Friday, July 30, 2010

QE 2.0 and the Insta-Refi

Another week, another slew of bad reports:

* The ECRI Leading Indicator hit -10.7 for the most recent week (the previous revised number is -10.5). (The ECRI is a measure of leading indicators, and both of these numbers were indeed ugly)

* Q2 GDP plunges from revised Q1 number: GDP comes in at a below consensus 2.4%, which a huge drop from the revised Q1 number which came in at 3.7% (from 2.7%), and well below the consensus. Per the revised GDP numbers, the US economy has now shrunk by 4.1% from Q4 2007 to Q2 2009, compared with the 3.7% previous estimate. The Gov't continues to "massage the numbers", quietly adding "revisions" later to cover the ugliness on announcement day.

* Durable Goods came at -1.0%, a major disappointment to consensus which had been hoping to a nice boost from the previous -1.1% number .

* Major plunge in Consumer Confidence, which came at 50.4, below expectations of 51.0, and down almost 10% from the prior 54.3 reading.

The St. Louis Fed's James Bullard issued a paper titled "Seven Faces of The Peril" in which the Fed president pledges that the Fed should immediately recommence purchasing Treasurys if the deflation scenario picks up, which he notes is an increasingly likely probability. Additionally, this week three more Fed governors were approved, all of whom are on board with money printing as the solution to all problems near and far. After eyeballing all of this, a major investment firm today.. the first.. came out with this:

"We think there will be something in the (FOMC) language that maybe reverts back to the language of 2009, around the first time they made this statement, that the Federal Reserve needs to maintain an expanded balance sheet" David Resler, chief North American economist for Normura Securities, told Market News International. Nomura Friday became the first major firm to formally anticipate a change in Fed policy as soon as August 10 to alter course toward some renewed quantitative easing, arguing that without the change, Fed policy is becoming less accommodative week by week.

But the most interesting idea being floated is what's called the "Insta-Refi":

MS and ML's Harley Bassman said that the GSEs (Freddie, Fannie & FHA) should provide some form of autorefi program to take borrowers to market rates. As this would impact a vast majority of the 37 million of mortgages outstanding backed by the government, not only would this housing stimulus have a huge impact on consumption appetites, but it would be a political coup as all of a sudden the administration would find tens of millions of giddy homeowners who are paying far less monthly

My thoughts on these are that first, any more purchases by the Fed of US Bonds would have little effect; bond interest rates are near historic lows as it is, and so the problem isn't an inability to fund the Gov't. The problem is evaporating liquidity on Main Street; fewer and fewer loans are available to both consumers and businesses, constricting economic growth. Bond purchases simply hands money from the Fed to the US Gov't. What Bernanke would love to do is simply begin mailing checks to the American people, but this is not within the ability of the Fed to do so. There would be some immediate results: the equities markets would shoot up and the rates on Bonds would possibly hit all time lows. But this does nothing to solve the major problem facing the US economy.. too much debt at every level.. personal, government and corporate. Until the overall debt level in the US goes down substancially, there will be no recovery.

As for the insta-refi's, given government's ineptitude in other mortgage programs, I simply see a major boondoggle here. While true it would help tens of millions lower their monthly mortgage payments some, it would'nt help too much.. most mortgage holders already have low interest rates as it is. Who would lose in this scenario ? Fannie, Freddie and FHA, which would see their monthly returns diminish as a result, possibly resulting in these entities needing yet more Gov't money to prop them up.

Never in the history of any nation has anything like this even been suggested. The level of government interference in the mortgage markets is stunning. In the 1980s, very few mortgages were guaranteed directly or indirectly by the Gov't. This year, above 90% of all mortgages are US Gov't guaranteed. Then comes this. In my humble opinion, this is yet another brick on the Road to Ruin.


  1. I agree Mr K nothing the government does will help. They need to stay out of it. They need to allow people to fail and the market to punish the losers.

    All they have the power to do is redistribute wealth and print money. Neither of these actions will make a difference. I don't think Bernanke can even pour enough money into the system to stop the deflationary spiral we are in. 100k check to every American might be his next move. We would just blow it and pay down debt and we'd be right back where we started. The velocity of money is dead on the table. No government intervention will change that. Dead is dead.

  2. Kudos Mr. K! You will clearly not be invited to appear on CNBC as you would rip apart Mr. Liesman and snap their financial powerhouses Michelle Caruso-Cabrera, Dennis Kneale and of course the well versed ex-Barbie Doll Julia Boorstin in half.

    The "massaged" government numbers as you noted included a revision to Q1 GDP by 37%! PLEASE! The shrooms had some kick to increase GDP by 37% while at the same time revising the prior 3 years of GDP guesstimates down.

    The disconnect between the "bongers" in the equity market and the "flight to safety" bond crowd is amazing. The S and P 500 launches 6.88% in the month of July (best % month in a year) while the 10 year treasury drops 4 basis points from 2.95 in June to 2.91 in July. Naturally, the S and P 500 trading volume in July was anemic compared to the down months of June and May however when the equity market is also broken...

    Yes Mr. K another brick has been placed in the road to ruin and what congress, publicly traded companies, SEC, FDIC, FASB and Wall Street are inflicting on our grandchildren is morally criminal.