Mortgage Credit News – October 23, 2009

Treasury and mortgage rates have again reached their post-August highs, but still in tight ranges: the 10-year T-note 3.48%, low-fee mortgages just under 5.25%.

The producer price index fell hard in September, down .6%, the much-hoped-for re-building of inventories not yet underway. Initial claims for unemployment insurance unexpectedly rose, back in the 525,000-550,000 weekly band.

Early-week news of housing starts (+.5%) and new building permits (down 1.2%) surprised on the weak side, and last week’s minor up-tick in rates cut mortgage applications sharply: purchases fell 7.6% and refis 16.8%. Sales of existing homes jumped 9.4% in September, presumably in the race for the last of the $8,000 credit, but NAR’s sales data is not supported by loan applications.

In the last two years’ crisis, the media and our own minds have each day provided a long list of things to worry about. Some are real, and some are not.

There is one item high on most lists that for now you can safely drop to the bottom: the exchange value of the dollar. All of this “falling, collapsing, crashing, wallpaper, Zimbabwe, subprime” — delete that. When that commentary comes by, just hit “reset.”

The dollar has of course fallen from its highs last fall, when the world ran to it for safety. However, in the post-1970 BoA/Fed/Merrill “Real, Broad, Trade-Weighted Dollar Index” the buck sits slightly below average value. For those insistent about dollar fear, here are some currency-market principles to help with rehab.

Any currency tends to fall versus “harder” ones — those with lower inflation prospects or higher interest rates than its trading partners. Hence the dollar has declined against the euro: Euro-zone inflation runs about 1% less than here, and the ECB rate is 1% versus zero here. Money always runs to higher return. And Europe’s economy may or may not survive its discipline, its exports suffering badly, only the super=productive German economy able to afford the exercise.

A strong currency is often not worth the trouble, or the pride. In its post-1970 high, Ron Reagan’s dollar stood tall on the back of a terrible recession and seven years of double-digit Fed rates. In a modern equivalent, Brazil today is doing better in its endless war versus inflation, but at the price of an 8.75% central bank rate — so high that money is pouring into Brazil; that flood threatens to over-value the real and wreck Brazil’s exports. Efforts to control such damage lead to wild counter-contortions: Brazil this week began a 2% tax on foreign investment to keep money out.

Contortions work in reverse. The one large-nation currency this year exactly unchanged versus the dollar: China’s yuan, grossly undervalued versus everybody, but held artificially cheap by the Bank of China. All of China’s complaints about our dollar-printing undermining the value of their export-earned Treasury hoard, and the need for a new global reserve currency… can’t have everything, guys. The undervalued manipulator must take the collateral damage.

Others suffer from China’s manipulation. Global export volume has fallen by as much as one-third, but China’s only by one-quarter, as the cheap yuan undercuts everybody else’s exports. Not merely exports get kneecapped: in a world in which labor is increasingly transportable by electron, not just Nikes in container ships, the weak yuan undermines wages especially in the US and Europe, and even Latin America.

The centuries-old remedy for yuan-style predation is “protectionism,” in which importing nations raise tariffs to protect native industries, wages, and even their entire economies. This kind of counter-trade war was discredited 75 years ago. However, the rise of Asian non-tariff barriers (yen manipulation began in the 1960s, as well as regulatory resistance to imports) has yet to find an effective self-defense among the receivers of excessive-exports, especially the foolishly insistent free-traders in the US.

We can, of course, print our way to ruin, but reflating the world’s reserve currency during a period of deflation is exactly the right thing to do.