Market News
January 18, 2008
Markets have entered a panicky freefall, the common precursor to at least a temporary rebound. Mortgages reached 5.75%, approaching the 5.25% all-time lows of ’02-’04 from which rates vee’d up every time. Of course rates could go lower, even set a new record, but this is a bird-in-hand moment for refinancing.
This adventure began in August with the onset of The Crunch. Through September the markets were aware of a modest crisis, one of those odd, transient, Fed-bank-plumbing things. Only credit market insiders were worried, staggered by the magnitude of potential loss. By October even the Fed had relaxed. Concern renewed and spread on news of defaults and losses in November and consumer weakness in December, but financial market opinion, especially in stocks, was still cool about the whole thing.
In the last three weeks, painted plainly on stock market charts, everyone has waked to danger, and the hazard itself has grown. Once confined to mortgages and very strange “structured” IOUs, an economic pullback threatens defaults in a wide range of credits, the typical victims of an economic slowdown, hitting a badly impaired system.
After this week’s massive write-downs at Citi and Merrill and elsewhere (about $30 billion), the WSJ totes the aggregate write-down since August at $107 billion. Some say we are past halfway in the adventure, but credit people laugh bitterly at the suggestion.
New economic data are not as bad as the fear of what will come: December retail sales fell .4%; inflation numbers were okay, just above the 2% “core” bound; new home construction indicators in December were awful; the Philly Fed’s index went to recession level (a big Thursday mover); and indices of the global economy are sinking. Then a pair of positive surprises: new claims for unemployment insurance are way down, and January consumer confidence rose from the December pit.
I wrote last November that this situation was so serious that it had become a pre-bailout political matter, no longer a matter solvable by the markets. This week’s political theater failed to reassure anybody.
Mr. Bernanke testified to the House on Thursday; stocks sank from the moment he began, after he left, and until the end of the day. He was true to form: bland, passive, and void of insightful conclusion. He may know exactly what he is doing, and it may be correct, but he drains confidence from a room like an open window in an igloo.
The House was at its anti-inspirational best when one dim Representative, hectoring the Chairman for profits made in his prior career, was advised that Princeton didn’t pay very well and that she had the Chairman confused with the Goldman-veteran Treasury Secretary. She blinked in pure Gilda Radner: “Oh. The other one.” Look for replays.
The whole show was surreal, the Chairman present to ask for fiscal stimulus “quickly.” The only thing that Congress does quickly is to give money away, but the markets are not impressed. This morning, the instant that Mr. Bush announced that he is on board with stimulus, the stock market rolled over. Again.
Stimulus makes some sense, as it would take effect more quickly than Fed monetary policy. However, neither measure has anything to do with the fundamental problem: unrecognized credit losses appear to have bankrupted the system.
Congress might have asked.... Mr. Chairman, you have succeeded in liquefying your banks, and in preventing fire sales. However, the real economic problem, far worse than housing, is some $4 trillion in bad assets that you and your predecessor allowed to be created. You’ve had six months to figure out how deep these losses really are, and where they are. How bad is it? What is your plan? Just leave these dead assets where they are, rotting and choking off new credit?
You are here to ask us to move quickly, yet you have cut the cost of money only 1% in six months? Your new transparency policy has brought us quick release of Fed forecasts, since August each one replaced by a new and weaker one. Why should we have faith in the one you brought today, growth and no recession?
