Treasury and mortgage rates have again reached their post-August highs, but still in tight ranges: the 10-year Treasury note at 3.48 percent and low-fee mortgages just under 5.25 percent.
The producer price index fell hard in September, down 0.6 percent, the much-hoped-for re-building of inventories not yet under way. Initial claims for unemployment insurance unexpectedly rose, back in the 525,000-550,000 weekly band.
Early-week news of monthly housing starts (up 0.5 percent) and new building permits (down 1.2 percent) surprised on the weak side, and last week’s minor up-tick in rates cut mortgage applications sharply: Purchases fell 7.6 percent and refis dropped 16.8 percent.
Sales of previously owned homes jumped 9.4 percent in September, presumably in the race for the last of the $8,000 credit, but the National Association of Realtors’ sales data is not supported by loan applications.
In the last two years’ crisis, the media and our own minds have each day provided a long list of things to worry about. Some are real and some are not.
There is one item high on most lists that for now you can safely drop to the bottom: the exchange value of the dollar. All of this "falling, collapsing, crashing, wallpaper, Zimbabwe, subprime" talk — delete that. When that commentary comes by, just hit "reset."
The dollar has of course fallen from its highs last fall, when the world ran to it for safety. However, in the post-1970 Bank of America/Federal Reserve/Merrill Lynch "Real, Broad, Trade-Weighted Dollar Index," the buck sits slightly below average value.
For those insistent about dollar fear, here are some currency-market principles to help with rehab.
Any currency tends to fall versus "harder" ones — those with lower inflation prospects or higher interest rates than its trading partners. Hence, the dollar has declined against the euro: Euro-zone inflation runs about 1 percent less than here, and the European Central Bank’s rate is 1 percent vs. zero here. Money always runs to higher return.
Europe’s economy may or may not survive its discipline, its exports suffering badly and only the super-productive German economy is able to afford the exercise. …CONTINUED
As seen in the 1980s, strong currency is often not worth the trouble or the pride. In its post-1970 high, then-President Reagan’s dollar stood tall on the back of a terrible recession and seven years of double-digit Fed rates.
In a modern equivalent, Brazil today is doing better in its endless war against inflation, but at the price of an 8.75 percent central bank rate — so high that money is pouring into Brazil. That flood threatens to overvalue the real (Brazil’s currency, pronounced "ray-al") and wreck Brazil’s exports.
Efforts to control such damage lead to wild counter-contortions: Brazil this week began a 2 percent tax on foreign investment to keep money out.
Contortions work in reverse. The one large-nation currency this year exactly unchanged versus the dollar: China’s yuan, grossly undervalued but held artificially cheap by the Bank of China.
All of China’s complaints about our dollar-printing undermining the value of its export-earned Treasury hoard, and the need for a new global reserve currency … you can’t have everything, guys. The undervalued manipulator must take the collateral damage.
Others suffer from China’s manipulation. Global export volume has fallen by as much as one-third, but China’s only by one-quarter, as the cheap yuan undercuts everybody else’s exports.
Not merely exports get kneecapped: In a world in which labor is increasingly transportable by electron, not just Nikes in container ships, the weak yuan undermines wages — especially in the U.S., Europe and even Latin America.
The centuries-old remedy for yuan-style predation is "protectionism" in which importing nations raise tariffs to protect native industries, wages and even their entire economies.
This kind of counter-trade war was discredited 75 years ago. However, the rise of Asian non-tariff barriers (yen manipulation began in the 1960s, as well as regulatory resistance to imports) has yet to find an effective self-defense among the receivers of excessive-exports — especially the foolishly insistent free-traders in the U.S.
We can, of course, print our way to ruin, but reflating the world’s reserve currency during a period of deflation is exactly the right thing to do.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.
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