Who Knows the Right Interest Rate, Report

By Keith Weiner

On January 6, we wrote the Surest Way to Overthrow Capitalism. We said:

“In a future article, we will expand on why these two statements are true principles: (1) there is no way a central planner could set the right rate, even if he knew and (2) only a free market can know the right rate.”

Today’s article is part one of that promised article.

Let’s consider how to know the right rate, first. It should not be controversial to say that if the government sets a price cap, say on a loaf of bread, that this harms bakers. So the bakers will seek every possible way out of it. First, they may try shrinking the loaf. But, gotcha! The government regulator anticipated that, and there is a heap of rules dictating the minimum size of a loaf, weight, length, width, depth, density, etc. Next, the bakery industry changes the name. They don’t sell loaves of bread any more, they call them bread cakes. And so on.

Continue reading Who Knows the Right Interest Rate, Report

Residential Mortgage Refinancing Applications Spike As Mortgage Interest Rates Decline

By Anthony B. Sanders

Purchase Applications Spike Even More!

Mortgage applications increased 13.5 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 11, 2019.

The Refinance Index increased 19 percent from the previous week to its highest level since March 2018. The seasonally adjusted Purchase Index increased 9 percent from one week earlier to its highest level since April 2010. The unadjusted Purchase Index increased 43 percent compared with the previous week and was 11 percent higher than the same week one year ago.

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You can see the spike in refi apps coinciding with a decline in 30-year mortgage rates.

Continue reading Residential Mortgage Refinancing Applications Spike As Mortgage Interest Rates Decline

Why Interest Rates Are Not Likely To Rise Much In The Near Future

By Anthony B. Sanders

Ford Cutting Thousands Of European Jobs, China Car Sales Plunge 13% YoY, Etc.

Since early November 2018 when the 10-year Tteasury note yield hit 3.24%, both the Treasury yield and 30 year mortgage rate (MBA) have plunged.

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Partly to blame is the slowing economies around the globe, particularly in Europe (check out Ford’s announcement of job cuts in Europe: Ford Motor Co. will shed thousands of jobs at its European operations as part of a bid to return the business to profitability with a broad restructuring that could include shuttering factories).

Continue reading Why Interest Rates Are Not Likely To Rise Much In The Near Future

Rising Rates Falling Assets, Report

By Keith Weiner

Last week, we wrote about the concept of discounting. This is how to assess the value of any asset that generates cash flow. You calculate a present value by discounting earnings for each future year. And the discount rate is the market interest rate. We said:

“If the Fed can manipulate the rate of interest, then it can manipulate the value of everything…

There is no other rate to use, other than the market rate. You don’t know the right rate any better than the people who centrally plan our economy. The problem is not that the wrong people are in the job. The problem is not even that they use the wrong magic formulas to determine what rate to set.”

The Fed cannot make a company more profitable, but it can reduce the discount rate so that market participants are willing to pay more for its shares. We noted that no one knows the right rate any better than the Fed. Thus, the only rate to use is the market rate. But we did not really make the case in favour of using the market rate.

Continue reading Rising Rates Falling Assets, Report

Mortgage Rates Explain Housing Weakness

By Tom McClellan

30-year Mortgage Rate versus 30-year T-Bond yield

Housing sector stocks have been among the worst performers in 2018, and analysts are pointing to lots of different reasons including the newly imposed U.S. tariffs on Canadian softwood lumber.  But an easier explanation arises when we look at interest rates.

Mortgage rates are not yet empirically “high”.  I bought my first house with a 13% mortgage, so rates that start with the number 4 still seem pretty low, at least to me and my ge-ge-generation.  The key insight contained in this week’s chart is that mortgage rates are high compared to 30-year T-Bond rates.  Both rates have been rising in 2018, and the 30-year mortgage rate has been more than a full percentage point above the 30-year T-Bond yield for most of 2018.

Continue reading Mortgage Rates Explain Housing Weakness

“Harbinger of Doom”: Amigo 3 in Play, But Real Doom Awaits

By NFTRH

“The Harbinger of Doom”? Of course we (well, the media) are talking about the yield curve AKA Amigo #3 of our 3 happy-go-lucky riders of the macro. I have annoyed you repeatedly with this imagery in order to show that three important macro factors needed to finish riding before situation turns decidedly negative.

Amigo 1: SPX (or stocks in general)/Gold Ratio

Amigo 2: 30 Year Treasury Yield

Amigo 3: Yield Curve

In honor of Amigo 3’s arrival to prime time let’s have a good old fashioned Amigos update (going in reverse order) and see if we can annoy a few more people along the way. :-)

Yield Curve

Clicking the headline yields a Bloomberg article all about various yield curves and all the doomed news  you can use, including a hyperactive interview with an expert bringing us all up to speed on the situation.

Continue reading “Harbinger of Doom”: Amigo 3 in Play, But Real Doom Awaits

A History of First Cuts

By Kevin Muir

The market is definitely torn about whether last week the Federal Reserve signaled a pause in their rate-tightening campaign. You know where I stand (they did), so there is little to be gained by my shouting into the wind trying to convince anyone.

Yet one of my more astute readers sent a note to be careful what I wish for. Now, he knows we are a long way from the Fed actually cutting rates. In fact, I suspect we both think the Federal Reserve will raise rates this December. But let’s imagine that I am correct and the next meeting brings about a one-and-done rate rise. What if the Fed’s next move after December is a rate cut? I know that seems preposterous right now, yet there are many signs the American economy is slowing faster than the Federal Reserve forecasts.

Continue reading A History of First Cuts

Revisiting the Age-Old Relationship Between Interest Rates and Prices

By Steve Saville

There is an age-old relationship between prices and interest rates that Keynesian economists have called a paradox (“Gibson’s Paradox”). The relationship was clearer during the Gold Standard era, but as I explained in a previous post it is still apparent if prices are measured in gold.

To understand “Gibson’s Paradox” and why it actually isn’t a paradox, refer to the earlier post linked above. Suffice to say that when money is sound or at least a lot sounder than it is today, interest rates don’t drive prices and prices don’t drive interest rates; instead, on an economy-wide basis both prices (in general) and risk-free interest rates are driven by changes in societal time preference. Moreover, as mentioned above and explained in my earlier post, even with today’s massive, continuous manipulation of interest rates by central banks the relationship is still evident, but only when interest rates are compared to a wholesale price index denominated in gold.

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The Mist! US Housing Starts Plunge Under Rising Interest Rates

By Anthony B. Sanders

Hurricanes Florence and Jerome

There is little doubt that Federal Reserve policies have resulted in mispriced risk and massive distortions in the economy. Fed Chairs Bernanke and Yellen were masters of distortion (keeping rates too low for too long) while Fed Chair Powell (Hurricane Jerome) is raising rates rapidly in the face of little-to-no inflation. Throw in Hurricane Florence and we have “The Mist” where fear changes everything.

Housing starts for September were released yesterday and, as expected, the numbers were down across the board (except for the West where it is seemingly always sunny).

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1-unit starts (aka, single family detached) are still below 2000 levels thanks, in part, to The Federal Reserve dropping their target rate like a hammer to 1%. We got a massive construction response. That blew up, so The Fed dropped their target rate like a hammer … again from which Hurricane Jerome is only recently begun raising.

Continue reading The Mist! US Housing Starts Plunge Under Rising Interest Rates

Stronger U.S. Economy May Warrant ‘Restrictive’ Rates: Boston Fed’s Rosengren

By Anthony B. Sanders

Consumer Credit Growth Slowing With Fed Fund Rate Increases

Now that the US economy is stronger, Boston Fed’s Eric Rosengren wants to  raise rates. Again.

BOSTON (Reuters) – When Boston Federal Reserve Bank President Eric Rosengren switched from advocating low interest rates to tighter monetary policy, he argued it was time to start crawling back toward “normal” rates even with 5 percent unemployment and weak growth and inflation.

Two years later, Rosengren has joined colleagues in beginning to lay the groundwork for those rate hikes to potentially continue longer and to a higher level than currently expected as the outlook for the economy strengthens.

Rates may not only need to become “restrictive,” but the definition of that may be moving up as well, Rosengren said in an interview with Reuters on Saturday following an economic conference here.

“This is not hair on fire. There is upward pressure on inflation, and given that we are already at 2 percent, labor markets are already tight … that is going to be a situation where we start persistently having inflation above what our target is,” Rosengren said. “There is an argument to normalize policy and probably be mildly restrictive.”

The Fed maintains a 2 percent inflation target, which it is only now reaching after a decade struggling to consistently hit and maintain it.

Yes, it has been a long, hard road to get to 2% core inflation … again.

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But here is the problem. Consumer credit YoY is slowing quite rapidly with increases in The Fed Funds Target rate.

Continue reading Stronger U.S. Economy May Warrant ‘Restrictive’ Rates: Boston Fed’s Rosengren

Mortgage Refinancing Applications Lowest Since December 2000

By Anthony B. Sanders

Rising interest rates have led to the lowest level of mortgage refinancing applications since December 2000.

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And compared to the “Go Go” days of the housing bubble, mortgage purchase applications are back to 1997 levels and growing at a tepid rate (by comparison).

Continue reading Mortgage Refinancing Applications Lowest Since December 2000