Mortgage Credit News by Louis S Barnes - July 30, 2021

The quiet in US markets reflects growing uncertainty, not nuthin’ happenin’. One at a time, interest rates, stocks, economy, China -- and save for last Covid, which is back as the top actor in the show.

Rates. The 10-year T-note fell below 1.30% on Monday July 19 for the first time since February. Anomalies abound: in February 10s were screaming upward from 0.55% in August toward 1.75% in March, and passed through the 1.20s without a howdy-do. Since May rates have fallen without a pause, a long way without a reversal of some kind.

When worried, and uncertainty is the worst kind, money flows to bonds for safety, and super-especially to US and German bonds. German 10s began their most recent drop two weeks before ours, their yield still falling and now minus-0.459%.

Okay, if money is looking for safety, why are stocks holding at record highs? I’m an IOU guy, so not to be trusted, but stocks are the only future return in town (aside from single-family homes), and in an open-ended era of low rates and hence low discount of future value, present value stays high. Technology is wildly underappreciated, and the usual stock market scare-bears with their ancient charts of fossilized economies rarely discuss the extraordinary global diversification embedded in today’s S&P500.

BTW, ho-hum: the Fed met this week and had no effect. Markets know the Fed is not about to destabilize a rickety situation.

Economy. By GDP measurement, the US economy is back where it was pre-Covid. Add GDP to the list of indicators which do not indicate.

Today, perhaps useful: in new data from June, which was a while ago, personal income rose 0.1%, while personal consumption expenditures rose 1.0%. Government stimulus is fading, but spending was strong presumably because of unspent previous stimulus. There are two broad forms of inflation, cost-pushed as in an oil panic, and wage-pulled. The latter is dangerous, requiring recession and unemployment to stop. In the absence of increasing incomes to fuel the fire, cost-pushed inflation fizzles.

China. The newest drop in yield on the US 10-year began on the Sunday night before the US July 19 market open, a fingerprint of something starting overseas.

That weekend the US warned businesses of the hazards of commerce in Hong Kong, and simultaneously China began a crude crackdown on businesses from tutoring to technology. Officially the crackdown is for stability and security, but the whole thing smells bad, especially the disgrace, fleecing, and imprisonment of China’s best entrepreneurs.

Go back only a half-dozen years when Xi became emperor, and we had reasonably reliable news from China. Michael Pettis blogged from Beijing U, and Bloomberg’s broadcast from Hong Kong included good and frank China-thinkers. Then and for twenty years before, non-Party economists had one overriding concern: how would China disassemble the inefficient, money-losing, and debt-loaded state-owned industries and banks, maybe 40% of its economy?

It won’t. The Party won. No entrepreneur will be allowed to compete in a manner embarrassing to the Party’s rice bowl. One theory about the advent of Xi’s suffocating dynasty: to rationalize and modernize China’s economy, disorder will ensue and require rigid state security. Which still may be partly true, but every day this crackdown looks more like a permanent effort to make China safe for the Party.

Uncertainty... China’s giant global economic force has closed to independent inquiry. China-provided information is dubious, and inferences from external observations are unreliable. China’s debt-financed unhealthy growth via over-investment may be in the process of fatal internal contradiction right now, or just plodding along at a slower rate as before, ever-larger lumps hidden under carpets. Nobody can know, maybe not even Xi.

Yesterday the difficult president Duarte of the Philippines reversed his cancellation of cooperation and joint exercises with the US military, both back on. Biden’s effort to build multinational opposition to China has found committed friends everywhere. China’s behavior is so bad that it will be hard to repair and be trusted. Everybody knows... no one in Taiwan steals a boat to get to the mainland paradise. Nobody but North Koreans.

Covid. Not the finest hour of humankind. Neither as individuals nor leadership. To have a successful civil society, individuals must sacrifice for the public good. The anthro record shows Neandertal individuals suffering physical disability living to maturity who could not have done so without the group sacrificing to benefit a non-productive member. Here in the US, the ultimate haven of individual rights, in our legal system back to foundations thousands of years ago, personal liberty stops at the point of harm to another.

During early Covid, if we masked and were tough about social distance, we had to be very unlucky to become infected. Delta is so much more contagious that those successful self-protections are likely to be futile. In this new Delta plague, there is no case to be made that personal freedom should include vaccine refusal. The vaccinated and unvaccinated are vulnerable to infection from the unvaccinated, and will then infect both groups. The vaccinated will not become seriously ill, but now are told again to wear masks to protect the refuseniks from serious illness.

Australia -- an island tough and unified -- embarked on testing and lockdown as Covid preventer, much as many on the Left in the US wanted here. The population is only 25 million, half that of Italy. 63% of Italians are at least one-shot vaccinated, 51% fully. Australia is 32% and 14% respectively, although moving at last. Japan is only 39% and 28%, South Korea 37% and 14%. Cases in the UK are collapsing again, maybe because 69% have had at least one shot. Ya think?

According to Oxford University, China claims 28% partially vaccinated and “no data” on fully vaccinated. China invented the oppressive model adopted by Australia (Vietnam, Singapore... ), but now Delta seems to be jumping China’s fences.

Here... the new CDC director may be even more damaging than the old, the lurching black comedy undermining faith in public policy. Here in CO we have a distant-Left governor who has suppressed his own feelings in favor of effectiveness and political workability, a truly brilliant performance. 59% of the state has at least one shot, Boulder County 79%, like most of our populous counties. When the new CDC mask order came down this week, Gov Polis was asked about compliance and said, “No comment.” Mask up again to protect vaxxers? Uh-uh.

Markets are fully aware of the global anti-social response by the public, and mostly bad top-leadership. Markets are aware that the social fabric of the world is threatened. Uncertainty squared.

The 10-year T-note in the last year, worry plain:

The CDC’s latest hysteria. Not because it is wrong to worry, but far out of touch with the people, credibility in tatters. Under this link the map is interactive, new policy explained.