Morning Report – The bubble in bonds 6/2/14

Vital Statistics:

Last Change Percent
S&P Futures 1922.6 1.1 0.06%
Eurostoxx Index 3248.0 3.4 0.11%
Oil (WTI) 102.4 -0.3 -0.27%
LIBOR 0.227 0.000 -0.11%
US Dollar Index (DXY) 80.52 0.147 0.18%
10 Year Govt Bond Yield 2.50% 0.03%
Current Coupon Ginnie Mae TBA 106.6 -0.1
Current Coupon Fannie Mae TBA 105.8 -0.1
BankRate 30 Year Fixed Rate Mortgage 4.15

 

Markets are flattish on no real news. Bonds and MBS are down
More disappointing economic data – the ISM Manufacturing report dropped from 54.9 to 53.2 in May and construction spending rose .2%. Both numbers were below expectations.
We will get the jobs report on Friday, and given the almost contradictory economic data we have been getting, I have no idea what to expect. I could see a 100k print. I could see a 300k print. FWIW, the street is at 215k, with a tick up in the unemployment rate to 6.4%.
Cash deals account for 29% of all sales, according to Bloomberg. Retiring baby boomers are choosing to own homes outright, as opposed to having a mortgage. Historically that number has been closer to 20%, and I have seen cash estimates as high as 40%.
In a related note, QE has rendered many economic risk models (particularly the Fed model for stocks) useless. Old definitions of “cheap” and “expensive” no longer apply in a world of unprecedented central bank stimulus and stubbornly low inflation. When investors start re-defining what “cheap” and “expensive” mean (think internet stocks in 1999), that is a signal that we are in bubble territory.
I would like to tie the two articles together – what sort of bet is buying a house with cash? Well, it is a real estate bet- going long real estate. However, by choosing not to get a mortgage, it is also a bond bullish bet, in a way. Lending is the act of going long bonds. Borrowing is the act of going short bonds. IMO, the baby boom is effectively doubling down on the bond bullish bet. They are making a very questionable bet that central banks around the world can stick the landing and exit this unprecedented stimulus without (a) crashing the bond market and (b) creating inflation. IMO, the risks are all to the downside in the bond market, and instead of buying homes with cash, I would be borrowing as much as I could at 4% interest rates. The baby boom drove the stock market bubble in the late 90s, the residential real estate bubble in the 00s, and are drinking the bond market kool aid now. I don’t think this ends well.

46 Responses

  1. Court Martial.

    Edit: This was the definitive piece from two years ago.

    http://www.rollingstone.com/politics/news/americas-last-prisoner-of-war-20120607

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  2. Isn’t the penalty for desertion during time of war death?

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    • Brent: In short, you would take out a mortgage to leverage the coming inflationary pricing of housing, right?
      Let us say I have $300K I want to move from the bond market into rental housing. I can buy one $300K house or three $300K houses with 30% down on each. You favor the latter strategy?

      The single buy has very little risk attached, of course.

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  3. Mark, without getting into the risks of being a landlord, all I am saying is that if you are negative on bonds (and I think they are priced for perfection), then you would borrow as much as you can at 4% for 30 years. If inflation ever returns, those rates will be gold, and if inflation ever hits 4% (remember for decades that was considered low inflation), then you are getting a negative real interest rate.

    Caveat on bubbles is that they can (and usually do) last longer than you think they will.

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  4. Isn’t the penalty for desertion during time of war death?

    UCMJ Article 85.3.c:

    (c) Any person found guilty of desertion or attempt to desert shall be punished, if the offense is committed in time of war, by death or such other punishment as a court-martial may direct, but if the desertion or attempt to desert occurs at any other time, by such punishment, other than death, as a court-martial may direct.”

    The chances of him being court martialed–which is what it would take to determine he’s a deserter, not after–are somewhere between slim and none.

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  5. interesting .. thx.

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  6. So what was the IKEA furniture?

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  7. Why shouldn’t there be a court martial?

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  8. tv stand, sofa, laundry room system.. we renovated the basement.

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  9. Nice! I can see why it took you a weekend.

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  10. Why shouldn’t there be a court martial?

    I didn’t say that; I said that the chances are between slim and none. And, before you ask, I don’t know whether he should be tried or not–there are too many questions that are unanswered. I don’t know if they’re even going to be asked or not, since the only person who really knows what happened is Mr Bergdahl, and I don’t see any evidence of political will to ask them. If the GOP hadn’t turned this into a political brouhaha the moment they found out about it the situation might be different.

    I’m glad they did the swap.

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  11. Yes, McWing, I’ve seen that piece. That’s one side of the story. Did you read jnc’s link (which is a much longer and much more thorough article)?

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  12. I’ve read it and also read debunkings of it. A court martial could establish facts. Did he mail home all his personal gear? Why was he curious about the penalties his fellow soldiers would face if
    He stole their gear?

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  13. There was no patrol that night. Bergdahl was relieved from guard duty, and instead of going to sleep, he fled the outpost on foot. He deserted. I’ve talked to members of Bergdahl’s platoon—including the last Americans to see him before his capture. I’ve reviewed the relevant documents. That’s what happened.

    Better to just ignore?

    http://www.thedailybeast.com/articles/2014/06/02/we-lost-soldiers-in-the-hunt-for-bergdahl-a-guy-who-walked-off-in-the-dead-of-night.html

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  14. I didn’t say there shouldn’t be a court martial; I said the chances of one are slim to none.

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  15. While Susan Rice claimed Bergdahl was “captured on the battlefield,” Defense Secretary Chuck Hagel agreed “there are still questions” about how he ended up in captivity.

    “[H]e’s been held by the Taliban, we’ve — we don’t know where, and we don’t know under what circumstances, for five years,” Hagel told NBC’s “Meet the Press” on Sunday.

    Is the fact that the White House cannot get their story straight a legitimate reason not to find facts?

    Hagel said “follow-on questions” about Bergdahl’s captivity will come later.

    How?

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  16. QB, our favorite is “The Stinking Rose”, but only if you enjoy garlic.

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    • Love garlic. I have an amusing honeymoon story about that.

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    • The last time I was here, a friend took me to a tiny, authentic french restaurant. He was excited that there was fresh rabbit. I passed on the rodent. But whatever I had was good.

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  17. My opinion pretty much lines up with the NRA’s on the open carry people who use long guns to try and make a point.

    http://www.nraila.org/news-issues/articles/2014/5/good-citizens-and-good-neighbors-the-gun-owners-role.aspx

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  18. Michi – you think he will get a medical discharge?

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  19. jnc–

    That would be my guess. They’ll cite the “walking to India” bit and say he was crazy.

    I’d prefer to see an investigation, but in the current political climate that won’t happen.

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  20. Looks like you are correct:

    “Another senior Defense official said Bergdahl will not likely face any punishment. “Five years is enough,” he told CNN on condition of anonymity.”

    http://www.cnn.com/2014/06/01/us/bergdahl-deserter-or-hero/

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  21. I’m fascinated that she is so certain yet SecDef Hagel has “questions”.

    President Obama’s national security adviser, Susan Rice, said on ABC that Bowe Bergdahl “served the United States with honor and distinction” and that “Sergeant Bergdahl wasn’t simply a hostage; he was an American prisoner of war captured on the battlefield,”

    http://m.weeklystandard.com/blogs/susan-rice-bergdahl-served-honor-and-distinction_794066.html

    The corruption here is breathtaking.

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  22. “The corruption here is typical”

    Fixed.

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  23. Soon to be a non-scandal.

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  24. To save you the suspense, the article is 4 years old.

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  25. I don’t know the legal background to the apparently widespread view that Obama violated the law here, but I just heard Jonathan Turley flatly say he did. Pretty surprising (that a liberal said it, not that Obama broke the law).

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  26. QB – You see the piece on Donald Sterling not being able to contest the sale of the Clippers due to claimed “mental incapacity”?

    http://www.slate.com/blogs/the_slatest/2014/05/30/donald_sterling_mental_incompetence_clippers_owner_reportedly_lost_control.html

    You ever see a trust that would allow that with no judicial review? Presumably the experts would have to have been named in the trust or by mutual consent somehow otherwise one party can doctor shop for someone to claim the other is incompetent?

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  27. Troll, you were the first person I thought of when reading this:

    “Female-named hurricanes kill more than male hurricanes because people don’t respect them, study finds

    By Jason Samenow
    June 2 at 3:05 pm”

    http://www.washingtonpost.com/blogs/capital-weather-gang/wp/2014/06/02/female-named-hurricanes-kill-more-than-male-because-people-dont-respect-them-study-finds/?hpid=z1

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  28. So what they’re saing is it’s a Bushes fault.

    And bagger racism.

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  29. JNC,

    That is an area of law I know little about. I did find the reports I heard over the weekend strange, including reporting on ESPN Radio that Shelly was required to protect the NBA from being sued by Sterling. I assume that means some form of indemnification, because I can’t fathom how else she could “protect” the NBA.

    As to the trust, I assume you are right that Sterling must have agreed to it in devising the trust, and it must have some details specified as to who would count as an expert and how this could be effected. In the end, though, we know that there is no such thing as an agreement or transaction that can’t be challenged in court. The challenge might fail, but it is always a possibility. What I assume happened here is that Ballmer’s lawyers scrutinized the documentation and facts and decided the declaration of incapacity could be defended if Sterling sues to block or rescind the sale. So he went through with the deal. They probably expect Sterling to sue but believe the sale will be held effective.

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  30. From what I’m hearing and reading, there seems to be no serious doubt, according to the members of his own unit, that Bergdahl deserted. And men were killed looking for him???

    It is beyond me how Obama could violate the law by releasing five hardened terrorists in exchange for his “release,” and Bergdahl won’t be court martialed??? I find this shocking.

    And what a kook his father is.

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  31. As an aside, I finished watching Breaking Bad on Netflix last night.

    It lives up to the hype, especially the last season. I’m conflicted now about whether it or the Wire is the best dramatic TV series ever made.

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    • jnc:

      It lives up to the hype, especially the last season. I’m conflicted now about whether it or the Wire is the best dramatic TV series ever made.

      I thought the penultimate episode was one of the best episodes of any series TV has ever seen.

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  32. I also liked Ross Douthat’s piece on the centrality of Hank in the story arc.

    “What undoes Walter White is more dramatically elemental, in a way, than even the death of his infant daughter would have been. His world collapses, inevitably and absolutely, when he kills the hero of his own story.”

    http://douthat.blogs.nytimes.com/2013/09/18/the-hero-of-breaking-bad/

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  33. This is the likely outcome, no?

    Does anybody seriously disagree?

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  34. Does anybody seriously disagree?

    There is no greater sin than embarrassing obama… None… Except maybe racism…

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  35. Breaking Bad was really good.

    But it doesn’t hold a candle to Mad Men. Best TV drama ever, without a close second.

    I did think the interplay between Walter and Hank was the best part of BB. Hank was a great character.

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  36. Is the fact that the White House cannot get their story straight a legitimate reason not to find facts?

    Is this going to be another Benghazi story line where any attempt to nuance, ambiguity, or sheer impossibility to say things for certain is going to be used as raw meat for certain perspectives.

    And I know that I am not the first one to note the superficial parallels between Bergdahl and the plot line of Homeland.

    Like

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