Long-term Treasury and mortgage rates fell again this week, not a lot, but remarkable in the face of fierce tub-thumping at the Fed. The 10-year T-note traded under 4.2 percent, and low-fee 30-year mortgages made it to 5.625 percent.
The producer price index plunged .7 percent in December, but the “core” rate stripped of energy and food costs increased point-one percent; overall prices are not falling, but inflation is negligible. A .8 percent pop in December industrial production gave the bond market some pause, combined with the highest percentage of capacity in use in four years, but the production seems likely to fade as inventories are rising at twice the rate of sales.
December retail sales were thin, ex-autos up .3 percent, and new claims for unemployment insurance are in an up-trend, at 367,000 last week, the highest in many months.
The economy is OK, not remotely “overheating.” Several Fed governors had portentous things to say (rate increases might be faster and bigger than “measured”; the Fed is watching home prices; the Fed is worried about the trade and current account deficits…) but all the big-shot bloviation added nothing to estimates of the Fed’s intentions. Commentators are on the tape today expecting the Fed to double its rate this year, or stop after a .25 percent rise to 2.5 percent on Feb. 2.
Federal Reserve Chairman Alan Greenspan has not had a thing to say since last summer’s oh-so-cute, “We will recognize neutral when we are there.” The bond market is all but shouting: when long-term rates hold still while the Fed raises short-term rates, the “flattening” is a warning that the Fed is overdoing the tightening, that the economy is about to slow, or both. The Fed must raise cash yields from the emergency basement to “neutral,” but the bond market says neutral is close to where the Fed is now.
Frustrated short traders swear that the 4.25 percent baseline for 10-year Treasurys has been the suppressed result of mindless buying by central banks all over Asia, determined to maintain their trade advantage. Don’t believe it: they understand risks in the bond market perfectly well, and they are hardly alone as buyers. This 4.25 percent T-bond speaks for tens of trillions of dollars of capital.
The Wall Street event of the week was Treasury Secretary John Snow’s appearance to pitch the Bush Administration’s Social Security privatization plan to investment bankers. I would give a body part (maybe two or three) to have been a fly on the wall after Snow left the room.
These bankers are the finest pitchmen on the planet. If you want to get your deal done, you go to them to ask how to get it done, not to tell. You do so in complete privacy – no one should know that you are going to see the bankers, before or after. It is utterly, completely pointless to try to sell something to these bankers – they assume that anyone attempting to do so has a problem with his/her SAT scores.
The disarray in the Bush Administration is painful to watch. The bankers know that privatization will do nothing for Social Security solvency unless benefits are cut, and the hole is too big for any conceivable tax increase. They also know that there are not enough Republican votes for a benefit cut, and that the Democrats are stifling don’t-get-mad-get-even snickering on the sidelines.
Political capital is a smoke-and-mirrors affair: you have it only so long as you look like you do. Everybody on the Street knows that Social Security reform as described is peripheral to the nation’s financial health. The financial center of President Bush’s second term is this: since the beginning of his first term, federal revenues have fallen 5.6 percent, federal spending has risen 23 percent, and federal debt has grown by 29 percent.
Begin to deal with it, or don’t expect to be taken seriously.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
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