Mortgage Credit News by Louis S Barnes - February 5, 2021

Back to money. Covid and politics will return to top billing, but money suddenly overshadows all. Long-term interest rates are holding on to deep lows by one claw, and it is scraping toward the edge. And along the way forcing forward a new conundrum.
The low for the 10-year T-note was last August at 0.55%, by November up to 0.90%, and on January 8 when it was clear that Biden would take office, to 1.12%. Mortgages held fairly well, not rising with 10s, the spread between the two closing.
Today 10s are not exploding, but stair-stepping quickly to another new high at 1.18% is not encouraging. Orderly markets pause in ranges, rattling between old highs and new ones. The right kind of mortgage deal (credit, equity, amount...) still has a “2” in front, but in doubt.
BULLETIN -- the rate rise has nothing to do with the innerweb, or kids e-reinventing commerce, or Reddit Roulette. A small mob of loons can move the price of a stock, but not a $15 trillion Treasury market headed for $20 trillion. The retail raid on stocks has fizzled, also. Adults who supervise markets prefer to let markets punish the foolish, as repeatedly with bitcoin instead of regulatory intervention. Nothing quiets a mob faster than empty wallets.
Why the rate raise? Once in a while the cause of a rate move is clear to all. Today. In the last 24 hours we have learned that employment is considerably worse than thought. People in markets know that the economy cannot re-open and “recover” until we have a grip on Covid. But most of us thought the economy was relatively stable. Not.
Yesterday came the weekly figures from new state-level claims for unemployment assistance. Just short of 800,000 new claims weekly, about four times the pre-Covid normal. Add to that 350,000 new claims for Pandemic Unemployment Assistance last week. And “continuing claims” for the two categories of assistance are over 12 million.
Today came the monthly report of new jobs for the prior month, and January was close to no-gain, the prior months revised down, and the benchmark annual revision also down.
in the standard (perpetual) equation, weak jobs deliver lower interest rates. But days like today clarify the relative power of different events, and economic weakness has been overwhelmed by the rising political fortune of Biden’s stimulus.
Stimulus is king. Biden went big, Republicans predictably countered with less, but at one-third of Biden’s initial proposal, nothing to talk about. Perhaps more important than the money, the result appears to be Democrats jamming the $1.9 trillion plan through Congress via negotiation-avoiding reconciliation. Too bad for both parties, and the nation.
The bond market is unhappy for two reasons: first, the stimulus might work, counteracting weakness. Second, who will buy anther $1.9 trillion Treasury IOUs? It’s one thing to hemorrhage debt to escape recession, but Covid will be self-escaping. The current rate of new infections down by half in one month, before substantial effects from vaccines.
Could we not have hosed $1 trillion quickly, see how Covid goes, and hold another trillion in reserve to follow if necessary?
The Fed’s conundrum. The Fed is buying $80 billion in Treasurys monthly, close enough to one trillion annually for government work. And another half-trillion in mortgages. That covers a lot of stimulus IOUs, but pre-stimulus built in to markets, and the prior administration left behind a structural annual deficit of at least one trillion and rising. No, the tax cuts did not add to revenue or productivity.
That’s a lot of wallpaper flying around.
Meanwhile, the Powell Fed has flipped the Fed from 25 years of unnecessary inflation-fighting. The Fed’s last episode 2017-2019 (seems a very long time ago) was called normalization of the zero-percent cost of money after 2008, raising the cost toward neutral -- unknown but surely at least 3.00%. The Fed made it to 2.50% before a near-hit recession, the march upward ridiculous to all, and cut back to 1.50% pre-Covid.
The Fed is now forthright that it will not hike again until inflation rises to a sustained 2% or more. Powell is enforcing speech discipline at the Fed as not since Greenspan -- blab as you wish among yourselves or to me, but don’t confuse markets. We are done with fighting phantom inflation.
Markets are already confused. We have no experience with a Fed attempt to induce inflation. Plenty of people doubt that the Fed can induce and control inflation, respecting the grip of Keynes’ “liquidity trap.” But markets without experience worry about damage done by trying. The Fed intends to run the economy hot, not slowing it during the hoped-for rise in inflation.
But I don’t know anyone inside the Fed or out who can explain how the economy can run hot, inflation rising, and long-term rates will stay low enough to sustain a hot economy. Or perhaps any economy. If 10s continue to stair-step, housing has seen its best days for a long while. If inflation is headed for two-plus, who wants to own a 10-year Treasury paying half of that, today’s 1.17%? Or for that matter, 2.17%, which would mean 4.00% mortgages?
Covid and Brexit. Opponents to Brexit were believers in Europe, a branch of one-worldism. Many Brexiters had a glorified idea of exit, which will be painful, but many others believed in the benefits of sovereignty and freedom from Brussels’ stultifying eurocrats.
New data has arrived. Early in the pandemic the northern core of the EU/euro experiment were oh-so-proud of their wisdom and successful response to Covid. That hubris did not survive last fall. Everyone is vulnerable to Covid, the only successes on islands and/or surrendering civil liberties.
Vaccines to the rescue. As of the end of January, UBS (the bank) reports that Israel has vaccinated 55% of its people. The US at 9.4% is rising fast, but the UK for all of its early fumbling has already reached 14%. The EU? The wave of the enlightened future? 2.8%. Individual EU nations gave vaccine control to Brussels, whose bureaucrats exceeded all expectations for incompetence.
Politics. This week one vote in Congress should reassure all of us that our marbles may be scattered, but we have not lost ‘em.
Most votes in Congress are semi-shams, cast for political effect at home. Also indirect. Few Republicans can support a second impeachment, no matter how well-deserved, and so found safe harbor in voting against the process. Congress is not a secret-ballot operation, but Congress also meets in party caucus, at which votes can be secret and hence a true reflection of division.
House Republicans this week voted in semi-secret to strip Liz Cheney of her leadership. She is the sole representative from Wyoming (two senators, but no people so only one rep). Cheney is the daughter of Vader himself, Dick Cheney, the family only fifteen years ago marking the hard right-wing edge of the party. Liz voted last month to impeach Trump, hence this week’s attack by the newer-farther right.
The House has 435 members. The Republican caucus is the 207-member minority. In private, the identities of voters unknown, only 61 voted to demote Cheney.
The Republicans are not a monolith -- nothing in US politics is. Polling makes Republicans look unanimous. But this Cheney vote reveals the true solidarity of the Trump cult -- less than one-third of the total. Enough for trouble, to frighten the other two-thirds, but not growing from the fraction in 2010 when the Tea Party first became an electoral force.

The fed funds rate is the Fed-controlled cost of money. In the chart below, fruitless fighting of imaginary inflation began in the mid-90s. Each interval of rate-hiking led to weaker recovery and shorter and lesser hiking. This pattern can change toward authentic inflation, but to do so would require overturning the three great forces pushing down on prices.
1) Global trade, 2) IT in many ways, but killing margins by easy discovery of supply and prices, and 3) global demography, aging and collapsing rates of birth. The effects of all three if anything are intensifying.