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Thursday, September 22, 2011


Because nothing says "I love you" like Japanese-style long rates.

Look at that 30-year, (she wrote reverently).

You can get the Treasury charting function here, but let me advise you not to try the longer terms at home. It was a true labor of love to get this. While I was waiting for the data to load, stars collided, galaxies were born, my dog nearly died of boredom and my patience almost ran out.

According to Treasury, the 30 year closed at 2.78% and the 10 year at 1.72%. The 7 year is at 1.24%. CPI-U is at 3.8%.

It will be interesting to see what happens. This is mostly produced by the combo of the bad economic news, especially the travails of Europe, reinforced by the Fed's announcement of Operation Twist. One can't feel confident about the economic trajectory we are seeing, and it is hard to imagine Italy's situation improving so the Euro angst is doomed to continue until it breaks into reality. That will happen within a year or two, and then Lord only knows what happens to Treasury rates.

You have to think there will be a wave of refinancings, although the net return for many will be low. For older people currently in good financial shape but with mortgages, the opportunity to refi into a 15 year at incredibly low rates might be enticing. With equity and good credit, 15 year rates should drop below 3%.

From my POV, this is a deflationary move. The rewards for saving money (or begging your parents for an equity handout) to qualify for loans at low rates are brilliant, but with rates so low underwriting criteria are surely going to tighten further. As rates fall,
rate risk increases and the relative percentage of loss risk rises, so underwriting criteria tend to tighten. It's hardly an easy money environment.

If that seems obtuse, let's consider FHA mortgage insurance premiums. Currently, the upfront premium is 1%. The annual premium varies according to downpayment and loan term.
Term > 15 years:
DP = or > 5%: 1.1% (110 basis pts)
DP < 5%: 1.15% (115 basis pts)
Term 15 years or less:
DP = or > 10%: 0.25% (25 basis pts)
DP < 10%: 0.50% (50 basis pts)
BUT there's a kicker - if you have a 15 year term or less, and your Loan to Value ratio is under 90%, you don't have to pay any annual premium - just the one-time upfront 100 basis pts.

This raises interesting economic scenarios. For example, good mechanics are in short supply right now. A lot of skilled tradesmen could end up in far more decent economic shape in 10 years than the person who racked up a lot of debt for an expensive secondary education, even if that education paid off. Racking up a 40K-80K joint debt for a young couple has a lot of implications, whereas a young couple that is more stereotypically "working class" could save money, live at home for a few years, get married and buy a starter house with a good DP and a very low 15 year mortgage in many areas by the time they were in their mid 20s.

This is the reason I think we are going to emerge from this with an economy that looks much more like that of the 50s and than any time later.

I opted for the tongue twister version.

Twisted Twist Is Twisting TIPS
came across this tidbit relating the current market patterns to 1946, maybe you have something there MOM. History dosen't often repeat but rhymes.

"The U.S. was in the midst of dismantling the stimulative effects of a war-time economy, and unemployment shot up in a big way. There were also concerns about rebuilding post-war Europe, and whether or not loans would be repaid like the Lend-Lease Program"


With most American workers facing global competition,
and no labor movement to speak of in this country, I
don't think the 1950's are apt. Eventually, things will
come into balance, but at a lower standard of living.
Part of the Fed's theory seems to be that lower rates will encourage refinancing and hence free up more cash for consumption. This ignores the fact that balance sheets have two sides; that lower rates will also reduce income for people and corporations owning debt in this maturity range and hence reduce *their* spending and investment ability.
We have some Armenian friends. It's always interesting to visit them as the mindset is so different. The two daughters did not attend college. One has been very successful running a restaurant at the mall, until they jacked up her rent to an outrageous level. The other did well as a Nordstrom manager. Both are married to Armenian men and have kids. The whole family shares a large, newly purchased house.

It's like a school for new businesses. The focus for everyone is on making their own future and the family acts as an economic unit. It's much different from my boyfriend's family, where his son is determined to live on his own and struggling through a bunch of day labor jobs.

I think our lives will be better when we have a lifestyle that is less credit based. If the power of the unions can be broken, it might become easier for young people to get into the trades.
David - the problem of retirement incomes now becomes paramount. Most retirees have modest incomes, and need secure interest from their savings to get by.

There certainly will be impact on retirees. The next generation of retirees is particularly impacted, because on the whole they have less in the way of pension benefits.
Spork - ultimately this is going to break, and the break is not too far from us. The great surge in manufacturing kind of petered out in the late 50s - not that it wasn't strong, but in the later 60s and 70s growth in service and government jobs far outran any growth in manufacturing.

See for example this article from the early 70s.

So swiftly has the economy changed, in less than a decade, that many economists and government policy-makers have failed to note what has happened. They may still imagine the economy as it was in the mid-1950's. Then, the new industrial state, with its core of large corporations and mass unions, employed nearly half the labor force. The industrial unions and large corporations clearly were setting the pace in wages and prices, benefiting themselves at the expense of consumers, pensioners, and the unorganized. Their days of overweening economic influence were limited, though, by the changing pattern of public demands. The number of manufacturing jobs has increased by only 10 percent since 1955 and by not even 3 percent since 1965.

There's a lot more in that article - it's very worthwhile.

The US is not going to sustain growth by consumption growth - the growth edge will shift into a retraction of manufacturing back within our borders. Costs are rapidly equalizing and capital is there. Removing energy/regulatory barriers will accelerate the process.

Are we seeing the end of the 30-year fixed? I can't see a lender wanting to take that interest rate risk (at less than half down anyway), although if the only lender is the government (GSE's) then they may be willing/foolish enough to do it.
Charles - for now, Treasuries are so liquid that it is just fine. You can trade them in and out, as there are buyers. With the Fed buying long, that inserts additional liquidity. Therefore it is safe to buy long currently, and in fact the Fed action just makes it safer. But it's not like most investors are buying 30s to hold them.

Ultimately the EU will be forced to do something, even if that something is merely to stop trying to pretend that countries can pay their debt and to provide a mechanism for them either to default and stay in the Euro or leave the Euro and default by adopting their own currency. Greece will default within two years, and Italy probably won't last that much longer.

Japan is a wild card, because Japan also has an unsustainable debt. But it is a debt that is mostly held internally, so that won't insulate the US. Because so much of that debt is held internally, it doesn't create the need to bail out the international financial system. It will blow up currency valuations, though.

After the EU resolution, the US liquidity advantage will start to wane rapidly.

Also, for banks holding those long term securities is difficult. They can maintain them at the original value by having them in their hold-to-term accounting bucket, but they won't want to tie up tons of long money at these rates that way.

So in the end, the demise will be rapid, but I don't think it is currently predictable when that will come. There are bound to be more twists and turns along the way.
We would see a lower standard of living in aggregate because we all cannot borrow for consumption any longer. Living within your means is a lower standard, but wasn’t the higher standard an illusion?

My latest label for the upcoming economy is “The Great Repricing”. We have all the same skills and same resources as the Big Bubbles of the past decade(s). The material world has not changed.

Deflation and the inability to manipulate value by purely financial means will make tradesmen worth relatively more and analysts worth relatively less as the prices of everything jitter downward to an unleveraged equilibrium.

And those prices may not be in dollars anymore.
Outside of the largest cities, Unions have practically
no power. The influx of Mexican trade workers has crushed wages in most trades. The decline in blue collar wages follows the decline in union membership.
With only 8 percent of private sector workers in a union
it's hard to argue they are the reason for the downturn
although that what you hear repeated by MSM.
Ref David's comment "Part of the Fed's theory seems to be that lower rates will encourage refinancing and hence free up more cash for consumption."
= = = = = =
I would certainly have refinanced, EXCEPT that I'm one of those people on "voluntary reduced hours to keep the company going" and no longer qualify for a mortgage on my house, even at the new lower assessed value. I'm not underwater, and on paper I have some equity, but if I sell, I'd have to go rent something. Even a 2-BR apartment is within $200 a month of my current mortgage payment, so I figure (or maybe "I hope") it's worth staying the course to have a real tangible asset. Since I'm 63, I *could* apply for early Social Security (though I hate to lock-in the lower monthly benefit).


It's not just small businesses who are delaying making choices because of our current economic uncertainty!

wv= "sliezqd"
I can see there's a sleaze factor in there somewhere...
I live just down river from Longview, where the unions are fighting over the grain mills using non-union laborers. It's not a big city, but this is a very Democratic state. They still control access to apprenticeship programs too. And then there's the teachers' unions, the legal and medical professions.
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