RateWatch #414 – Jobs, Short-term Bull Market, Iraq.
July 3, 2004 by Dick Lepre
dicklepre@rpm-mortgage.com
What's Happening
The BLS Employment Situation Report was much weaker than expectation. 112,000 new jobs is
nothing to get excited about at this time. What no one noted before this report was that our old friend - the stochastic technical of the 30-year Treasury bond future has entered a weekly bull cycle. This creates the possibility of a 10 point upward move in price over the next 12 weeks and will move mortgage rates lower. That would send the 10-year yield down to about 4.10%. Some points about this: this is counter-cyclic - we are still in a long term bear market which should last until, approximately, year end. Counter-cyclic moves have a way of getting squished. The things that will undo the bullish weekly cycle are higher than expected core CPI or a great jobs report in August. Geopolitical instability will help the bull cycle because instability supports flight-to-quality
Treasury buying.
This past Wednesday, the FOMC hiked the overnight rate to 1.25%. This was the first increase infour years. Treasury (and mortgage) markets were 100% prepared for this and the news had no
negative effect on rates.
The goal of the Fed is to get the Fed Funds rateabove core CPI in a manner that hurts GDP growth as little as possible. This is not a simple task. We are dealing now, more than ever, with a world economy which serves both to contain inflation and to take bites out of GDP. Higher rates may lead to a stronger dollar which will hurt exports and GDP. The unstable situation in the middle-East puts energy prices at risk. This particular move to higher rates is particularly risky. The biggest risks are deflation and stagflation. Deflation is particularly dangerous but unlikely. "Stagflation" is inflation with flat or declining GDP. The next biggest risk is inflation with growing GDP. A more likely scenario is contained inflation with GDP growth perceived to be too low.
Some perceive that we are headed to a period of higher and ever higher rates. I think not. Rates
will keep increasing if any only if inflation gets out of control and there is no sign that is happening.
The world economy, outsourcing, global communication and competition are serving to keep prices down. Upward spikes in energy prices are due to the efforts of the OPEC cartel but as perilous as the situation in the middle-East may be we have a couple of things going for us. It may take another year or so but Iraq is going to come back on-line as an oil exporter. Saudi Arabia is in a truly strange place. If the government there wants to survive their perception may be that they are ill-served by upsetting the USA. The Saudis need all of the help they can get to preserve
the delicate oil infrastructure but if it is damaged or is attacked by weekly bombings then the price of oil on the markets could be seriously impacted.
At some point the entire industrialized world better start taking terrorism seriously.
Iraq
Now that the war/occupation has moved to a new phase I want to comment on what strikes me most about thisventure and its present situation.
This is an event that has gotten untold media coverage but the media has been consistently inaccurate about predicting what was going to happen there.
What Some People Who Had the Media's Ear Said Before the War
Former weapon's inspector Scott Ritter: "The United States is going to leave Iraq with its tail
between its legs, defeated. It is a war we can not win. We do not have the military means to take over Baghdad and for this reason I believe the defeat of the United States
in this war is inevitable. Every time we confront Iraqi troops we may win some tactical battles, as we did for ten years in Vietnam, but we will notbe able to win this war, which in my opinion is already lost."
MSNBC Motor-mouth Chris Matthews; "This invasion of Iraq, if it goes off, will join the Bay of
Pigs, Vietnam, Desert One, Beirut and Somalia in the history of military catastrophe.
What will set it apart, distinguishing it for all time, is the immense - and transparent - political stupidity."
Peter Arnett on March 30, 2003 "That is why now America is re-appraising the battlefield,
delaying the war, maybe a week, and re-writing the war plan. The first war plan has failed because of Iraqi resistance now they are trying to write another war plan."
(Four days later U.S. forces took the airport. Ten days later Baghdad fell.)
Mission Accomplished?
On May 1, 2003 the U.S. declared an end to "major combat operations". 115 U.S. troops had died to that point. Subsequently terrorist bombings started to take a toll. The U.S. was ill-prepared for the "peace".
Aug. 19, 2003- A truck bombing of UN headquarters in Baghdad killed 20 and the U.N. turned tail.
Now we have turned sovereignty over (sort of) and I am sure of only one thing: I haven't a clue as to what is going to happen next. Looking at the arraignment (or whatever it was) on Thursday I realized that the events of the five days preceding were extraordinary. First folks were
wondering if the transition would occur smoothly and on time. Then it happened two days early. Three days later Saddam is in court. One thought that I keep having is that this might actually go OK. The Iraqis will get their country back with the most affirmative situation of being able to bring justice to bear on the folks who caused them so many years of misery. Iraqis have the possibility of recognizing that Saddam caused a lot of misery, documenting that misery in court, meting out punishment and starting to put this behind them. Subjecting Saddam to a system of justice is a necessity. One of the most important aspects of democracy is a separation of the judicial
and executive branches.
In the short run, Iraq will become a stabile place if and only if Iraqis act against insurgency.
The long term prognosis for democracy in the region is a bit murkier.
On the same day that this was happening, several hundred thousand people marched in Hong Kong protesting Beijing's unwillingness to allow them democracy in 2007. This democracy thing is easy to unleash against and enemy like Iraq. It is a lot tougher proposition when it starts in places where undemocratic governments are “on our side” (as in Saudi Arabia) or where we ignore democracy and human rights issues for economic convenience (as in China).
If we are not careful, this "democracy" thing could get out of hand.
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