Week of Monday,
February 4, 2008

If you don’t believe us, visit www.freddiemac.com and its weekly survey. It is unbiased by sales jive, although it suffers from “survey lag” (early-week data released on Thursdays always misses real-time reality), and assumes a fractional origination fee. Last week’s “5.48%” captured the one-day hysterical bottom when the industry could not log onto rate-lock websites. Last Thursday’s “5.68% plus .4% origination” is still about right, and all but identical to the prior week’s “5.69% plus .5%.”

Yet, the media refer constantly to “dramatically lower mortgage rates.” They are better, but... drama? Freddie’s average for the whole of 2007 was 6.34%. A half-percent drop is nice for buyers, and a help to a few refinancers, but no fire sale.
“How can it be the same...!?!” says the client, after a cumulative 1.25% cut at the Fed in only eight days? Answers follow.

Brand new January economic data are not that bad. Says here not bad enough to justify the Fed’s panic, let alone to anticipate more cuts. Payroll growth slipped to flat in January (negative 17,000 is within the huge range of error and revision), unemployment down to 4.9% in a workforce statistical quirk -- soft, but hardly a recession. The purchasing managers reported their first gain in six months, likewise soft, but with persistent strength in foreign orders. 4th quarter GDP grew by a mere .6%;

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The Fed’s form is disturbing to long-term investors. Central banking is not figure skating, but Mr. Bernanke has departed his predecessor’s 17 years of gradualism for lurching on the rink. A Fed that will lurch down will lurch up.

Investors bought long Treasurys and mortgages at these levels 2002-2004 because Mr. Greenspan said after every meeting into 2006: Excessive monetary stimulus most likely will be “removed at a measured pace.” Translation: you’re safe for now, and we’ll give you time to get out before we kill you.

In those late Greenspan years, deflation was the problem. Today, inflation is rising all over the world. Australia, 16-year-high 3.8% core; Europe 14-year-high 3.2%; UK 2.6% core; China 6%-plus, and an economy completely out of control beginning to export inflation to us. Each time the Fed has lurched to a catch-up ease, all the way back to August, it has rescued stocks, commodities, oil, gold, and tanked the dollar.

We have chewed on the Fed for its inaction and credit-wreck oblivion. However, this situation is NOT a monetary problem: it is a banking-system near-insolvency that may morph into a recession, each making the other worse. The crying need for six months has been transparency of credit loss and bad-asset firewall. Cuts in the overnight cost of money may intercept recession, but inflation means that these cuts cannot be maintained or removed at a measured pace.

© 2008 - Economic Notes is published weekly by the Economics Department of Universal Lending Corporation.

Two non-Fed forces holding up mortgage rates: credit fear about Fannie and Freddie has the spread between mortgages and the all-defining 10-year Treasury (3.57% on the 1st) over two percent for the first time ever. Second, somebody by accident may arrive at an effective credit-wreck bailout: the giant bond insurers, Ambac and MBIA may be resolved in days. If no collapse, then credit fear will give way to inflation fear.

The Fed’s cuts have had a dramatic effect on ARM adjustments, and should revise estimates of housing doom to the better -- also reducing bond-market fear. This month, common one-year Libor-floating loans will adjust DOWN to 5.125%.