RateWatch #398 – Offshoring
March 13, 2004 by Dick Lepre
Last Friday's BLS Employment Report changed the psyche of the markets. Equities are hurting and the Treasury market has the appearances of starting a new bull cycle (higher prices, lower
yields, lower mortgage rates).
There is a lot going on and, for some perverse reason, my mind is forcing me to write about
two significant topics in the same newsletter. Maybe they are connected.
For those of you actually interested in mortgages something most significant has happened. At the
end of February the monthly stochastic finished in the upcrossed position. This is the first
signal of a secular bull market (lower rates). For the bull market to become "official" the monthly sto must memorialize its upcross (i.e. stay upcrossed) on March 31.
The ugly Employment Situation Report of last Friday has, it would appear, assured that the
memorialization will take place.
One problem is that there is confusion about how many people are working. There are two
employment surveys. The employers' survey, which asks businesses how many workers they
employ, says that 2.4 million jobs have vanished in the last three years. The household
survey, which asks individuals whether they have jobs, says that 450,000 more people are
working. Are 2.85 million more people working for themselves? Maybe, but I don't think
so. Something is funky with the data.
The implications are, frankly, stark for the economy. We are about to end a bear market
that started just 7 months ago. These cycles are supposed to be 12-15 months long. In addition
the level of the June bond future corrected for backwardation is the same as it was when the
bear market started. We had a bear market where, at the end we were at the same spot that we had been at the beginning - a sort of "Groundhog Day" market.
We are about to start another bull market for bonds. This call is based upon my belief that
"the sto don't lie." (My source for this is www.stomaster.com/stopdfdc.pdf.) The implication is that the 30-year will test and perhaps even break beneath the 4.0% level. The annoying thing for mortgage folks is that this does not necessarily mean that the 10-year and, by implication, mortgages will follow. There are, at least, two possible cases:
1) the 10-year will follow and test the 3% level
2) the yield curve will flatten or invert meaning that the 10-year will not move so much as the 30-year. A flattened or inverted yield curve is indicative of recession. Absent the fear of recession, the 10-year yield will fall and, in all likelihood, mortgage rates will drop to new "record low" levels.
Another extended refi boom is a strong possibility. It may be the case that everyone who refinanced last year plus everyone who did not refinance last year will want to refinance this year. (And I thought I was going to get to go to more baseball games this year.)
It is notable that very few economists are buying into this. The problem may well be that the
economy is in a place rarely visited. Economics is a serious business/art but it requires fresh
perspectives when we find ourselves in these rarely visited places.
One caveat about this call. All indications are in place to make this happen but that does not
constitute certainty. The monster is at the door, he may walk away - but I doubt it.
The "event" that caused this market change is the jobs report - not just last week's but this entire
series of "below expectations" reports. The underlying force is "offshoring." I am in
no way stating that offshoring is the sole cause. It is a psychologically convenient issue.
If you have been reading these for any length of time you know that I am a "free market" kind
of guy. I believe almost totally that our long-term best interests are best served by a
There are some realities behind the present jobs picture. One is that the demographics of the US population are about to go through a massive change. In the next few years more
folks (baby boomers) will be leaving the jobs market than entering it. The reason behind this
is simple: we went from a high birth rate baby boom era to a lower birth rate post-Roe v. Wade era. The implication is that the long-term picture is not bleak regarding the jobless picture. There will not be enough people here to do the work so either
1) the work will not get done
2) the work will get done elsewhere (offshoring) or
3) we will need more immigrants
Coming in the midst of an election year (and what may well be a savagely fought election year) we are going to hear "offshoring" become a political issue. Here is my take: money is above politics. The forces that drive the economy do not care less who is elected. Making "offshoring" a political issue is no more valid that making gravity a political issue. "Vote for me and gravity won't break
that glass you just dropped". I don't think so.
I hear people say (and e-mail me) "rates will stay low until the election." My point is that money really does not care about politics. It cares only about money. In any given election year the probability that rates will go down is the same as the probability that rates will go up.
Bush has by default (it's his jobs report) had to take the position that offshoring is good and will lead to long-term benefit. Interestingly he has backers like Alan Greenspan. Democrats are well-positioned to use offshoring as an example of how corporate, rich America screws the working middle class. Offshoring may not be Bush's idea but it is his political problem. It might make long-term sense for the economy but it ain't going to win any votes.
1) offshoring is going to happen, so learn to deal with it. If you think that your job may get offshored don't wait and be a person who goes to the doctor and finds that he has 3 months to live. Instead get started by getting training for another job. Hell, maybe, people in India will start doing mortgages and my job will be offshored. I will find something else to do. I got started as a loan officer in 1992 because I found that the set of computer skills that I had was nearly obsolete. I chose to do what I now do because I had, from doing computer software for an S&L, learned about the mortgage business.
2) suggesting that the government pay companies to keep jobs here is absurd. Why should tax
dollars support someone's price inefficiency? In all likelihood the money would be ripped off by people who have skills at scamming the government. The U.S. government cannot do things like this correctly.
Recognizing that some people are going to be jobless for an extended period as a result of
this shift, perhaps the federal government needs to help them by extending unemployment
3) businesses that, for whatever reason, decide not to offshore when their competitors do
offshore may lose 100% of their jobs by going out of business.
A broader view might be this: if offshoring is a bad idea because of inefficiency or some such
thing then the marketplace will determine the fate of those who offshore. If it is a good thing, those who offshore will be more successful (greater profits or market share).
4) the number of jobs being offshored is not so great when taken as a percentage of the
labor force. This would be a problem if offshoring went on forever but it will not.
5) complaining that somehow foreigners are "unfair" and taking advantage of our open market
and we should somehow lead a jihad to keep these jobs here misses the fact that there are a lot
of domestic US workers who work for foreign-owned companies. This is a 2-way street. If you want to lead a jihad against offshoring, be willing to tell Sony and the Japanese car manufacturers to take their jobs back first.
6) there is an almost sinister irony of unintended consequences at work here. A few
years ago we were talking about "the new economy" wrought by the Internet. What resulted
was the laying of a large amount of fiber-optic cable so that the same infrastructure that you
use to check out Paris Hilton's adventures on the little screen enables some person in India
to access the database that the title companies to create preliminary title reports.
As an aside here there are three areas in which offshoring has touched the mortgage business - and I am only talking about what I know first-hand:
1) the preparation of preliminary title reports which, at least here in California, are now done almost totally in India
2) appraisal reviews and
7) There is a strange "second order" effect at work here, at least in regard to programming
jobs going to India. About 4 years ago, when I was president of Homeownmers.com, I needed
programmers. I went to a large employment agency. I interviewed about 6 people. They
were all from India. The fact was that the US did not produce a large enough supply of skilled
programmers to fill the demand. We reached out. Folks with the training came here and, in
a sense, took the jobs back home with them.
8) I am conscious of the fact that real people who are my neighbors are losing their jobs. This is sad, but this is also inevitable. I would rather encourage them and help them to find new training, new careers and new jobs then commiserate about the forces that took these jobs away.
9) Offshoring produces advantages:
a) less expensive goods and services
b) political-economic stability that comes from working together. I don't intend this to
be glib, but maybe if we could get North Korea to take some of these jobs then we won't have
to worry about them nuking us.
c) it brings the nations of the world together in a way that has meaning. It is literally "working together." More socio-political advantage will come from offshoring than from the United Nations.
10) if you don't believe me, here is what Greenspan said on Thursday: "As history clearly shows,
our economy is best served by full and vigorous engagement in the global economy,"... "new
protectionist measures" were being proposed, without specifying what he was referring to, and said they could be self-defeating.
"These alleged cures could make matters worse rather than better," he said. "They would do little to create jobs and if foreigners were to retaliate, we would surely lose jobs."
In 1900 America was on the verge of an Industrial Revolution. An equal amount of dissatisfaction
about the loss of jobs by farmers and blacksmiths likely existed. Somehow, we got over it.
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