Mortgage Credit News by Louis S Barnes - June 11, 2021

By mid-week, everyone who is anyone in central banking had announced deep fear of inflation and that the Fed should act now, removing stimulus of all kinds and lift interest rates.
Exceptions: everyone except chair Jay Powell and Treasury Secretary Yellen.
And of course everyone who is anyone in markets had decided months ago that an inflation disaster was inevitable. Or said so, anyway. Then on Thursday came the actual bad news: “core” CPI ex-food and energy jumped .7% in May alone, almost double the forecast, and 3.8% year-over-year.
Long-term rates... wait for it... fell. Again. Even more after the CPI report. On Tuesday the 10-year T-note broke below the 1.55% three-month low, but marginally and suspiciously, perhaps just an overreaction to the Fastly web-outage. Thursday... the rate drop was decisive, the 10-year closing at 1.44%.
Not numerically big, nor a big effect on mortgages, but spiritually yuge. So, who are you gonna believe? The smart guys? Or the owners of a gazillion dollars in US IOU wallpaper, who will lose a fortune if they get inflation wrong, but bought more bonds anyway?
Comments from Wall Street economists and celebrities (Larry Summers et al) are useless. But Donald Kohn and Mark Carney have been among the straightest-shootin’ central bankers ever. Kohn worked at Fed jobs from 1970-2010, ultimately vice chair. An understated man, he biked to work, further evidence of his balance as an economist. Before Thursday’s CPI report: “The intensity of the current inflation and the current bottlenecks in supply chains and labor markets is greater than I had anticipated.” Although he still sees a temporary rise in inflation, “But it also could be that the underlying demand-supply balance will not correct as readily or as comfortably as the Fed and I had expected earlier. It’s got my inflation antenna quivering.”
Mark Carney, born at Fort Smith, Northwest Territories began with 13 years at Goldman, led the Bank of Canada through the Great Recession 2007-2013, and then the Bank of England 2013-2020. On Monday: “The prospect of inflation being above target for longer than the makeup of the past undershoot -- I think the balance of risks is headed in that direction at this stage.”
There are two reasons to trust guys like this, and one reason not to. The first reason to believe Kohn and Carney, despite this week’s bond-buying: big money had shorted bonds, certain of rate increase, and got caught wrong-footed. The range-breakdown forced them to buy to cover bad bets, a temporary technical matter.
Second, as many old-timers believe, investors in bonds don’t particularly care about inflation. They are scared witless for what the Fed might do about it, but the Fed says it is not ready to do anything. Most of the gazillion US IOUs are embalmed in two places: pair-offs of liabilities in life and pension funds, and in the age of global QE held inert on bank balance sheets. But the hot money -- genius hedge-funders -- holds bonds with leverage, and the Fed controls the cost of the borrowed funds. If I can borrow 10:1 at 0.25% and earn 1.44%, I’m good, until the day that Jay Powell changes his mind.
If those two forces -- shorts and Powell faith -- have caused the drop in long-term yields, we will find out soon and markets will reverse.
Then there is the reason not to trust the wise people. Any central banker who lived through the ramp in global inflation, 1965-1982, or even the young ones who have been taught about that spiral by the old folks... every single one is pre-programmed to see inflation around every corner, and far better to intercept it than let it get going. No matter what the cost of interception if inflation turns out to be imaginary.
Which is exactly what the Fed did from 1995 through the 2018 idiocy of rate-hike “normalization,” repeatedly increasing the risk of deflation and hurting the economy. Jay Powell’s saw through the mechanical pre-programming toward pre-emption, and saw the “new” world -- new in 1995 and Fed-ignored as IT, trade and demographics reversed the global tilt toward inflation instead to deflation. Powell declared “No clothes!” on that failed pre-emption two years ago.
The interest rate near-term future is likely to be resolved quickly, by the next few words spoken by Powell. Powell and Yellen hold back Fed tightening almost by themselves.
No Fed chair has had a tougher call to make than this one. For all of the Fed’s thousand economists (there are more there, but I have not seen a recent nose-count), we have no means to forecast inflation. Pre-emption is discredited (although the impulse is still strong). But we have no modern experience at all with this new, non-pre-emption policy. We see actual, outsized jumps in prices in the last two months’ data, but have no way to forecast the restoration of the deflationary new age after interruption by a once-a-century pandemic.
Conclude with Covid Good News. Here in the US and most of the developed world, Covid is moving quickly into history -- a disappointment, I know for all of the scaremongers. Vaccines do work against all known variants. The vaccines are safe, immunity likely durable. In the poorer parts of the world Covid still does its awful work, including China, still disrupting supply chains, and will for many months ahead. The disruptions can as easily lead to periods of over-supply as this moment of under-supply. Good Covid graphics below.

The 10-year T-note in the last year, from rock bottom 0.55% in August to 1.75% in March. Add to the list of “why going down?”... too far too fast.

In Colorado, a dozen counties have reached or exceeded 70% vaccination of everyone over age 12. I’ve noted characteristics of counties not familiar to flatlanders -- not an accident that our fastest vaccination rates have been mountain hideaways and Metro. BTW: cases have dropped 90% in Denver.

San Juan (population 669) - 89.1%
San Miguel (Telluride) - 83%
Summit (Breckenridge, Copper, Keystone)- 80.7%
Mineral (population 712) - 77.7%
Broomfield (Metro) - 77.2%
Eagle (Vail) - 76.6%
Pitkin (Aspen) - 74.6%
Boulder (Metro) - 73.9%
Routt (Steamboat) - 72.8%
Jefferson (Metro) - 72.4%
Gunnison (Crested Butte) - 70.6%
Denver - 70.1%

Specific to Boulder County, 320,000 of us... as of early June new cases have evaporated, seven-day incidence averaging 7 cases. Positive tests 1%. Total deaths since March 1st, nine. Excellent age-adjusted graphic here -- once we needled the age 18-34 brackets... all over: https://www.bouldercounty.org/families/disease/covid-19/covid-19-illness-data/

Then, the world. Oxford U’s constantly updating engine https://ourworldindata.org/covid-vaccinations add nations or regions as you wish. Europe is catching up very fast: