Napoleon Bonaparte. And there have certainly been more than ten who
are speaking out – and using some pretty strong words – as experts and
analysts are looking forward to some major events this week, including
the midterm elections this Tuesday, the Fed Statement on Wednesday, and
the Jobs Report on Friday. To say the least, that’s a very influential
trifecta of events – so let’s take a look at some of the strong and
colorful lingo being used – and why.

One of the biggest news items up for debate is the Fed’s expected
announcement of another round of Quantitative Easing (QE2) when it
releases its statement this week. Remember, QE is the concept of the Fed
becoming a heavy buyer of Treasuries and Bonds. This is done to
artificially cause those security prices to move higher under the
increased demand, which in turn will cause interest rates to move lower
in the hopes of stimulating the economy – but it also continues to load
the US with debt and may have numerous other negative unintended
consequences. Although this move by the Fed is likely, it’s been under
some criticism – and after hearing some colorful commentary about QE2
last week from Fed Chair Ben Bernanke, the skepticism heightened.

Fed Chair Bernanke compared the Fed’s handling of the next round of QE2
to being like a golfer with a new putter, stating that the golfer has to
tap lightly at first and try to figure out how to use it properly. Wow -
not exactly words that inspire confidence in the Fed’s ability to get
QE2 right… particularly when you consider that the weekend golfer has
a less than 50% chance of sinking a putt 3 feet in length.

And one of the Fed members themselves, Kansas City Fed President Thomas
Hoenig, actually said that attempting to stoke change for the economy
via monetary policy like QE2 is making a “bargain with the devil”.
Strong words.

Bill Gross, manager of the world’s largest Bond fund, PIMCO, took the
criticism of QE2 a step further. He recently stated that “Checkwriting
in the Trillions is not a Bondholder’s friend… it is in fact
inflationary, and, if truth be told, somewhat of a Ponzi Scheme. It
raises Bond prices to create the illusion of high annual returns, but
ultimately it reaches a dead end where those prices can no longer go
up.” Definitely colorful language, likening what is happening to a
“Ponzi Scheme!”

Let’s take a look at one of the consequences that may impact consumers
looking to purchase or refinance a home in the future.

For months there has been an ever-growing fear that our economy is
headed towards deflation, which is when prices on goods and services are
falling lower. Deflation is the exact opposite of inflation, which of
course occurs when prices climb higher. Remember, inflation is the
arch-enemy of Bonds, so fears of inflation negatively impact Bond prices
and home loan rates. But fears of deflation are good for Bonds and home
loan rates. That’s because the fixed payment that a Bond provides to an
investor goes further in a deflationary environment. So, the recent
fears of deflation have helped Bond prices move higher and home loan
rates move lower.

But last week, future deflation/inflation expectations changed… and
investors in the Bond market started betting that the Fed will be
successful in “creating inflation” via their Quantitative Easing plans,
and will thus avoid continuing down a deflationary road. This was
evidenced by the results of last week’s 5-Year Treasury Inflation
Protected Securities (TIPS) auction, which saw investors buying TIPS at
a premium since they were confident they’d be able to benefit from the
increased inflation that should result from the QE2.

Of course, investors aren’t the only ones impacted by this. The media
has already been chattering that the Fed has to be careful not to let
inflation get out of control in the coming months and years. In fact,
just last week, there was a headline explaining how another round of
Quantitative Easing brings the risk of “unleashing the 1970s inflation
genie.” Consumers who are looking to purchase or refinance a house
should also take note of that possibility – since even talk of inflation
can impact home loan rates negatively. After all, a rise in inflation
would be bad for Mortgage Bonds and, as a result, for home loan rates.

The good news is that home loan rates are still near historic lows for
the time being. If you or someone you know would like to see how you can
benefit from the current situation, call or email me today.

The Martini Forecast For The Week:

Put on your seatbelt – it will be an exciting week ahead! As stated
above, we’ll see the midterm elections this Tuesday, the FOMC Meeting
and following Monetary Policy Statement coming on Wednesday, and the
all-important Jobs Report on Friday. On their own – each one would have
the ability to create volatility in the financial markets… but having
all three in a row certainly spells an exciting and interesting week
ahead. I’ll be staying closely tuned – and we’ll break down all the
events in next week’s issue.

In addition to those three big events, we’ll see economic reports on
Personal Spending, Personal Income, and Personal Consumption
Expenditures (PCE) – which measures price changes in consumer goods and
services – on Monday.

We’ll also see some important employment news leading up to the official
Jobs Report on Friday. First up is the ADP National Employment Report on
Wednesday, which measures nonfarm private employment. That will be
followed the next day with another round of Initial Jobless Claims. In
last week’s report, Initial Jobless Claims were reported at 434,000,
which marked the third straight decrease in Claims and the lowest level
since early July. That was definitely an improved number… but we can’t
get too euphoric until we see the Initial Jobless Claims reaching the
400,000 mark and steadily moving lower from there.

And as if that weren’t enough excitement for the week, we’ll see more
housing news with Pending Home Sales on Friday. Regardless of what these
economic reports say, it’s bound to be a roller coaster ride with all
the big news items on tap – call me this week if you have any questions
about how home loan rates are moving.

Remember: Weak economic news normally causes money to flow out of Stocks
and into Bonds, helping Bonds and home loan rates improve, while strong
economic news normally has the opposite result. As you can see from the
chart below, Mortgage Bonds managed to rally towards the end of last
week after being pushed down early in the week.

Kevin Martini

THE KEVIN MARTINI GROUP

919.274.3700 - Kevin@KevinMartini.com - www.KevinMartini.com

NMLS # 143962