RateWatch #330 – The Economy Comes HomeWhat's Happening?
Good question. Rates were getting better until Thursday came along and a touch of rosy economic news caused serious selling sending mortgage rates up.
In my eternal quest to explain how various things that happen to the economy affect mortgage rates I present:
The Economy Comes Home
My lovely wife, Elizabeth, called me at work this morning. She only calls me when something is really important so I was immediately concerned.
The conversation went something like this:
D: Hi, babe, what's up?
E: I can't get the remote control for the TV to work.
It's getting me so upset that I may have an asthma attack. (Some background here: we have a large TV in the bedroom and we have a combined remote for the TV and the cable box. If you start pressing the buttons in the wrong order it can be unforgiving.)
D: What's on the screen?
E: There are these geeky looking people talking about the economy. I want to watch the Cartoon Channel. Daffy Duck makes more sense.
D: Press the red button that says "cable". Then enter the 3-digit number for the Cartoon Channel.
E: Frankie (Frankie is our female dachshund) just took the control out of my hand and sat on it. It's louder now.
D: What's happening now?
E: It's making no sense.
D: Are you talking about the remote or the dog?
E: No! The TV geeks are making no sense.
D: What are they saying?
E: Well this one guy says that since there is more unemployment and business is slowing down, more people are buying stocks. That makes no sense. No one is that stupid. I got the remote back from the dog by giving her one of your socks but I still can't turn this off.
I knew that I was headed into dangerous territory. It is very difficult to convince my wife of the truth of propositions that seem irrational. The last time that I successfully did this was when I convinced her to marry me.
D: You have to try to understand what these guys are talking about. It will make you a better person.
E: The last time that you said that was when you brought that girl, Monique, over here.
D: Let's not bring that up. Here's what they are talking about: if the economy is slowing down then the demand for borrowing goes down and interest rates go down.
E: But if the economy is slowing down why are people buying stocks?
D: Because companies will make more money if they can borrow money at lower rates.
E: I don't get it. If the economy is slowing down then there is less business and it seems to be that companies will make less.
D: Yeah, but that is short-term. The stock market tries to think long-term.
E: But just a couple of years ago you were explaining why all of those Internet stocks were losing value - were they thinking short-term or long-term?
D: That was different. In that case they actually started thinking. Before that they were just confused.
E: So what you mean is that, since you are in the loan business, you want bad economic news because that means lower rates.
D: Are you sure that you don't have a PhD in Economics?
E: Let me get this straight: what I should pray for is - and this time I'm writing it down - 1) more unemployment 2) fewer jobs 3) lower wages.
D: You're beautiful.
E: So, since there is more unemployment interest rates will be lower and you will do more mortgages and we will make more money.
D: Uhh, yes.
E: So then I can start spending more since unemployment is up!
D: Well, uhh, I don't know about that.
E: Now I understand it. This is that business cycle thing. If these geeks are forward-looking then we have to be even more forward-looking. I should start spending more money right now because we will be making more money because interest rates will be lower because other people have no jobs.
D: I wish you wouldn't put it exactly like that.
E: Look, I'm thinking about this and I'm getting worried. If there are fewer people working and they will be making less and the only people who will be making more are people in the mortgage business then who is going to be buying all this stuff? I can only buy so much. Shopping is difficult work.
D: Darling, you can only do your part. Greenspan can't expect more of you.
E: Now they are saying that AMD’s stock is up after they laid off 2,000 people.
E: Why don’t they just fire people every week and keep their price going up all the time.
D: I don’t think that works.
E: Hey, I got the remote to work. Daffy Duck is on now.
D: What's he saying?
E: Bugs Bunny is explaining to him that since more rabbits are unemployed the demand for carrots will go down and he is getting Daffy Duck to buy stock in a company that sell carrots over the Internet.
D: See, it all makes sense. The medium is the message.
You were just watching the wrong channel.