Mortgage Credit News by Louis S Barnes - September 10, 2021

On the 20th anniversary of 9/11, thinking is a good idea, although we’ll be awash in each others’ thoughts and touching awful, walled-off spots.

Begin in a safe place, the unavoidable decisions facing the Fed twelve days from today, and its leadership. Then Biden and Covid and money, and the state of each other.

Interest rates are bracing for the Fed’s meeting. The 10-year has held a tight range, 1.19%-1.38%, today 1.34%. However -- technical gobbledygook, chart below -- ascending bottoms since August 3 form an unsustainable wedge underneath the horizontal tops. One of these two chart moves has to break -- either bottoms or the whole thing going lower, or out of the top -- not far, maybe 1.50% but out.

The Fed does have long periods when it can relax. When economic conditions are clear, set a course and hope to notice the surf on the next reef before hitting it. The Fed’s next meeting concludes on September 22, and it marks the second-worst of all Fed situations: damned if you do, damned if you don’t. (The worst is sudden knowledge of prior error and the need to catch up).

The 1970s suffered our first and only “stagflation,” the theoretically improbable stagnant economy and inflation. Analysts and salespeople ever since have often announced a repeat, but have been wrong on the inflation side. Stagflation is likely the result of an extremely rare predicament: severe inflation, so bad that even rising unemployment and interest rates cannot stop it, and the Fed dares not to hike faster and farther for fear of cratering the economy altogether.

In the 1970s inflation was forced by a tenfold burst in oil prices. In the inflexible US labor economy of that time, the cost-push caused a dreaded self-reinforcing wage spiral. The Fed triggered two recessions, 1973 and 1979, the second unnecessarily brutal and might as well have waited for oil to collapse of its own accord -- which it did in 1985 as prices forced both conservation and supply.

Today, it’s Covid. There’s a braying jackass on every corner claiming the Fed has been too easy with money, but our inflation trouble now is supply chain, combined with a workforce even more reluctant to go back to work than customers are to visit. Labor has pricing power for the first time since the 1970s but only in low-end and not very nice jobs, from waiting tables to nursing homes (some workers would say, all the same). A one-time rise in lousy-job wages is a good thing, not the beginning of a dangerous wage-price spiral.

Nobody knows how long global supply chains will be herky-jerky, nor if infectious. Nor does anybody know if tighter Fed policy would be helpful against prices, balanced with damage to citizens. Nevertheless, chair Powell is struggling to hold a majority against the reflexive Fed hawks who would taper bond-buying right now and begin to raise rates.

Perhaps the main reason that the 10-year fell from 1.74% in March to 1.19% in July: some smart investor-folk figure that reflexive inflation-fighting will indeed crater an economy as fragile as this, and a lot of money to be made buying bonds now before the 10-year returns to the 0.55% of 14 months ago.

Fed leadership. It is not an easy job, even with support from enlightened elected officials. Fed leadership in many ways depends on other leaders, even if grudging. Until August 31 I thought the Fed’s worst trouble was the hard-money mules. But on the 31st came the most-ignorant-ever demand on the Fed: "We urge President Biden to reimagine a Federal Reserve focused on eliminating climate risk and advancing racial and economic justice." From Rep. Ocasio-Cortez and her squad, who oppose Powell’s renomination.

Not to be outdone, yesterday we learned that the presidents of two regional Feds -- Robert Kaplan at Dallas and Eric Rosengren at Boston -- have been trading financial markets for their own accounts. In the case of Kaplan, who learned his ethics at Goldman, his trades were in the many-million range. Rosengren, one of the most insightful in the summer of 2008, merely significant amounts. Both have said “I have decided” to stop this practice, although within the bounds of Fed rules. Expect those rules to change, directly. Very old self-discipline of the rich entering public service: put your assets into a blind trust, or investments limited to Treasurys (Greenspan, Bernanke and so many did so...).

The Fed is a con. A dozen regional presidents are selected by local boards and approved by the DC Fed and its seven Congressionally approved governors and chair. We pretend and hope at bedside each night that these women and men are incorruptible and the best and brightest we have. Some are. All are human. But the Fed must hold the confidence of the people and markets -- and Congress, many of whom would like a tighter rein on the Fed and/or crackpot agendas.

Kaplan... handsome, terrific suits, wise and market-savvy, a prototypical investment banker. The culture of 18-hour seven-day work in those firms... some is running Excel to death, manufacturing presentations, but the rest of the effort... just like Kaplan. Find the edges of every rule, convince all that the client comes first, and that we never breach client confidentiality or regulation for personal profit. Uh-huh.

Resign, disgusting Mr. Kaplan. Get out. Too bad about Rosengren, but you, too. The Fed is a one-strike league.

Biden. Tough job. He could use some help, and isn’t getting much. His approval tanked ten points in the last month, all of it among independents, which may be more the end of his not-Trump honeymoon than true disapproval, crystalized by Afghanistan. The guy who shouts, “No clothes!” is often less popular than the emperor.

Help? Politico magazine today posted interviews with 17 of our highest leaders in office after 9/11. All mentioned regrets, but collective, “we”... not one mentioned a personal mistake, or personal responsibility. Some of the highest can’t talk: Cheney and Rumsfeld. Some not included, but who could speak and take heat from Joe -- Condie, Hillary, Dubya, Barak. No guts. The pathetic parade of generals, now even more silent than on the way out of Vietnam. As a colonel in 1997, now-general McMaster wrote “Dereliction of Duty” about our military leadership in Vietnam which nearly ended his career. Now he has met the enemy and he is them.

It’s amazing that Joe can find the energy to swing the bat again, quickly after this kind of abandonment, but he hit vaxxers hard with “Our patience is wearing thin” this week. A large majority is with him. Vaccines work, turning Covid into insignificant colds. Everything else has failed: lockdowns, test and trace, hermit nations, masks a stopgap. To attend elementary school for the last fifty years has required documented vaccination: measles, mumps, rubella, diphtheria, pertussis, chickenpox.... We don’t do polio and smallpox because vaccination ended them.

Money... both parties are in extreme phases. Both have lost a fundamental aspect of democracy: your appetite for policy must be proportionate to your popular support, and if so will likely enact better policy. Big things require big support. The Progressives’ current push for trillions has the same whisker of support as the 2017 Republican tax giveaway, and is just as bad policy.

Historical political extremes can be more dangerous either on the Left or Right. In the US today the divide is asymmetrical: the Left is more silly than dangerous (Portland’s Antifa hobbyists notwithstanding). The Right is so threatened by economic and cultural change that it has embraced secession, but a rural/urban divide does not allow physical separation. How to tell the difference between normal disagreement and secession? Trump was one, January 6 another, but better: so intent on separation that you’re willing to die of Covid to make the point, and not caring who you take with you.

The 10-year T-note in the last year. Drawn with my shaky mouse, the “wedge formation,” and also note the preceding double-bottom at 1.19%:

In other news, a moment for science. Paleontologists have discovered a fossil in the Burgess Shale, roughly 500 million years old. Initially mis-identified as a carnivorous bottom-dweller, the object is more than one foot long and 20 times the size of anything else alive at the time. After considerable argument, the object has been correctly identified as an early football. Because of its age and modest internal pressure, its phylum and genus are now named inflatio tbradiensis.