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.

The Fed Hasn't Gotten Spanked, At Least Not Hard and Not Yet

I am sure you all have been waiting for me to weigh in on this morning's data, but quit frankly, I have been busy.  Besides my normal workload, I have been toying with the idea of moving the Florida Mortgage Report to a different site using WordPress instead and I am now running this site alongside this domain. 

More on that later in another post, but here is the breakdown of today's data, the way I see it...

There was a bunch of news this morning with the highlight being the PCE data and the Chicago PMI.  On first glance, the PCE looked good, coming in on par with expectations and keeping to just above the Fed's comfort zone.  Dig a little deeper and you will see that it still ticked higher .09%, the most it could tick up and still remain unnoticed due to rounding to the nearest tenth.  Interestingly enough the December gain was .24%, also the highest it could be before rounding made it look worse.  So, though not bad, inflation still grew slightly at the core levels.  Stray away from the core and we have a much worse picture.

Chicago PMI came in lower than expectations as well, providing some relief.  It shows further evidence of a slowing economy, but with inflation above the "price stability" range, it also signifies stagflation.

Other news out on the economic front included Personal Spending and Personal Income.  The bad news is that Personal Income beat expectations (bad news for bonds that is).  Worse news is that Personal Spending beat expectations also.  Both add to inflationary pressures, though the PCE is a better gauge.  The good news is that spending didn't increase as much as income did, so disposable incomes went up also.  Now, take that extra money and invest!

Alright, so what does all of this mean?

Nothing.  Tomorrow is a different day and the next big event of the week hits the airwaves as the gates are opened.  That's right, the Jobs Jamboree is tomorrow and get ready for a buckin' bronco ride in the markets with my bet's on the bull (stock market) taken down the bonds.

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?

Hold on Tight Folks, We Are Going for a Ride

As I have mentioned repeatedly (too many times to link), the roller coaster ride of mortgage rates will get pretty wild this week with a slew of news coming through and today is the beginning.

This morning's ADP report came in strong and that may weigh on the Fed decision later today as they certainly have to be wondering if another rate cut is a smart move, especially after being a little embarrassed last week with an emergency cut to minimize a financial meltdown created by a "rogue trader".

Why?  The ADP, while not a very accurate predictor, is a good gauge as to how the Jobs Jamboree this Friday will turn out.  As strong as it was, the jobs news is expected to beat expectations now and that spells bad news for mortgage rates.

The good news in that report is that it is time for the Fed to rethink their decision due out this afternoon.  They may very well decide not to cut rates or only cut 25bp on the heels of the ADP report.  That would be good for bonds as it will likely destroy the stock market like last month.

Tomorrow continues the ride with the release of the Personal Consumption Expenditures Index (PCE).  Since this is the Fed's favorite gauge of inflation, and since it has been ticking higher lately, it will likely move the markets with its release.  It may also leave the Fed embarrassed again.  Remember that they said inflation would remain a non-issue so long as the public kept faith in them and that faith is dwindling.

Then, of course, is the Friday Jobs Jamboree, where a whole plague of data will hit the airwaves showing what's happening on the job front and, more importantly, the concerns surrounding wage-based inflation.

As you can see, make sure your seatbelts are fastened because this ride could be a rough one, or even a freefall for mortgage bonds.  See you on the other side!

Did the Feds Screw Up? Again?

In my post over at Agent Genius, Have Bernanke and Buddies Gone Bonkers?, I talked about the Fed screwing up and looking to appease the stock markets more than really worrying about the economy in general.  Bernanke, in a MarketWatch article yesterday, admitted they screwed up, acting based on the failure to do a complete analysis of the situation.

The Federal Reserve was not aware that Societe Generale was unwinding trades in Europe on Monday that had been amassed by a rogue trader at the French bank, a Fed source said Thursday.

You would think that the Fed would dig deep into why the markets moved dramatically lower worldwide, even though we (the US) were on vacation, before the Fed made a drastic, potentially fatal, action.

If the weakness in overseas stocks spilled over into the U.S. market, the wealth outlook for U.S. households would have darkened because of already dropping home prices, economists said.

What?  I guess the continued devaluation of the dollar is increasing our wealth.  The decrease in my buying power in the other countries I fly to must be my imagination.  Yeah, that's it, I am imagining my wealth disappearing every time the Fed acts like this.

SocGen did, however, inform regulators at the Bank of France as early as Sunday, a full day the U.S. decision on the big rate cut, according to a letter that the bank's chairman, Daniel Bouton, wrote to investors. The Financial Times reported that SocGen got permission from the central bank to postpone its announcement to allow it to unwind trades on Monday.

Why the Fed, which usually keeps in contact with the world's central bankers, wasn't aware of this when Bernanke held his emergency policy meeting remains an unanswered question that might dog officials in coming days.

So, there you have it.  Had the Fed done their job, they would have realized why the markets were tanking worldwide and could have stated so Tuesday instead of hitting the panic button.  Or did they really want to drop the rates now, and then again next week? 

I don't know about you, but I have now lost what little confidence in the Fed I had left, and you know what that means (read the underlined print).  And apparently I am not the only one...

Longer-term, if the Fed was spooked into making an emergency rate cut this week on the back of what was just technical selling, it could further undermine market confidence in Bernanke.

"Tuesday's panicked 75 basis point cut will prove to be an historical embarrassment a blot on the Fed for all its days," Ritholtz wrote.

I couldn't have said it better.

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.

Mortgage Rates Rise at Fastest Weekly Pace

Do you think that the headline here will be representative of what mortgage rates do this week?  Do you think reality will set in and the markets will realize that the recent rallies were all based mostly on "fiction"?

If you have been following what I have been writing in various places around the RE.net, you already know what I am about to say.  If not, you probably better read on or you could lose thousands.

The markets are very finicky and when there is nothing left to hope for, investors will grab on to anything they can.  Such has been the case basically since Christmas, carried forward into the start of 2008.  On geopolitical news, continued "recession" fears and the dismal Jobs Jamboree, bonds have pushed themselves to the limit, and beyond.  Of course, when bonds, namely mortgage backed securities, push higher, their rates fall and that is how mortgage rates have managed to reach the lowest they have been in over 2 years.

But can it last, or are they likely to implode, potentially allowing rates to rise faster than a rocket during this coming week?

Fear is a powerful emotion, the most powerful actually.  It causes "temporary insanity" in reality.  With fear in control, logic and reason cannot be found.  Such is the case in the markets today, and mortgage rates have dropped.

But now, a new fear will arise.  Bonds hate inflation, in fact it is the archenemy of bonds.  So, much like the recessionary fears of late, inflationary fears will take center stage this week in the economic data to be delivered, such as CPI and PPI.  While the the herd flocked to bonds in the last weeks, they are highly likely to flee from bonds this week, and in droves.

Dan Green talked about the "herd mentality" in his post this morning.  That reasoning is enhanced by fear and will actually cause someone to jump off a cliff because everyone else is doing it.  You can expect this type of reaction throughout this week and likely next as the data comes pouring in.

"Limpflation": A New Medical Term for E.D.

While looking across my RSS feeds this morning, "limpflation" caught my eye, and not for the reasons you may be thinking.  Actually what caught my eye was "stagflation", which is a topic I talk about a lot as the economic data (E.D.) points to its occurrence.

Limpflation appears to be a new term for the economy, or at least for one atheistic economist, you know the ones that do not believe in recession.  According to a MarketWatch article, Andrew Clare, professor of finance at London's Cass Business School, believes that the market is fixated on stagflation when in reality it will only see limpflation.

Since stagflation is when both unemployment and inflation are rising (which recent data has shown with increases in both), limpflation is when there is a period of "limp growth" where higher inflation is likely to occur.  So, instead of our economy going "stag", he is saying it will merely go "limp".

So, add "limpflation" to your dictionary as follows:

LIMPFLATION (limp-flay-shun): Term used to describe when developing E.D. shows a partial lack of growth, or "limp" condition.

 

(Side note:  Normally I do not add the same content to two separate blogs, but I just couldn't resist with this one.  The other location is at www.agentgenius.com)