News Impacting Mortgage Rates

Here is a great week in review from our friends at It addresses how the financial mess in Europe is effecting mortgage rates in Houston, TX and all throughout the nation. No doubt we live in a global economy. I really want to thank Lou Barnes for his contribution and giving us this outlook.

The newest European maneuvers have trigged a stock rally, but credit markets are not buying the deal. The small upward pressure on US yields today is preparatory to a bigborrowing binge by the Treasury next week, not anything fundamental.

Through the fog of Europe, dominating and concealing everything, one pattern is clear: the US economy is doing better than forecast 90 days ago, and the rest of the world is in some stage of sinking.

The two surveyors of US consumer confidence have each reported November-December gains. New claims for unemployment insurance last month were the lowest since February, and the small-business org, NFIB, has also found the first up-turn in small-business hiring since 2008. The Fed’s Z-1 reported a couple-trillion-dollar drop in US household net worth in the 3rd quarter;
however, all of it was attributable to stock market losses then, all of which have been recovered.

The perma-optimists say that emerging economies will carry the globe. Uh-huh. China’s 18-months of inflation-fighting has dampened prices, but also hosed down its economy. Brazil’s GDP grew 7.5% last year, but went negative in the 3rd quarter.

The European predicament has been a source of amusement while markets there and everywhere for two years have tried to anticipate whatever new system will follow euro-folly. As of last night, it is no longer funny.

Germany has no answer to anything except to force unsustainable austerity on the weak dozen of the 17 nations in the euro currency. In their frailty, they dare not object. Feckless France for 150 years has asserted power that it does not possess, now coat-tailing German dragoons. Beyond the currency zone lie another 10 nations together comprising the European Union, a fantastic bureaucratic boondoggle based in Brussels.

Today minus one, the UK. Once applying force, Germany has never known when to stop. Germany and France have long envied the City of London, second only to New York as a financial center. Among the fiscal-union treaty changes jammed at the EU-27 last night, the UK would lose protection from EU regulations which would dismantle the City and reassemble it in Paris and Frankfurt. To UK PM David Cameron’s great credit, despite the risk to UK exports, half of which go to Europe, he told Merkel and Sarkozy to bugger off.

Financial markets have been wagering on euro-breakup since July, one Friday after another guessing the precipitating event. First we expected sovereign-debt default as a catalyst for collapse, but just enough aid has been provided to the weak to prevent it. In July began the greatest bank run of all time, transcending even post-Lehman here, and markets bet on a banking collapse as endgame. European banks have indeed collapsed, but the husks are held open by ECB funding alone  (example: in November US money-market funds pulled 68% of their money from French banks), and the absurd notion that all sovereign debt will be repaid at face value and in euros.

German muscle will prevail until European economies are crushed by austerity, and tax revenue falls out from under budgets. That will take a while. Marking the absurdity of this blockheaded pursuit: several sources report authorities in Ireland, Greece, and others inquiring about capacity to print new local-currency banknotes. Every investment house is handicapping the values of local currencies post-breakup. Emails circulate discussion of the lex monetae rules governing who-owes-what after currency change.

There is nothing holding Europe together except a political superstructure which will be thrown from power when the unified Europe project fails. Thus no matter how transparent the folly and failure, the harder that class tries to preserve the project.

The lesson for us, far more powerful than caution against financial profligacy: the more your political structure detaches from economic reality, the greater the danger. That hazard is masked here, now, by European distress. Cash flows to us for safety, keeping interest rates low, and global weakness inhibits inflation. We’ll take that as long as possible.

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