Morning Report – Out: Tapering. In: Normalization 5/22/14

Vital Statistics:

Last Change Percent
S&P Futures 1886.0 1.1 0.06%
Eurostoxx Index 3178.4 -8.7 -0.27%
Oil (WTI) 103.9 -0.2 -0.18%
LIBOR 0.227 0.000 -0.09%
US Dollar Index (DXY) 80.17 0.076 0.09%
10 Year Govt Bond Yield 2.54% 0.00%
Current Coupon Ginnie Mae TBA 106.5 0.0
Current Coupon Fannie Mae TBA 105.6 0.0
BankRate 30 Year Fixed Rate Mortgage 4.17


Markets are flattish after retailers Best Buy and Sears missed earnings estimates. Bonds and MBS are flat.
We finally got some economic data this morning, starting with the Chicago Fed National Activity Index, which came in below expectations. Initial Jobless Claims rose from 298k to 326k. The Markit May preliminary PMI came in at 56.2, a little better than expectations and consumer comfort remained on the low side. Finally, the Index of Leading Economic Indicators fell to .4%
Existing home sales increased to a 4.65 million rate in April, which was an increase from the prior month, but below street expectations. As anyone in the mortgage business can tell you, it is tough out there. Housing continues to punch below its weight and sales continue to be at depressed levels. On the bright side, between 40% and 50% of these transactions are all cash, compared to 20% historically. So, there is a lot of potential business out there, but we need the first time homebuyer to step up.

The new buzzword for the Fed is now “normalization,” which is all honesty is simply a euphemism for “raising rates.” There was nothing earth-shattering in the FOMC minutes yesterday (the bond market barely noticed), but the Fed did muse a bit on how monetary policy will function with a balance sheet the size of Jupiter. People forget that we are truly in uncharted territory here, with a Fed balance sheet of 4.3 trillion in assets vs 900 billion at the beginning of 2008.

The Fed noted the strength in the March industrial data, but did not pick up on the reversal in the April numbers. Even though Q1 GDP growth was below the Fed’s forecast, they chose not to revise their 2014 GDP estimates downward, as they expect a rebound in the second half of the year. Overall, if you look at the trend of the Fed’s forecasts and revisions, GDP, unemployment, and inflation forecasts have been progressively lowered. I almost wonder if the Fed’s economic models were created during an environment where recessions were caused by the classic inflation / inventory buildup cycle and that model is simply irrelevant in this climate, where the recession is caused by a burst asset bubble.
The latest CoreLogic Market Pulse is out, and it has some good articles as usual. They address short sales and the expiration of the Mortgage Debt Forgiveness Relief Act. So far, it looks like the expiration of the tax relief (mortgage debt principal mods are now treated as taxable income, where before they were not) is crimping short sales, exacerbating an already tight inventory situation. Conversely, construction employment is beginning to increase, especially in Florida. I expect construction (especially residential construction) will be the catalyst that sends us from 2% GDP growth to 3% + GDP growth. The homebuilders have been able to report increased revenues primarily by increasing average selling prices. The typical publicly-traded homebuilder was reporting double digit increases in ASPs and high single digit drops in deliveries. Once they hit the ceiling on prices (and traffic patterns suggest we are close), they will simply have to push through volume if they want to report growth. That will begin the virtuous cycle. I was hoping this would be a 2014 event, but it is looking more and more like a 2015 event. CoreLogic also discusses the excuse du jour for weak housing starts – bad weather – and finds that it doesn’t fully explain what has been going on. RTWT.

40 Responses

  1. Serious question, does this surprise anyone?


  2. That was actually a response to the tweet.


  3. No. It does not surprise me. This was inevitable


  4. That’s right, it’s time for another quiz. Here’s my honest result. I think I missed reading a few of these classics.

    17 out of 25
    Nicely done. You enjoy reading, but there are still some classics you haven’t picked up. Why not stop by the library this weekend?


  5. WSJ: Emergency Room Visits Rise Despite Health Law

    If it rose by 2 it’s because of Walter and I………………yikes. Seriously, isn’t it a little early to judge yet?


  6. Do you beleive ER visits will go down? What time frame should we use?


  7. McWing, I honestly don’t know but was hopeful because the uninsured cost us all a lot of money. My comment was really just pointing out that not much time has passed to determine actual trends.


  8. Scott, guess I’m a better guesser.


  9. 13 o’ 25

    Lms, the reason I asked those questions is that in MA, ER visits went up and have stayed up. So, it’s a given the same will be true nationally.

    Also, the Oregon studies (and others like it) demonstrate that insurance doesn’t actually provide any benefit.

    As you know, I believe that the concept of Universal Healthcare to be immoral and no amount of “success” of Obamacare will ever justify it’s existence in my mind. Ditto the VA, Medicare or Medicaid.

    That being acknowledge, isn’t it fair to ask proponents how long it should be given (Obamacare) and by what metrics it should be measured?


  10. I got 12. That’s pretty bad. with a lot of guessing. some of them i’m read and still kind of guessed.


  11. McWing, it’s fair I suppose but I’m not actually a proponent so I’m not the one to ask. I am a proponent of Universal care as you know, and we’ve already argued that subject, but Obamacare isn’t it. I’m not sure comparing Romneycare stats to Obamacare stats is the best way to get an answer but I really don’t know. Someone a lot smarter than me might know.


  12. 13 out of 25 but almost all were guessing.


  13. I have to admit I’m surprised I did the BEST so far………lol. I thought my score was disappointing………..;)


  14. Any opinions on if we are headed for a stock market correction/bubble pop?

    “Warning signs of a credit market that could go pop soon
    By Steven Pearlstein, Published: April 25”

    He won a Pulizer the last time around for calling the housing market crash.

    It will be interesting to see if he gets it right twice which is pretty rare.

    See also:


  15. Re Pearlstein,

    We are in uncharted territory with the Fed’s balance sheet as large as it is, but Corporate America is flush with cash and really has very little leverage. Not a recipe for a crisis.

    You are not seeing the bottom-of-the-barrel bonds (PIKS, toggle notes, Co-Cos) that you usually see at the top of bubbles.

    Of course the Fed is the polar opposite – with tremendous leverage at the moment.


  16. Given the debt, can the Fed ever really raise interest rates?


  17. Paul Waldman wrote a blog post in The Washington Post Wednesday imploring President Barack Obama to fix the VA to redeem the liberal vision of government. If six years into his presidency he has yet to fix the VA he promised to fix before he took office, that’s either an indictment of his presidency or the liberal vision of government or both.

    As my National Review colleague Jonah Goldberg points out, the usual excuses don’t apply here. The existence of the VA isn’t politically controversial. No one is trying to repeal it, or “sabotage” it. It hasn’t lacked for funds. Its budget has been increasing at a rapid clip. What we’re seeing is simply unaccountable bureaucracy in action.

    Still < SP, AmIRight?


  18. Still < SP, AmIRight?

    Of course – good intentions matter, not results you silly bagger you.


    • Hypothetical question for Mich:

      Nigerian authorities capture a member Boko Harum. He refuses to reveal where the girls are being kept. Would you condone waterboarding him to find out where the girls are? If yes, what about if US authorities did it?


  19. 15–pretty lousy. Sadly, I couldn’t remember several from books I’ve read. I’ve read Gatsby and Mockingbird but didn’t remember those, although I guessed the latter had to be Atticus. But it is not a great quiz. On the Road? Beloved? Catcher? Please.


  20. I have to admit I’m surprised I did the BEST so far………lol. I thought my score was disappointing………..;)

    It is basically a list of books you either were assigned to read in English class or weren’t. Not many people, book lovers or not, would bother to read most of them otherwise.


  21. QB, when I can’t think of anything nice to say I look for a quiz we can all take. Admittedly some are better than others. I beg to differ with Catcher though! :>)


  22. I wasn’t trashing you linking of the quiz, just saying, meh, I don’t think any of us should feel too bad for flunking. I’ve never read Huck Finn. Never had to in school, and when I’ve picked it up several times to start, I’ve just put it down. It’s a hard slog and not enjoyable. I am willing to live with being branded semi-literate.


  23. For Scott, pointing out the complete abandonment of impartiality of the SSM judges, evident in their purple prose and corresponding bankruptcy of reasoning.

    I do believe they are in a sort of contest to see who can write the most lofty paeans to homosexuality and the most soaring denunciations of dissent. Unfortuately for them, they are hacks and on the wrong side of history in the long run.


  24. Everyone has been fixated on David Barron’s role re killing of US citizens. Ignored has been the fact that he is a hard-core advocate of left-wing judicial activism. His goal literally is imposition of “progressivism” from the bench.


  25. Barron’s confused writings reflect the false construct shared by the various prog camps he describes and over which they have their pretend debate, going back to some basic questions like what “judicial activism” should mean. To anyone who recognizes that the Court’s duty is to faithfully apply and enforce the Constitution, as written, not as rewritten in their own imaginations, both the New Deal Court and the Warren Court were guilty of the same thing: spurning their duty to the Constitution in favor of their own policy preferences. Activism, just in two faces of the same coin. After the switch in time, the New Deal Court overruled precedents and rubber stamped legislation despite its clear violation of the Constitution. The Warren Court started the new process of invalidating state and federal legislation that clearly was constitutional. All was, however, part and parcel of the same strain of “progressive” infidelity.

    In Barron’s account, however, as in prior prog accounts, he portrays these two faces of the same coin as if they were conflicting philosophies. They tell themselves fairy tales about how conservatives are “activist” in the same way the Warren Court was, and at the same time fear that critiquing conservative “activism” will impede their own ability to, e.g., impose same-sex marriage by judicial fiat. This is all a fraud and sham. Conservatives believe, in one variant or another, in faithful application of the law as it is, not as they wish it were, with the Constitution supreme. As Barron’s writing reflects, progressives do not. Their concern is how judges can best transform the country along the lines of progressivism, and everything after that is a matter of strategy and tactics. He could scarcely be clearer about that. Their internal debate between committing to “substantive” progressivism and what he calls the Anti-Court critique is purely strategic and tactical, purely political.

    Progressive “constitutionalism” really boils down to a very simple idea: the Constitution’s only real purpose is to empower judges to do whatever they think best. It means whatever they say it means at any given time. All the rest of what people like Barron write is obfuscation.

    Btw he wrote that in the journal of the absurdly named American Constitution Society, the organization founded by progs to counter the Federalist Society and its journal, since, you know, conservative and libertarian thought is so over-represented in legal academia. Never mind about how organizations like the Federalist Society are supposed to be illegitimate because … Koch brothers, Halliburton, etc.


    • qb:

      Conservatives believe, in one variant or another, in faithful application of the law as it is, not as they wish it were, with the Constitution supreme. As Barron’s writing reflects, progressives do not. Their concern is how judges can best transform the country along the lines of progressivism, and everything after that is a matter of strategy and tactics.

      This is, I think, the nub of the difference between conservative and liberal judicial philosophy. I mentioned this 2 years ago right here, pointing out the handicap that the conservative approach to understanding the constitution imposes on conservatives. One can legitimately question whether a given opinion written by Scalia or Thomas is true to the philosophy they profess. The same cannot be said of liberal justices, because their very philosophy (if it really can be called that) can justify pretty much any outcome that they might prefer in a given instance.


  26. Wilson reigns supreme.


  27. “During Senate floor remarks, Sen. Ed Markey (D-Mass.) also urged senators not to equate their views on the drone program with Barron, who, as an attorney, was simply doing his job by providing his legal analysis of the policy.

    “Let’s be clear: Barron is … certainly not responsible for the administration’s drone policy or the decisions to authorize an attack,” Markey said. “He is a lawyer who was asked to do legal analysis for his client: the president of the United States.””

    Presumably this standard will be retroactively applied to John Yoo now.


  28. Re: Dean – the liberal and conservative views of the Constitution are irreconcilable. Time to split the country in half and go our separate ways.


    • jnc:

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

      Any suggestions on how to make that happen? I would definitely support such an eventuality.

      BTW, it’s somewhat amusing to imagine such a split occurring, and each side carrying on with an identical Constitution and government structure, implemented in drastically different fashion.


  29. That’s almost like a Star Trek TOS episode.

    Scott, there’s two ways I see it proceeding if it were to come to pass:

    1. A replay of the run up to the Civil War where basically the individual states vote to secede and either go peaceably or it’s settled by force of arms, again.

    2. A Constitutional convention is called by 2/3 of the state legislatures per Article V and basically does the same thing that the convention to revise the Articles of Confederation did and proposes a new Constitution that takes effect among the states that ratify it when X number do so.

    Politically, the country is still a ways away from this but the constant drum beat of red vs blue builds up over time. One can also see a vocal minority on the progressive side in various blogs and on shows like Bill Maher advocating for jettisoning the “red state moochers” and allowing them to tackle climate change, etc without having to deal with obstruction.


  30. Red state moochers is a trite phrase. Nearly all of the transfers come from support of low income individuals (for which progressives have argued passionately) or military bases (which would be cost prohibitive in the bluest states and are better situated in locations where there is more support).



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