Morning Report – On the Waterfront Edition 12-28-12

Vital Statistics:

  Last Change Percent
S&P Futures  1401.8 -8.9 -0.63%
Eurostoxx Index 2633.2 -26.8 -1.01%
Oil (WTI) 91.01 0.1 0.15%
LIBOR 0.308 -0.003 -0.96%
US Dollar Index (DXY) 79.81 0.188 0.24%
10 Year Govt Bond Yield 1.70% -0.03%  
RPX Composite Real Estate Index 192.3 0.0  

Stock index futures are lower on pessimism about a budget deal. Obama will meet with Congressional leaders today to see if they can hammer out a deal. The House will meet on Sunday night. The same story remains – stocks are worried about going over the cliff, while the bond market seems skeptical.  For a laugh, check out Rick Santelli’s rant about the way the markets are handicapping it. 

One other possible headwind for the economy in Q1 – a longshoreman’s strike that would close cargo ports on the Eastern Seaboard and the Gulf Coast. This would not only limit raw material supplies to US factories, it would also push many logistics workers, truck drivers, etc on to the unemployment rolls. Some economists estimate that a strike could cost the US economy $1 billion a day. Will Obama risk alienating his labor base to intervene?  Fun fact:  the average compensation for a longshoreman in $124k.

Yesterday’s consumer confidence numbers took a step downward, and seem to back up reports that this year’s holiday sales were weak.The outlook for business conditions and labor markets fell. 

Chart:  Conference Board Consumer Confidence:

 In spite of the pessimism over the fiscal cliff, luxury homes priced over $1 million are making a comeback. Sales have risen by 9% for the first 9 months of 2012.  Strong foreign demand has been driving up prices in Manhattan and the Hamptons. In terms of foreclosures over $1 million, the NYC suburbs hold 4 out of the top 10 zip codes, with New Canaan taking the lead.  This is still the wreckage from the bust, where lots of $1 million a year guys lost their jobs in 2007 and haven’t worked since.

22 Responses

  1. Happy Holidays to all!

    I’m back intermittently for a while. We’ve had a bit of ice and snow here, but nothing impassable — if one’s car starts. Now that I have a new battery and have finished some chores, I find it humorous that stores I need are not open so I can finish what I need to get done on the house. Sigh, I guess it’s only Oklahoma that shuts down if you even think the words “ice” or “snow.”

    I’ve been pretty out of touch so have much catching up to do. Funny how the fiscal cliff proceeded without my input. Brent, I hope your take is right about “luxury” homes. My nephew bought and extensively updated and remodeled what I am told was originally a Westinghouse summer estate in NY. He had just spent millions on it when the bottom fell out of the market, and I know he wants to sell but there apparently has not been much of a market.


    • jnc:

      Cohan, the author of your link, is right about some things, but on others he either doesn’t know what he is talking about or he is deliberately trying to deceive people. He says:

      So who benefits from the low interest rates on checking and savings accounts? The big, consumer-oriented banks such as Bank of America, Wells Fargo, JPMorgan Chase and Citigroup, all of which were bailed out by the federal government four years ago. The way banks work, of course, is by getting us to park our money there, nearly for free, and then lending that money to borrowers at much higher interest rates. Banks capture the spread — the difference between the cost of the money and what they get paid to lend it — as profit.

      Yes banks earn a spread between what they pay on deposits and what they charge on loans, but that is true regardless of the level of interest rates. To suggest, as he does, that it is a function of the Fed’s zero rate policy is just foolish.

      He might have argued that the spread is currently bigger than it would be at higher interest levels, but that too would be deceptive. The rate that banks pay on deposits is very short term, usually daily or monthly, but the rate that it earns on loans is generally for a much longer term. This creates term mismatch risk for the banks. Say a bank is paying 5% on deposits and is it issues a 10yr loan at 6%. At first the bank is earning a 1% spread, but if rates move, which in a normal environment over the course of 10 years it will, the rate it must pay on deposits will change while the rate it earns on the loan will not. This means the spread it is earning could eventually go to zero or even negative if rates rise high enough. Of course, the spread could also increase if rates go down and it can lower the rate it pays on deposits. So with rates at higher levels, there is some probability that rates will drop and the bank will earn more than its original 1% spread, and some probability that rates will increase and the spread will shrink or go negative.

      However, with rates at essentially zero, they cannot possibly go lower. They can only go higher in the future, so the term mismatch risk for banks is all downside risk with no upside risk. To cover for this one-way downside risk, the banks need to earn a higher spread at the start. Hence the higher spread when deposit rates are at zero than when they are, say, 5%.

      Cohan also says:

      Traders, meanwhile, know that Bernanke will be there to buy their Treasury securities or mortgage-backed securities — to the tune of that $85 billion a month. They can make a killing buying the securities in the market, for their clients or themselves, sure that when they are ready to sell, the Fed will buy them at the market price, which, thanks to the Fed chief, has been rising steadily.

      This is just plain wrong. Fed buying influences the direction of the market, but it does not dictate it. Total federal debt outstanding right now is over $16 trillion. Almost 75% of that held and traded by the public. Currently the fed holds a little over $1.6 billion in treasuries, which represents less than 10% of total debt outstanding. And the amount of debt held by the Fed has not increased significantly since the middle of 2011. It is somewhat deceptive to talk about how much the Fed buys each month without also talking about how much of the existing debt held is maturing. Basically for the last year and a half the Fed has maintained a steady holdings by buying each month the amount that is rolling off. I point all of this out to show that there are a lot more forces than just the Fed that can effect the market. It simply isn’t true that the dreaded “traders” can simply buy treasuries knowing that the fed is going to drive the price up and they can reap a profit by selling them back to the Fed.

      A simple look at the 10 year treasury yield over the last year makes the point. On the final day of 2011 the yield was 1.89. Currently it is at about 1.75, a drop of only 14 basis points. But over the course of the whole year the yield got at high as 2.38% in March and as low as 1.45% in July. Anyone who bought treasuries in December last year would have lost a lot of money by March (and lots of people would have been stopped out of such a position, forcing them to realize the loss), would have made a killing by July, and then would have given most of that profit back by yesterday. This simple minded notion of Cohan’s that the Fed’s program is easy money for bond traders is just that…simple minded. And his claim that prices just keep “steadily rising” is demonstrably false.


  2. Scott, I agree. I have never understood why Cohan believes that QE is such a gift to the banking system. I think they would trade another 50 basis points of net interest margin for uncertainty on where short term interest rates are going.


    • Brent:

      I have never understood why Cohan believes that QE is such a gift to the banking system.

      I know some people in banking who have all but been put out of a job because of the extended zero interest rate policy. No one in my business is happy with it. Cohan either is ignorant or he’s just trying to whip up populist sentiment against the banking industry.


  3. Cohan has a hard-on for Wall Street.


  4. Steyn on the oh-so-ironic legal travails of David Gregory for violating DC’s gun control laws.

    But, even if we’re denied that pleasure, the “dumbest media story of 2012” is actually rather instructive. David Gregory intended to demonstrate what he regards as the absurdity of America’s lax gun laws. Instead, he’s demonstrating the ever greater absurdity of America’s non-lax laws. His investigation, prosecution, and a sentence of 20–30 years with eligibility for parole after ten (assuming Mothers Against High-Capacity Magazines don’t object) would teach a far more useful lesson than whatever he thought he was doing by waving that clip under LaPierre’s nose.

    To Howard Kurtz & Co., it’s “obvious” that Gregory didn’t intend to commit a crime. But, in a land choked with laws, “obviousness” is one of the first casualties — and “obviously” innocent citizens have their “obviously” well-intentioned actions criminalized every minute of the day. Not far away from David Gregory, across the Virginia border, eleven-year-old Skylar Capo made the mistake of rescuing a woodpecker from the jaws of a cat and nursing him back to health for a couple of days. For her pains, a federal Fish & Wildlife gauleiter accompanied by state troopers descended on her house, charged her with illegal transportation of a protected species, issued her a $535 fine, and made her cry. Why is it so “obvious” that David Gregory deserves to be treated more leniently than a sixth grader? Because he’s got a TV show and she hasn’t?


  5. Gregory’s sense of entitlement as a member of the press grates, but pales in comparison to the double standard that applies to Wall Street. See the various consent decrees and the most recent decision to give HSBC a pass from any criminal liability.


    • jnc:

      How is a consent decree indicative of a “double standard”?

      And HSBC paid $1.92 billion to settle the charges against it. What other organization has been indicted on money laundering charges rather than being allowed to pay a multi-billion dollar settlement?


    • jnc:

      I discovered this page at the DoJ which you might find interesting. It lists all currently proposed consent decrees and the dates for public comment on them. Interestingly, of the 15 currently proposed consent decrees, not one of them seems to involve charges against a bank, so it appears that the use of these consent decrees is not restricted to cases involving “Wall Steet”.

      (BTW – any idea why there would be a picture of a diving whale at the top of the site? Weird.)


  6. Because the average person doesn’t have the option to neither admit nor deny guilt when settling a criminal charge with them.

    With regards to HSBC, somehow the organization engaged in illegal activity, but no individual in it has any criminal culpability.

    Under this standard, the obvious solution for the David Gregory issue is for NBC to enter into a consent decree to never show a high capacity clip in DC again, while neither admitting or denying guilt with regards to the original violation.


    • jnc:

      Because the average person doesn’t have the option to neither admit nor deny guilt when settling a criminal charge with them.

      Well then your real beef is with the legal system differentiating between an individual and a corporation, not the existence of double standard in how the law treats “Wall Street” corporations in particular. Framing the problem you see as a “Wall Street” double standard is misleading. At most it is a corporate double standard. And in fact I don’t think it is even that, because I believe the average person does indeed have the ability to neither admit nor deny guilt. Isn’t that precisely what a plea of no contest is?

      With regards to HSBC, somehow the organization engaged in illegal activity, but no individual in it has any criminal culpability.

      I don’t know the all the inside details regarding the HSBC situation, but HSBC is an international bank. Perhaps the individuals that were responsible for the illegal activity reside overseas and so it would have been very difficult or even impossible to indict and prosecute them. Or perhaps a judgment was made that a strong enough case against any individual could not be made, or that only a case against low level people could be made. In any event, there are any number of reasons that prosecutors might not seek individual prosecutions. I do not automatically assume that the prosecutors huddle together and decide not to indict anyone simply because they work for a “Wall Street” firm.

      Under this standard, the obvious solution for the David Gregory issue is for NBC to enter into a consent decree to never show a high capacity clip in DC again, while neither admitting or denying guilt with regards to the original violation.

      In addition, of course, to paying a multi-billion dollar fine and agreeing to establish a new compliance department that will set up multiple procedures designed to ensure that such a violation never occurs, will get those procedures approved by the regulatory agency which regulates it (oh, wait, the media has no such regulatory agency…do you think we should have one?), and will report back to that agency on a regular, weekly basis demonstrating that the procedures are being followed and perhaps even establish an office in-house where the regulators can reside and watch over them thus ensuring that the procedures are being followed in the future. One of those new procedures, BTW, will be semi-annual mandatory “training”, designed by the regulators, for all on-air talent and their producers which will “teach” them what props they can and cannot use on the air in order to avoid violating the law. And, in fact, these new regulations will be imposed not just on NBC but on all networks, because they too could in theory at some point engage in the same violation, even though none of them ever have. Yes, this is indeed the, er, “obvious” solution if one wants to follow what goes on on “Wall Street”.


  7. The NYT has a bizarro world definition of tax “reform”

    “Why the Economy Needs Tax Reform
    Published: December 29, 2012
    Over the next four years, tax reform, done right, could be a cure for much of what ails the economy. Higher taxes, raised progressively, could encourage growth by helping to pay for long-neglected public investment in education, infrastructure and basic research. More revenue would also reduce budget deficits, helping to put the nation’s finances on a stable path. Greater progressivity would reduce rising income inequality, and with it, inequality of opportunity that is both an economic and social scourge.

    With that in mind, Mr. Obama would be wise to instruct the Treasury Department to start work on tax reform now, exploring carbon taxes, both to raise revenue and to protect the environment; a value-added tax, coupled with provisions to protect lower-income taxpayers from higher prices, to tax consumption and encourage saving; and a financial transactions tax, to ensure that the financial sector, whose profits have substantially outpaced those of nonfinancial corporations, pay a fair share.

    Not all of the proposed new taxes would gain support, but all deserve to be part of the debate. Controlling the terms of that debate, and then advancing from debate to action, could well be the toughest challenge of Mr. Obama’s second term and, if met, his defining economic legacy.”


  8. The NYT finally directly states their view of the root of the country’s problems:

    “Let’s Give Up on the Constitution
    Published: December 30, 2012

    AS the nation teeters at the edge of fiscal chaos, observers are reaching the conclusion that the American system of government is broken. But almost no one blames the culprit: our insistence on obedience to the Constitution, with all its archaic, idiosyncratic and downright evil provisions.”


    • A bit heavy handed to assert that a Georgetown Law Prof’s view is that of the NYT, JNC. But the column does piss me off.

      I quote approvingly and in possible violation of copyright Johnathan Adler at Volokh today who has had time to cool off and is a better legal writer than I will ever be:


      Georgetown’s Louis Michael Seidman, author of On Constitutional Disobedience has an NYT op-ed (noted in the comments to Orin’s open thread) calling for ignoring the Constitution — or at least those parts that he does not like.

      As the nation teeters at the edge of fiscal chaos, observers are reaching the conclusion that the American system of government is broken. But almost no one blames the culprit: our insistence on obedience to the Constitution, with all its archaic, idiosyncratic and downright evil provisions. . . .

      Our obsession with the Constitution has saddled us with a dysfunctional political system, kept us from debating the merits of divisive issues and inflamed our public discourse. Instead of arguing about what is to be done, we argue about what James Madison might have wanted done 225 years ago. . . .

      If even this change is impossible, perhaps the dream of a country ruled by “We the people” is impossibly utopian. If so, we have to give up on the claim that we are a self-governing people who can settle our disagreements through mature and tolerant debate. But before abandoning our heritage of self-government, we ought to try extricating ourselves from constitutional bondage so that we can give real freedom a chance.

      As commenters in the open thread have already noted, the Constitution itself provides for its own revision to cure deficiencies: Article V. This amendment process has allowed for dramatic changes to the document, from the Bill of Rights and the Civil War Amendments to women’s suffrage and changes to election procedures.

      Seidman cites what he characterizes as a proud history of “constitutional disobedience” to suggest that ignoring the document would be all to the good, suggesting that the country would be better off if political disputes about everything from budgetary policy to military conflict were merely debated on the policy merits. Yet Seidman conspicuously ignores the various policy measures throughout our nation’s history that would have remained the law of the land were it not for the Constitution, including numerous restrictions on the freedom of speech and the detention policies struck down by the Court in Boumediene.

      Seidman suggests that liberal constitutional values such as the freedom of speech and religion, equal protection, and due process “are important, whether or not they are in the Constitution” and that “we should continue to follow those requirements out of respect, not obligation.” But our political history shows quite clearly that the political process is more than willing to trample such principles, often with substantial popular support even with a constitutional obligation to respect. Yet the whole point of a constitution is to prevent such abuses and constrain popular majorities.

      Seidman writes that if we followed his advice: “The Supreme Court could stop pretending that its decisions protecting same-sex intimacy or limiting affirmative action were rooted in constitutional text.” So supreme court opinions would be nothing more than policy briefs and appeals to moral principle? It seems to me that is a recipe for undermining the legitimacy of judicial review and ultimately relegating all such questions to the political process — and producing quite a few results I doubt Seidman would much like (e.g. greater limits on expression, lesser protection of criminal defendants, and more expansive national security authority). There are reasonable arguments for constraining (or even eliminating) judicial review — I don’t agree with them, but I think they are reasonable — but I don’t take that to be Seidman’s argument. To the contrary, he seems to want to keep judicial review, but just for those constitutional provisions he likes, but that’s hardly the basis for a principled argument for “constitutional disobedience,” as such.

      Of course the constitution doesn’t settle all questions, and wouldn’t even if everyone accepted the same approach to constitutional interpretation. Our understanding of the Constitution changes over time, even if the document itself does not (other than when we amend it). Seidman is correct that a constitutional order such as ours depends upon “entrenched institutions and habits of thought and . . . the sense that we are one nation and must work out our differences.” But that does not mean that the Constitution itself serves no role, or that lessening constitutional constraints on government action is desirable or beneficial. The Constitution is not perfect — far from it. But Seidman’s op-ed does not convince me we’d be better off to disregard it.
      And I add, for all the reasons cited by Adler, that Seidman’s view is irrational and anarchic.


      • Mark:

        And I add, for all the reasons cited by Adler, that Seidman’s view is irrational and anarchic.

        I encountered Seidman once before on an on-line forum discussing the then on-going Sotomayor confirmation hearings. He did not strike me as very much of a thinker at the time.


  9. I believe most of the ones for the banks come from the SEC.


    • jnc:

      I believe most of the ones for the banks come from the SEC.

      Actually, now I get why there is a picture of a diving whale…that link was just to the Environmental and Natural Resources Division.


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