Sunday, May 15, 2011

30-Year Mortgage Rates Fall to 6-Month Low

30-year mortgage rates have been falling since early February, and fell to a six-month last week of 4.63%, the lowest level since early December last year (data here).  If rising inflationary pressures are building up in the economy, wouldn't we expect rising, not falling, 30-year mortgage rates?  

The chart above shows the historical relationship between 30-year mortgage rates and annual CPI inflation over the last 35 years.  One clear market signal that inflationary expectations are increasing will be rising, not falling, 30-year mortgage rates.

27 Comments:

At 5/15/2011 9:37 AM, Blogger PeakTrader said...

Nominal growth (real GDP and inflation) remains too low, with real GDP expanding 1.8% last quarter and core inflation at 1.3% over the past 12 months.

We need 6% nominal growth, e.g. 4% real growth and 2% inflation.

 
At 5/15/2011 9:40 AM, Blogger PeakTrader said...

Unfortunately, we got a heavy dose of Obamanomics instead of Reaganomics. So, it'll take longer for the economy to recover.

 
At 5/15/2011 9:57 AM, Blogger Methinks said...

Inflation (especially not the fake CPI) is not the only component of the nominal interest rate. We are also still in a period of global deleveraging.

For years, acceptable returns were obtained by levering the hell out of low-yielding investments. Deleveraging won't stop until normal returns can be obtained using sane amounts of leverage.

The Fed has been "fighting" that since 2008. On the one hand, it's increasing money supply and on the other, it's forced a tightening of lending standards. It desperately wants to inflate everything evenly, but it's going haywire - as usual.

Whatever.

it's not the first derivative of price that matters but the second. Once expectations about the rate of change of inflation change, the Fed loses whatever illusion of control it had over inflation and all these graphs will change overnight.

 
At 5/15/2011 10:49 AM, Blogger Che is dead said...

“John Williams, over at Shadow Stats, compiles economic data for inflation and unemployment the way it used to be calculated pre-1990. Based on that data, the CPI inflation rate is over 10%, and the unemployment rate is over 15% (see charts). The Misery Index is the sum of the current inflation rate and the unemployment rate. If it were to be calculated using the older methods, the Index would now be over 25, a record high. It surpasses the old index high of 21.98, which occurred in June 1980, when Jimmy Carter was president.”

Economic Policy Journal

h/t Instapundit

 
At 5/15/2011 10:57 AM, Blogger Che is dead said...

"The Fed has been "fighting" that since 2008. On the one hand, it's increasing money supply and on the other, it's forced a tightening of lending standards."

Actually, Obama is intent on resurrecting the subprime mortgage fiasco:

"The 1977 Community Reinvestment Act (CRA) requires banks to make loans in all the areas they serve, not just the wealthy ones. A Bloomberg analysis found the percentage of banks earning negative ratings from regulators on CRA exams has risen from 1.45 percent in 2007 to more than 6 percent in the first quarter of this year."

"At the Justice Dept., a new 20-person unit dedicated to fair lending issues received a record number of discrimination referrals from regulators in 2010 and has dozens of open cases, according to a recent agency report."

Bloomberg

 
At 5/15/2011 1:39 PM, Blogger Benjamin said...

John Williams, or whatever name he is using these days, is a crank.

If you believe John Williams, then you believe our free market system is completely manned by boobs, and that investors are utterly unable to respond to price signals or protect their own interests.

Bond investors are lending money to Uncle Sam for 10 years at 3.18 percent. If you believe that crank Williams, then investors are willing to lend money to US for negative 7 percent annually compounded.

In fact, if I get a real estate loan, lenders are willing to lend to me for about negative sex percent interest, annually compounded.

In other words, if you believe Williams, then you believe the free market system does not work, on even fundamental levels. Even large institutional investors are cement-head stupid.

Of, you might conclude that John Williams is cement-head stupid. And his followers. Or they are just dog-in-the-manger mau-maus for crank gold-nut whack-jobs.

 
At 5/15/2011 2:10 PM, Blogger juandos said...

"John Williams, or whatever name he is using these days, is a crank"...

Coming from the non-stop, drivel spewing pseudo benny this is just to rich for words...

LMAO!

 
At 5/15/2011 3:10 PM, Blogger Benjamin said...

BTE--American Manufacturing Boom?

By BEN FORER
May 13, 2011
In the next five years, the U.S. will experience a "manufacturing renaissance," according to a new analysis.

As wages in China increase, flexible work rules and government incentives in the U.S. will make America one of the cheapest places to manufacture goods in the developed world, the Boston Consulting Group (BCG) analysis suggests.

"If the trend plays out, I think you'll see manufacturing growing and expanding in the U.S.," said Michael Zinser, one of the authors of BCG's analysis on manufacturing. "What we're expecting is that companies will step back and rethink their networks, rethink their supply chains."

Chinese wage rates likely will continue to grow by 15 to 20 percent year over year, Zinser said. When the increase in wages is combined with the increasing value of the yuan, the wage gap between the U.S. and China is narrowing rapidly.

"China is no longer expected to be the default low-cost manufacturing location for those companies who are looking to supply the U.S. market," Zinser told ABC News. "What we would expect to see is a convergence in terms of the wage rates to what we're seeing in the U.S. today."

Harold Sirkin, lead author of the analysis on manufacturing, expects the convergence to occur "by around 2015."

 
At 5/15/2011 3:26 PM, OpenID Sprewell said...

I'm not sure we get a prediction out of these mortgage rates. Looking at the chart, it appears that mortgage rates adjusted after the inflation spike of the late '70s, making it a lagging indicator. That suggests that they just react after the fact so they won't know what to do till looking at the measured inflation data, just like the rest of us.

 
At 5/15/2011 4:48 PM, Blogger VangelV said...

We need 6% nominal growth, e.g. 4% real growth and 2% inflation.

Perhaps in some alternate universe. In this one the US would be lucky to show nominal growth to be the same as the true inflation rate.

 
At 5/15/2011 4:51 PM, Blogger Benjamin said...

Vange-

Have you explained to bond investors how they are lending at negative 6 percent?

 
At 5/15/2011 4:56 PM, Blogger VangelV said...

If you believe John Williams, then you believe our free market system is completely manned by boobs, and that investors are utterly unable to respond to price signals or protect their own interests.

What free market? The treasury market is dominated by central bank activities.

Bond investors are lending money to Uncle Sam for 10 years at 3.18 percent. If you believe that crank Williams, then investors are willing to lend money to US for negative 7 percent annually compounded.

As I said, they are not lending money to Uncle Same at 3.18 per cent. People like Bill Gross and Warren Buffett have dumped their low yielding treasuries and have made it clear that there is a huge bubble in bonds. The new ten year treasuries are primarily purchased by the Fed and select banks that are working on behalf of the Fed.

In fact, if I get a real estate loan, lenders are willing to lend to me for about negative sex percent interest, annually compounded.

The lenders have to prevent the collapse from taking place because they are insolvent. If prices crash because of rising interest rates they would all be out of business. Better to borrow for free from the Fed, ignore the real inflation rate, and lend money to people incapable of paying it back if it means that they can work another year and collect nice fat bonuses a few more times.

In other words, if you believe Williams, then you believe the free market system does not work, on even fundamental levels. Even large institutional investors are cement-head stupid.

Free market system? Think TARP. Think Freddie and Fannie. Think the Fed. Think the primary dealers. There is no free market system.

Of, you might conclude that John Williams is cement-head stupid. And his followers. Or they are just dog-in-the-manger mau-maus for crank gold-nut whack-jobs.

Williams shows his calculations and uses the same methodology as the BLS used to before new changes went into effect. The comparison between now and the days before the changes were made are not favourable. The US is in a lot of trouble.

 
At 5/15/2011 6:18 PM, Blogger VangelV said...

Have you explained to bond investors how they are lending at negative 6 percent?

I think that the Fed already knows that when it buys the newly issued treasuries it will take a loss. But it does not really care because it creates money out of thin air and it has purchased lousy mortgage paper from the banks in the past without caring about returns. The banks know too but it is the price of being able to sell their impaired paper to the Fed in exchange for money that they have to apply to treasuries. They don't care because thanks to the Fed they can borrow at zero and lend at 4%. The game goes on and everyone but savers wins.

 
At 5/15/2011 7:18 PM, Blogger Benjamin said...

Vange-

You seem clueless that corporate bonds are also selling at negative interest rates, if you believe Williams. That banks will lend on good commercial real estate at negative interest rates (if you believe Williams).

In short, Williams' antique methodologies do not hold water.

You seem to be suggesting that a simple rigging of the CPI has pulled the wool over massive segments of the professional investing public--and you, nearly alone, have the x-ray vision to see through the fog.

Have you considered philately?

 
At 5/15/2011 8:21 PM, Blogger VangelV said...

You seem clueless that corporate bonds are also selling at negative interest rates, if you believe Williams. That banks will lend on good commercial real estate at negative interest rates (if you believe Williams).

I do believe Williams because he uses the exact same methodology as the BLS used to. If you want to debate the issue you have to show why the methods that we used during the Carter Administration are not applicable today and why we are better off today if the measures show higher inflation and higher unemployment.

In short, Williams' antique methodologies do not hold water.

The methods are not 'antique.' They were certainly good enough for the presidents and Fed chairmen prior to Clinton and Greenspan. Of course, in those ancient days we did not have one in fourteen individuals on food stamps and one in two households did not have someone who was collecting transfer payments from the government as you do today. In those days a budget deficit of $50 billion was considered dangerous and the federal government did not consume nearly as much of the economy as it does today.

You seem to be suggesting that a simple rigging of the CPI has pulled the wool over massive segments of the professional investing public--and you, nearly alone, have the x-ray vision to see through the fog.

Who says that I am alone? The same people who saw the housing bubble while the "massive segments of the professional investing public" saw good times ahead are also seeing a huge bond bubble and acting accordingly.

Have you considered philately?

You might try that instead of savings or buying bonds. Stamps may hold up a bit better than bonds or FRNs.

 
At 5/15/2011 8:53 PM, Blogger Michael E. Marotta said...

I love charts! They show so clearly what happened in the past. Of course, as von Mises warned, the past is no predictor of the future.

 
At 5/16/2011 1:52 AM, Blogger PeakTrader said...

Shadow Stats should be named Static Stats.

Since 1982, the most dynamic economy in the world has been in a strong disinflationary growth boom, mostly from the explosion of the Information Revolution and the acceleration of international trade.

 
At 5/16/2011 8:26 AM, Blogger VangelV said...

Since 1982, the most dynamic economy in the world has been in a strong disinflationary growth boom, mostly from the explosion of the Information Revolution and the acceleration of international trade.

This is not an argument against changing the way that we measure unemployment by ignoring those who gave up looking for jobs because could not find employment for long periods of time. Or for allowing the BLS to take out of the supposedly fixed goods basket items with high price increases and substitute items with lower or no price increases.

And I believe that Williams was showing a contraction in the rate of the M3 growth including a contraction in 2009 and 2010. Since then the Fed has engineered a reversal and we saw an explosion in the price of stocks and many commodities where the supply fundamentals were not supportive of the action. (Which is why I was selling copper and some base metals late last year.)

The problems for the Fed are the math and the political incentives. Neither supports stopping the QE activities but suggest major problems if they are continued. That means that we have a serious amount of volatility to look forward to. I hope that you are prepared.

 
At 5/16/2011 9:11 AM, Blogger morganovich said...

"wouldn't we expect rising, not falling, 30-year mortgage rates?"

not if governmental organizations like freddy and fannie are 80%+ of the market.

there is current NO price signal at all in the mortgage market.

rates are not being affected by inflation at the moment, they are being arbitrarily set by the GSE's which already failed and should be being curtailed, not expanded.

 
At 5/16/2011 10:10 AM, Blogger Eric H said...

Using Benjamin's argument about bonds, doesn't the Fed know they are "losing money" when they loan at -2.1% (0% interest when their own CPI is reported at 2.1%)? Or is U.S. currency also somehow not "core" to the inflation measurement of U.S. currency?

 
At 5/16/2011 11:56 AM, Blogger Benjamin said...

Vange-

I was a stamp collector in my youth. Most of the US mint stamps I collected can now be purchased on eBay--at face value.

Certain rare stamps have appreciated, I assume. But the kind some kid could collect in the 1960s have done nothing. I would be better off using them for postage.

 
At 5/16/2011 1:51 PM, Blogger Benjamin said...

Could this happen to gold too?


"US Postage stamps from the last 50 or so years are pretty much worth their face value. In large quantities, dealers will buy them for 80 cents on the dollar. You would be better off using them for postage, unless your really need cash. The US has not devalued their stamps since the Civil War, so any stamp issued can be used for postage.
Selling or buying a single stamp is usually not worth the effort to a dealer. They can make their profits on buying in bulk and selling them in smaller lots."


Read more: http://wiki.answers.com/Q/What_is_the_value_of_a_US_postage_stamp#ixzz1MXigafOL

 
At 5/16/2011 4:16 PM, Blogger Matt said...

John Williams does not actually use the old CPI methodology. He is not collecting or analyzing any actual price data and re-calculating the CPI. According to Williams himself: "I'm not going back and recalculating the CPI. All I'm doing is going back to the government's estimates of what the effect would be and using that as an ad factor to the reported statistics." See http://www.econbrowser.com/archives/2008/10/shadowstats_res.html

In other words, he just takes whatever CPI is and adds a hypothetical number (something like 7 or 8% these days). That is his sole calculation. If you think CPI is a fraud, Williams is even more fraudulent because he isn't even trying to get an accurate number.

 
At 5/16/2011 7:26 PM, Blogger Eric H said...

"Could this happen to gold too?"


You mean would someone give you an ounce of gold for $1500 face value of U.S. postage stamps?

I highly doubt it.

 
At 5/17/2011 8:58 AM, Blogger VangelV said...

Certain rare stamps have appreciated, I assume. But the kind some kid could collect in the 1960s have done nothing. I would be better off using them for postage.

You may well be right that stamp collecting is a bad deal. (I suspect that when so many people are doing it, it is a bad deal.) But collecting fiat dollars was also be a very bad deal because the taxable interest did not cover the depreciation. The USD has lost around 90% of its purchasing power since Nixon cut its link to gold and bonds did worse.

 
At 5/17/2011 9:06 AM, Blogger VangelV said...

In other words, he just takes whatever CPI is and adds a hypothetical number (something like 7 or 8% these days). That is his sole calculation. If you think CPI is a fraud, Williams is even more fraudulent because he isn't even trying to get an accurate number.

But there is your problem. At least Williams makes an attempt to account for the different by using the estimate of the effect that comes from the government. What is fraudulent is to have the government claim that there is an effect but that the effect has not been incorporated in its reporting. It is not as if the funding isn't there for the BLS to do the calculation and to let people like Williams and other skeptics check the math. The fact that the BLS has not done so is clear evidence that its reports are an outright fraud and that the current numbers cannot be compared to those before the time when the changes were made.

We have already seen ordinary people lose confidence in the reported numbers because they see the real effect of price increases in food, fuel, insurance, tuition, health care, and other prices that seem to be adjusted away by the BLS. This loss of confidence is troubling because it creates a huge problem that could see a crash in the equity markets and the real economy or a huge explosion in inflation and a collapse in the real economy.

 
At 5/20/2011 9:25 PM, Blogger VangelV said...

Rates are dominated by Fannie, Freddie, and banks that get to borrow from the Fed at zero percent. Why would you expect anything different as long as there is no external trigger to set off a correction?

 

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