Morning Report – Bill Gross’ investment outlook and why the CRA disparate impact analysis is all wet. 6/27/13

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BankRate 30 Year Fixed Rate Mortgage 4.57    

 

Markets are up this morning as personal income comes in a little better than expected, and personal spending comes in at expectations. Initial Jobless Claims came in at 346k, more or less in line with expectations. Bonds and MBS are up.
 
The Corker – Warner Bill to wind down the GSEs is out. The full text of the bill (all 154 pages of it) are here. Punch line: GSEs are wound down, their liabilities are transferred to the taxpayer, some private entity will bear the first 10% loss on new securitizations, and the Federal Mortgage Insurance Corporation (FMIC) will re-insure losses over 10%. 
 
Bill Gross’s latest investment outlook takes the view that the recent spike in rates was overdone.Yes, there was too much risk in the system (read leverage) and the Fed needed to act to squeeze some of that out. But, he believes that the 10 year yield is probably 30 basis points too high and belongs at 2.2%. Reasons: (a) the Fed’s economic forecasts are too optimistic (remember, we just revised Q1 GDP downward yesterday from 2.6% to 1.8% after coming in at .4% in Q4). (b), the Fed wants higher inflation – 1% is too low, and finally, he makes the point that the Fed Funds rate is going nowhere until 2015 at the earliest. This anchor of Fed funds should hold down Treasuries, in his view. Color me unconvinced with that final argument – the 10 year has yielded over 4% in the context of a 25 basis point Fed Funds rate. In fact, since we have been at ZIRP, the average 10 year yield has been 2.65%. From 2009 to 2011, it average 3.25%. So, I don’t see any reason why it can’t go back to those levels. 
 
Insurance companies are suing HUD over the “disparate impact” rule – which says if statistically your lending to “underserved” groups doesn’t comport with the national statistics, you are guilty of discrimination, no questions asked. Here is the complaint. Of course, these sorts or analyses use FICO as the only relevant variable, which is incorrect – the volatility of prices in the neighborhood matters too. As a lender, you are short a put (if the house drops in price, the borrower can toss you the keys and walk away, yet if the house increases in price, you get the cash flow stream). That put must be priced, and you can see that the volatility of the real estate indices in places like San Bernardino is much higher than places like Milwaukee WI. Which means loans in San Bernardino should have higher rates than loans in Milwaukee WI to take into account the price of that put. It isn’t discrimination, it is the proper pricing of risk. 

56 Responses

  1. Brent….I’m pretty cynical about Gross’s prognostications. When the 10 year was yielding just above 2% a little over a month ago, he announced that the bond bubble was over and yields were about to skyrocket. The market reacted directly to his comments by sending yields up to over 2.15%. I speculated at the time that Gross must have gotten short just before his comments. I’m now guessing that he’s taken his profits and reversed to a long, and so is just trying to coax the market his way yet again.

    Like

  2. “It isn’t discrimination, it is the proper pricing of risk.”

    AKA, discrimination.

    Like

  3. @Scott, I don’t know.. PTTRX has gotten hammered

    @Nova.. sadly, I think this president sees it that way and believes that borrowers in Milwaukee have a duty to subsidize borrowers in San Bernardino.

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    • Brent, thanx for explaining the risk factor. It makes perfect sense once it is pointed out.

      The Admin surely sees this differently, and while I understand their view, they are in this case wrong.

      The Admin concern would be that affluent neighborhoods in the same SMSA get better rates than poor neighborhoods. We know from our experience that this too is actually risk [of default, in this case] pricing.

      The Admin thus sees risk pricing as akin to profiling.

      I don’t think we can change the Admin’s mindset about a single SMSA, but there should be some ability to influence it wrt different areas, as being an entirely different mechanism at work causing the risk: volatility.

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  4. sadly, I think this president sees it that way and believes that borrowers in Milwaukee have a duty to subsidize borrowers in San Bernardino.

    What possible reasoning could he use? Why should taxpayers in Milwaukee have to pay what would be a tax to support Berdoo? It’s not like they get a vote there. Berdoo elected the thieves, not Milwaukee, they elect their own thieves.

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  5. beats me, troll. but i think the entire idea of promoting and/or fostering home ownership is flawed. homelessness, sure.

    also — I’m incapable of reading “Milwaukee” without thinking of Alice Cooper:

    Yes, Pete, it is. Actually, it’s pronounced “mill-e-wah-que” which is Algonquin for “the good land.”

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  6. @mark,

    I could use the government’s own data – the very granular FHFA house price inidces – and show that the volatility in HUD targeted lending areas (a proxy for “underserved” areas is higher than non-targeted areas.

    The reason is that the collateral in a place like Detroit, or Harrisburg, or Camden NJ may in fact be worthless. In other places, that is seldom the case.

    Like

  7. This may be interesting:

    “Senators propose ‘blank slate’ approach to tax reform
    By Lori Montgomery, Thursday, June 27, 12:32 PM

    The Senate’s chief tax writers plan to scrap the entire code and start from scratch in their push for tax reform, and on Thursday they gave lawmakers a month to make a case for preserving some of the $1.3 trillion in breaks on the books.

    In a letter sent to all 98 of their colleagues, Senate Finance Committee Chairman Max Baucus (D-Mont.) and his Republican counterpart, Sen. Orrin G. Hatch (Utah), said they would take a “blank slate” approach to the tax code that assumes the elimination of thousands of popular perks, including such sacrosanct policies as the deduction for mortgage interest, the child credit, and the lower rate for dividends and capital gains.”

    http://www.washingtonpost.com/business/economy/senators-announce-blank-slate-approach-to-tax-reform/2013/06/27/b3adbcb0-df3b-11e2-b2d4-ea6d8f477a01_story.html?hpid=z1

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  8. Yes, people who believe in limited government are more dangerous than people who blow shit up for their religion… sheesh…

    Like

  9. Time to split the country in half and go our separate ways.

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    • jnc:

      Time to split the country in half and go our separate ways.

      The thing is, if they were inclined to just let us go our separate way in peace, we wouldn’t have to.

      Like

  10. Well, if you’re a believer in big government, what is more terrifying….

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  11. our half will have beer, BBQ and guns. and, god willing, dune-buggies.
    theirs will be dedicated to flavorless mush called rootmarm

    Jebediah: “People, our search is over. On this site we shall build a new town, where we can worship freely, govern justly, and grow vast fields of hemp for making rope and blankets.”
    Shelbyville Manhattan: “yes, and marry our cousins.”
    Jebediah: “What are you talking about Shelbyville? Why would we want to marry our cousins?”
    Shelbyville Manhattan: “Cause they’re so attractive. I thought that was the whole point of this journey.”
    Jebediah: “Absolutely not.”
    Shelbyville Manhattan: “I tell you I won’t live in a town that robs men of the right to marry their cousins.”
    Jebediah: “Well then, we’ll form our own town. Who will come and live a life devoted to chastity, abstinence, and a flavorless mush I call rootmarm?”

    Like

  12. Does anyone really trust Baucus to do anything impartially?

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    • yello:

      Does anyone really trust Baucus to do anything impartially?

      I don’t trust anyone in the federal government to do anything impartially.

      Like

  13. Now that the government has to treat gay couples like any other married people, they want to get rid of the married tax bracket. Not that the idea isn’t without merit but the timing is suspiciously convenient.

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  14. “yellojkt, on June 27, 2013 at 12:16 pm said:

    Does anyone really trust Baucus to do anything impartially?”

    The important thing is the issue is framed correctly:

    Eliminating deductions to lower marginal rates is the default position.

    Raising marginal rates is completely off the table and not even under discussion.

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  15. “I don’t trust anyone in the federal government to do anything impartially.”

    my work here is done.

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    • I’m curious what people here think about this question: What 5 liberal policy achievements of the last 50 years (so in the post-Civil Rights era) have had the largest impact – for good or ill – on the nation? How about the top 5 conservative policy achievements?

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      • Off the top of my head and not in order of preference:

        conservative achievements
        1] Goldwater’s reorganization of the military
        2] Gingrich’s participation in the end of welfare.
        3] The first Gulf War
        4] RWR establishing relationship with Gorbachev
        5] Nixon establishing relationship with China

        liberal achievements
        1] The Civil Rights Acts of 64-65
        2] Medicare
        3] Clinton’s participation in the end of welfare.
        4] The Israel-Egypt peace of ’79.
        5] multiple EPA river cleanups

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  16. In all sincerity Medicare has utterly destroyed any solvent future for the US. Any other “achievement” is irrelevant.

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    • If true, George, that would make Medicare the source of the largest impact – for good or ill – on the nation, wouldn’t it?

      I think Medicaid was the big black hole. Medicare still has a chance to be solvent in and of itself, with tweaking. I am doing my best to keep it solvent by paying in and not taking out, btw.

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  17. I think Medicaid was the big black hole. Medicare still has a chance to be solvent in and of itself, with tweaking. I am doing my best to keep it solvent by paying in and not taking out, btw.

    I believe it is impossible to fundamentally alter. Prime utilizers are population growing fastest and most likely to vote.

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  18. Finally, Matt Taibbi writes a sentence I agree with:

    People should be skeptical of everything they read. In fact, people should be more skeptical of reporters who claim not to be advocates, because those people are almost always lying, whether they know it or not.

    http://www.rollingstone.com/politics/blogs/taibblog/hey-msm-all-journalism-is-advocacy-journalism-20130627#ixzz2XTKzQ3DF

    Like

  19. Conservative achievements, good and bad:

    1. Collapse of the Soviet Union.
    2. Gulf War I
    3. Reagan Tax Cuts
    4. Funding of Afghanistan rebels
    5 Wage and price controls in the 70s.

    Liberal achievements

    1. Marriage equality
    2. Egypt-Israeli peace accord
    3. Panama Canal Treaty
    4. Welfare reform
    5. Medicare

    Personal note: Jimmy Carter will always have a fond place in my heart because he gave me my first raise, from $3.10 to $3.35 an hour.

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  20. Conservative

    1. The EPA
    2. Start Treaty
    3. Title IX
    4. The Bush Tax Cuts
    5. Deficit Spending

    Liberals

    1. Space Exploration (including moon landing)
    2. Ending DADT
    3. Medicare
    4. Legalizing Abortion
    5. Americans with Disabilities Act

    I tried to find a few that weren’t already mentioned although I agree with many of them already

    Like

    • Thanks all who responded to my question. I’ll nitpick a little in that some of the choices actually reach back beyond the 50 year time frame I set. Also I would argue that just because something passed under a D or R president doesn’t make it a liberal or conservative policy idea. Welfare reform of the 90’s, for example, was obviously part of the conservative, not liberal, agenda while things like the EPA and wage/price controls, although implemented by Nixon, were liberal, not conservative, ideas. I also probably should have stipulated that I was looking for the most consequential domestic policy achievements.

      Mine would be:

      Liberal
      1) legalized abortion
      2) ACA
      3) EPA
      4) legalization of same-sex marriage
      5) Medicare (ok, I cheated too)

      Conservative
      1) Reagan’s tax reforms
      2) supply side economics
      3) welfare reform
      4) NAFTA

      I can’t actually come up with any other consequential, conservative, domestic policy achievements, and NAFTA is debateably not even that conservative. Most consequential policies that I would associate with conservatives would be on the foreign policy front. As I have argued in the past, I think it is clear we live in an era dominated by left-wing ideology, and the right, despite its regular electoral success, has proven itself mostly incapable of even tempering the tide of liberalism, much less implementing its own far-reaching ideas.

      I was a little bit surprised that legalized abortion only showed up on lms’ list. I think it is hard to overstate the impact that Roe v Wade has had on the nation, not only in terms of the culture, but also in terms of transforming the national political landscape. I think it has had a huge impact on the evolution of both parties since 1973, it has transformed the whole Supreme Court Justice nomination and approval process, and has been instrumental in the way that the current makeup of the court has come about, thus arguably being the decisive factor in many SCOTUS rulings that have absolutely nothing to do with abortion. Does DOMA get overturned by a Supreme Court with Justice Robert Bork instead of Justice Anthony Kennedy? It also proved the effectiveness of the strategy of getting policy enacted by the courts rather than via proper legislation, which continues to be a major part of our politics.

      Anyway…thanks for the responses.

      Like

  21. Btw, I know title IX wasn’t a conservative idea, but impact wise it was huge, and since Nixon signed it, I gave conservatives credit……..haha

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  22. 2013-50=1963. Did you want 1968 at the cut-off?

    A liberal could not have made the thaw with China or the USSR. A liberal could not have led the successful reorg of the military and the base closure act.

    A conservative could not have led welfare reform in the 90s without a liberal partner.

    We could add affirmative action as a conservative victory – engineered by RMN to destroy union seniority programs. Incredibly successful.

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    • Mark:

      2013-50=1963. Did you want 1968 at the cut-off?

      I was thinking 1973…I’m not so good with numbers.

      Like

    • Mark:

      A conservative could not have led welfare reform in the 90s without a liberal partner.

      Sure, but convincing one’s political opponents to help implement your ideas, necessary as it may be, doesn’t mean it becomes your opponent’s achievement. I actually think one of the signs of the huge success of liberalism has been the fact that it has gotten ostensible conservatives to support and even sometimes pro-actively implement liberal ideology.

      Like

  23. Re: Trolls link to the NHS and malnutrition. this is actually an area that I work it. on of my new projects to sound the alarm on un-diagnosed malnutrition. (and not just so we can sell more stuff). it’s a bigger problem than just starvation. i’ve been making the rounds on the hill talking about this.
    this is one of those prevention areas that actually make a big difference in patient outcomes. meaning you need to be well nourished for any other intervention to be most (or at all) effective.

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  24. whoa — 97. I didn’t think it would be that high.

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  25. 42 for me

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  26. I took it last night at scored 82.

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  27. Scott

    Sure, but convincing one’s political opponents to help implement your ideas, necessary as it may be, doesn’t mean it becomes your opponent’s achievement.

    I tend to disagree with that and here’s why; Republicans talk a good game when they’re running for office and out of office, but once they’re in office they do the same thing liberals do in many respects. There are tons of examples and I named a couple of them but it’s tough to remember a Republican who didn’t run up big deficits or implement government spending programs. I probably should have mentioned the War on Drugs (Reagan) as it’s had a huge impact on the growth of government.

    The last two presidents in 70 years to balance the federal budget for three consecutive years were both Democrats. What’s the point of voting for a Republican anyway now that Democrats are pretty much the same on foreign policy and the security state as Republicans? If you can’t count on a Republican to cut spending and slow the growth of government I don’t really think it’s fair to blame liberals.

    By the same token if you can’t count on a Democrat to curb the excesses and coddling of big business why vote for one of them. There’s so little difference between the parties that it almost doesn’t matter who we vote for anymore.

    The differences that we express as individuals matter I think but no one’s actually listening to us.

    Like

    • lms:

      There’s so little difference between the parties that it almost doesn’t matter who we vote for anymore.

      There is a distinction between party and ideology, which is why I asked about liberal and conservative policy achievements, not Democratic and Republican achievements. I think there is a lot of truth to what you say ie the failure of R’s to act on their claimed principles once in office. That is why I said that liberalism has been so successful. Even R’s, who are ostensibly supposed to be conservative, have in many respects taken to supporting and even adopting liberal ideology.

      BTW…it is true that both D’s and R’s are guilty of passing legislation that is advantageous to this or that “big business” constituency. But I would argue that it is less a function of any ideology (conservative ideology does not advocate partnership between private business and government) and more a function of generic political power, which tends to corrupt. And to the extent that ideology is at play, I would say that it is liberal ideology that tends to enable this kind of corruption, because it embraces big government as the go-to problem solver, thus giving politicians precisely more of the power that they then use in a corrupt manner. As you have probably heard me say repeatedly in the past, if you don’t want government to give political advantages to businesses, then stop asking government to regulate businesses.

      Like

  28. Achievements, good and bad

    Conservative

    1) Welfare reform
    2) Free trade
    3) Winning Cold War
    4) Privatization of government functions
    5) breaking organized labor

    Liberal
    1) Abortion
    2) Dual Mandate
    3) Gay rights
    4) CRA
    5) obamacare

    Like

  29. Here are two links to support my contention in a small way, as I don’t have much time.

    WHEN DICK CHENEY SAID, “Deficits don’t matter,” economists took that as proof of the economic illiteracy of the Bush administration. But it turns out there is a case to be made that Cheney was onto something.

    On the deepest level, the vice president was echoing, in slightly exaggerated form, an idea put forward a few years ago by Irving Kristol, the Godfather of the neoconservatives who have had such a wide-ranging effect on Bush administration policy. Kristol wrote then, and still believes, that “We should figure out what we want before we calculate what we can afford, not the reverse.”

    On the political level, treating deficits as a non-issue also proved a successful strategy. After all, despite the torrent of red ink that splashed across the national budgets during his first term, George W. Bush was reelected by a substantial margin.

    http://www.weeklystandard.com/Content/Public/Articles/000/000/005/245esggv.asp

    And there’s this graph of debt under presidents going back to FDR.

    http://zfacts.com/p/318.html

    And supply-side economics was a huge failure as it sucked all the money out of the middle class and moved it upward, IMO.

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  30. 23, same as yello and now I’m heading out to the warehouse to try to beat the heat. It’s going to be over 100 again today and we’re swamped with work. Luckily I can spend my lunch break in the pool…………….aaaaahhhhh.

    Like

  31. ” I probably should have mentioned the War on Drugs (Reagan) as it’s had a huge impact on the growth of government.”

    Nit picking. War on Drugs belongs to Nixon.

    Like

  32. Taft-Hartley was outside of your time period.

    Like

  33. jnc, actually the war on drugs goes all the way back to the early 1900’s but I always remember Reagan elevating it with his Office of National Drug Control Policy and the media coining the term drug czar from that. But you’re right of course that Nixon is really the one who coined the term and got the ball rolling. I do remember Nixon very well growing up in the sixties.

    Like

  34. Scott

    There is a distinction between party and ideology, which is why I asked about liberal and conservative policy achievements, not Democratic and Republican achievements.

    It’s D’s or R’s who enact the policy achievements you asked for whether it’s liberal or conservative. I don’t see how ideology actually governs.

    Anyway, see y’all later.

    Like

  35. ” But you’re right of course that Nixon is really the one who coined the term and got the ball rolling.”

    It’s more than that. He’s the one who got the current controlled substances act passed. That’s what started the Federal War on Drugs and made it no longer a state by state issue.

    http://en.wikipedia.org/wiki/Controlled_Substances_Act

    Like

  36. @yellojkt: “1. Collapse of the Soviet Union.”

    I wonder if this is a conservative achievement, so much as an implosion of a dysfunctional system. Things we did to speed it along were largely bi-partisan, such as successfully feeding the Soviets bad technology and software, which ended up costing them a pretty penny when mission critical systems failed. I think the speechifying of the right was on point, but I’m not sure the activity, except perhaps for the Kennedy-to-Reagan space era and the Reagan military buildup and threat of SDI (which helped encourage the Soviets to more rapidly bankrupt themselves) helped.

    Just finished reading Legacy of Ashes, which asserts that presidents and politicians had terrible information on the Soviets from the CIA most of the time, and so most of what we did in terms of espionage and covert activity was useless. Good book, makes a compelling case that the US has never had a competent intelligence service, and still did not as of 2007.

    Like

  37. @lmsinca: “It’s D’s or R’s who enact the policy achievements you asked for whether it’s liberal or conservative. I don’t see how ideology actually governs.”

    Liberal Republicans cooperate on liberal policies, conservative Democrats cooperate with conservatives on conservative policies. For example, if the Republican alternative to Clinton Care, very similar to Obamacare, had been enacted, it would have been Republicans enacting a liberal policy.

    Like

  38. @jnc4p: “Nit picking. War on Drugs belongs to Nixon.” Nixon partnered with Elvis for the War on Drugs. Can’t imagine a better dream team.

    Like

  39. @yellojkt: “Now that the government has to treat gay couples like any other married people, they want to get rid of the married tax bracket. Not that the idea isn’t without merit but the timing is suspiciously convenient.”

    I think that’s the same people who’ve wanted to get rid of marriage exemptions (especially as regards inheritance taxes) for a long time. Perhaps they think they can drum up support amongst those opposed to gay marriage, but the arguments are pretty much the same: the married tax bracket was for a time when the little woman stayed at home, and discriminates against fully employed working couples and unmarried people, and that the government is shorted their fair share of inheritance by spouses, and that working spouses don’t get any spousal benefits if they made enough money working, while non-working spouses can get spousal benefits even if divorced from their deceased spouse.

    I think both marriage equality and any burgeoning urge the rid ourselves of the married tax bracket comes from the same hostility (or distaste, or what have you) for traditional social constructs and arrangements which may have been obsoleted by technological and cultural change.

    Like

  40. 24.

    NoVA, I can’t believe that you really scored a 97! That whole last section about privatizing everything was crazy.

    Like

  41. I got a 19 LOL There were just too many abolishments. I prefer to fix things so they work properly. Something would have to be unfixable for me to check abolish..

    Like

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