Lou Barnes
Mortgage Banker
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1844 Folsom Street
Boulder, CO 80302

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Friday, March 12, 2010
By Lou Barnes

     Long-term Treasury rates rose under pressure from constant borrowing, but mortgages did well, holding at 5.00% with lowest fees. Versus the 10-year T-note at 3.70%, that’s the narrowest spread ever measured.
     Retail sales for February this morning have been mis-described as a strong surprise; in reality, post-revisions, Jan-Feb were close to flat versus December. Overall retail sales have risen 6% since the pit one year ago, but are still 6.5% below 2008. New unemployment claims are still elevated, running 462,000 last week.
     Take good news where you find it: a reasonably stable “L” economy beats hell out of deterioration. The National Federation of Independent Business released its small-business survey, methods constant since 1973 (www.nfib.com, “SBET”), charts for confidence, sales, earnings, and hiring all “L” since last summer and stuck near the worst levels ever measured. Stability has a price: the Treasury hosed $221 billion in borrowed cash in February, our largest-ever monthly deficit. Quite the sugar jolt.
     The small-biz results reflect Main Street conditions, as opposed to life at the fancy multi-nationals. Those guys began to re-deploy two years ago when the music stopped here: shed US costs and labor, and set up turnstiles in the hot, emerging-nation-trade markets. Half of S&P500 earnings come from overseas operations.
    
     For those with bi-focals, the most exciting reading every 90 days is the Fed’s Z-1 Flow of Funds.
     This week’s release of 4th quarter 2009 data exposes healthy imagination among the big-recovery green shooters. Thursday’s WSJ announced that credit markets have healed, but Z-1 later that day revealed the worst US credit collapse ever measured. In impressive spin, the Journal today says the absence of credit signals recovery.   
     Credit for consumers is declining steadily, down $110 billion in 2009, overall now at the same level as 2006. Home mortgages dropped $58 billion in the quarter, $215 billion in 2009, also to 2006 totals. Total debt in the economy grew at the smallest rate ever measured, 1.6% in the 4th quarter; however, excluding the Treasury’s massive borrowing it was 1% negative. Think that through: civilians and the real economy are starved of credit, and the Treasury borrows instead. Unsustainable.
    One policy is working: the Fed’s “extended period” commitment to zero-percent money. After eighteen months of holding zero-return cash, more people and institutions see the non-recovery, trust the Fed to stay put, and have begun to buy “out the yield curve.” That is, buying longer maturity bonds in search of yield. However, only the highest quality: hence guaranteed MBS are improving, closing on Treasurys, and easy-borrowing Big Biz buddies of the WSJ wonder what all the credit fuss is about.
     Z-1 shows the whole pattern. The “shadow banking system” was badly abused in the Bubble years, but the flipping of securitized loans off bank balance sheets was and is essential to adequate credit supply. The market for ABS is still dead as a hammer; the total outstanding has free-fallen 25% since 2007, a $1.14 trillion hole in supply. The ABS market funded jumbo mortgages... remember those?
     Z-1 gives answers to brand-new questions. The Fed bought $1 trillion in MBS last year... so, who sold ‘em? A net $300 billion by foreign investors, and the rest by US “households.” Households? Yup: bond-market mutual funds, which then bought big-business bonds, and soaked up the flood of Treasurys.
     Then a dog that didn’t bite (yet): total 2nd mortgages outstanding, $1 trillion, about the same as 2006, have unwound only 8.6% since the 2007 peak. Certainly, damned few new 2nds have been made, and by now defaults should have cut outstandings a lot. A loan departs Z-1 when paid or written-off. Odd that so few have departed.
     The $450 billion in 2nds still on the books at Wells, BoA, Chase, and Citi... you don’t suppose that they’re carried near full value? The underwater ones that roadblock short sales, some banker hoping to get paid someday? Maybe half a dead loss?