Florida Mortgage Report

Atheistic Economists Now See the Light

Amazingly enough, today's news is full of reports that the nation's leading economists are now "seeing" that we are currently, or at least soon will be, in a recession.  Hallelujah, they have seen the light!

If you look at their track record, none of them saw the recession coming in 2001.  Of course, none of them saw the stock bubble either.  But hey, let's give them credit for seeing at months after it happened, much like the liquidity crisis we are going through (it's not over yet).

Bear in mind that economists don't predict recessions though.  Whether or not they simply will avoid the issue or not is not certain, but when has an economist, or at least not a measurable portion, predicted a recession?  They do, however, admit to one after the fact.  With that in mind, the fact economists are now seeing a recession is probably a good indication we have been in one for several months.

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?

If Bush Says the Economy is Strong, the Data Must be Wrong

Despite all the clear cut evidence in this morning's Jobs Jamboree, Bush came out after a meeting with his economic advisors and said that the economy, and the markets, are strong.  All I can say is that I want some of the Kool-Aid his advisors are drinking.

Here is a quote from today's CNN Money article...

"This economy of ours is on a solid foundation, but we can't take economic growth for granted," Bush said. "And there are signs that will cause us to be ever more diligent and make sure that good policies come out of Washington."

Has he been in a coma for the last 5 months?  He went on to say that there have been 52 straight months of job creation, core inflation is low, and consumer spending is strong.

Let's look at what the data shows...

Job growth - BLS data has be known to be more BS than factual at times, so 52 months of job growth is likely to be inaccurate, especially with an unemployment rate climbing to 5.0%

Core inflation is low - Well, that may be true, but people do need food to survive and more than likely energy to stay warm and drive to work.  Oops, I goofed.  Sorry, you used to drive to work, so now you can save a little.  CPE data shows otherwise and has increased to 2.2% year over year and is likely to rise further.

Consumer Spending - Sure, but based on what...cheap credit and a home ATM machine.  Those sources are quickly drying up, even with the Fed rushing to lower rates.

Ok, so the data must be wrong because Bush understands, right? 

"For those of you who are paying more and are worried about your home, we understand that," Bush said. "That's why we have an aggressive policy to help creditworthy people stay in their homes."

Oh, you meant that mortgage rate freeze that doesn't help anywhere near the numbers presented when thought up?  You know, the one that really bails lenders out more than homeowners as it allows them to delay losses and maintain a little better liquidity (like that is helping them, case in point Citigroup)?

So, sleep easy with the peace of mind knowing Bush says everything is OK...

"While there is some uncertainty, the report is that the financial markets are strong and solid," Bush said.

I Take a Vacation and the World Goes to...

Well, I guess I can't take a vacation from my blog anymore as the world just seems to find ways to screw things up.  That's right, bankruptcies were reported 40% higher, credit cards are reporting more and more delinquencies and even home equity loans are gaining on the delinquency acts.  Heck, even Florida got cold, what's up with that?

Will people ever start paying their bills, or has the home ATM machine dried up and no real money exists to pay those accelerated debts?

I guess everything is all fine and dandy since the Fed will likely set up a bail out program for credit card companies, like the 33.6% APR they charge is not a big enough ripoff.  Oh, wait, they will dream up a fancy name to try to pretend it is not a bailout program for anyone other than consumers.  Like we are going to fall for that one again.

Apparently there is some good news from this last week.  Mortgage rates are headed lower on all sorts of both fake and real news.  Also, people are apparently getting paid more, but more of them are finding themselves without a job.  Cool, huh?  But are the BS (sorry, I meant BLS) statistics trustworthy?  I doubt it, though we will have to wait until next month to see just which direction the revisions will actually go.

On a side note, one of my predictions for 2008 was that we would see unemployment break 5.0% and we saw that this morning.  I am guessing it will still go higher before people realize they need people to work in order to maintain competitiveness.

So, what is real and what is fake?

Real - Slowing economy, stagflation, inflation rising, weakening dollar.

Fake - "Strong Dollar Policy", "Strong Economy", just about everything out of the government's mouth right now.

Ok, I know I am being harsh (with a hint of sarcasm), but fundamentals have not changed, so why are bonds soaring?  Sure, bad economic news, but are we to believe that inflation is not going to push bonds back down?  Do we think the Fed is not going to continue to allow the dollar to lower in value?  Do we really believe that the economy is strong and growing?

The proof is in the pudding and eventually the numbers cannot be hidden.  Though I am glad that bonds are rallying and mortgage rates are heading lower, they are likely going to reverse course as we head into the "inflation" data coming, such as CPI, PPI and definitely PCE.

Is There Madness In The Mortgage Market?

Mortgage bonds have been rallying since Bhutto was killed yesterday, all due to uncertainty about who will take control of the nuclear power there.  As is typical with uncertainty, there is a "flight to quality" which means bonds, including mortgage backed securities, benefit even when the fundamentals are lacking.

Is it madness?  Not really, just temporary insanity.

Once the dust settles on the geopolitical issue and we return to fundamentals, bonds will find themselves without much to stand on.  The drastic swings in prices are fueled by low volume and that is rarely sustainable, especially without solid fundamentals.

So, mortgage rates will tick down temporarily, and the correction that has been foreseen will complete itself before the trend higher will resume (readers of my company blog, Florida Mortgage Daily, already knew this was coming).  So, enjoy the rally, but don't expect it to last.

Why not?  In one word, inflation.  CPI and PCE, as well as other economic reports, point to rising inflation and that spells trouble for bonds.  With the Fed still dumping money into the system through auctions and lowering rates, inflation is only going to get worse before it gets better.  That means that when fears subside and reality returns, bonds will not be feeling any love.

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).

The Fed Opened Pandora's Box

Long time readers of this blog will understand what I mean just from the title.    Those of you who are newer to this site, welcome, and let me explain what I am talking about.

Shortly after the Fed started cutting rates back in September, I started blogging about the fact that they were likely opening a "Pandora's Box" in regards to inflation.  Even after the last Personal Consumption Expenditure's Index (PCE) came out, I reiterated that same fact and forecast. 

You see, the Fed's favorite gauge on inflation is the PCE report.  You may have already known the Fed's "comfort zone" is between 1 and 2%.  The last report, although with in the "comfort zone", ticked up from 1.8% to 1.9%.  It went virtually unnoticed since it was in the acceptable range and other economic data was relatively friendly for a Fed rate cut, which they ultimately did.

This morning, the most recent PCE data was released and guess what.  My warnings came to fruition.  The numbers released this morning showed year over year inflation at 2.2% (0.3% higher than the last report) and that should be making the Fed "uncomfortable" now. 

So, as I asked before, will the Fed regret cutting rates?