Rate Cut: Is it Two and Done?

All eyes were on the Fed's FOMC statement on Wednesday as if it meant anything. In reality, the statement was irrelevant for the simple reason that no one can possibly believe a thing the committee says.

The Action: The Fed cut by 1/4 point in spite of a GDP that came in as a surprise.

The Reaction: The dollar sank, oil and gold hit new highs. Those stuck in ARMs did not benefit at all. Mortgage rates are still higher than they were a year ago in spite of a total of 75 basis points (.75%) cuts by the Fed and an additional 50 basis point (.50%) cut in the discount rate.

The stock market gyrated wildly but settled pretty much where it was before the announcement. The sad thing is that no one can possibly believe the reasons the Fed gives for what it does. The Fed seems more inclined to wordsmith what the market expects rather than do what needs to be done. Reasons can be made up along the way. It's pretty clear that's exactly what happen. So much for transparency.

The committee did manage one dissenting vote. Here's what I want to know: Was there a volunteer or did Thomas M. Hoenig draw the short straw?

For the record: I am in gold and a libor based mortgage. Both benefited from today's action. I do not think the Fed should have cut.

Is It Two and Done?

Curve Watchers Anonymous was watching the action today and here is the top question on their collective minds: Is It Two and Done?

The following FOMC Probabilities Chart will show the basis of the question.



click on chart for a sharper image

The odds of rate cuts in December plunged immediately on the FOMC announcement.

Was this because of the cleverly arranged short straw dissent? Who knows? What we do know is that the market will forget all about Wednesday as soon as Thursday. On Thursday will come the weekly unemployment numbers on Friday will come the monthly jobs report.

Payroll Playbook

If the jobs numbers are bad, the odds of a rate cut in December will again rise. In reaction, the dollar will likely be under pressure, and gold will likely find a bid.

In short order, everyone will have long forgotten about Thomas M. Hoenig and the irrelevance of the latest FOMC statement.

Numbers That Matter

There are some numbers that matter. Happenings in commercial real estate are at the top of the list. I will get to commercial real estate early next week but for now let's concentrate on housing vacancies. I talked about housing vacancies in Pent Up Housing Supply. The numbers seem so unreal that some have questioned them.

Professor Eugene Linden is also on the case. He is writing about An Underappreciated Housing Number.

Since 1965, the high water mark for homeownership was 69.2%, reached in the second and fourth quarters of 2004. Before 1998, the ownership rate never topped 66%. Then came exotic mortgage products and unscrupulous mortgage brokers. Suddenly a cohort of Americans who never before could qualify for mortgages found themselves in homes, and the homeownership rate marched steadily upward through the early 2000’s.

Sadly, these newly minted homeowners quickly began to demonstrate why they couldn’t get a mortgage before. Astonishing numbers of subprime borrowers in these exotic mortgages never even made the first payment. The predictable consequence is that the homeownership rate is once again declining. How far this goes will be hugely consequential for the economy.

Given that it’s now easier to arrange a golf outing with Tiger Woods than it is to get a mortgage, it’s reasonable to expect the ownership rate to revert to pre-credit bubble levels of about 65%. Even if no additional houses are built, that would shift another 3.5 million homes and apartments from the owner-occupied column to the rental or vacant columns. This is not what a market already groaning with 17.9 million vacant units needs.

I am not holding my breath waiting for that phone call from Tiger Woods for a golf date, but residential real estate is nowhere near the bottom with this kind of pent up supply.

The interesting thing is these rate cuts are not helping borrowers one iota.
Here is the scorecard to prove it.



click on chart for sharper image

The Fed does not care about borrowers in trouble. All the Fed cares about is bailing out banks that made stupid decisions lending to those who never had any business buying a house. In that regard "Two and Done" won't cut it. Look for more rate cuts down the road. Just don't believe the reasons why.