MORTGAGE CREDIT NEWS BY LOUIS S BARNES - 1-24-20

In a week with no economic data, the US 10-year T-note has fallen today to 1.69%, the lowest trade since Halloween.

HOWEVER, the 10-year needs to break below this level to make a run at last summer’s 1.47% and mortgages near 3.50%, and the move this week is concentrated in Treasurys, not yet mortgages. That concentration is the signal of an international flight to safety, not a downshift in the economy or policy change at the Fed.

Ha-CHOO. This week has Wuhan Flu all over it.

And from there a big jump to ethics. Ethical behavior is not contagious by sneezing, but does seem to self-reinforce, both in good behavior and poor. The temptation to lousy ethical behavior is clearly a permanent feature of humanity. Not as simple as dishonesty, although inclusive, but also common among people who see themselves as honest but ethical standards overridden or distorted by emotion, partisanship, retribution, or self-interest.

In this week of impeachment, each side accuses the other of ethical weakness. The matter is too delicate for a family financial letter, so move on to three other ethical adventures.

China is huffy about criticism, reasonable for any nation coming out of two hundred years of darkness, abuse by outsiders and mistakes inside. However (that word again), Wuhan Flu has spread for exactly the same reason as SARS: fear in the Party of doing anything without permission from the top, especially any action or words revealing China weakness, and decisions kicked slowly to the top, every rung on the way afraid to decide. Wuhan Flu might have jumped anyway, but China was late, again.

The outside world has also become reluctant to speak truth to or about China. Media refer to the Wuhan Flu as “the coronavirus.” That’s the generic term for this virus, but not a specific identifier, like SARS or H1N1, previous species-jumps in China, or Spanish Influenza (which it was not). Yesterday the World Health Organization flinched: “This is an emergency in China, but it has not yet become a global health emergency,” said Director-General Ghebreyesus. He added, "It may yet become one." Financial markets all over the world say, yes it is an emergency, right now. You don’t suppose that China leaned on the WHO?

Ethical case number two this week: theoretically responsible media printing inflammatory falsehoods designed to attract attention, or to grind axes, or both in one piece. Today’s WSJ, print-edition front page, web-posted last night: Credit Scores to Drop for Millions. Which went on to state, “Consumer debts are at record highs, with many Americans forced to rely on debt to help fund their everyday lives.” Both are technically correct but are gross misrepresentations to the public. Fico scoring is in a constant state of recalibration of the many dozens of algorithms, causing some scores to rise and some to fall, but nothing big underway now.

Household debt is at new high, but the slowest rate of growth in any expansion on record, the most exacting standards by lenders, and the least sign of distress. Detail here, the New York Fed’s quarterly report on household debt. Or for technical diggers, the Fed’s Z-1, scroll to B.101.h, page 144 of 198 for the Balance Sheet of Households, our net worth now the highest on record. Remember the name of the WSJ reporter, AnnaMaria Andriotis a serial offender on housing and credit issues, her colleagues on that beat also repeaters.

And case number three. Wells Fargo was once a fine bank. John Stumpf became CEO in 2007, and apparently not alone began to slide Wells Fargo into slime not seen since Countrywide and Angelo Mozilo. Both men have been fined and banned from banking, Stumpf this week, but our legal system is unable to send both to Leavenworth.

The story does not end there. The concept of the limited liability corporation, now some 500 years old limits the losses of investors to the amount of money invested. And our corporate structures are supervised by officers and themselves by boards of directors, both liable for corporate misbehavior. Investors can lose a ton of money invested, but cannot otherwise be held to account for crooked business.

Warren Buffett is a good guy by all accounts. Despite his warm and fuzzy demeanor, he may also be the toughest man ever to sip a cherry coke. The greatest investor ever, and known for ethical behavior, he has one evident blind spot: investments in financial businesses. He held a large position in Salomon Brothers in 1991 when one of its traders illegally cornered a portion of the Treasury market and the CEO lied to cover it up. Buffett had to drop all and run the place for a while. Seven years later Buffett acquired General Re, an insurance company which turned out to be to be crooked, losses large. Soon thereafter, during the inflation of the credit bubble, Buffett’s Berkshire Hathaway was the largest stockholder in Moody’s, soon infamous for granting high ratings for securities “underwritten by cows.” Largely unreformed Moody’s is still Berkshire’s 10th largest equity holding.

Until 2019, Wells Fargo was Berkshire’s number one stock market investment. Might things at Wells -- and for its customers -- have turned out better if Buffett had taken early and public notice of the fraudulent source of Wells’ earnings, and demanded that management be replaced quickly?

In 1787 Thomas Jefferson wrote, “The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. It is its natural manure.” Drama a bit overdone, but ethics on scales large and small require constant attention by everyone.

And may Wuhan Flu pass quickly into history.

The US 10-year T-note in the last year. Sliding down, but not yet winning the cigar:

The Atlanta Fed GDP forecast has stabilized just below 2% for the 4th Quarter of 2019

One of the pages from the NYFed quarterly report on household debt. Yes, student loans have grown, as have auto loans. But if you can see hazard in mortgages, Helocs, or credit cards, you’ve got better eyes than I.

Then, life in China. These images from the Xinhua News Agency, the site of a 1,000-bed hospital being built in Wuhan in six days. Bootleg cell photos in the NYT show a different hospital corridor packed with the ill. Top-down autocracy can get amazing things done. But the failure of information to flow upward, and the fear of underlings to do or think anything independently will cause even greater failures. Empires always founder in this way.