MORTGAGE CREDIT NEWS BY LOUIS S BARNES - February 28, 2020

The first rule of panic: don’t join. I would suggest that everyone take a deep breath, but better not add insult to no mask (sold out). So just pause, and chop this Wuhan furball into manageable pieces.

Sometimes panic is justified. For example, the 48 hours after Lehman went down, before Ben Bernanke took charge of the economy. In Wuhan flu, panic is the enemy, far worse than the virus. We have three panics underway: financial markets, the global public, and governments.

The least important first: mortgage rates typically follow the yield of the 10-year T-note, but not in moments of great stress. As credit markets gradually collapsed 2007-2008, 10s fell far below mortgages, those rates actually rising until Ben rescued us all with Quantitative Easing. In this Wuhan market fever, global money is racing to the safest and most liquid of all places: sovereign debt. MBS are quirky, pricing wrecked by surprise waves of refinancing and fractured markets for hedging, so mortgage rates are stuck just under 3.50%, little changed since January.

Panic: the US 10-year this morning has blown through the 1.32% all-time low set in 2016 (and 2012 and 2019) all the way to 1.14%, from 1.52% in the last week of January. The German 10-year was minus-0.16% in January, and this morning is minus-0.62%. If 10s stay so low, or the Fed joins the panic, of course we could go lower but two or three trillion dollars’ worth of mortgage refis will clog the drain.

The deepest panic in markets is of course in stocks, but an illusion as well. From early 2018 through April 2019, the Dow repeatedly topped near 26,500. The Fed began to cut its cost of money in spring 2018, and made it clear to markets that they need not fear a new Fed hike for a long time. The Dow briskly ascended a new series of all-time highs, topping at 29,500 two weeks ago, and with no basis in increased earnings or a stronger economy -- just an easy Fed open-ended. Wuhan or no Wuhan, stocks were way overbought and vulnerable. Here at the end of an awful bad week, the Dow is right back in the center of its 2018 trading range.

Markets are quick and ruthless in anticipation, and have been far in front of the public and governments. Markets are also infamous for overshooting. Odds are growing that markets have done so now.

Public panics? People are tough, even when poorly led. The worst-case Wuhan event is a pandemic resembling a very bad flu season, but nothing like 1918, then a vaccine within a year. We are there now, aren’t we? On Wednesday, Moody’s Analytics said it sees a 40% chance that the virus will break containment in China and grow into a global pandemic and recession. Later that day Moody’s announced a 63% probability that Germany was defeated in WW II.

The public has a hard time computing and evaluating risk. Especially in America many of us have tried to rig lives free of any risk. Vegan-Med-Paleo-Keto, aromaphobia, toxin mania, climate.... In the last weeks anyone mentioning the high mortality from ordinary flu has been hooted down. We’re at greater risk than Wuhan by driving home surrounded by texting zombies at the wheels. Or, if you say that, somebody might throw a phone at you. San Francisco has declared an emergency, without a single case.

We are going to get used to Wuhan. We know that it is wildly contagious, even from those with a passing sniffle or no symptoms at all. Because China has destroyed the whole epidemiological trail to Patient One -- probably back in November -- we do not have the data we need, but will figure out quickly, now. We do know that China’s shoot-the-messenger culture turned the place into a gigantic petri dish for three months. No other nation will do that, but worst-case is at hand: everybody may get Wuhan, until a vaccine. And the medicos will figure out quickly how to triage Wuhan: who is at life risk, who needs some limited care, and who should sit out symptoms at home -- not even go out to the ER.

The third panic -- by government -- is the greatest risk to the global economy. China’s late attempt at shutdown quarantine may have been necessary, given its suicidal blundering. Or maybe not: infections there must be in the several millions, maybe tens of millions, but who knows if no one is allowed to count, or to discuss what to count?

Limited quarantines underway in Europe may have some effect, but odds grow that the best response will be a limited one. Do not shut down your economy. Do not “try to stop the wind,” as one epidemiologist described Wuhan.

As recommended in this space, no matter what, do deploy your sense of humor, or at least your appreciation for the absurd. America is a rich vein.

While still in India on Tuesday, Mr. Trump said, “There’s a very good chance you’re not going to die.” His cracked thinking often requires some processing, and in this case his advice is correct if a bit blunt. The Wednesday press conference was not so useful, triggering a new global wave of stock-selling while he was speaking. “Under control”... not.

China sat on Wuhan for three months, then declared it under control, has forbidden anyone to speak or report news, and sent its number two man, Li Keqiang to Wuhan. Here we are thirty days after China’s cover blew, and the White House has replicated Beijing’s do-nothing freeze, and its words nearly verbatim. For incompetence the achievement rivals even the Democrats’ debates. Almost.
Would Mike Pence please wear a white lab coat? “Dr. Veep” embroidered above the breast pocket? When the first Wuhan is reported in DC, how quickly will the Chief germophobe lock down the White House? Will he deliver the next press conference in a hazmat suit? Or order all near him to suit-up, lest their contagion spread to him?

Last, what should the Fed do? Powell should speak, say that the Fed stands ready to support the economy and banks, and during periods of selling in markets will maintain orderly conditions. And sit down.

When penicillin first appeared we tried the miracle on everything, including the common cold, risking allergic reactions for no benefit. The Fed is not a miracle drug, much as we are addicted to it. There is no shortage of credit and it is already cheap. The threat to consumer demand is panic and shutdown quarantine, and the Fed can’t do anything about that. Rate cuts to offset economic damage overseas spreading here may become necessary, but reversing those cuts quickly after panic passes can cause more harm than the cuts prevented.

The 10-year T-note, Monday through today:

...And in the last 30 days:

...And since the Great Recession through the previous all-time lows to Wednesday’s close: