Tuesday, Dec. 2
Posted 4 p.m. Eastern

Thoughts on the Fed's mortgage moves

Even a broken clock is right twice a day. In my Oct. 28 post, I called for the Fed to truly make a difference on the interest rate front by purchasing instruments on the long end of the yield curve, specifically mortgage-backed securities and 10-year Treasury notes. (I am by no means the only person in the world to suggest this, but I am the only writer of this blog to suggest it, so you are therefore subjected to my gloating, as it is rare that I get the opportunity to do so.)

To refresh your memory, here is the relevant paragraph from that post:

"Far be it from me to suggest that a more effective step toward easing the credit crunch and the mortgage crisis would be for the Fed to plunge whole hog into mortgage-backed securities and 10-year Treasury notes in the hope of bringing fixed mortgage rates down in a substantial and sustainable way. Getting fixed mortgage rates well below 6 percent and keeping them there would entice bargain-hunting homebuyers into the marketplace and facilitate refinancing for homeowners trying to get out of adjustable rate mortgages. Cutting short-term interest rates doesn't help fixed mortgage rates and only directly helps adjustable mortgage resets tied to Treasury indexes, not Libor. What it does for credit card and home equity lines of credit won't help enough -- or in the right way."

Of course, last week the Fed announced that $600 billion is destined for mortgage-backed securities and debt of Fannie Mae and Freddie Mac over a period of "several quarters." Whammo! Mortgage rates fell sharply in response.

Now there is talk that the Fed will continue along this path by next piling into ten-year Treasury notes. This may not produce a further windfall in terms of still lower mortgage rates, but would help in keeping a lid on mortgage rates through 2009.

With the next FOMC meeting just 2 weeks away and another interest rate cut a certainty, there is more and more talk of what it means if the federal funds rate eventually goes all the way to zero. Let's cut to the chase: It means a whole lot less than the $600 billion that will produce sub-6 percent mortgage rates for an extended period of time. While it's not a panacea by any means, it is the single-biggest step taken by the Fed and Treasury to benefit consumers. Perhaps best of all, it rewards the many consumers that have been financially responsible -- those making payments on time, keeping debt under control, first-time buyers that have diligently saved for a down payment, current homeowners that bought homes they can afford, and those positioned to move up to larger homes.

That, to me, is a much better utilization of money than rescuing the financially irresponsible.

A subject for another day is the capacity limitations in much of the mortgage industry after two years of layoffs and consolidations. Many shops don't have the staff to handle a deluge of applications. However, the plan as it is designed is for rates to remain sustainably low and not be a "here today, gone tomorrow" phenomenon that we've seen at times in the past.

Your comments, questions, and criticisms are always welcome. I'll select some for an upcoming blog entry.

Friday, Nov. 7
Posted 11 a.m. Eastern

1.2 million job losses for 2008 ... and counting

The monthly employment report was released this morning. It was expected to be bad, with forecasts calling for 200,000 job losses. It turned out even worse, with 240,000 job losses in October, and September job cuts revised from 159,000 to 284,000. Even August -- which was before the most severe turmoil commenced -- was revised from 73,000 job losses to 127,000. Awful. Simply awful.

For the year, there have been 1.2 million job losses, with more than half of that coming in the past three months. Jobs have been cut every single month this year, and folks, that unfortunate streak will continue.

One more scary stat from the employment report concerns the long-term unemployed, those that have been out of work at least six months. In October, this tally increased to 2.3 million and now represents 22.3 percent of the unemployed.

Given the tailspin that began in mid-September, employers are cutting payrolls in an effort to get ahead of, or keep from falling too far behind, the cutbacks in both consumer spending and business investment. Historically, the labor market has proven to be a lagging indicator, not a leading one, which means job cuts often result when things are bad, not so much on the expectation that things will get bad. Notice I said "historically." I add that caveat because of the vast uncertainty about the current financial and economic climate and also because employers have shown an inclination to cut staff ahead of economic deterioration. After Sept. 11, 2001, job cuts immediately accelerated with September, October, and November 2001 showing the deepest cuts:

July 2001 - 125,000

Aug. 2001 -160,000

Sept. 2001 -244,000

Oct. 2001 -325,000

Nov. 2001 -292,000

Dec. 2001 -178,000

Here is how the trend reads in 2008:

July 2008 -67,000

Aug. 2008 -127,000

Sept. 2008 -284,000 (preliminary)

Oct. 2008 -240,000 (preliminary)

Nov. 2008 ??

Dec. 2008 ??

If we follow the same trajectory this time around, the peak of the job losses will be what we're seeing now, but job losses would continue into and quite possibly throughout 2009.

Reader e-mail: All right folks, we're going to cover a lot of territory here, so refill the coffee before proceeding. My thanks to Paul for submitting the thought-provoking e-mail that follows.

"I have a question was wondering what you recommend given current rates.

"In looking at the historical context of the Greenspan 'conundrum' from 2004 could the opposite be happening and if so how long would you guesstimate it to occur? Could the deflationary spiral hit even with the real interest rates heading to zero?

"In 2005 through 2007 rates began to advance, the Feds raised the rates approximately 16 times over a number of years to cool off the economy from overheating. Lending rates stayed stubbornly low yet the Feds were obviously trying to push them up. At that time, demand for return, lacking fundamental risk analysis, resulted in an "excess" cash supply problem of cheap money and market for various goods and services rose to the occasion. This application of brake pads to inertia lacked the full power to work because the open markets continued to add more monies than the Feds could compensate for and we now know excessive debt and margin added to that inertia. We now understand the Feds lacked conviction to utilize or expand their regulatory tool box. This growing investor appetite was whetted by more and more excessive non risk adjusted returns creating a positive feedback wind-up loop with greater and greater inertia to the economic flywheel subsequently creating even more risk. The ball bearings of risk appeared to be glowing red hot particularly in housing and the follow-up of oil. The open markets continued to push an excessive supply of cash to anyone for any reason i.e. hedge funds, real estate, cars and other types of assets. These ball bearings of risk, which are the hub of the economic flywheel are cooked",grinding noisily. The current flywheel of economic activity and inertia is slowing down due to the subsequent pop of real estate, then oil, then other commodities, transportation and subsequent markdown of assets.

"So here's the conundrum in reverse.

"The Feds/U.S. Treasury are adding grease and coolant to the bearings in the form of lower rates and cash. The problem is now there is plenty of grease on the bearings but application of demand doesn't appear to be winding up the flywheel of economic activity and banks and lending institutions are now being burned by the various types of rising defaults.

"So what do you think will give. will the banks will start dropping various debt types of rates to attract responsible debtor lending (now that banks are wiser) or will they continue to raise cd and savings rates to attract even more capital to fund current operations and bulk up their asset base. Could the banks forseeably add much more to their rates to build up the cash horde for anticipated "tough times" or to buy out smaller competitors. Our gov't and its agencies have fixed the cash supply problem directly and but are not browbeating banks to lend out these bailout funds. Can't blame the banks from shirking from additional potential losses. Bad debt being brought forth and cleaned up. Demand is easing in most sector of the economy particularly most raw materials. Transportation and labor costs appear to be well under control and bodes well for the next economic recovery. That being said we now have a demand problem, who really wants to buy stuff in this economy?

"Since the fear of not being paid back (bank and investment fears) are heavy they want higher rates for loans, but growing consumers/industry fears don't want to buy or expand shouldn't longer term rates come down sometime soon? Those that can afford to borrow won't, those who need it most can't. Who will win the tug of war and when? Time to ladder CD, go long...or go short and do you think the
Feds will drop to a 0% rate next year?"

On mortgage rates, it is mortgage credit spreads that have been the big driver behind the volatility in mortgage rates. Although I believe long-term rates will fall because of tech economic outlook and lower inflation prospects in the near-term, that does not mean we'll see a corresponding decline in mortgage rates.

Regarding the Fed, 1 percent is certainly not a stopping point as it was in 2003. The Fed made that pretty clear in the post-meeting statement last week, essentially taking inflation out of the equation by saying, "the Committee expects inflation to moderate in coming quarters to levels consistent with price stability."

Just how and when they cut rates further remains to be seen, but they only have a couple rate cuts left. I'm assuming that if the Fed is compelled to trim rates below 1 percent, that the next move would once again be a half-point cut and that a quarter-point cut would only come into play afterward.

Might the federak funds rate get to zero? Should the financial system be pushed to the brink once again, then yes. But aside from that scenario, the only certainty is that we'll get darned close.

On the CD front, 2009 will be a better year for savers by virtue of inflation pressures easing significantly. A quick recap: CD yields spent much of 2007 above 5 percent while inflation spent much of the year around 2.5 percent. But Fed rate cuts and higher commodity prices took a toll in 2008 as CD yields declined while inflation zoomed higher. The outlook for 2009 as I see it is one where inflation comes in much lower, around 3 percent, while CD yields hang in around 4 percent, restoring a positive real (read: after-inflation) return for investors - even if CD yields don't improve.

As always, I welcome and encourage your thoughts.

Tuesday, Oct. 28
Posted 8 a.m. Eastern

Fed to cut rates again this week

It should come as no surprise that the Federal Open Market Committee is expected to cut interest rates at their regularly scheduled meeting concluding Wednesday. Another half-point cut is most likely, and would bring the federal funds rate to 1 percent.

Sound familiar? Yes, 1 percent, the same 1 percent federal funds rate we encountered in 2003 and became well acquainted with over the ensuing 12-month period. The same 1 percent that many blame for this mess. I don't subscribe to that theory myself, but can't help but point out the irony. As the saying goes, "You're either part of the problem or part of the solution." Unless, of course, its low interest rates we're talking about, in which case you're both.

The consumer impact of another Fed rate cut is dubious, but our friendly Fed doesn't have the luxury of holding anything back amid a global credit crunch, recession and asset deflation. In short, they must throw out all the stops, and that means a federal funds rate of 1 percent may not be the bottom. With persistent credit tensions and mortgage spreads now hitting new highs, anything is possible, including a federal funds rate actually being pushed to zero.

Far be it from me to suggest that a more effective step toward easing the credit crunch and the mortgage crisis would be for the Fed to plunge whole hog into mortgage-backed securities and 10-year Treasury notes in the hope of bringing fixed mortgage rates down in a substantial and sustainable way. Getting fixed mortgage rates well below 6 percent and keeping them there would entice bargain-hunting homebuyers into the marketplace and facilitate refinancing for homeowners trying to get out of adjustable rate mortgages. Cutting short-term interest rates doesn't help fixed mortgage rates and only directly helps adjustable mortgage resets tied to Treasury indexes, not LIBOR. What it does for credit card and home equity lines of credit won't help enough -- or in the right way.

The best news savers can take away now is the fact that inflation will fall far enough, fast enough that the 4 percent CD yields will once again provide a tangible after-inflation return.

Reader e-mail: Two reader e-mails today. The first deals with the economy.

"The economic situation in my view: Banks used to loan monies to families based on income: Rates that balloon after a few years is the bank rolling the dice that someone who "could" afford the "now" payment, and defaulting on the balloon payment. (No responsibility there). Most banking institutions "used to" have their customers and the banks interest when it came to loans. The fuel prices spike or whatever it really is, killed the economy for all folks, regardless of whom. That furthered the snowball to roll. The Wall Street deal, there is "no" excuse for those companies involved (I call it greed). The real thing that bothered me about that issue is the CEO's and the C.F.O.'s had to see that coming long before it got there and still gave out bonuses. I thought you gave out bonuses for great performance, not ruining companies -- and peoples -- lives. What happened to the folks that run these outfits, did they quit common sense school? What are they teaching in college now? I find this inexcusable. That reminded me of the "savings & loan" issue that happened several years ago."

This next e-mail comes from Jeff, a mortgage guy that wants to "show I do have some common sense."

"Why don't they change the index all the adjustables rate mortgages use? That is within the provision of the loan and would create an immediate relief for most homeowners. Also, they could look to do a rollback to the intro rate -- typically low 6's, when these loans were made. If the intent is to keep people in their homes, let's not give them a gift, let's give them a payment they can afford. Finally, I don't think we should look to give $$$ to the banks to buy the assets, but I would not be opposed to a tax relief that would fund lower payments simi liar to a buydown in interest rates. We need to stabilize prices, fundamentally change people into believing their home is foremost just that -- their house not an investment and taxpayers should be treated equitably in whatever plan is designed. Some people will lose their homes -- but some people have always lost their homes, some companies have/will take losses, but some companies have always taken losses, some investors will lose money (most already have!) but some investors always have lost money. The American dream is the opportunity for homeownership, not the guarantee of homeownership. If they are looking for fundamental changes, it should begin in K-12 education and having some financial commonsense and basic skills taught."

Fed Outlook archive