Mortgage Market Commentary, 5-13-2022

May 13, 2022 6:54:56 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.

Friday The Thirteenth. Most of these pass without note, and I do not suffer from triskaidekaphobia, but am afflicted by Okie amusement at misfortune. Dust Bowl, Depression, tornadoes, oil busts... may as well laugh.

The world-historical-financial moment on this Thirteenth could not be more appropriate, so many people today wondering where they went wrong. This streak of ill-fortune is spoiled only by good news at the Fed. Begin there.

The Fed, Huzzah! Chair Powell’s first term expired at the end of January, and he has served as Chair pro tem while several other people have auditioned for the job. James Bullard (St. Louis Fed), William Dudley (retired NY Fed), and Lawrence Summers (fired by Harvard but sooooo important) are all certain of Powell’s incompetence and their own genius, and have hoped that a fractious Senate would pick them. The 13th has fixed ‘em. The Senate voted 80-19 to confirm Powell for another term. These days nothing gets that kind of bipartisan landslide except a vote to adjourn.

Also confirmed: two new Fed Governors (both Black, both of Left-side economic work but very capable, and good that neither belonged to the banker club). A third Governor will be confirmed in a couple of weeks, making a full roster of seven including the Chair. Powell has operated shorthanded. Governors in the modern era tend not to dissent from the Chair even if they would like to, and with three empty seats, too much weight to the dozen presidents of the regional Feds and their low-talent boards of directors. BTW: last year’s newbie Governor Christopher Waller is a pleasant surprise -- having escaped Bullard’s St. Louis Fed, he turns out to be wise, and skilled in housing.

And this week came two tremendous improvements in the regional roster. Two good presidents had been canned for personal trading, and sadly had been among the most talented. The Dallas Fed replacement is ideal. Lorie Logan has been the NYFed manager of the Fed’s trading and portfolio during an... exciting period, parts of her story in Timiraos’ “Trillion Dollar Triage.” She is a do-er, neither and economist nor banker, and even better not a Texan (I should know, half my forebears were displaced Texans, and none but them should miss prior prez Richard Fisher). In the other win, Susan Collins (not the Senator) will lead Boston -- Collins is possessed of one of the most-broad and accomplished resumes ever to serve. Another person of Jamaican heritage to make it near the top: Colin Powell. 

Data, Rates, Inflation, and Markets... With one exception below, none has suffered a 13th fate. The 10-year T-note has held just under 3.00% for a month, a good sign despite the Chair’s notice of two more half-point hikes before the end of July (the cost of money then would be 2.00%, “prime” to 5.00%). Mortgages have held mid-fives, the spread to 10s narrowing in a sign of orderly trading -- and during this week of $103 billion in new long-term Treasury bond auctions.

The new CPI numbers... in media the now-obligatory eyeball-grabbing 8.3%!!! That’s the twelve-month back-look, but overall CPI in April rose only 0.3%, 3.6% annualized. The core rate in April jumped at twice the pace of March, 0.6% -- for the first in a long time because of food, not energy. Energy costs add to food: fuel, fertilizer, and transport, but mostly Ukraine and supply chains.

Oil has been range-bound for three months, now $110/bbl and holding. Natural gas same, US prices just below $8/mbtu, still more than double a normal price. Gold bugs take note: Gold has held $1700-$2000 since Covid was young, today $1806/oz. Possibly pushed down by Russian sales, but zero response to inflation. The bugs think the Fed should calibrate to gold, and on that theory should not be raising rates at all.

In the biggest inflation surprise, ex-im prices are behaving. In the last year import prices rose 12%, but in April, zero (the super-dollar helpful). Export prices soared by 18% in the last year, but in April down to 7.2% annualized.

Winners of the Triskaideka Schadenfreude Prize: If nothing of our own to celebrate, take pleasure in the misfortune of others, especially those who deserve it. At the top of course, Putin and Xi, although incompetence intrudes on bad luck. Xi, sir... Covid will be with us forever, or until a sci-fi anti-viral med, so you’re going to stay locked down forever? Channeling the Ming, 14th Century retreat from the world? Your Covid strategy has made your chubby hermit neighbor another winner this week.

Elon Musk. The market for Twitter stock has fallen out from under your privatize price, so much so that the $1 billion el-foldo fee is cheap. If you proceed and destroy Twitter, we’d name dozens of high schools after you.

The Grand Prize...

Crypto. All media have the catastrophe charts and stories, but the principles and law involved get lost in the entertainment and IT eyewash.

US Constitution, Article I, Section 8, Clause 5: “The Congress shall have Power... To coin Money, regulate the Value thereof.” Everybody else is a counterfeiter. Congress since the beginning has delegated currency issuance and enforcement to the Treasury, and modern management to the Fed. All done this way because phony currencies have been dangerous and destabilizing throughout history.

Humankind has several genetic disorders, and one of the more widespread is belief in salespersons offering can’t miss free lunch. Thus we have regulators. If you’re not a currency, then you’re an investment. The Securities Acts of 1933 and 1934 control fractional sales of investments. Foolish and criminal inventiveness has spawned more and more regulators of banking (Fed, FDIC, FSLIC, Comptroller...), but for all of that, the 2002-2008 subprime loophole... no regulator was charged specifically with regulating credit.

     The crypto regulatory loophole is similar, but this time widened by indolence. Even armed with Dodd-Frank’s broad authority, no regulator would do the right thing: smother crypto in its crib. Everyone hoped it would crash quickly into oblivion, but it became too big to shut down. Exposed now, now would be a good time to make cryptos obey all the rules against flim-flam.

A currency as a means of settlement must have par value all the time. If a merchant sends an invoice in dollars, no matter how damaged by inflation or deflation, a dollar is a dollar. Yesterday an otherwise fine reporter (Telis Demos, WSJ), addled by IT fondness got our currency and cryptos confused with other currencies. Dollars constantly change in relative value to euros, yuan, pesos, and yen, but a dollar must be a dollar. 100 cents, not 89 in the morning and 107 in the afternoon.

Cryptos are classic organized financial crime, “classic” because its boosters and priests claim attributes -- value -- which are internally contradictory. In the last 150 years most currencies have retained par value because of central banks. Cryptos have no such support. Nor do they have any collateral value or income. 

They are unique, in their scandalous energy-hogging manufacture. Uniqueness can create value to a collector, and in that sense an investment (Warhol’s silly-painted Marilyn just sold for $195 million), but uniqueness is the enemy of liquidity. Fungibility at par requires all-same.

Blockchain may be useful for clearing someday, although anonymity is primarily a benefit for crooks and crackpots, and has nothing to do with the value of an individual token. A super-technology pal, nameless here for his own protection wrote to me today, “Keeping the dream alive are the rosy-eyed technologists who maintain that there is a pony there, if we can find it.” 

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The 3.00% tops in 2013 and 2018 are slender reeds of support, given the track of the Fed today, but more solid the longer 10s can hold here:

     


Here is the link to the BLS inflation data https://www.bls.gov/news.release/pdf/cpi.pdf , and monthly and annualized chart by components of inflation going back to last fall. Note extreme volatility caused by supply shocks, and the added jolt of Ukraine in March -- not at all the steadily accelerating ramp, 1965-1982:



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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