believe this offering will be well bid. If so, it will likely have little impact on the trend trajectory of mortgage interest rates. If analysts are proven to be overly optimistic (as I think they likely will be) the yield of these notes will rise -- which will cause mortgage interest rates to move higher as well
Wed. Nov. 26, 8:30 a.m. ET
Oct. Personal Income
Spending
Core PCE Index
+0.1% vs. last +0.2%
-0.9% vs. last -0.3%
0.0 vs. last +0.2%
If the consensus estimate proves accurate, incomes will post their smallest gain in three months while a sharp drop in spending is likely setting retailers up for the worst holiday season in six years. The decline in income and spending combined with the Fed’s favorite measure of inflation at the consumer level, the personal consumption expenditure index, showing that core inflation pressures are nowhere to be seen -- will all likely be viewed as a positive for the prospects of steady mortgage interest rates today.
Wed. Nov. 26, 8:30 a.m. ET
Initial jobless claims for the week ended 11/22
Down 7,000
The modest expected decline in the initial jobless claims figure will likely draw nothing more than a passing glance from mortgage investors today.
Wed. Nov. 26, 8:30 a.m. ET
Oct. Durable Goods
-2.6% vs. last +0.9%
If the consensus estimate proves accurate, look for the news to push stock prices lower creating a “flight-to-quality” in the mortgage market which will be supportive of slightly lower rates.
Wed. Nov. 26, 10:00 a.m. ET
Oct. New Home Sales
-2.17%
The combination of weak economic conditions and tight credit likely restrict the pace of new home sales in October. Look for this data to have little, if any impact on the direction of mortgage interest rates today.
Wed. Nov. 26, 2:00 p.m. ET
All markets closes early
Thurs. Nov. 27
Market closed for the Thanksgiving Holiday. I wish you and your family a safe and enjoyable holiday.
Fri. Nov. 28, 2:00 p.m. ET
Fixed income markets closes early
Mon. Dec. 1, 8:30 a.m. ET
Nov. Institute of Supply Mgmt.
37.6 vs. last 38.9
Everybody knows the manufacturing sector is weak so today’s report will only define the degree of weakness. Look for this data to have little, if any impact on the direction of mortgage interest rates today.
Monday, November 10, 2008
The Ride That Never Ends
I have started working on our firms' forecast for 2009 and in looking an a number of micro and macro economic reports I've got to tell you that I don't like what I am seeing. Not in one bit.
The concerns are many, the challenges are well publicised. Am I predicting the end of modern finance as we know it.... No. Do I believe the experts when they say Americans have run out of money.... Perhaps. The driving concern I have is jobs. Should this recession (we are in one and if you don't believe me feel free to contact me off line to discuss) prolong itself past the second quarter of 2009, I anticipate significant job loss. Note that we have certain markets almost at 9.5% today (see my previous post titled National City Bank - Did the C ranks really drop the ball). I am referring to a national average perhaps as high as 12%.
Like it or not, the US government has and will continue to socialize our way out of this mess(including debt) because my first prediction mentioned above may no longer be a No. We could end up with a completely socialized banking, auto and our financial system. Since our country is no longer manufacturing oriented, service industries which make up a HUGE percentage of GDP (perhaps as high as 75%) now take center stage. In case you haven't noticed, it's a whole lot easier to get that corner table at the new high-flying restaurant or club. In short, if you think people aren't spending money today... you haven't' seen anything yet!
Back to jobs. If you look at the largest labor sectors (housing, manufacturing, service - already mentioned above) most are already depressed with the latter having more room to fall. The latest GDP numbers 0.3% was somewhat smaller then I expected. The reason for this contraction is not really a sound one: government spending soared. While I had expected government spending to rise, it rose a lot more than usual. Government purchases rose from 20.1% of GDP to 20.4%-the highest since Q3 1991, and up from just 17.6% in Clinton's last quarter (During the Clinton era, government purchases decreased significantly as military spending fell). As before, military spending increased particularly much, but non-military federal spending and state & local government spending increased its share of GDP too. Excluding government purchases, the contraction would have been closer to 2%.
My point, the citizens of the United States might have elected the right party in charge (at the present time). A return to a strong financial footing for this country may be through a significant government spending package, one the Democrats will likely give us. Otherwise, this could be a long painful road, one which this country hasn't seen in 70+ years.
This weeks economic figures: dominted by Treasury Auctions
Release Date & Time
Economic Indicator
Consensus Estimate
Analysis
Mon. Nov. 10, 1:00 p.m. ET
Treasury auctions $25 billion of 3-year notes
This will be the first leg of a three-part borrowing Uncle Sam will engage in this week. By the time Friday rolls around, Uncle Sam will have tapped investors for an additional $55 billion. That’s a record amount for November – well above last year’s $18 billion capital need. All of this incoming supply from the government will likely make mortgage investors hesitant to push mortgage interest rates notably lower.
Mon. Nov. 10, 2:00 p.m. ET
The mortgage market will close at 2:00 pm EST for the Veteran’s Day Holiday
Tue. Nov. 11
Veteran’s Day Holiday
Wed. Nov. 12, 1:00 a.m. ET
Treasury auctions $20 billion of 10-year notes
All of this incoming supply from the government will likely make mortgage investors hesitant to push mortgage interest rates notably lower.
Thurs. Nov. 13,
The current delivery month for most mortgage-backed securities “rolls” to December
This is a standard monthly administrative function of the mortgage market. The small price impact this event creates is already reflected on most investors’ rate sheets.
Thurs. Nov. 13, 8:30 a.m. ET
Initial jobless claims for the week ended 11/8
Up 1,000
The modest expected increase for initial jobless claims will likely draw nothing more than a passing glance from mortgage investors today.
Thurs. Nov. 13, 1:00 p.m. ET
Treasury auctions $10 billion of 30-year bonds
We might see a small “relief rally” in the bond and mortgage-backed security once the supply from Uncle Sam is out of the way. Any such rally will likely be limited in terms of price movement and duration.
Fri. Nov. 14, 8:30 a.m. ET
Oct. Retail Sales
Ex. auto
-1.9% vs. last -1.2%
-1.0% vs. last -0.6%
Unless they’ve been living under a rock – there is no one that doubts the October retail sales figures will be weak – the only question is how weak. The consensus estimate is already reflected in current mortgage prices, so it will take numbers considerably worse (a headline drop of 2.1% or more and an ex auto value showing a decline of 1.2% or more) to create much support for the prospects fractionally lower mortgage interest rates. The likelihood that the consensus estimate proves to be overly pessimistic is very small. Nonetheless a headline number showing October sales did not fall as sharply as expected will probably tend to nudge all credit including mortgage interest rates higher.
Fri. Nov. 14, 10:00 a.m. ET
Sept. Business Inventories
0.0 vs. last +0.3
This sliver of dated economic news will undoubtedly be completely overshadowed by the much more important October retail sales report that was released early today.
Mon. Nov. 17, 9:15 a.m. ET
Oct. Industrial Production &
Capacity Utilization
-0.5% vs. last -2.8%
76.1 vs. last 76.4
Already released reports showing sagging factor orders and plummeting retail sales make it a virtual “given” that these two measures of manufacturing activity will be puny as well. Look for this data to have little, if any noticeable impact on the trend trajectory of mortgage interest rates today.
The concerns are many, the challenges are well publicised. Am I predicting the end of modern finance as we know it.... No. Do I believe the experts when they say Americans have run out of money.... Perhaps. The driving concern I have is jobs. Should this recession (we are in one and if you don't believe me feel free to contact me off line to discuss) prolong itself past the second quarter of 2009, I anticipate significant job loss. Note that we have certain markets almost at 9.5% today (see my previous post titled National City Bank - Did the C ranks really drop the ball). I am referring to a national average perhaps as high as 12%.
Like it or not, the US government has and will continue to socialize our way out of this mess(including debt) because my first prediction mentioned above may no longer be a No. We could end up with a completely socialized banking, auto and our financial system. Since our country is no longer manufacturing oriented, service industries which make up a HUGE percentage of GDP (perhaps as high as 75%) now take center stage. In case you haven't noticed, it's a whole lot easier to get that corner table at the new high-flying restaurant or club. In short, if you think people aren't spending money today... you haven't' seen anything yet!
Back to jobs. If you look at the largest labor sectors (housing, manufacturing, service - already mentioned above) most are already depressed with the latter having more room to fall. The latest GDP numbers 0.3% was somewhat smaller then I expected. The reason for this contraction is not really a sound one: government spending soared. While I had expected government spending to rise, it rose a lot more than usual. Government purchases rose from 20.1% of GDP to 20.4%-the highest since Q3 1991, and up from just 17.6% in Clinton's last quarter (During the Clinton era, government purchases decreased significantly as military spending fell). As before, military spending increased particularly much, but non-military federal spending and state & local government spending increased its share of GDP too. Excluding government purchases, the contraction would have been closer to 2%.
My point, the citizens of the United States might have elected the right party in charge (at the present time). A return to a strong financial footing for this country may be through a significant government spending package, one the Democrats will likely give us. Otherwise, this could be a long painful road, one which this country hasn't seen in 70+ years.
This weeks economic figures: dominted by Treasury Auctions
Release Date & Time
Economic Indicator
Consensus Estimate
Analysis
Mon. Nov. 10, 1:00 p.m. ET
Treasury auctions $25 billion of 3-year notes
This will be the first leg of a three-part borrowing Uncle Sam will engage in this week. By the time Friday rolls around, Uncle Sam will have tapped investors for an additional $55 billion. That’s a record amount for November – well above last year’s $18 billion capital need. All of this incoming supply from the government will likely make mortgage investors hesitant to push mortgage interest rates notably lower.
Mon. Nov. 10, 2:00 p.m. ET
The mortgage market will close at 2:00 pm EST for the Veteran’s Day Holiday
Tue. Nov. 11
Veteran’s Day Holiday
Wed. Nov. 12, 1:00 a.m. ET
Treasury auctions $20 billion of 10-year notes
All of this incoming supply from the government will likely make mortgage investors hesitant to push mortgage interest rates notably lower.
Thurs. Nov. 13,
The current delivery month for most mortgage-backed securities “rolls” to December
This is a standard monthly administrative function of the mortgage market. The small price impact this event creates is already reflected on most investors’ rate sheets.
Thurs. Nov. 13, 8:30 a.m. ET
Initial jobless claims for the week ended 11/8
Up 1,000
The modest expected increase for initial jobless claims will likely draw nothing more than a passing glance from mortgage investors today.
Thurs. Nov. 13, 1:00 p.m. ET
Treasury auctions $10 billion of 30-year bonds
We might see a small “relief rally” in the bond and mortgage-backed security once the supply from Uncle Sam is out of the way. Any such rally will likely be limited in terms of price movement and duration.
Fri. Nov. 14, 8:30 a.m. ET
Oct. Retail Sales
Ex. auto
-1.9% vs. last -1.2%
-1.0% vs. last -0.6%
Unless they’ve been living under a rock – there is no one that doubts the October retail sales figures will be weak – the only question is how weak. The consensus estimate is already reflected in current mortgage prices, so it will take numbers considerably worse (a headline drop of 2.1% or more and an ex auto value showing a decline of 1.2% or more) to create much support for the prospects fractionally lower mortgage interest rates. The likelihood that the consensus estimate proves to be overly pessimistic is very small. Nonetheless a headline number showing October sales did not fall as sharply as expected will probably tend to nudge all credit including mortgage interest rates higher.
Fri. Nov. 14, 10:00 a.m. ET
Sept. Business Inventories
0.0 vs. last +0.3
This sliver of dated economic news will undoubtedly be completely overshadowed by the much more important October retail sales report that was released early today.
Mon. Nov. 17, 9:15 a.m. ET
Oct. Industrial Production &
Capacity Utilization
-0.5% vs. last -2.8%
76.1 vs. last 76.4
Already released reports showing sagging factor orders and plummeting retail sales make it a virtual “given” that these two measures of manufacturing activity will be puny as well. Look for this data to have little, if any noticeable impact on the trend trajectory of mortgage interest rates today.
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