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Credit News by Lou Barnes — 1/31/20

Written each Friday by Lou Barnes in Boulder, CO. Also available online. Reprinted with permission. Lou typically provides background and context to what's happening in the credit/bond world that some readers appreciate.

Oh, bOh, boy. What in this strange week is important, and what not?

Wuhan. (Gesundheit.) Even if China’s extraordinary self-quarantine shutdown works, and in another two weeks the incidence of new infection begins to drop, the damage to China’s economy will be considerable. Current estimates shave 2020 GDP from 6% to 4%, but the harm will continue in two ways: China has already overextended stimulus, leaving an enormous heap of bad debt, soon to heap on heap, and second everyone outside China doing business with it will feel the pain.

That is the good news. Markets are trying by the hour to handicap the economic shortfall ahead, and at the moment are not pricing China-level contagion to make a global jump. China was slow to respond, but has mobilized in a way that few other nations can match, and may prevent a global leap.

If Wuhan does jump... then a worldwide China-style stoppage of travel will be necessary, including local, and nobody wants to think about Wuhan mortality in the many nations without good healthcare infrastructure.

At the moment we can see overbought stock markets caught wrong-footed. Bond markets define mortgage rates, and cash is racing to them all over the world for safety -- first to government bonds, secondarily to mortgages. The US 10-year T-note in ten days has crashed from 1.82% to 1.53%. The cash race is global: in the same ten days, German 10s have fallen from minus-.17% to minus-.44%. US mortgages are disorderly, the lowest-fee ones just above 3.50% -- and waves of refinance rate locks are likely to intercept further declines even if Treasury 10s go lower.

Two delicate observations about markets today. First, these bond yields are now in the same general place as the all-time lows in 2012, 2016, and the one day last September. It’s a poor idea to bet on breaking a triple bottom. However... if Wuhan jumps, there is no bottom. If Wuhan does NOT jump, as markets seem to assume today, the Treasury yield curve is again close to inverted and trading below the Fed’s overnight cost of money. The Fed’s target since its last cut in November has been a range of 1.50%-1.75%; the 2-year T-note is the best Fed-forecaster, trading at 1.37% today. If Treasurys move only a little lower the Fed will be forced to cut again, and should.

The second delicate matter: the most serious professionals in markets always try to separate channels of information, in this case separating pre-Wuhan from post-Wuhan. Next week we will get the usual first-week-of-month flood of fresh news from January -- all pre-Wuhan, and as traders say, from Jurassic Park. Wuhan-affected US data will not appear until later February and the good stuff not until early March.

How were things here in the US, pre-Wuhan? 4th quarter GDP was stable, growing 2.1%, although consumer spending downshifted, and inflation continued to underperform at 1.6% core PCE. However, as a pre-Wuhan measure, here on the last day of January, data from the 4th quarter is fossilized. The freshest data today, just since December are unsettling, all slow-side: orders for durable goods and capital goods were weak, and after-inflation disposable income and spending were both slightly negative. This morning’s release of the Chicago Business Barometer survey for January, the traditional one-day precursor for the national ISM purchasing managers’ survey on Monday: a stone-drop to a 2015 low at 42.9 from 48.9 in December. 44 is a recession level. National results will not necessarily follow, but Chicago is not good news.

The US economy may have entered a slowdown just before Wuhan.

The rules of refinancing while watching all of this unfold: if you find a deal in which interest savings recapture closing costs within a year, or maybe 18 months, do it. Don’t bottom-fish. And don’t lock a rate unless prepared to take it no matter how low rates may go. The mortgage world will be at processing capacity by the end of next week, MBS desks on Wall Street will choke on the new locks -- each of which is a presale of a new MBS -- and typically push up mortgage rates to cut demand. Don’t watch the news until closed.

Which brings up another reason not to watch the news. Yes, that one, although the main event has concluded today. CNN can revert to asking Kobe Bryant’s family how they feel, and Fox can continue its four-year victory parade.

The impeachment post-mortem will meld quickly into pre-election ceremonies, the vote only nine months away, and acquittal will not reassure many participants in our economy. Many prefer Trump’s re-election for partisan or business reasons or both, but a majority of people are opposed. Despite the large number favoring anyone-but-Trump, the Democrats have their own internal polarity and any nominee may drive to the sidelines large numbers of moderates or progressives.

The Democrats missed opportunities in the impeachment. More important than removal or acquittal is, has been, and will be Congressional supervision of presidents. Certainly not partisan fishing expeditions making presidents’ work unworkable, but in this case a phrase unheard: probable cause. The difference between fishing and fact-finding is establishment of Congressional probable cause to validate its subpoenas of any president. The Democrats would have been better off to litigate that matter even if running out of time for impeachment.

Worse, the Democrats forgot that the important part of impeachment is the people. Not unwatchable, droning Congresspersons. To change minds, speak to the minds. Instead, egos ruled: Schiff and Nadler from the beginning had no television appeal but stayed on center stage. Schumer... New York City style and accent are anti-compelling at any distance more than 50 miles from the city.

Perhaps the worst miss of all... might all of the Democrats’ presidential candidates ceased their attacks on each other, suspended campaigns and together bought television time for a unanimous and dignified presentation of the impeachment issues, issues more important than any of them, and demonstrated statesmanship and ability to govern?

Oh, well.

 

The US 10-year T-note in the last year. The abrupt rollover is mostly due to Wuhan, but an economic slowdown possibly in play:

US GDP through the end of 2019. Now, Jurassic Park. Given events in January, previous trends no longer apply:

We’ll get the national survey results on Monday morning, a good pre-Wuhan baseline. Hope that the nation is doing better than Chicago:

7 Replies
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Frequent Contributor

Re: Credit News by Lou Barnes — 1/31/20

CV is still very much a threat to growth. Airlines shutting down flights is not something to er, sneeze at! Neither are countries closing borders. The markets want desperately to ignore Wuhan in favor of trailing indicators, as evidenced by last Tuesday and today's pre-market data.

Cognitive dissonance!

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Re: Credit News by Lou Barnes — 1/31/20

Based on current, available information, here are the relevant Corona virus trends:

ScreenHunter 756.png

This data does not show an exploding uptrend, but the virus' incubation period may be as long as 14 days.  Read HERE.  We won't know for some time how significant the toll will be.

---

Blinded by TDS, Barnes' latest politically-biased comments are unfortunate.  Personally, I think the facts don't come close to meeting the standard for impeachment.  The individuals behind the conspiracy hate Trump so much that they'll go anywhere and do anything to bring him down.  Putting a pathological liar like Schiff front & center is suicidal, but mainly it's embarrassing.

For the record, I think that the Republicans' impeachment of President Clinton was equally partisan and ridiculous. 

N.

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Re: Credit News by Lou Barnes — 1/31/20

norbert, would it be fair to say that pretty much everyone’s political opinions are biased?

I don’t read Lou’s articles for his political opinions, and sometimes he bashes Trump a little too exuberantly, but I didn’t think he did this week.

But even if you disagree with some things, I think Lou gives a good thoughtful overall view of what happened to the market. It kind of reminds me of watching Louis Rukeyser when I was younger - he has a humorous, sometimes caustic style.

Thanks for posting it wayoutwest!

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Re: Credit News by Lou Barnes — 1/31/20


@PN wrote:

norbert, would it be fair to say that pretty much everyone’s political opinions are biased?

I don’t read Lou’s articles for his political opinions, and sometimes he bashes Trump a little too exuberantly, but I didn’t think he did this week.

But even if you disagree with some things, I think Lou gives a good thoughtful overall view of what happened to the market. It kind of reminds me of watching Louis Rukeyser when I was younger - he had a humorous, sometimes caustic style.

Thanks for posting it wayoutwest!


@PN 

I wrote that Barnes' comments are politically biased.  Sure, most opinions contain bias, but that's not what I wrote. In fact, many market-focused pundits are able to leave politics out of the picture.  Barnes is not one of them.  In fact, I think politics are his primary focus.

Barnes inserts anti-Trump messages into most of his weekly missives, therefore I react.  Barnes' pieces are often entertaining. He knows how to use a pen and occasionally deliver some useful insight.  It's a shame that he has a nasty case of TDS. 

This week's article is no exception.  It includes the following paragraph:

Perhaps the worst miss of all... might all of the Democrats’ presidential candidates ceased their attacks on each other, suspended campaigns and together bought television time for a unanimous and dignified presentation of the impeachment issues, issues more important than any of them, and demonstrated statesmanship and ability to govern?

Barnes is claiming that, although the Dems' tactics were misguided, the impeachment issues involved are very important. I think that's nonsense.  It's another example of Barnes infusing an economic / market analysis with political bias.  Sure, the president says a lot of wild things, but he did nothing impeachable.  The Dems' impeachment efforts, like the earlier Russia / Mueller fabrications, are efforts to corrupt the democratic process by overruling the decision made by voters. 

N.

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Re: Credit News by Lou Barnes — 1/31/20

Norbert, I remember a few years back, you getting bashed on the old T/A thread for posting political comments and your rebuttals to that, you saying that politics are a necessary consideration of the investment landscape. Have you given up on that viewpoint?

Well, Lou’s new weekly report is out, and wow, a whole new set of political opinions, international and domestic, that would appear to be more pleasant to your point of view.

I guess what we have realized is that those political discussions typically go downhill into tit for tat insults between posters. I don’t know if there is a way to raise the caliber of the debate, but with the new forum and now having a moderator, who knows.

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Re: Credit News by Lou Barnes — 1/31/20

@PN 

I fully agree that political discussions at M* typically go downhill fast.  Unfortunately, Lou Barnes (via the OP) continues to focus on politics.  I merely respond in order to maybe provide a more balanced perspective.  (Frankly, I'd prefer that Barnes stay away from politics, but I doubt whether he cares what I think.)

Barnes' posts are entertaining and sometimes offer new insight.  I just with he'd lose the TDS.

As for politics being or not being relevant to investing, do you honestly think there's any question?  Are you willing to argue that it doesn't matter who gets elected in November?  Trump vs. Sanders vs. Bloomberg vs. Warren ... that it won't affect the stock market?

Yes, I just read Barnes' newest (Feb 8) post.  Why would I possibly consider it to be "more pleasant to [my] point of view"?   I like brilliant, original insight that helps me look around the next corner.  Barnes' latest is almost 100% politics.

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Re: Credit News by Lou Barnes — 1/31/20

The OP can easily cut out the political BS. I would make it much better unless it's there for a purpose.  

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