August 29, 2011

Even Lower Rates Coming? (part 2)

August 29, 2011

Even Lower Rates Coming? (part 2)

Friday’s GDP report was weak. The fact that there will apparently not be an inflation-inducing QE3 should reinforce the call for lower Treasury yields. We may be moving to record low Treasury yields and mortgage rates, and this post is to follow a recent post exploring this possibility.

It should be noted that mortgage rates don’t follow Treasury yields but rather mortgage bonds issued by Fannie Mae, Freddie Mac and Ginnie Mae. But since the government also backs Fannie and Freddie, these bonds are still also safe havens from weaker economic data—covered below.

There are the comments by Rick Davis of Consumer Metrics Institute on Friday’s GDP data. I think that if is safe to say that Rick is suspicious of the BEA data.

– Aggregate consumer expenditures for goods was still reported to be contracting during the second quarter, reducing the overall growth rate of the economy by a -0.34% rate.

– Consumer expenditures for services increased, but at an anemic 0.64% annualized growth rate.

– The growth rate of private fixed investments was the best news in the report, although even it increased at a weak annualized 1.01% rate.

– Inventories are now reported to have been drawn down during the quarter, indicating that production has slowed even faster than demand. The revised estimate of inventory levels caused the overall growth rate to be reduced by a -0.23% annualized rate.

– Total expenditures by governments at all levels continued to shrink, reducing overall economic activity at a -0.18% annualized rate.

– Exports weakened materially relative to the earlier report, halving the contribution that they made to the overall GDP growth rate to 0.41%.

– Imports increased somewhat, removing -0.33% from the growth rate of the overall economy.

– The growth rate of “real final sales of domestic product” rose to an annualized 1.21%, largely on the strength of the fixed investments and draw-down of inventories.

– The effective “deflater” used by the BEA to offset the impact of inflation was 2.51%, still substantially below the rates reported by their sister agencies. Substituting the current inflation rate published by the Bureau of Labor Statistics (actual year-over-year CPI-U of 3.6%) for the rate used by the BEA causes the entire reported GDP growth rate to disappear.

Why We May See Record Low Mortgage Rates
– Anemic GDP growth.

– Any sovereign default in Europe may set off a cascade of losses threatening European bank solvency, creating another liquidity crisis and export looses from credit default swaps to the U.S creating another liquidity crisis here.

– Failure of Keynesian deficit spending to produce any growth. When politicians are measuring the success of deficit spending in terms of how many jobs may otherwise been lost you know there is a problem.

– Failure of Fed monetary policy to do anything positive. With low rates and $1.6 trillion in excess banking reserves what more is there to do? QEII drove increases in commodity prices and created an equity bubble which we are watching deflate. The “wealth effect” of the boost in equity valued has not carried over to increased spending. The fact that Wall Street was counting on QE III is an indication of severe desperation.

– Near total lack of confidence in the ability of the political process to produce any solutions. To me this is good. I have never believed that the government is the primary force for job creation or economic growth and broader recognition of this fact would be healthy. Businesses which are the primary creators of jobs. Government can help but often that comes at the expense to taxpayers. Excessive government regulation destroys private sector jobs.