"Calculated Risk says: 'All, this is a huge move. Announcing the buying of longer term treasuries has had a huge impact. This will push mortgage rates down significantly too.'"
"BOSTON (MarketWatch) -- Home-builder stocks were higher Wednesday after the Federal Reserve said it will provide more support to mortgage and housing markets by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year. Also, the Fed will increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion".
Wednesday, March 18, 2009
Goosed
Posted by Harriet at 2:37 PM
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28 comments:
This will not end well.
If there is one fundamental fact of economics, you can not simply create money out of thin air.
Harriet,
Thanks for posting CR's take. It is because of this kind of unpredictable actions by the FED--and government intervention in general, that make it impossible to make any fundamental analysis for the near term with any degree of confidence. Yet, we have all those wave theorists who think they have it all figured out.
I was told this by a lender, what do you think of it:
"We think that they [rates] are going to go up. I think we have seen the bottom. Rates have continued to go up with every announcement. Can’t see them getting much lower, if they do at all. The stimulus will be inflationary and that will drive up rates. That is the only way the stock market is going to recover."
t,
in the long term yes, and as refers to the stimulus package yes. (that's what it hopes to do, whether it will succeed is another thing)
This action by the Fed is two-fold. Inflationary in the printing money sense. But also what they're using that money to buy is mortgage backed securities and now a wider selection of consumer student and business loans. The Fed buying these securities provides a market for them which "should" drive down mortgage rates since the banks can sell the loans off to the Fed.
So, yeah. It's possible rates will slip down a little more in the next couple of weeks. I'm sorry. I did not anticipate this at all, and you did do ridiculously well on your rate, but indeed it might not be the rock bottom rate ever offered during this bust. Though I don't think the Fed can push those much lower than it already has no more than half a percent.
T,
Stimulus like this will always be inflationary, but the FED must have been privy to some data that shows the deflationary trend is worse than they had expected. So, in the near term, I don't think the inflationary expectations will be so dominant as to raise rates significantly higher. But there will inevitably come a time when rates go up sharply. It just doesn't seem like it will happen within the next year. Just my take, who knows.
Cara - no need to apologize. No one can predict anything on the rates, especially something like this. I am very happy w/ my 4.375 conforming jumbo w/ 2.375 points. I would have to have my rate locked up in a week anyhow to close.
I am hopeful the rates do dip a bit or at least stay this way until my TH sells. It could spur that extra bit on the sale price, so I'll take it.
This is exactly what I was afraid of when I refid last month. Time to pull out the calculator again - sigh.
In all seriousness it will be interesting to see how the mortgage market reacts. You might recall when the govt said the conforming amount would be boosted to 620K whatever in an effort to drive down large loan rates nothing happened. The market pushed back & said in sum, we dont believe you - we know this is temporary. It may very well push back again.
Also, after reading the minutes of the meeting, I am a bit surprised they did this. Obviously we need mild inflation, but thats exactly what we have - core inflation per the last report was +0.2. Next report would likely be worse, but with a few of the leading indicators looking ok, was this really necessary?
The next trick will be when to pull back on the monetary throttle and how hard? Do it to early too quickly, and we go right back into a funk...do it too little/too late and we get a situation like greenspan had in 2002 when he led us into this mess.
These guys are playing with fire in a big big way.
There are so many things wrong with this plan I hardly know where to start.
This calls into question the stability of our entire currency.
That is a big big deal.
Once you start playing games like this, where do you stop?
This is not just a slippery slope argument. People only accept ugly pieces of paper in return for valuable goods and services because they have confidence that ugly piece of paper has value.
Massive interventions like this are going to make major investors very very nervous about the dollar. These are people that make their money by doing serious analysis and effectively placing bets.
This throws all that out the window. We are no longer talking about the market, now we are reduced to guessing what a government will do. Take a look at what the 10 year treasury note has done today and imagine what you would be thinking if you were in the business of trading in them.
With the deficits we are going to be running over the next few years we are going to be asking investors and foreign governments to loan us an unprecedented amount of money.
Are they going to be willing to do that knowing that we are officially creating money out of nothing on a massive scale?
How much additional risk is there in holding dollars now that the Fed has announced their willingness to carry out such interventions?
Does anyone know?
fed wants 4.00 rates, pretty seriously. it was well known for a while. can they get there? don't know.
"With the deficits we are going to be running over the next few years we are going to be asking investors and foreign governments to loan us an unprecedented amount of money.
Are they going to be willing to do that knowing that we are officially creating money out of nothing on a massive scale?"
So far it looks that way. Plus guys like China need our dollars to grow just as much as we need them to buy them. When we started our QE program I expected the dollar to tank in forex only to find the opposite happened. Despite our unprecedented weakness (for modern times), everyone else got hit so harder than us that our balance sheet is still the strongest in the world.
Also, if you take the longer view, our debt isnt so dire. After the war, our debt as a % of GDP is far larger than it will be now. UK for a while was running a debt equal to 150% of its GDP!
I dont mean to make light of this, but I do think they have been suggesting this is what they would do for a while. Weve recovered from much worse before. I think we can do it again.
"I dont mean to make light of this, but I do think they have been suggesting this is what they would do for a while. Weve recovered from much worse before. I think we can do it again."
I am not going to suddenly turn into a doom and gloom type burying gold coins out back my cabin... but this is dangerous business.
Thus far we have been able to take advantage of the fact that the Dollar is the world's reserve currency and countless investors fled other currencies into the dollar, but there are limits to what we can do and once we find out we have hit them, it is probably already too late.
If the dollar becomes shaky it will undermine the global economy in a big way and we will all end up feeling the pain.
This calls into question the stability of our entire currency.
Dude, you're years late! The dollar has BEEN called into question since at least 2005. Read Peter Schiff's OLD book, Crash Proof, or his NEW one.
IF the dollar gets shaky"??????
It's been going down for years! This is why gold has gone from $250 to $1000.
Okay, there was a recent double hump of a rally in the dollar--but as of this week, that's breaking down--and so have treasuries been breaking down since the first of the year. That's why the fed's buying them--it doesn't want the Treasury bubble to pop on all those retirees and stock bears hiding from the market. It doesn't want high mortgage rates to make the coming second wave of resets to put the final nail in the housing coffin and cause prices to drop to, er, reasonable, affordable levels. It wants to keep them overpriced. Why? Because the fed's friends at the BANKS hold a lot of them now. Gotta keep prices high until the banks can get rid of them and the MIDDLE CLASS has them. THEN it's okay if prices finish going back to 1989 levels!
Except, that WON'T be okay AT ALL.
Leroy,
It remains my analysis that the fire is snuffed out and the Fed is doing every thing it can to light it back up.
http://www.federalreserve.gov/releases/z1/Current/annuals/a2005-2008.pdf
If you want to follow along at home.
Essentially over the last decade or so people borrowed about 10 Trillion on housing that will end up being worth about 12 (and was 23 at the peak). Since about 4 T of that is made up of people who own their homes outright, the 10 T in mortgage debt is backed by an actual value of 8 T in homes (it was about 16 T or so. The ratio should be something more like 14-20 T in homes that 10 T in debt. So the Fed either has to:
1. Have the government pay down about 6 T of the 10 T in debt
2. Deal with the default of about 6 T of the 10 T in debt (this is what the market is pricing into bank/insurance company equity prices)
3. Inflate to get home prices back above 14 T. Which means the dollar has to be devalued by >40%
There's really any other solutions. Lowering rates allows makes it cheaper to wait for inflation, but that's mostly just lengthening the window with which the Fed can work (defaults won't waterfall if incomes stay well above mortgage payments). So it gives them more time to boil the frog (actions that boost inflation don't work as well if everyone expects it).
And meanwhile, the sticky-price sellers out there figure that they should stay with their same high prices, since efforts are going to continue to be made to make it easier for buyers to pay those prices....sigh...
Just by coincidence, I had called a mortgage broker today to see if he could beat Navy Fed. He gave me some quotes in the morning, then called me back in the afternoon and said HOLD EVERYTHING, check out THESE numbers! Then he told me to wait til tomorrow, and see what happens. So the rates dropped immediately with this news.
Will let you know what happens tomorrow. Meeting to give him the mortgage application in the afternoon.
Tabitha,
Hope you can benefit from this!
Meshell, I'm starting to feel like I've entered a parallel universe or something.
Thank you for the kind thoughts!
If we were any other country this would already have blown up, but b/c we are the world's reserve currency it hasn't . . . yet.
I'm not entirely sure of what the outcome of this mess will be . . . I'm not doom and gloom that US will be obliterated . . . but I am of the opinion that we will not go back to the way things used to be.
Take Argentina, their economy blew up (or imploded) in '01, I was there for 2 years right before it happened and then visited in '07. Life still goes on but it is different.
I am of the opinion that as a country overall we will have to get used to a lower standard of living (not necessarily a bad thing-i.e. putting family/kids more important than a brand new SUV), and that we will most likely not be the world's superpower that can kick everybody's butt and say "do it our way or else". I think that's a good thing, is it so darn important to be #1 this, #1 that, etc. How about being #1 in small gov. less intervention, mind your own dang business.
The biggest prob. w/ the Fed and central bankers is the idea that they can control the economy the way they want to. They want the stock market to go up, bond low, houses high, and everyone borrowing. They cannot control it! The only thing they can control is the amount of money they print . . . where it goes is uncontrollable. Inflation is a non-uniform event. Pumping gobs of money is just pouring fuel all over the ground. It's not lit yet, and we're not sure when it will be lit, but when it does get lit, look out, 'cuz it's going to be a bonfire. Hubris . . . disgusting.
My ultimate prediction, leveraged goods, little to no price inflation-possible lots more price deflation, non-leveraged things-look out.
"Take Argentina, their economy blew up (or imploded) in '01, I was there for 2 years right before it happened and then visited in '07. Life still goes on but it is different."
GTE - I had a deal going down there that imploded when the currency did. Our client was never the same after that - they still havent recovered 8 years later.
By contrast, I was in Turkey a few years after they had rampant inflation (50% a year). Before, the currency was so bloated it took 1 million lira to pay for a cup of coffee. Then a new government came in & took over. They lopped a bunch of zeroes of the currency - inflation fell to 11% a year, growth ensued - everyone was pretty happy.
So maybe thats the scary thing about it - you never know how things will end up coming out of this.
CRT,
I agree, you never know what will come out of it.
I guess my point is five fold :-), 1) hedge your bets-so you don't end up with absolutely nothing, 2) prepare for the unexpected, 3) figure out what you value most in life and make sure you do what is necessary to keep it (hint, I don't think wealth is the most important 'cuz ya can't take it w/ ya). 4) While having nice things is great, you really only need food, clothing, shelter, fuel. 5) PMA--it can always be worse and it was a lot worse only a few generations ago.
Not doom and gloom, just be prepared for the unexpected :-).
As far as the differences. Argentina imploded, but they still had plenty of inflation afterwards (100% or more). Inflation is used to mask theft by governments. Contrary to popular belief, inflation is not the natural order of things. Left alone, prices would naturally deflate; deflation is the natural order. Inflation is an aberration and not natural (except in extreme circumstances like floods or plagues of the old days). If natural deflation were allowed to rule vs. the unnatural government supplied inflation the world's standard of living would be MUCH, MUCH higher than it is now, and there would not be as much of a disparity between rich and poor in most of the world.
With deflation the poor and save their meager $20 a week and after a while actually buy something of value. With inflation he must "invest it" in order to maintain his purchasing power. Of course with "investment" comes risk and inevitable over the time period he is saving through "investment" the investment will go belly-up (hmmm, stock market anyone??). Or if he is lucky and doesn't lose it all, he must give his money to some "manager" who is smart enough to NOT lose it for him, b/c of course the poor slop that is saving $20/week isn't going to have time or energy to actually determine how to "invest" wisely as that is a full time job. So of course the "manager" gets a cut of the poor slops money in order to keep him paid. This is done all in the hopes of actually having something of value after 10-20 years so that his savings isn't completely eroded by inflation. The whole argument of the paradox of thrift is such bs . . . savings IS investment . . . just not current investments, it's delayed, and there is no difference b/w savings and hoarding. Okay rant off.
"Dude, you're years late! The dollar has BEEN called into question since at least 2005. Read Peter Schiff's OLD book, Crash Proof, or his NEW one."
People have been saying this for decades... but this time they might be right.
"I'm not entirely sure of what the outcome of this mess will be . . . I'm not doom and gloom that US will be obliterated . . . but I am of the opinion that we will not go back to the way things used to be."
This has the potential to change a lot, I suspect the dollar crashes the US will actually come out of things in the best shape of everyone involved.
We will get to see our massive debts erased and probably a resurgence of domestic manufacturing.
Our standard of living will drop significantly as impossible cheap stuff from Asia, mostly China, disappears from store shelves.
The people with the most to fear are in export dominated economies that depend on our borrowing to fund their growth. China is on top of that list, but there are quite a few total. Not only will they lose the primary driver of their economic growth over the last 20 years, they will see much of their savings wiped out.
Stick with Navy Fed or USAA or prepare yourself to get screwed a few days before closing.
Those are the 2 lenders Ive used and they were 100% honest. Almost everyone I know got some sort of rate hike, or extra fee at closing who went with other lenders.
doug,
Oh yes, which reminds me, if at all possible always have a second lender ready and waiting in your back pocket at closing. They'll feel it's double dealing the whole time but it's really just keeping them honest.
cara/doug--
how do you "keep a second lender"? and how can they change rates/add fees as closing? help! meeting w/ the broker today...
tabitha,
there's the HUD documents which require them to follow the fees they disclose, but if you're at closing and there's this pesky extra $200, most people either won't notice or will just pay it to close. So you have two brokers who've both followed through on the deal, who've both gone all the way through the process competing all along rather than just at the start. They won't like it, and I don't know if I'm stiff enough to carry through with it myself, but at half a million dollars... you may be.
Or rates may be so ridiculously low right now that you don't care and don't want the extra hassle.
But keep in mind, other people have lost funding at the last minute because of the bank they were with and managed to get a perfectly good deal at another bank in time to close. So if some can do it out of desperation recognize that it can also be used as a credible threat.
CARA--GOT IT. THANK YOU!
oops-caplock
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