Inman

Wednesday was a twenty three hour day for me. I took the first flight out of Denver to Chicago and the last one of the day back home. It was all part of a effort to speak at the inaugural SPARKt conference, a real estate and social media workshop put on by Kit Mueller in the Windy City.

More and more, speaking about social media is what I do. It’s one reason why I let lenderama’s contributors do most of the posting here recently. I’m a firm believer in the power of social networking tools like LinkedIn, Facebook, and Twitter. They offer tremendous opportunities to grow a sphere of influence, and to do it from the comfort of your own home, at 2:00 AM, in your pajamas.

However, my favorite social network has always been In Real Life (IRL). Maybe this is why I never had any problem calling on real estate agents while I was a loan originator, or on loan originators while I was an wholesale account executive. IRL is where relationships are the strongest. IRL are where faces are matched to voices.

Wednesday, I had the opportunity to meet several online colleagues, and turn them into IRL friends. I was lucky enough to meet fellow lenderama contributor, Peter Thompson. That was a treat in it’s self. I met Hilary Marsh, and spent the better part of the afternoon talking with her about all things NAR Social Media. In addition, it was awesome to reconnect with long time friend Dan Green for coffee in the morning and a cocktail before my flight out.

I bring all of this up because it’s in times of economic downturn and sour weather that it’s easiest to shelve IRL. It’s times like these when we tend to let real world relationships wither, or never make the effort to grown new ones. Don’t feel so bad. All of your competition is doing this as well. So, if you really want to stand out, it’s time to grow those real world relationships again. Host a holiday happy hour, go make some calls to your client base. Don’t even ask for their business if you don’t want to. Now is just a great time to touch base with them and wish them a happy holiday. Gas is cheap again folks. Get out there.

Greetings from Santa Cruz, Bolivia this time.  Saturday night, part of our voyage was to fly to La Paz, Bolivia, then over here.  You may have already heard of La Paz due to its airport being the second highest commercial airport in the world with an elevation of just over 13,300 feet.  Since the airport is over 10,000 feet, we are required to use oxygen for all operations during which our cabin is above 10,000 feet.  Mortgage bonds may need oxygen if they reach the heights that Treasury Secretary Paulson wants them to go.

Last week saw a reiteration from the Fed that they are going to keep buying mortgage backed securities and Paulson even came out saying he wants to drive mortgage rates down to 4.5%.  As the data flowed, we saw more and more reasons to focus on our dismal economy and forget about inflation, but do not let that sleeping giant awaken unnoticed, for it will awaken eventually.

The week started off with a worse than expected ISM Index, followed by ISM Services Index.  The big kicker of the week, besides the Fed and Paulson’s statements indicating the buying of MBS will continue, was the ADP Employment Report, and ultimately the horrendous jobs report.  Strangely, if you watched the bond prices during the week, they moved down at the beginning and changed course only towards the end, with mortgage rates ending the week slightly worse.  Once again, we are seeing data unable to move the markets solidly as news and even technical indications take control.

What does the future hold, though?  This week will be fairly quiet when it comes to data, with some moderately impacting reports due out, that is until Friday’s Retail Sales.  With a better than expected Black Friday, it will be interesting to see the Retail Sales numbers.  We will also see the PPI on Friday.  Here is the breakdown of scheduled data…

• Monday:  No data
• Tuesday:  Still no data
• Wednesday:  Crude Inventories (10:30)
• Thursday:  Initial Jobless Claims (8:30), Balance of Trade (8:30)
• Friday:  Retail Sales (8:30), Producer Price Index (PPI - 8:30), Consumer Sentiment (8:30)

As you can see, technical indications and news will be in control, at least until Friday.  That spells more of a pullback and mortgage bond pricing, resulting in slightly higher mortgage rates in all likelihood this week.  Keep in mind that Bernanke and Paulson are determined to get those mortgage rates down no matter the cost, and since it isn’t “their money”, chances are they will find a way to do it.  Plan on higher rates this week based on the charts, but don’t be surprised if news, or speeches, manage to enter the picture in an attempt to push bond prices higher.

I hope everyone had a great Thanksgiving Day, and there was plenty to be thankful in the mortgage markets with the early Christmas gift from the Fed that sent mortgage backed securities higher and sent mortgage rates lower, kicking off increased inquiries for mortgages.  But was that all that happened last week? 

Certainly not, as we saw some more favorable data hit the airwaves and the breakout of the trading range virtually opens the door wide open for lower mortgage rates, avoiding those deadly piranhas I mentioned last week.  While the main event for the week was supposed to be the Personal Consumption Expenditures, or PCE, data, it was overwhelmed on Tuesday by the Fed’s announcement it was going to buy up mortgage backed securities. among other other things.  Since data had failed numerous times to send mortgage rates lower, mortgage bonds needed this announcement to break through the ceiling of resistance.

As the data flowed last week, we saw continued signs of our struggling economy, including a still weak housing market.  Consumer Confidence is down, though we can all be thankful that at least inflation is not going through the roof.  Yes, there is even talk of deflation these days and that may very well happen as this Christmas season is poised to bring plenty of red ink to retailers.  Indeed, Personal Spending was down despite Personal Income ticking slightly higher, but the PCE showed inflation in check, though the Core level is still a bit higher than what the Fed typically likes to see.

The question for now is just how high mortgage bonds can reach this time.  There are some cautions that remain, but I am also very optimistic as we will see more data flowing this week that could propel MBS to heights not seen since January, if not even higher.  They will certainly have a tough fight ahead of them, but the fire has been lit and the flames will likely be fueled further by data this week…

• Monday:  ISM Index (10:00)
• Tuesday:  No data
• Wednesday:  ADP Employment Index (8:15), Productivity (8:30), ISM Services Index (10:00), Beige Book (2:00)
• Thursday:  Initial Jobless Claims (8:30)
• Friday:  Non-farm Payrolls (8:30), Unemployment Rate (8:30), Average Work Week (8:30), Hourly Earnings (8:30)

See what I mean by data that can propel mortgage bonds?  The week starts off with another set of data that lets traders dwell on the gloominess of the economy and then it ends with the Jobs Jamboree, which will almost certainly see unemployment rise again.

Now for the cautions, which can be seen in the charts.  Stochastic indications remain in the overbought zone and are “flatlining”, meaning things may change soon.  Mortgage bonds will face several layers of resistance if they want to break to new heights, so the road ahead will be tough.  Resistance will be faced at September’s highs, followed by January’s.  The good news is that all moving averages are now below current pricing.

This week will be an interesting one to say the least.  What I am expecting is a pull back to occur at some point, maybe even back the highs of last month, followed by a resumption of price increases which hopefully will let us see mortgage rates even lower than what we have seen all year.

CPI is the measure of inflation provided to us by the government. In parts 1-5 of this series, I talked about how the current CPI calculation varies from the way CPI was calculated prior to 1983. The graph below says it all.

Courtesy of ShadowStats.com

The above graph is courtesy of John Williams’ Shadow Government Statistics website. Mr. Williams is an economist who exposes and analyzes flaws in government reporting data. The above CPI graph reflects the CPI as if it were calculated using the methodologies in place in 1980 (prior to the ‘83 and ‘99 changes). As you can tell by looking at the graph, CPI calculated using 1980 methods (the blue line) is far in excess of current CPI (red line) calculated after the various changes made by the Bureau of Labor Statistics (BLS).

I cannot vouch for the accuracy of Mr. Williams’ graph. What I can say is that I wish I could vouch for the accuracy of Mr. Williams’ graph, which would be easy enough to do if the BLS would simply publish the CPI as it was calculated previous to the changes made in 1983 and 1999. They already have the base calculation. They simply take it and make the changes to it that I discussed in the previous segments of this series. If they already have it, I say publish it alongside the adjusted CPI (which they claim is more accurate). I argue that we should let the financial markets decide which CPI is more accurate, but then again, I am always on the side of more transparency.

I have heard that most economists think that CPI in its current form — with all the changes — is more accurate than the CPI given to Americans from 1921 - 1982. If CPI as a measure of inflation was significantly overstated for 62 years, where were the economists during that time? Were they fooled? If not, why didn’t they speak out during those six decades? If inflation was dramatically overstated during those 62 years, the economists seemed to have missed it. If inflation was overstated for six decades, were interest rates way off the mark too?

I would like to think that the inflation as represented by the government is accurate. However, the inflation that we feel as individual consumers is probably the real rate of inflation. It seems to me that luxury items sometimes get cheaper. Unfortunately, it seems like have-to items get more expensive — sometimes drastically so. I’m glad that plasma televisions are coming down in price, but it seems like education, health care, food and energy are all going up. We can live without plasma televisions, but we cannot live without the necessities of life.

In the end, I am skeptical about the government’s inflation numbers. I think that the government is playing games in order to intentionally understate inflation. I only hope that inflation isn’t understated to the extent that Mr. Williams thinks it is. Because social security cost-of-living adjustments are tied to CPI, that makes for a powerful incentive to keep CPI low. If Mr. Williams is right and social security payments should be double what they currently are, I wonder why the AARP hasn’t done an in-depth investigation on this issue. Perhaps they aren’t aware that the measure of inflation presented to Americans today isn’t the same one they received from 1921 to 1982. Or perhaps they know that increasing social security benefits would break the bank, so why bring it up.

One thing that Congress could do would be to pass a law allowing long-term capital gains to be adjusted by inflation. That would give the government an incentive to keep inflation in check (lower inflation meaning more taxes on capital gains), and it would give the wealthy an incentive to be a watchdog group to make sure that inflation wasn’t understated (understated inflation resulting in higher capital gains taxes). I’m probably just dreaming, though.

by Wade Young