Mortgage Credit News by Louis S Barnes - September 17, 2021


Next week, “game on” at the Fed -- and while waiting, below are Democrats and taxes, French outrage, and General Milley.

Rates. Today the 10-year T-note has risen again to its summertime top at 1.38%, likely to break through next week although not explosive. 30-fixed mortgage rates have hovered near 3.00% and likewise not likely to rise far.

The risk of surprises from new economic data has never been greater. We don’t know -- can’t know -- how to read the steam of data. Core CPI rose over 5% in the last year, but in August dropped to 1.3% annualized. Consumer prices have been propped by unseemly Covid profiteering, expanding margins in the absence of supply competition, but no way to know if chair Powell’s view of “transitory” inflation is correct. Covid is rolling overseas, especially damaging to supply chains in Asia, and may run out of control in China.

Some analysis says that supply chain issues are worse in the US than anywhere. Obviousman! would say, duuUUuuh: we piss away more money than anyplace else. Ahem. A dignified way to analyze that phenomenon: the US gave more fiscal support to its economy and consumer demand than all others combined. Which leads to...

The Fed. The hawks, who include powers in Congress, civilians, and Fed officials with impaired imagination have driven the coming policy tightening. The Fed will announce a taper of purchases of MBS and Treasurys beginning in November, and cost-of-money liftoff in 2023. It’s that liftoff -- extent in altitude and continuance unknown -- which will give most trouble to long-term bonds and mortgages.

The Fed’s bond-buys were most helpful to markets during the Covid fiscal-spasm. I can’t hold in my head the total amount of Covid borrow-spend but it’s near $5 trillion, about one-third financed by the Fed. That fiscal goosing is winding down now, hence less need for Fed financing. However, we don’t know -- can’t know -- how the economy will do without the fiscal stimulus with or without the Fed..

The inflation worry has minor legitimacy: maybe vendors will become accustomed to higher margins and get away with them, and maybe workers will get higher pay for poor jobs, and expect raises and get them. Maybe. However, the three great forces of deflation since 1995 are still with us, and two are more powerful than ever. Demographics... the rapid aging of the world has gotten worse, Covid driving down rates of birth. IT... every aspect from productivity and logistics to price discovery is gaining power and suppressing prices. Only global trade is suffering, from shortages of supply to ships and port capacity, all likely transitory.

Democrats, taxes and spending. After the last three administrations’ relentless pursuit of error, it’s hard to imagine this new group getting most things wrong, as matters of fairness, economic merit, and reading the mind of the nation.

The infrastructure bill will likely pass, as pork is still an easy sale in both parties. The $3.5 trillion thing is failing so fast that the Dems will allow a separate vote on infrastructure, but the progressives’ intent is so far out of the American mainstream that all could fail.

The 3.5T... when embarking on big spending, deficit or not, or for that matter tax cuts from the other side, the disciplined question is “What’s the multiplier?” For a unit of spending, what unit of GDP increase do we get? China has entered multiplier hell, in which it gets less than half the GDP return on spending, the fraction still falling.

The Dems know that an increase in outright deficit spending has no future. So their proposal is to be paid for by tax increases. I’m all in favor of tax increases, beginning with repeal of the 2017 giveaway -- but with no increase in spending, designed to reduce our fiscal health. Unfortunately the real tax money is in the hands of the middle class, and both parties have walled-off that revenue.

If 3.5T has dollar-for-dollar taxes, what economic merit? Only if a dramatic add to productivity. The progressive bells and whistles would be helpful to many, child care and such, but nobody can demonstrate the productivity pull-through from free pre-school.

The whole scheme rests on the idea that taxes extracted from the rich are free money. On the left side, it is axiomatic that America is unfairly unequal in wealth and income, and hence equalization by transfer is fair-er. The Democratic Party began to die on that theory 55 years ago. Bill Clinton knew better.

The worst of the 3.5T pay-for is the attempt to tax capital. Taxes on long-term capital gains historically have been at lower rates than income for several reasons. We need investment risk-taking. Fairness: the money used for investment has already been taxed once, and is at risk -- put into markets from houses and stocks for at least one year. We tax dividends and interest at higher rates because current income, and not risky. Last, in prior folly of higher rates on capital gains we have discovered every time that revenue falls because investors opt not to sell.

Which leads to the most odious, deceitful aspect of the 3.5T: a new attempt to raid assets at death. Since the beginning of estate and income taxes, when we die all of our assets step-up in basis to current market value, and then above a threshold are taxed. This dismal crew, unfortunately including Joe have tried to insert a capital gains tax in addition to estate tax. Unfair? I know hundreds of clients who began to invest in youth in capital assets, houses and stocks, and did so for periods in excess of 50 years in reliance on stable law.

Fortunately, the step-up and sky-high cap gains rate are dead. Moderates taking heat from progressives see the collapse in administration support from independents. However, it looks as though the cap gain rate at the Federal level will rise from 20% to 25%. The cap gains exemption of $500,000 from the sale of a primary residence was set 24 years ago. I am not going to enjoy telling a downsizing couple in their 70s that the home they bought in 1970 for $22,000, selling now for $890,000 will face a capital gains tax of $90,000, not $70,000 -- plus 5% Colorado.

France is outraged by the US/UK transfer of nuclear submarine technology to Australia. But, France is always outraged, a state of mind for 200 years, ever since Waterloo put an end to empire. As many have observed, France has the inclination to empire, but not the means. And if Britain is involved, automatic outrage. And France thought is had the inside track to sell subs to Aussies, quaint and coastal diesel-electrics.

Aside from needling France, several things. Biden is showing how to deploy foreign policy muscle. China, if you intend unpleasantness, we can make life more difficult for you than you can for us. France... you have had your own nukes, the Force du Frappe for 60 years, repeatedly refused cooperation with allies, and join the rest of Europe in ignoring your NATO responsibilities, and prefer get-along with Putin. Stuff it. Way to go, Joe.

General Mark Milley, bulldozer face and physique, chairman of the Joint Chiefs of Staff, was revealed this week to have called his China counterpart General Li twice last winter to reassure him that, yes, we know the president is nuts but we won’t let him start a war. We already knew, back in January that Milley had said to his colleagues that the run-in to January 6 was a “Reichstag moment.”

Most of us were busy and Covid-distracted last winter. The 2020 election and aftermath were out of a Fletcher Knebel novel (two: “Night of Camp David” and “Seven Days in May,” the latter a Rod Serling screenplay, Frankenheimer-directed), and too crazy for most to follow while happening.

This weekend, look for reviews of Bob Woodward’s newest, “Peril,” formal release on Tuesday. And consider... how many Americans know the meaning of “Reichstag moment?” Five in one thousand? Two? One?

The 10-year T-note in the last year, the last two trading days sketched. The chart is UG-ly. Double-bottom at 1.19%, never re-touched. Ascending bottoms since. The top of range at 1.38% held by the Fed’s promise not to raise the cost of money -- which goes bye-bye next week.