10 22 t note

Mortgage Market Commentary, 10-22-21

Oct 22, 2021 5:39:26 PM

We are excited to partner with one of our favorite mortgage minds, Lou Barnes, to bring you his biweekly commentary. Lou is a loan officer in Boulder, CO, but his insight is relevant across the country. Lou's opinions should not be construed as the opinions of CENTURY 21 Redwood Realty or our partner, Day 1 Mortgage. 

We hope that you enjoy this series! Our good friends at Day 1 Mortgage are here to answer all of your mortgage needs. You can reach them at 888.973.0624 or online at Day1Mortgage.com

In an odd lot of news this week, perhaps one common thread is the widening separation of policy makers from political support. Rates, the Fed and inflation, energy, and Democrats.....

Rates. The new and higher trading range of the 10-year T-note, 1.50%-1.60% lasted ten whole days, now 1.60%-1.70%. Which is where charts said it should be (see below) after rising from July-September 1.20%-1.37%. “Technical” indicators (mysterious patterns on charts) suggest a lot of support at 1.70%, but a weird world getting weirder can do unusual things. Mortgages are creeping north from 3.00%, but not alarming.

The Fed. There is nothing mysterious about the reason for the rate rise. Chair Powell today conceded: “Supply-side constraints have gotten worse. The risks are clearly now to longer and more-persistent bottlenecks, and thus to higher inflation. I do think it is time to taper. I don’t think it is time to raise rates.”

Fed Governor Quarles earlier in the week described the Fed’s twin dilemmas (not a tri-lemma, a di-di-lemma): inflation for how long, and how high before the Fed drops a hammer? First, his calming thought:

“The fundamental productive capacity of our economy as it existed just before COVID -- and, thus, the ability to satisfy that demand without inflation -- remains largely as it was. Constraining demand now, to bring it into line with a transiently interrupted supply, would be premature.” BUT: “We can tolerate inflation of 2.5% as supply returns to normal, for a much longer period than we can tolerate 4.5%.”

If you heard a click, that was the hammer cocking.

Heresy. Nearly alone, I believe supply chains will self-repair far faster than the doomers say, and the next worry will be prices falling back to pre-Covid baseline and semi-deflation. For two reasons: the LA/Long Beach port, 40% of US merchandise imports, is running 24/7, and LA and CA are working fast to accommodate container transit, and the harbor still has 100 ships waiting. That’s renewed supply floating out there, and likely to overshoot accumulated demand. Second, I have an inside source. My kid engineers software for an essential IT tool of logistics. Right through Covid, demand for his employer’s tools has exploded, never-better logistics management getting better fast.

Inflation... the deeper danger. Anyone old enough to remember the 1970s knows the worst inflation hazard: energy prices. Today, supply is available, except as climate zealots take the place of OPEC. 

On Tuesday the UN climate people released a reverse-engineered carbon report and demand for action. 

Activists have failed to convince the world to cut rapidly our use of fossil fuels. Science, research, and investment have yet to produce non-carbon sources which are economically feasible. Not even the zealots are willing to run numbers on decreased usage resulting in temperature cap, for fear of demonstrating futility (one IPCC reference: an entirely carbon-neutral US would limit global temperature increase by 0.3 degrees C).

So the UN has calculated current plans and investment for global energy production versus the maximum energy consumption which would keep temperature-capping on IPCC track. In just the next nine years, “The world’s nations are planning to produce 240 percent more coal, 57 percent more oil and 71 percent more natural gas than would be needed to limit warming to 1.5 degrees Celsius. The world’s governments must step up, taking rapid and immediate steps to close the fossil fuel production gap.” Cut supply so that it can’t be burned. 

Which of course would raise the price of carbon energy, alternates suddenly competitive but not available in volume, demand presumably falling. But in the meantime, hideous inflation and central banks forced to create serial recessions, and the global standard of living going down and down, which is the problem with getting off carbon in the first place.

The Saudis gave a polite, buzz off. India and other developing nations: if you think you’re going to cap our standard of living, think again.

The politics of it all.... Even in non- or semi-democracies, governments can’t move far without their people. In the West, policy does not move more than inches without the people. A common artifact of democracy: we’d rather do nothing than to allow extremists or even minorities to have their way.

Nor, for that matter, may narrow majorities have their way on big things, a message eluding the Democrats. If a narrow majority pushes too hard, it quickly will lose the edge of its majority. The Democrats this year have pursued a spending agenda last advocated by Walter Mondale in 1984, routed by Ron Reagan. Bill Clinton was the first to refer to giveaway spending as “investment,” but made deal after deal with Republicans to cap spending in exchange for tax increases, which in the prosperity which followed brought budget surpluses on track to pay off the entire national debt -- just 22 years ago.

So far in 2021, the Democrats have revealed an insatiable desire for spending giveaways and new sources of tax revenue. Democrats have never understood why low-ish income, rural and small town Republicans who could use a hand always oppose soaking the rich and giveaways. For all of the Trumpian failures of the party, the opposition to new taxes and handouts is a matter of principle. Don’t soak anybody, especially as you may be next, and we’d rather go hungry than say that we are unable to look after ourselves and neighbors.

The center of US opinion (bigger every day as both parties drive away their moderates) is not aboard with the Biden and Progressive acid flashback. As their plans founder, they have doubled-down: give the IRS authority to fish through the bank records of every citizen, and adopt a wealth tax to be paid on annual gains in investment value sold or not. The rich only, of course, will change their behavior to escape this theft.

Every day that this minority-extremism continues, more people in the center think, “I can’t bear Trump, but I’m not voting for these people again, soon.” 

More on rates.... Speaking of flashbacks, if the Fed is forced to fight inflation, inducing recession, the historical rate pattern is clear -- especially if the inflation is caused by energy shortage. The economy will enter recession, but inflation will not fall as fast, and we’ll get the strange “inverted yield curve” -- long-term rates fall while the Fed is slow to cut short-term rates.

Be careful what we wish for... Quarles notes above that the means of production is intact, as before Covid. Also intact as before Covid, the three great forces of deflation: IT, global trade, and demographics, the latter made considerably worse by Covid, premature deaths and collapsing rates of birth.

The best news: people seem to be taking it all in stride, annoyed by Covid and politics, but taking care of Job One -- family, work, and play.

The US 10-year T-note in the last five years. The 2017-2018 rise resulted from the Fed’s foolish attempt to “normalize” the cost of money during a still-deflationary environment, and produced near-recession a year before Covid. The 1.70% support level is good, but if breached not pretty:

10 22 t note


Thanks for tuning in to our collaboration! Remember that our friends at Day 1 Mortgage are here for you for all of your mortgage needs.

Lou Barnes

Written by Lou Barnes

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