The Ides of March Are Upon Us

I am worried about this spring. There are too many things happening all at once. Our nascent recovery is going to be put to the test, and it seems all too likely that it will be hobbled.

Why do I say that? Don’t I see that the Dow is well above 10,000? Haven’t I noticed that Bank of America trades at 16, and that the rate of increase in the national unemployment rate is leveling off?

Our economy is being driven by stimulus, and a few fumes.  Those fumes include the sudden demand among businesses to restock inventory.  That’s not enough, though. The real fuel comes from the forces of intervention.

Among the most important are the efforts by the Federal Reserve to restore some kind of liquidity to mortgage markets.  Last fall, amid all of the uproar over TARP, the Fed announced that it would buy $1.25 trillion in mortgages.  That is almost one-sixth of the national debt for mortgages in 2009.  Well, it was a nice party while it lasted.  All of that demand kept things stable.  It kept money going through the doors at the banks. It meant that those banks could keep on making loans to homebuyers.  Well, that lifeline is about to cease.  As of January 27th, the Federal Reserve was holding $969.7 billion in mortgage-backed securities. That is more than the Fed’s portfolio of Treasuries! Fed watchers expect the purchasing program to end by the end of March.

The First-Time Homebuyer Tax Credit program has been a huge hit. It has helped many people to come up with downpayments for new homes.  It removes an obstacle for buying a home that is keeping lots of people on the sidelines. Right now, banks want at least 20 percent down.  The number was even higher six months ago.  With that credit, the hurdle isn’t so steep.

In 2008, the FTHBC provided a credit that was to be paid back over the next 15 years.  In 2009, it got even better.  There was no longer a provision that the credit had to be paid back! Right now, homes in the $100,000 and $200,000 range are selling.  Homes that need a jumbo mortgage are spending a long time on the market.  The First-Time credit expires at the end of April.

Inflation. It’s coming. Buy your TIPs now.

The sum of these issues will be to take the lid off of interest rates. The Fed says that they are out of the game. The Chinese are hinting that they are losing their appetite for US debt (either in the form of MBS, or in Treasuries).

The other perspective out there is that the market is about to be led out of this recession by more jobs. If unemployment did drop, there would be all kinds of benefits.  There would probably be fewer foreclosures and more new homebuyers. Businesses would increase inventories, leading to a “virtuous cycle” of job-led growth.  But that kind of evidence is still not to be found on Main Street.