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Credit News by Lou Barnes — 7/31/20

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

     The whole world is in a lot of pain and struggling with public policy, but only here in the US do we have the sense of going deeper into Alice’s rabbit hole. Every day deeper, just slowly enough that we must look backwards to feel the magnitude of craziness.
     Aided by all media no matter what the political slant, blaring virus alarm, and then economic fright, all with little interest in accuracy or perspective, just attention. The WSJ and NYT at opposite poles each now has an internal rebellion among real reporters against their own screwball op-ed pages.
     So, a string of correctives here, anything but absolutes, just centering.
     Ignore GDP. Pay no attention to bad historical numbers if only because they are history. Nor to “recovering” new numbers, an illusion. The indoor and close range components of our economy, at least 20% of the total are shut down and non-recoverable unless we learn to behave with un-American discipline. Until vaccines.
     Jumbo mortgages. A dope with an idea but no diligence wrote this week that jumbo loans are no longer lower in rate than Fannies. Pre-Covid they were not cheaper, not fee-adjusted. And now they are not more expensive than pre-Covid -- if you have a big enough down payment or equity, and Ficos, are buying not refinancing, and a house not a condo.
     Fannies are government guaranteed, their MBS exceptionally liquid and easy for investors to finance. Jumbos have to go into corner pockets of markets, bank and credit union portfolios, or “structured finance.” Prior to 2000, jumbos always had a rate premium, often a half-percent over Fannies. By 2007 that spread fell to zero because of infamous house-of-cards structures, which after collapse that year took a half-dozen years to restore lending with 10% down.
     At recovery from the Great Recession in 2012, new card-house players pushed down jumbo rates via REIT structures very much like borrow-short lend-long S&Ls, but without depositors, funded by wholesale hot money, repurchase agreements again. In the March panic essentially all failed in fire sales. The few investors still buying jumbos are volume-crippled, hence a cherry-picking market, low rates available but only for great borrowers.
     Commercial Bank Cowards. Banks are public utilities, not “free enterprise.” If the nation guarantees your debts and deposits, you owe us a favor: in hard times, make loans. Even if you’re worried about the loans you’ve already made, the one certain way to lose more money is to choke off credit. America’s fattest bank and management is Chase, its opposite Wells, the herd in the middle -- all in competition now to chop credit. Just for fun, ask either giant bank for a Heloc. These banks are booking huge losses which they do not have, “loan loss reserves” against future losses which may not occur but in the meantime are a splendid tax shelter. The pullback from Helocs is especially harmful to households with plenty pf equity trying to bridge through Covid. Which leads to
     Stalled Aid From Congress. The Democrats have in mind $3.5 trillion, Republicans $1 trillion. Perfectly normal and resolvable. The hang-up: Republicans want to cut the $600/week jobless income support in half. Their reason is both blind and disgusting: they think the jobless assistance is too rich, people happy to take the handout instead of going back to work. Cut the help, make ‘em work.
     Aside from the traditional fat-cat view that people who work are lazy, the fat miss the point. How can a waiter go back to work when all of those jobs are suspended? In each of these industries, the percent of normal activity: airports and everything in them 25%; restaurants 40%, hotels 65%, and mass transit 50% (NYC subways 25%).
     The Mad Hatter in Chief makes negotiations impossible. His contribution has been to insist on a payroll tax suspension, which would favor everyone at work and their employers and do nothing for the shut down.
     The Fed Gets It, But... “Fiscal policy can address things we can’t address,” said Mr. Powell, and the rescue funding which Congress has approved so far is “really helping now.”      
     Congress is not giving money away, it is bridge-financing the sectors in Covid shutdown. Powell: the Fed is “not even thinking about thinking about thinking about” raising rates.
     So, The Virus...? The US will hear less criticism from overseas. Spain is back to 2,000 new cases daily. France and Germany not so bad, but not under control, either. Same with Asia. And here most of the hot spots have begun to cool, just as the prior ones did.
     Schadenfreude... the red states slow to be infected now are showing NYC how to mismanage. Herman Cain was not a bad guy, and may not have caught his fatal dose in Tulsa, but hard to tell with a mask-refuser. Louie Ghomert (no relation), Texas cartoon congressperson and mask refusenik tested positive and while going off to quarantine insisted that he had begun to wear a mask. Occasionally. His farewell video: “When I have a mask on, I’m moving it to make it comfortable, and I can’t help but wonder if that put some germs in the mask.”
     Pick Your Scientist... To improve skills at media crap-detection, follow the argument between droplets and aerosols. Tip-off to truth: skip to the bottom of each post on the subject and note that every aerosol alarmist is a physical scientist not an immunologist. One of the physics grandstanders this week admitted that we don’t have a clear definition of an aerosol versus a droplet (maybe .5 micron) but an aerosol can go a LONG way, DOZENS of FEET and infect EVERYBODY. Do we know the viral load in smaller, free-floating aerosols? Or the load necessary to infect? Nope. Trust mask and distance, avoid groups and strangers and stale indoors.
     Covid Resistance. More studies from around the world every day nail the fraction of us with some immunity acquired by prior exposure to ubiquitous other Covids, and along the way affirm lasting immunity after infection and probably vaccine. Data is clustering 35%-50% of us resistant, some resistant altogether and in others probably the reason so many are asymptomatic. The larger the fraction, the closer to herd fizzle even with initially small groups vaccinated.
     Bureaucrats. Can’t live with ‘em, can’t live without ‘em. But in an emergency, call somebody else. Brave and miniature Ouchy Fauci took on Jim Jordan today, he the attitude model for Freddy. Scary man. Fauci is of course right about eye protection (Brits four months ago grew virus in eye mucosa). I expect Boulder will be sold out of goggles by sundown, but distance works just as well, and keeping your hands out of your eyes. 
     Bureaucrats struggle to find the heart of the matter. If Ouchy were the driver of your ambulance, after loading you aboard he would check the tire pressures and oil, locate the vehicle insurance card, thumb the owner’s manual to be sure he hadn’t missed anything, warned you about traffic and how easily he gets lost, and asked if you really wanted a ride since you might not make it to the hospital.


The 10-year T-note used to be mandatory watching and posting here. It could go lower, but without effect or signal. Nothing in a lower 10-year will help us to bridge to re-opening shutdown sectors:




Colorado has done better than most with mask and distance, the initial ski-town outbreaks scaring most into paying attention. But our patterns are well-studied and representative. We know of course that total cases were vastly undermeasured early, and now capture many asymptomatic, the 20-29 group swelling disproportionately. Rotten kids.




Age-weighting another way includes hospitalization. The numbers of fatalities are too small to fit on the Department of Health bars: statewide among our 5.8 million population, we’ve lost 1,691 people. The total fatalities aged under 60, which are 80% of cases: 198.




And we’ve had our relaxation second wave, which seems to have also been a second wake-up. Maintain discipline, test 3% positive, we’ll reopen schools and see how it goes.