Displaying items by tag: rates

(New York)

The Dow has not been doing so well lately. Last week it dropped to its lowest level of the year, declining further than in its worst bout of volatility in February. The reasons why are becoming harder to explain with every day of losses. While isolated flare ups used to be explained away, the situation is growing more complicated for investors. A growing risk of tech regulation, a looming trade war, higher interest rates—all are weighing on stocks. That makes the markets much more complicated and hazardous for investors, and it has become commensurately harder to make good decisions.

FINSUM: The market seems to be in a very treacherous period. Its failure to regain momentum after the fall in February seems ominous to us, and we do not see a clear end in sight.

(New York)

The mortgage market has been doing quite well for a number of years. A steady stream of home buying and refinancings because of ultra low mortgage rates has kept things flowing. However, with rates rising, the refinancing part of the business is weakening for lenders. In 2017, 37% of all mortgage origination was from refinancings, down from 72% in 2012. Accordingly, the overall mortgage market fell by a whopping 12% in 2017. In order to combat the fall, lenders are pushing home equity lines of credit and adjustable rate mortgages.

FINSUM: This is a huge part of the mortgage market that is falling away. This will mean lower earnings for lenders. One wonders when the rising rates will start to curtail purchases. It seems inevitable.

(Washington)

Investors get ready, because it looks like the next recession is on the horizon and the Fed is set to start it. And we are not talking about a distant horizon. The Fed has now made its goal a task that has been nearly impossible historically. That is to boost the unemployment rate without causing a recession. The odds of failure are very high and the Fed has never successfully achieved it in its history. The reason the Fed wants to boost unemployment is that labor markets are very tight, which will produce unacceptably high inflation. Accordingly the Fed must intentionally walk up the unemployment rate to keep things in check. The tool it will use is gradual rate rises to slow down growth and boost unemployment.

FINSUM: We think the Fed is probably going to fail in this exercise, either by being too dovish and letting inflation get too high, or by being overly hawkish. Either way we do not see a good outcome. This cycle might have just crested.

(Miami)

The Wall Street Journal has just put out the first thoroughly insightful article about the new homes crisis that we have yet seen. The US is currently plagued by one of the most severe declines in new home construction in the last century and the piece interviews many parties, including home builders, to understand why. The heart of the issue is that the costs to build a new home have roughly doubled since just before the Crisis, as labor, land, and materials have surged in price. Accordingly, many builders now only build luxury homes, where the margins are fatter for them. The low end of the market has been left with very few homes for a large number of buyers, which has sent prices through the roof.

FINSUM: So we have surging pricing at the same time as rising interest rates. Prices look set for a big fall in the near to medium term.

(New York)

Barron’s has just interviewed a prominent economist—Stephanie Pomboy—and she has some very interesting opinions about the economy. Rather than seeing the economy’s recent growth as a good performance, she analyzes the data to show that this pickup in growth is actually the last gasp of American consumers before a big recession. Digging into corporate spending data, she shows how the US consumer has been stretched by everyday expenses even as discretionary spending is weak. Consumers have had to pay for extra everyday costs, such as on food and energy, from savings or credit. Now that the savings rate is starting to rise, Pomboy thinks we are headed for a recession.

FINSUM: This is an entirely different way to read the tape, but may not be that far off the truth.