Archive for February 11th, 2011
Two in one day?
Yeah…. Friday seems to be busy.
Two of my favorite newsletters hit my desk today — the Conerly Businomics Newsletter from Dr. Bill Conerly and the Philadelphia FED’s Survey of Professional Forecasters. You can reach the first one via the link on the right of this page (scroll down and look for Conerly). I’ll take a couple of minutes on the second one, though.
For quite a few years, the Phily FED has surveyed a host of leading economic forecasters (this quarter, it’s 43), and reported their median expectations on inflation, GDP growth, etc., as well as the dispersion around the median. The median gives a fairly good idea of the central tendency of economic thinking, and the dispersion measures let us know how “solid” that central tendency is. In general, this group tends to move together, which means that the dispersion measures usually aren’t very great, and when they’re wrong, they’re all wrong together. (Intriguingly, that means that economic markets are efficient but for unpredictable economic shocks. That in and of itself could lead to a wonderful discussion of Arbitrage Pricing Theory, but I don’t have time or patience for that…)
Even more interesting — and this may be the best stuff in the report — is the change in sentiment from one quarter to another. In short, how is new information being captured in economic forecasts? The magnitude and direction of change is often a more important element in the market than the absolute value of things. For example, prices are what they are, but the CHANGE in prices over time, and the magnitude of that change, is called inflation. Get it?
The following chart shows the consensus opinions on GDP growth for the coming 3 years. As you can see, there is a generally higher consensus for this year and next, and in fact (as not reflected on this chart) the biggest “jump” is in near-term growth rates, which are expected to be particularly robust during the first half of 2011.
(c) Greenfield Advisors LLC, with data from the Philadelphia FED
Coupled with that, we see marginal improvement in the unemployment picture, although (and consistent with our own thinking) unemployment will continue to be a drag on the economy for quite a few years to come.
(c) Greenfield Advisors LLC, with data from the Philadelphia FED
For a complete copy of the survey results, visit the Philadelphia FED by clicking here.
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The death of the fixed rate mortgage
It might also be called the “death of the easy mortgage”, and will almost certainly be the death of the small-town lender….
The Obama Administration today outlined the broad-stroke strategy for dealing with Fannie Mae and Freddie Mac. They suggest three solutions, all of which basically call for a multi-year wind-down of the two troubled institutions, which have cost taxpayers about $150 Billion in recent years to bail out.
How we got this way has been covered in thousands of articles, blog posts, and even text books. FNMA and FHLMC were set up to provide liquidity to small mortgage lenders (primarily, small-town S&L’s, of which there aren’t many now-a-days). A small-town S&L had a fairly finite pool of deposits, and once they made a few home loans (which were very long in duration), they simply couldn’t loan anymore until those mortgages were paid-off. Worse still, in times of rapidly changing interest rates, low-rate, fixed-rate mortgages didn’t get paid off, but depositors ran for higher-rate money funds. S&L’s were caught in a liquidity trap, and crisis after crisis ensued.
Today, of course, the mortgage lending business is filled with several thosand-pound gorillas with names like Wells Fargo, BofA, and JPMorgan/Chase. These institutions have the muscle to package mortgage pools and sell them off to investors. Why, then, do we have/need FNMA and FHLMC?
Congress is firmly on the hook for this one. Over the past decade and a half, the F’s were encouraged by Congress to morph into investors of last resort for mortgages that the securities market didn’t want. (It was actually a lot more complicated than that, but you get the general picture, right?) Why didn’t the private sector want these mortgages? Because they knew eventually many of them would go bad — and they did. Congress essentially got what it wanted, a subsidy of home ownership which, unfortunately, wasn’t sustainable.
This deal isn’t done yet, of course. Wait for the long-knives to come out from the Realtors and Home Builder’s lobbies. The current proposal would privatize all housing lending with the exception of FHA/VA lending. To put this in a bit of perspective, today, FHA loans constitute over 50% of housing lending. Back in the “hey-day” of the liquidity run-up, FHA loans were down around 4%. Without the F’s, we’re looking at a privatized mortgage market not far different from what we see out there right now, and that’s fairly unsustainable for the homebuilding industry.
From a small northwestern observatory... 