Florida Mortgage Report

Is Bernanke Dazed and Confused?

If you think the markets are screwed up, wrapped in fears of recession and wondering whether they should buy or sell, you are not alone.  Why?  How can they expect to know what to do when Big Ben can't even tell what is going on?

In three separate articles I read this morning, each breaking down what Bernanke (and Paulson) said, each focused on a different part of what Bernanke mentioned, and all lead to different conclusions on the economy. 

CNN Money highlights Bernanke and Paulson's comments stating that the economy will not see a recession because of the Fed's actions.  Here is the opening remark...

Treasury secretary and Fed chairman say rate cuts and rebates should keep economy out of downturn.

Bernanke even opened the speech with this statement...

"At present, my baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal stimulus begin to be felt,"

That sounds like he is no longer concerned with the economy and, in fact, expects it to grow reasonably later this year.

Then there is this article, put out by MarketWatch, which talks about how Bernanke and his buddies stand ready, willing and able to cut rates further.  Why would there be a need to cut rates again if the cuts already in place will keep the economy from recession and return growth toward the end of the year?

Federal Reserve Chairman Ben Bernanke said Thursday the central bank was ready to cut interest rates further if fresh signs of a weaker-than-expected U.S. economy emerge.

So, should we fear recession, or as I have mentioned numerous times, inflation?  Bernanke and his buddies have been putting recession fears ahead of inflation, even saying inflation is a "non-issue", all the while the CPI and PCE numbers were ticking higher.

And then we head over to the Miami Herald which headlines reads "Bernanke warns economy worsening"...

Federal Reserve Chairman Ben Bernanke told Congress Thursday that the country's economic outlook has deteriorated and signaled that the central bank is ready to keep on lowering a key interest rate - as needed - to shore things up...

"The outlook for the economy has worsened in recent months, and the downside risks to growth have increased," Bernanke said. "To date, the largest economic effects of the financial turmoil appear to have been on the housing market, which, as you know, has deteriorated significantly over the past two years or so."

So, which is it?  Which should we be fearing more?  Recession or inflation?  I guess he is just doing a little CYA maneuvering right now because he probably is just guessing at this point. 

Still wondering why there is so much volatility in the markets today?  Still wondering why housing is so screwed up and failing to correct itself in many markets?  Big Ben and the government gang have the answers, right?  Don't count on it.

Fed President Fisher Headed South and Took The Mortgage Bond Market With Him

Dallas Fed president Richard Fisher conducted a speech today down south in Mexico, a speech which ultimately sent the mortgage bond market crashing through the floor.  He took the opportunity to elaborate on his dissenting vote this last go around.

When the Feds decided to cut rates last week, there was but one vote that was cast against the rate cuts, and Fisher cast it.  In his speech today, he informed the crowd why he has turned against further rate cuts and that reason is the one I have been talking about since just after the first rate cut months ago, inflation.

Yet at the same time, we are faced with the unprecedented consequence of demand-pull inflationary forces fueled by the voracious consumption of oil, wheat, corn, iron ore, steel and copper, and all other kinds of commodities and inputs, including labor, among the 3 billion new participants in the global economy. When it comes to these precious inputs, we have no control over the surging demand from China, India, Brazil, the countries of the former Soviet Union and other new growth centers, but we know that it is putting upward pressure on prices in our economy. Economists note that the “income elasticity of demand” for food is higher in China and other emerging economies than in the United States. Many of these countries’ income elasticity of demand for oil and certain other vital commodities is greater than 1, meaning that their demand for these items will increase faster than their income. Even if growth slows somewhat in some of these important emerging economies—the World Bank, for example, projects China’s growth will be 9.6 percent in 2008, down from 11 percent last year—demand for inputs relative to the world’s ability to supply them will likely continue to exert upward pressure on key commodity prices.

We also know that the inflationary expectations of consumers and business leaders are impacted by what they pay for gasoline at the pump and food at the grocery store.

He then says probably the best quote to describe why the Fed should stop and take a look at what it is doing...

Monetary policy acts with a lag. I liken it to a good single malt whiskey or perhaps truly great tequila: It takes time before you feel its full effect. The Fed has to be very careful now to add just the right amount of stimulus to the punchbowl without mixing in the potential to juice up inflation once the effect of the new punch kicks in.

You see, as I have mentioned before, the rate cuts allow the opportunity for inflation to rise out of control.  Since the effects of the rate cuts take several months, if not a year, before you see the results, the drastic actions the Fed has been taken recently could fuel the inflationary fire and let it burn out of control.  We already have core inflation above the normal Fed "comfort zone". Of course, only time can tell the future, but Fisher is correct in his stance that if nothing else, the Fed should stop reacting (or overreacting) and take more of a wait and see approach.

Since inflation is the archenemy of mortgage bonds, Fisher's comments on the risks of inflation sparked a major sell off in the bonds pit, with bonds dropping as much as 65 basis points, but settling in down 44 at the close.  What that means to you is that mortgage rates ticked higher today and broke below their sideways trading pattern allowing the potential for further rate increases down the road.

Fed Slashes Rate .50%: Mortgage Bonds Throats Slashed Also?

The Fed made their decision and went as most people expected even though their decision may not be the right one.  In another apparent attempt to keep the stock market content, the Fed chose to cut the Fed Funds Rate by another 50bp (.50%) bringing the rate down to 3.00%, fueling speculation of the rate dropping as low as 1.25%.

Before I get into the potential problems, let's look at the potential benefits...

• HELOCs may see a drop in their rates over the next month or two.
• Credit Cards may see drops in their rates over the next month or so.
• ARM holders should rethink their desire to switch to a fixed rate mortgage if their rates are indexed to LIBOR, and possibly other indexes as well.
• "Special financing" deals will likely continue as money is even cheaper.

Certainly some good can come of this, but remember that mortgage rates are not driven by this change directly and, in fact, will likely move higher on this news.  So, let's take a look at the potential problems...

• Mortgage Rates may tick higher (not lower)
• Inflation may grow uncontrollably
• Continued devaluation of the US Dollar = less real wealth for Americans (and foreigners with currencies pegged to the dollar)
• Stagflation environment (slowing economy with rising inflation) - inflation may actually help the cooling of the economy creating larger problems

As you can see, there are some potential problems as well, some big ones at that.  Since no one has a crystal ball, only time will tell, but the first test of their decision comes tomorrow with their favorite gauge on inflation, the PCE report. 

Did the Fed get fooled again?  What is your take?

Fear of Recession Causes Fed to Cut Rates

Well, that headline is not entirely true as it had a lot to do with the worldwide financial collapse today.  With stocks dropping over 400 points out of the gate this morning, the Fed felt they needed to do something and they did a .75% rate cut, overkill if you ask me.  And for what?  Stocks rebounded a lot, but they still ended down considerably as traders felt there was more on the way.

I have heard arguments on both sides of the inflation spectrum with those stating that inflation is low, so the Fed should be lowering rates to fight a recession.  I also have heard arguments from those that believe inflation is too high.  Personally, the numbers show inflation at the core level to be above the Fed comfort zone and reducing rates will likely drive that number higher.

Am I wrong?  Maybe.  I hope so.

The Personal Consumption Expenditures Index (PCE) is due out later this month and that will be what I continue to base my inflationary beliefs on.  The last two reports showed inflation ticking higher, with the last one at 2.2% year over year, just above the Fed comfort zone.  So, for now at least, I will continue believing the Fed should not be cutting rates, at least not as drastically as they have been.

What is worse is that the Fed cut today makes traders feel that another cut is coming next week.  That puts the Fed in a precarious position since, if you remember, last month saw the market tumble after the Fed did not cut as much as traders thought they would.

Another scary point I would bring up is that of the bonds market's trading versus the Fed decision.  The normal markets have mortgage rates moving opposite of what the Fed does, meaning that if the Fed cuts rates, bonds will move lower and mortgage rates will move higher.  That is at least the initial reaction from bonds and that is what is normally supposed to happen.  When the Fed cuts rates and the bonds rally, things are not normal.

So, since the bonds has been rallying after the Fed rate cut, things are abnormal.  The question to be seen is whether or not the markets are in chaos, temporarily insane as it may be, or if the situation is much worse than we are led to believe.  Time will tell, but either way you look at it, the Fed's actions are devaluing the dollar, so inflation is growing, even if only as buying power outside the US.

If Bernanke Doesn't See a Recession and Inflation is Growing, Why Cut Rates?

I am still trying to see the hidden meaning in why bonds are still rallying when inflation is growing and recessionary indications, according to what Bernanke said this morning, do not point to a recession happening, but rather a slowing economy (Limpflation versus Stagflation).

“We currently see the economy as continuing to grow, but growing at a relatively slow pace, particularly in the first half of this year,” Mr. Bernanke told the House Budget Committee, acknowledging that conditions are worse this year than in the “reasonably good” second half of 2007. (NY Times)

The chairman insisted that despite valid concerns about the “slowing growth” of the economy, it remains “extraordinarily resilient,” fortified by diversity, a strong labor force, excellent technology and a “liquid financial market that is in the process of trying to repair itself.”

So, in one speech he downplays inflation due to recessionary risks, then in another he claims recession isn't really an issue.  He again downplays inflation stating that inflationary pressures should ease this year and next, as long as the public’s confidence in the Fed is not shaken. 

That's a big IF! 

I guess a devalued dollar doesn't matter either.  Maybe he should run for President.  But wait, he did reiterate his last speech's point...

“We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.”

That quote has been translated as more rate cuts even though we don't necessarily need them.  Since the Fed loves to throw money, even if fake, at the problems, we can expect these rate cuts to occur.  If for no other reason, the Fed must cut rates just so the DOW doesn't drop to 8,000!!

He does point out what many in the RE.net community, including myself, have talked about for a while and that is that the housing and mortgage mess is far from over...

“Our expectation is that delinquencies will go higher and that there will be ongoing losses in the subprime area,” he said. Asked to put a dollar figure on total losses, he said, “I see so far about $100 billion, but it certainly could be several multiples of that as we go forward and the delinquency rates and foreclosure rates rise.”

So, there you have it.  Despite a weakening economy, Big Ben doesn't see a recession and believes since the American public loves him, we won't see inflation either.  No wonder people keep buying bonds.

Has America Lost Confidence in the Fed?

Based on the markets' reaction to the Big Ben's speech, there is a definite lack of confidence in our Fed.  Part of the reason is that Big Ben failed to emphasize inflation as he has done in the past and we all know that inflationary pressures are running high. 

Couple that with the fact he said the Fed was ready to cut rates as drastically as it feels is necessary on or before their next meeting, and you can see why the confidence is lacking.  Lowering rates increases the same inflationary risks he seems to want to avoid placing a spotlight on.  Of course, you knew that already if you have been a regular reader of this blog as I have been mentioning the Fed opened Pandora's Box in regards to inflation since September.

In a CNBC poll, 70% of the respondents are in disagreement with what the Fed is doing, however nearly 50% believe they should be cutting rates even more than they have been.  23%, me included, believe they are cutting rates too much.

Have you lost confidence in the Fed?  Leave a comment expressing your opinion on the subject.

Are the Feds Finally Seeing Reality?

Ever since September 20, I have posted about the risk of inflation as the Fed rushed to lower rates and increase liquidity in the system.  Now it appears that the Fed is admitting that "stagflation" is occurring and they are in a bind.

Fed President Plosser (Philadelphia) stated this morning that the Fed is in a tough spot on monetary policy since the economy is slowing down and inflation is rising.  All I can say is it's about time the pulled their heads out of the ground.

We have been seeing signs of a slowing economy for several months and the last two months saw the PCE reports moving higher.  Remember I stated back in November that the PCE report, though within the Fed "comfort zone", was in fact changing direction as it ticked slightly higher.  Then, the last report had it pop higher to 2.2%, outside the Fed's comfort zone.

Since Plosser made his statement and we are heading into the CPI, PPI and then PCE reports starting next week, I wonder exactly how bad they think it will be.  Remember that I fully expect that PCE to climb over 3.0% before year end and the Fed to cut rates at least one more time creating more chaos in the system. (see What's In Store for 2008?)

These coming weeks will shape the future for bonds and mortgage rates, but expect reality to return to the markets as the real inflation numbers start pouring in.

Just How Bad was That Jobs Report

I am on the "road" right now, so I am actually writing this in the cockpit, excuse me, flight deck, in between flights.  But as I sat here thinking about what to write as I had time, I began to analyze the Jobs Jamboree from Friday and dig deeper into the harshness of reality.

The number of jobs created, according to the report, was a dismal 18K.  But was it really that good?  Not likely.  Odds are very favorable that those numbers will be revised considerably lower in the coming months.

Why?

As I have mentioned before, the BLS statistics are not very accurate and cannot be truly relied on for anything other than guidance.  The facts are that the numbers are skewed, sometimes higher, sometimes lower, all depending on which direction the economy is headed.

You see when the economy is gaining momentum, those numbers were generally come in lower than reality, and in times like now when the economy is slowing, those numbers are going to be higher than reality.  So, as time will show, the jobs report will highlighting the fact the BLS should leave out the "L".

With the jobs number being low, you can bet that the Feds are looking to lower the rates again at the next chance they get.  However, as I have mentioned numerous times before, inflation is on the rise and lowering rates, especially with the Fed pissing money away into the system, is just going to exacerbate the problem.

The Feds Answer to Everything...Throw Money at It

Well, the Fed continues to devalue the dollar despite its "strong dollar policy".  After the success of throwing money into the banking system to bailout, ahem, I mean assist the idiots running those in trouble (Citigroup, Countrywide, Washington Mutual, and the list goes on and on), the Fed is going to throw another $60B into the system.

The Treasury Auction Facility is going to be expanded to handle two $30B each auctions, one on the 14th and the other on the 28th.  Keep in mind that the success of these auctions is due to the anonymity of those gaining the money.  Those institutions can feel free to grab all the money they can without disclosing to shareholders what is really going on, thus keeping their stock artificially inflated and keeping them liquid.

The Fed has also stated that they will continue throwing money at the problem until liquidity concerns are gone.  With more and more delinquencies spreading across the board, that guarantees that inflation will rise, the dollar will continue to lose value and we can all look forward to less purchasing power everywhere for a long time to come.

But, alas, the good news is that the Fed is now expected to lower rates by .50% the next run and we can all borrow even more money at lower rates.  But who cares since we won't pay them back anyway?

Business Week's Economic Survey Shows Economists Expect Slow Growth, Inflation, and Lower Home Prices

Business week interviewed 54 economists as they do every year end and posted their results here.  The general consensus is that the economy will be slow and steady, but will not fall into recession.  I can already tell you they are looking at the wrong numbers for inflation though.  Why?  They use CPI instead of the Fed's favorite gauge, which is actually PCE.  This shows they still don't "get it".

The survey shows a wide range of answers across the categories, with some really off folks included.  Let's just wipe some of these guys reports out simply looking at the inflation numbers.  Anyone thinking inflation will be below 2.0% is likely off their rocker so we can file their forecasts into the "yeah, right" (ie circular) file.  The consensus does show a 2.4% CPI and 2.2% CPI, which I think will be higher. 

Interestingly enough, the ones thinking CPI will be less than 2.0% are from the companies making headline news these days, and for the wrong reasons.  They are economists from Merrill Lynch, UBS, Swiss Re and others.

Ok, what about the Fed Funds Rate and why is this important?  The importance is that what the Fed does drives inflation.  If they keep cutting rates, inflation will continue to rise for sure.  According to the latest PCE report, it already sits at 2.2%.  Additionally, the Fed's decisions determine Prime Rate and that drives credit card, HELOCs and other credit vehicles.  It does not, however, drive mortgage rates, which are heading higher.

So, the consensus is for the Fed Funds Rate to be at 3.9%, so round it to 4.0%.  That means at least one more cut, which should help push inflation higher.

What about unemployment?

The consensus here is for it to drop to 4.5% from its current 4.7%.  If that occurs, that will further drive inflation higher in all likelihood.

And what about home prices?

The consensus here is for them to drop 7.1%.  If you are in South Florida, you can only dream they will only drop that much as we will likely see upwards of 30-35% drops before homes become "reality priced".

I am not an economist, but many of these economists are way off in their predictions, some are absolutely insane, just take a look.  I will provide my first annual forecast in the coming days for those who care (and if you live in Florida, you probably should care).