Mortgage Market Commentary, 6-17-2022

Jun 17, 2022 5:39:39 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.

Before the details and numbers, two visuals.

An older but fit-looking man walking along the sidewalk has the sniffles, then coughs hard and trips. Trying to recover his balance he slips on a patch of oil... and the Fed races to his side and pushes him from behind, flying over the curb. “You have to stay down there for a while before I can help you.”

Alternately, in mixed-mangled metaphor... Trying to fix today’s inflation problem by using monetary policy is like trying to change a tire with a screwdriver. And while refusing any thought or offer of a lug wrench.

The Fed Before this week’s meeting had continued its nine-month and effective policy by jawbone. Samson should have been so strong. Last fall and winter, the Fed allegedly behind the curve had pushed the 10-year T-note from 1.25% to 2.00% just before Ukraine. The Fed had properly left the cost of money low, hoping that supply chains would resolve. Oil and natural gas had risen from the Covid low near normal, $70/bbl and $4/mbtu.

Post Ukraine, supply chains still muddled, worse in China as Covid defied Xi’s orders, energy markets entered the worst disruption by far since 1979. The Fed swung the jawbone harder and harder: we will raise rates until we see months of reduced inflation on the way to 2% and stability. Until last Friday, 10s had risen to 3.00% but held support there.

Last Friday the murder-talk, a bad CPI report, and “expectations” survey destabilized everything, no answer to “how high?” 10s to 3.16%, on Monday 3.36%, and during the Fed’s Wednesday meeting 3.48%. Everyone knew the .75% hike in the cost of money was coming, leaked and immaterial, from 1.00% to 1.75%. But markets were fearful of a near-term future at 4% or 5% or 6%, as demanded by the disgusting row of jackdaws (Summers, Dudley, El-Erian...).

And After: Fed meetings break with release of docs, this time quarterly projections, and Powell’s press conference (transcript here). After this one... a puzzled, slow understanding that the Fed was more jawbone than lethal. Markets hate the “damned little dots” scattergram of the future Fed funds rate, and feared this one. But... holy cow... these dots (below) are a tight cluster centered on 3.25% for the end of 2022, cresting at 3.75% in 2023 -- and even next year only a few known bird-brain hawks (dots are anonymous, but we know who you are) as high as 4.00%. 

Those are the same levels and timing as priced into Treasurys since Ukraine. Late Wednesday after rounds of repricing, from 3.48% 10s fell to 3.20%, and mortgages from 6.50% to 6.00% -- although fee-heavy, typical of an addled market -- where these rates remain today. Looking at future meetings, it makes no difference to markets how quickly the Fed moves from 1.75% to 3-ish.

“Expectations” and Other Fed-Hooey. Powell is worth our faith (there isn’t anybody else), but not blind faith. His presser had strange moments. “There’s no sign of a broader slowdown that I can see in the economy.” Officials are inevitably cloistered, and should get out more. Asked about housing, “So rates were very low... now they’re coming back to more normal or above levels.” At Ukraine, mortgages were 4.00%. One month later, early April to 5.00% just as pocketbooks were hit by gasoline from $3.50 to $4.40 and the Dow lost its first 10%. In the 2017-2019 march to nowhere, housing cracked immediately at 5.00%. The 2022 Housing Faceplant began two months ago, mortgages up to 6.00% since. The Shove From Behind.

Powell confirmed that the rise in a survey of consumer expectations of inflation produced the .75% hike instead of .50%. We should all understand and have compassion: nobody knows how to forecast inflation, so clutching bad data is inevitable. Got to clutch something. Other alleged measures of expectations: the OIS spread, swaps, and TIPS. BS.

Expectations matter because entrenched inflation feeds on itself. Boomers saw that in the ‘60s and ‘70s. Merchants and civilians borrowed to buy things before prices went up more. Today we have none of that, no credit bulge at all. We have the reverse, overall spending crowded out by energy and supply costs. May retail sales ex-autos in short supply rose 0.7% while inflation rose 1% -- real sales fell. Credit card debt has increased, but exactly correlating to Ukraine and energy and defensive borrowing.

Authentic Expectations. Any good conservative, Austrian theorist, or banker knows that gold is the best measure of inflation expectations. Gold has been within a short putt of $1800/oz ever since Covid onset. On gold theory, the Fed should not tighten at all. Silver falling from $25/oz normal. Copper is a great forecaster of overall global economic activity, although puffed by China insatiable for infrastructure. In the last 20 years, copper centerline $3.50/lb... Covid ran to $4.50 but crashing since May, $4.03 today. Pure Ukraine: wheat from $750 to $1100, Corn from $575 to $800 (unit is 5,000 bushels), but steady since March.

There is no pattern in the entire commodity complex suggesting inflation expectations. Except for the real problem.

To Solve the Problem, State the Problem. I flinch in pain when Powell says of energy, “...Nothing we can do about that.”

If we had a capable and energetic government, on the fourth day after Ukraine when Europe said that it would cease energy supply from Russia as fast as it could, and Russia began to cut in counter-sanction, imagine this presidential address: “In thirty days I want every drilling rig in the US punching a hole. We’ll get to climate in good time, maybe better than ever, but at the moment we need to save the economy, ours and everybody’s.”

Instead, the US rig count has crawled from Covid low to 733 at work, one-third of the fracking crest 2008-2015 (chart below) -- and no acceleration in trend post-Ukraine.

Us Okies perspire hydrocarbons. Capital for drilling has been scarce. “Big plays... Yer lookin’ at tin-twenny years investment recovery, an’ any minnit some damned Swedish teenager kin shut ya down fer good. Ya’ll kin cook in summer, thin freeze in the dark.”

We fought WWII with “cost-plus” contracts. Whatever is costs plus a guaranteed profit. The Senate Truman Committee kept suppliers straight, so well that it led to Harry’s next job. We need fossil supply through transition to non-carbon. Offer capital to producers and guaranteed prices through investment recovery -- even if halfway we are able to leave the carbon in the ground -- in exchange for fixed and reasonable profit.

This week an example of fragility in energy markets. Normal for natural gas has been about $4/mbtu. Post-Ukraine to $9 in the US, as much as ten times higher in Europe, especially when Vladimir amuses himself fiddling with the valves, as he did this week when European leaders visited Kyiv. US prices jumped because we diverted our production to Europe. The only way to get it there is LNG. The Freeport TX LNG facility had a little “bang” last week and will be off-line until 2023, reducing US LNG exports by one-sixth (by 2byncfs/day). US gas instantly to $7 because nothing to do with the gas but to store it.

Worried About Joe. We all age at different rates, as do each of our parts -- knees and brains, teeth and continence. Wisdom involves accepting change, especially letting go of youth -- hair, costumes, and unlimited can-do.

A friend of mine near Joe’s age refers to him as “Gramps,” which makes me laugh but is no longer funny. Joe has single-handedly supported the hair-transplant industry. Did Joan Rivers’ doc do his eyes? He is sure that a 1960s pro-union Democrat is as attractive as ever.

Several media this week reported his scolding of Blinken and Austin for saying that we intend to “win” in Ukraine, while we slow-walk support. In Korea Russian pilots (good ones) flew NKor MIGs. Unmarked “green men” invaded Ukraine in 2014. We are fussy. Take six months to train Ukraine on counter-battery rockets, instead of sending our volunteers? 

This week Gramps demanded in writing “Immediate actions to increase the supply of gasoline, diesel, and other refined product.” Clueless. Refineries are running at max now. We built our last refinery 50 years ago, and as above are way short of LNG. Wonder why. Gramps griped about profits. Seize them all, and won’t make a dent in prices or supply.

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The Fed-sensitive 2-year T-note. Here you can see the post-Ukraine jump into energy crisis, then last week’s panic and remarkable retracement:

 

The Damned Little Dots. Quarterly each Fed governor and regional Fed president casts a dot indicating the level of Fed funds at the end of each year ahead. ALWAYS wildly wrong, it’s the best we have. Roughly five of these people are known hawks of poor judgement. Toss out the top five to get a good picture. Even with the five, a remarkably compact forecast:

 

The 10-year T-note in the last year, the last two trading days added. Down from the panicked peak, trading in the last week blew out eleven years of support and two major tops, now ascending tops to 3.50%. Odds are rising that the combination of prices themselves and the Fed’s shove set a cycle top in this last week:


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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