MORTGAGE CREDIT NEWS BY LOUIS S. BARNES - 1/5/18
Markets have given in to modest complacency. I doubt we’ll be badly punished, at least in credit markets and interest rates (stocks... dunno), but the what-me-worry picture follows. Together with a little New Year debunking of jive from salesmen.
Today we got the monthly payroll report, and a market-wide sigh of relief that “only” 148,000 new jobs were created. Slowing from then 180,000-range takes heat off of the Fed, which would like to see job growth fall to about 100,000 monthly, the theoretical growth rate of the work force. These payroll numbers are prone to large error and revision, so be careful deconstructing, BUT the report said that retail jobs contracted by 21,000 in December.
Each of these reports is seasonally adjusted, and every December adjustment assumes large temporary retail hiring for the holidays. However, Jeff Bezos and pals are gradually destroying retail as we have known it. If traditional holiday hiring fell off last month (guaranteed), then the seasonal adjustment is overdone, job growth better than it seems. That thought is supported by wild strength in the two ISM purchasing managers’ December surveys, manufacturing to a rarely so hot 59.7, and the service sector 55.9.
Unemployment remained at 4.1% but is meaningless, useless as an indicator of future inflation because none of us understand today’s workforce-elasticity. However, wages are trickling upward from the low-2% range to high 2%. Nevertheless, long-term rates stayed under control, mortgages just above 4.00%, the 10-year T-note just below 2.50%.
Debunking is not seasonally adjusted. It’s necessary at all times of year, and especially so during this time of rapid change. Change reduces our ability to understand what is happening to us, and we respond by trying either to hammer new data into obsolete equations, or to take wild swings at megatrends. Adding to the fun: most financial market information comes to us through sales organizations, which long ago learned that frightened consumers are pigeons. Scare them and they’ll flock into your net.
The weak dollar is a current favorite. Do not pay any attention to the dollar -- someday, maybe, but give it a couple of decades. Currencies have values only in relation to each other. China’s yuan is pegged to the dollar and thus can neither weaken nor strengthen. The euro has risen in value versus the dollar from $1.05 to $1.20 because European collapse is less likely for now, and because of Germany’s mania for net exports. In the ten years prior to 2010 and possible collapse, the euro traded near $1.50. Who is weak? The yen has upside-down value, yen/dollar as opposed to dollars/euro. It’s at 113/buck today, and hasn’t done anything for years -- and is so rigged both by the BoJ and markets that its movements have little to do with economic change.
In the short run (years), currencies respond to interest-rate differentials, primarily diverging plans of central banks. In the long run, trade balances matter, as do rates of economic growth. So, why not watch rates and economies instead of antique, gold-standard bragging rights? Because it’s fun to scare people.
American Drowning In Debt is a highlight everywhere. Ray Dalio, brilliant portfolio manager and billionaire (I am neither) and self-acclaimed management genius told the WSJ this week that we’re all going to die from combined public and private debt equal to 325% of our GDP. Somebody somewhere in suspenders and a $300 necktie says the same thing every day.
But, where is this debt? 325% of US GDP is $65 trillion. The NY Fed tracks household debt, which is growing about as fast as GDP, total $13 trillion. The essential component is mortgages, just this year aggregate balances rising above the 2007 level. The Treasury owes about $15 trillion (net of inter-governmental swaps). Throw in all corporate and municipal debt and you’re just over two times GDP.
We also have some assets. The Fed’s quarterly Z.1 reports household and non-profit organizations’ (B.101) total assets at a hair over one-hundred and twelve trillion dollars (net worth just under $100 trillion), and the same category for non-financial business (B.103), $43 trillion, net worth $23 trillion.
Which leaves “financial business.” Do we care... should we care the amount borrowed against portfolios of Treasurys, so long as a healthy excess of value over debt? Or stocks (margin debt limited to 50%)? Or in a post-bubble era, the Fed on watch with pitchforks and torches for any debt abuse?
The debt-mongers also offer horrifying effects of the Fed’s balance sheet contraction. The money supply will shrink! Nevermind that both the assets and “money” were held inert in mayonnaise jars under the Fed’s porch. Fannie and Freddie got into trouble by retaining together $1.7 trillion in MBS and mortgages and financing the portfolio with short-term loans. The two outfits since 2008 have bled off $1.3 trillion! That’s 15% of all mortgages outstanding shifted out into private markets and without a ripple in the mortgage water. Same so far for the Fed’s unwinding.
Last on debt: the rate of growth in bank credit in 2017 fell in half or more, to perhaps 3% annualized. Nobody knows why, although business self-funding via enormous profits is a good thought.
There’s plenty to worry about out there. But, repeating last week’s advice, do watch the stock market. It will keep your mind off politics.
The 10-year T-note shows every sign of heading upward:
The 2-year T-note is ballooning upward, testing the upper limit of the Fed’s atmosphere in months ahead:
Household debt is not a concern. Period. The only two sectors of growth are student loans and autos, both inevitably beginning to slow now: