My Mortgage Blog

The world received a ton of new information this week, most in political cloak, all difficult to interpret. Markets accordingly have wockety-tonged all over the place, but the 10-year T-note sliding below 2.90% says the net effect is heightened anxiety.
    
The only straightforward stuff was US economic data. Sales of both new and existing homes slid in May, but with no real change in pattern. Weekly claims for unemployment insurance are trickling upward, 11-straight weeks above 400,000 -- far below the 650,000 post-Lehman, but about the same as the worst of the two prior recessions. May orders for durable goods improved, but did not offset April’s decline; similarly, the Chicago Fed’s index in May was again negative, but better than April.
    
The endless Greek saga reminds me of schoolboy trial by Odyssey and Iliad fire. Lashed to a mast, but no sirens in sight. Could Odysseus just... go home? The European proceedings are now officially stupid, an argument over verb conjugation: default, defaulting, defaulted. Each day that the inevitable approaches, stocks sink and cash goes to bonds, then reversing at each new and absurd procrastination.
    
The moment that Greece finally goes will be anticlimax, as banks and regulators have had 18 months to sort through the web of its debt and credit default swaps. The daily concern in the markets is the next euro-dominoes.
    
In the global black box of black boxes, China is further along in its first-ever central bank fight with inflation. New signs: slowing real estate sales, a decline in lending, and a spike in bank-to-bank lending rates (5.5% to 8.9%). All nations, even ones with a hundred years’ experience in this sort of thing, are touchy about how much tightening medicine to apply to deal with a little inflation. Yet none has ever beaten China-sized inflation without a recession, and throwing a lot of people out of work.
    
China is likely to be flinchier than most, as it is in the midst of one of its changes in leadership without constitutional guide, just a power struggle under the covers between Party, Army, bureaucrats, entrepreneurial Princes, and ethnic and migrant crowds. Thirty years ago, less than 20% of China lived in cities; today, more than 50%. Urban populations are volatile. How China’s first capitalist business cycle plays out may matter more than anything that happens in Europe.
    
With that backdrop, the aftermath of the Fed’s meeting this week seems almost routine and orderly. Almost. The Fed did not announce any new action; in fact took pains to engrave that it would not do anything until the economy does something.
    
However, two jarring aspects. First, another downward revision in the Fed’s 2011 GDP forecast: January’s 3.9% best-case gave way in April to 3.3% and this week to 2.9% -- which will require acceleration in the second half of the year. Then, rather more disturbing, Mr. Bernanke offered, “We don’t have a precise read on why this slower pace of growth is persisting.”
    
Tha-dump. “Maybe some... weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues -- some of these headwinds may be stronger or more persistent than we had thought.”
    
You don’t say. Housing... ya think, could be? Credit a little... scarce?
    
All right, enough smartass. Be serious: Perfesser Bernanke doesn’t have the votes to take new stimulus steps, regional Fed rockheads ready to revolt. Congressional no-bailouters and hard-money nitwits are especially upset that the Fed has interrupted their path to national suicide. This is a good time for the Fed to get off the stage, to lower its profile in self-protection.
    
A benefit from that exit: the markets already see, and the nation soon will, that absent the Fed there is nobody on stage. The hapless Treasury Secretary speaks from time to time, but no one listens, and the President has not been seen near a financial issue since his party got pasted last November. Congress... is Congress.
    
Thus a competition between misgovernment here and in Europe and who-knows-what in China, and the net result is  safety trades and lower rates, even for mortgages.