In the 1978 film Animal House, there was a scene where Dean Wormer proceeded to read off the GPA’s of all the brothers of Delta House. Upon reaching the character played by John Belushi, Dean Wormer glared into the camera and said, “Mr. Blutarsky… zero point zero.”
Perhaps the Labor Department could have added some levity to this morning’s Non-Farm Payroll release by having Dean Wormer make the announcement. Something like, “Mr. Blutarsky, your GPA has something in common with the growth in non-farm payrolls. Zero point zero.” That would have been good for a least a chuckle before the market opened.
As it were, Dean Wormer was no where to be found and the jobs number clanged onto the floor like a 100 pound anvil. Here are the details:
Non-farm payroll growth: 0 on expectations of +75, 000
Manufacturing payroll: down 3, 000
Average work week hours: down 0.1 from 34.3 to 34.2
Average hourly earnings: down $0.03
Unemployment rate: Steady at 9.1%
Non-farm private payrolls: up 17, 000 on expectations of +110, 000
On the news, the market fell 2% and held at that level up to the time of this writing.
The talk has now returned to the increased likelihood of QE3 — a concept I find ludicrous. But, I wouldn’t discount the probability that we are entering another “through the looking glass” market where bad economic news will be met with a rising stock market because bad news increases the odds of QE3. Extending that logic, I guess we should hope for 25% unemployment!
Another thing we are keeping our eye on is mortgage-backed securities. If President Obama’s speech next week includes a plan to implement some type of a national refinancing program for homeowners (as is rumored), mortgage-backed bonds could be in for a huge prepayment. Further, as Bruce Krasting pointed out yesterday, such a refinancing program could be a backdoor to QE3 with all kinds of political cover. To summarize Bruce’s thoughts, Fannie and Freddy would offer new, low cost mortgages to ease the cash flow problems of homeowners. These cash from the new mortgages will be used to retire the old ones. The Fed, coincidentally, owns $1 trillion of MBS that (up to now) had been rolling off the books at a normal pace. If this $1 trillion of MBS were to be prepaid, the Fed’s balance sheet would shrink dramatically. Now for the finale’… The Fed has already stated that it will deploy the proceeds of MBS roll-offs into Treasury bonds. If this refinancing scenario were to occur (one giant MBS roll-off), that would be $1 trillion in additional QE done under the cover of helping struggling homeowners.
While this might sound a little like something that should have me wearing a tin-foil hat, the elegance of the solution has me wondering. And in light of today’s horrible jobs report, this sort of thing would be much more palatable to the government while being much less understandable to the general public.
If it were to occur, the investment ramifications would likely be bad for mortgage-backed securities and good for all risk assets.