Mortgage Credit News by Louis S Barnes - August 20, 2021

At the end of a week with no economic data of note, and long-term yields frozen, explore how rates can be so low, and... can’t stay away from it... Afghanistan. Strange places can have large and strange effects on markets.

Fed at the Campfire. Next week is the annual conference of global central bankers at Jackson Hole, Wyoming. No prettier place. Sometimes the Fed chair in the opening address makes important policy noise, and markets will be glued.

But there is some additional entertainment, especially for those of us with mountain cowboy childhoods. Nobody out here ever looked more uncomfortable or sillier in a three-piece suit than Alan Greenspan in Jackson. Now the bankers dress casually, sort of, but not exactly the independent-minded sartorial splendor of zoom costumes. As beautiful as the setting, it ain’t Davos. Visual: bankers sitting on hay bales singing old sad songs about wrecking economies.

Why Buy Bonds? For rates to stay so low, somebody has to buy. The Fed has bought a lot during its four QE operations since 2008, but its July meeting minutes released this week reinforced the Fed’s intention to taper soon and stop by next summer -- and the news had no effect on the market.

-- Mechanical. Life insurance and pension funds must buy to cover the long-term liabilities of our retirement and demise. Perversity: the lower rates are, the less bonds pay until we depart, and so the more bonds these outfits must buy.

-- Deflation. The best reason to sell is inflation -- until Covid. Inflation still matters, but now we have no way to measure it. Japan has spent 2021 in deflation (roughly 30 years, now) and its bonds pay nothing at all.

-- Bad news. War is the worst of all news, and Afghanistan has added a downward push. Why buy US bonds when the US is humiliated? Our IOUs are still the safest of all.

-- Currency instability. German bonds have had yields less than 0.50% for six years, and negative since 2019. Germany should not be confused with a safe place except a good idea on the day the euro blows up.

-- Crackpots. Principally on the Right, persistent claims that too much debt means slow economies, and since there is too much money from central banks, too much goes to bonds. Uh-huh. Central banks have figured out how to make bonds disappear, and with rates so low, payments are immaterial. Too much money... walk into a bank and ask to open an M2 account. In antique monetary aggregates, there is a lot of M2 out there, but in the miracles of low velocity and liquidity trap going nowhere.

-- Cheap carry. Inflation should be pushing yields up. But the Fed’s cost of money is near zero, and on 10:1 leverage good money can be made by buying 1.25% Treasurys.

-- Trading. If we buy a bond and market rates fall, the value of the bond goes up. Why would market rates fall? See above and below.

-- Fed policy error. This sword cuts two ways, but today there is a growing bond bid by those who think the Fed’s next mistake will be the same as the last dozen going back to 1990. Premature or unnecessary tightening, crater an iffy economy.

Lower? The 10-year T-note has looked like bottoming repeatedly since spring, and not done so. Covid Delta is bad news for the global economy, and could easily take rates lower. Which is why 10s are holding so well in the 1.20s.

Afghanistan. Junkies can’t stay away from the junk, but there is a higher mission here. Misinformation is the rule today, intentional and/or ignorant. Great newspapers, WSJ and NYT in the lead have become engines of partisan propaganda. We lost Fox, CNN, and NPR years ago. Social media profiteer as megaphones for propaganda and ignorance. The political wings are entrenched without souls, the Right side outraged at a Trump policy embraced by Democrats, and Democrats acquiesced to a Trump policy which had outraged them. It is incumbent on every citizen to self-educate, and to swat back at propaganda.

If you read one thing... Tom Friedman’s NYT post yesterday, an imaginary interview with Lyndon Johnson, Xi Jinping, and Mohammed Zahir Shah, the last king of Afghanistan. Three People I Would Interview About Afghanistan If you can’t get around the NYT paywall, ask a friend to copy-paste and e-mail. Friedman got Iraq wrong, and his ego gets in his way, but he’s got better sources and understanding of the area than anybody. His post is funny, dead right, and will make you feel well. Very clear: we have no business in Central Asia, and our presence causes far more trouble than benefit.

Style points? A brave president made a correct and 18-year-overdue hard decision, and a dark cloud of jackdaws expects the outcome to be tidy? Field Marshall von Moltke (“the Elder”): “No plan of operations extends with certainty beyond the first encounter with the enemy's main strength.”

You thought it possible to pull the plug from a bathtub filled with water, and there was an easy way to get the water to stay put until you said, “Okay... now drain.”

When you look at video from Kabul, look at the clothes and faces. The Taliban soldiers were clean and rested, not infantry after a hard fight. They wore the expression of a kid who is surprised to find the ball in his glove. BTW: it has long been the Western media convention to refer to Islamic combatants as “fighters” -- like insects. These are very capable soldiers. Then study a replay of the first rush of refugees to the airport, better-dressed than patrons at fine US restaurants. Did the sons, husbands, and fathers of this upper-crust give their all in the fight? How much money in overseas accounts, if only they can get to them?

Folly afflicts its victims in reverse. So many well-intended people demand to know why we have not rescued our friends in Afghanistan. For exactly the same reason that the whole adventure failed: you can’t get there from here, so why be surprised that we can’t get from there to here?

To move heavy things, like an army and its continuous need for supply, we need either ships or rail. Afghanistan has neither. Way back, when Putin was weak, we railroaded supplies across Russia to the ‘Stans (Kyrgyz, Uzbek, Tajik), and used airports there. Trucks will do, if you have a great many, and fuel, and excellent and short roads. Airplanes? Like filling that bathtub with an eyedropper.

To truck a few hundred thousand people out of Afghanistan... first the trucks. Then to the north Dushanbe 275 miles away over iffy 2-lane. Or east over the Khyber Pass (hah) to Pakistan, our good friends. Or south 325 miles to Quetta, or west 500 miles over tracks to Iran. And once to any of those places, to where and how?

Support for Joe? Some fine officers (McChrystal, McMaster) and not-so-fine (Petraeus) blinded by can-do should rise to say, we were wrong. Mr. Obama inherited this mess when he took office in 2009, after five years of post-bin Laden blundering. Obama for the next eight years was alternately rolled by the Pentagon or went along, while Joe made himself unpopular by constant advice to end it. The one person who can take the heat off Joe by accepting responsibility: Obama. Say it: Joe was right all along, and we didn’t listen.

Just when 10s broke above 1.30%, headed north... back into the 1.20s:

Below is an overhead shot of Karzai International airport and its one runway. One. At 6,000-foot altitude, thin air and heat mean underloaded aircraft. The airport was renamed after Hamid Karzai, the super-corrupt president of Afghanistan 2004-2014 -- one look into his eyes, never trust him with lunch money. Still alive in Kabul, he has already met with the Taliban.

For comparison, Denver International Airport. Note six runways.

Hamid his own self:

“The Last Stand of the 44th Foot” by William Wollen. In January 1842 the 20,000-man garrison of Kabul retreated toward India. The 684 men of the 44th lead the way. The column made it only to Gandamak, 43 miles. Of the entire column, six of the 44th escaped. The second painting, “Remnants of an Army” by Elizabeth Butler is the less heroic depiction of assistant surgeon William Brydon arriving at the Jalalabad British fort, thought at the time to be the sole survivor. In 1963, British PM Harold Macmillan: “The first rule of politics is never to invade Afghanistan.”