Mortgage Credit News by Louis S Barnes - October 1, 2021

This week... interest rates, the supply chain trap in two parts, and econ-politics.

Long-term rates continued to move up after last week’s breakout, the 10-year T-note cresting at 1.55% but then oddly retreating to 1.47% by this week’s end. So far little effect on mortgage rates.

Why the breakout is always a matter of debate. New economic data is still distorted by Covid, shutdowns and stimulus, except inflation rising, core PCE ramping last month at 3.6% annualized. Fed tapering is in play, but the dot-plot of future Fed intentions to raise rates has been the leading cause. The limited market rate rise, despite the Fed’s cyclical turn last week says investors doubt recovery.

The Fed trapped by supply chains. Powell: “The current inflation spike is really a consequence of supply constraints meeting very strong demand.”

All good students know that inflation is caused by too much money chasing too few goods and services. However, since the 1980s the worry has always been too much money, not too few goods. We’ve been buried in cheap and cheaper goods, as well as services on IT steroids. So, the Fed is trapped in an unpleasant equation: if supply is interrupted, the Fed must squelch demand, even if the economy is well short of recovery.

That trap gave us stagflation in the 1970s, although in a far less flexible economy than now. If supply chains do not begin to function soon the Fed will have no choice but to flatten demand -- very different from the dot-plot madness of rate hikes in search of “normal.” The Fed dares not allow a short-term crunch-spike to become an embedded price-up-cycle.

Fed sidebar: Messrs. Kaplan (Dallas) and Rosengren (Boston) have resigned after exposure of their personal trading. Neither man offered the slightest apology, Rosengren for “health reasons” (a fig leaf of truth), Kaplan insisting he had done nothing wrong.

Fed sidebar #2 is a lead-in for econ-politics below: Senator Warren said she will not support Powell’s renomination because he is a “dangerous man.” For jaw-trembling, threatening, angry extremism, she is her party’s answer to Jim Jordan.

Supply chains in deep trouble. Beginning in 1990 with the fall of the USSR and Iron Curtain, and the opening of China and nearby lands, global trade began to expand faster than GDP. The conveyor has been greased by IT, the fantastic geometric increase in the quantity and velocity of information making it effortless to find the lowest-cost supplier of anything. And then exposing that supplier to lower-cost competition, driving down prices, and pulling down on developed-nation wages while supplier nations climbed from poverty.

These conveyors became hyper-efficient, the smooth flow itself contributing to price-compression. Price compression became an expectation for every vendor of anything -- no point in even trying to raise prices, or margins over costs.

Now the conveyors’ delicately calibrated drive gears are spitting teeth, the belts jumping wildly. And during increasing supply shortage... hell, anybody can raise prices. Lumber prices fell from the 2020 spike almost to normal $400/kbf, now back to $627 -- despite builders pausing construction until prices rationalize, which is a warning to the Fed that squashing demand may not hold prices.

The belts of the goods conveyors are shipping containers. The cost of one at a port in China has quadrupled in two months. Where are they? Floating at anchor in LA harbor, or after that wait sitting in a yard waiting for a truck to take it to a train or to another truck, and we are short of truck drivers. The port yards are so packed that even if the longshoremen get around to offloading a ship, no place to put the container.

Energy stories abound. The UK may be even colder than usual this winter. Climate activism is partly responsible for shortages, drilling frustrated. Half of the provinces of China, the most-populous and productive ones now suffer energy rationing, in part because of the explosion in energy prices, partly to reduce air pollution, and partly the standard failure of top-down economies to forecast properly. China imports 10 million barrels of oil every day, now at $80/bbl. Coal in the last year has nearly tripled in cost.

I smell more than dislocation pricing. I get the scent of profiteering, most enjoyable after decades of price discipline. The seven largest publicly traded ocean carriers (Maersk, COSCO, Hapag-Lloyd...) reported $23 billion in profits in the first half of this year, compared with $1 billion in the same period last year.

Econ-politics. It was a relief to the center to have ol’ Joe take office. Comfortable old shoes, steady, old values of stability, distanced from “progressives.” Too old physically, short on oomph, and now painful to watch failure unfold. He was right about Afghanistan, but blew the leadership image (the chaos itself probably inevitable). He has mismanaged our southern border from the get-go (the NYT’s Tom Friedman nailed the center’s wish: “A high wall with a big gate”).

Joe doesn’t have a lot of blind spots because he’s seen so much. But his oldest one is very old. He’s a union guy. He’s emotionally with the regressive progressives who see America as Jeff Bezos, landlords, corporations, and nobody else except low-pay “working people.” Private sector union membership is now 6% of the workforce, including the NFL and NBA, and another 5% public sector, the most secure jobs in the nation. Unions have disappeared because employers 60 years ago adopted all of he good from unions, and added empowerment, profit-sharing and ownership, and removed middle management.

The greatest progressive misunderstanding results in obnoxious reference to “working people,” but they have left the Democrats to vote Republican. This $3.5 trillion whale offers to “working people” the same old Plantation Democrat bribes which worked for a while in the 1960s. The NYT’s David Brooks hopes that passage of these bills will repopulate the Plantation: “The list of states... getting the most money per capita... places where Trumpian resentment is burning hot: Alaska, Wyoming, Montana, North and South Dakota.”

Yeow. Big majorities in those states hate your guts. They are terrified by the loss of their culture by Leftie meddling in their lives -- and the loss of their economic wherewithal, not Lefties’ fault but you’re the ideal villain. They do not want your handouts, or your vaccines, or your condescension. They know how to educate and look after their kids, and their neighbors. They want and need entirely different support, beginning with respect.

Joe is in office and Democrats have the thinnest-possible control of Congress because suburbia flipped. Joe says, the $3.5 trillion is “no cost to the deficit.” Do you think the suburbanites who will pay are deaf? Do you think they do not see themselves as “workers?” The top 25% of American earners just below the rich 1%, our most-productive worker-earner-savers, screwed by Democrats every time they say they’re going to soak the “rich?”

Karl Rove, Republican but straight technician, watching the Democrats’ collapse in polling of the center asked rhetorically this week, are the Democrats better off next year if the $3.5 trillion passes or fails?

One way for Joe to begin a self-rescue: use emergency powers to un-clog domestic chains before the Fed has to hit all of us. This is an emergency, and LA is still working only two shifts, and weekends off. Unload some frustration, do something useful.

The US 10-year T-note in the last year. The last two days’ trading in red, and chart support in green. The two tops 1.60%-1.70% mark very strong support which will be challenged by spring, IF Covid retreats, IF economies stay strong, and IF knee-jerks at the Fed stay jerky: