Morning Report – A political shot across the bow 6/12/14

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10 Year Govt Bond Yield 2.63% -0.01%
Current Coupon Ginnie Mae TBA 106.2 -0.1
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BankRate 30 Year Fixed Rate Mortgage 4.22


Stocks are down small after some disappointing economic data. Bonds and MBS are up.
Retail Sales came in lower than expected at + .3% versus Street expectations of +.6%. April numbers were revised upward substantially, however. Ex autos and gas, retail sales were flat in May.
Initial Jobless Claims came in at 317k, a little higher than expected, but still a decent number.
Elizabeth Warren’s bill to refinance student loans died yesterday in the Senate. The bill would have allowed students with private student loan debt to refinance at the current government – set rate of 3.86%. It would have been funded with a new tax on the rich, which meant it was going nowhere. Of course this is naked politicking – the 2% surtax on the rich was a poison pill, and the point of it was to give Democrats an issue to demagogue on in November. I have said it a million times, but if we subsidize college education, and universities capture that subsidy by raising tuition, what have we accomplished? Do these people not realize this? Or do they just not care?
That said, student debt IS a big issue. Until the first time homebuyer manages to get in a decent financial position to buy, the housing market (and the economy) will be sluggish. Of course the way to fix the student loan problem is to have a robust economy and we can’t have a robust economy without a strong housing construction market. So we have a Catch-22. I was hoping that this year would be the breakout year for housing construction, but it is looking like a 2015 event now.
Eric Cantor (the heir apparent to John Boehner’s Speaker of the House position) lost his primary to a relative nobody. The result shocked everyone. What are the takeaways? First, money doesn’t buy you love. Cantor outspent Brat 25:1 and still lost. Second, Brat ran as an anti-Wall Street populist. In an overwhelmingly Republican district. This means that supporting the financial industry politically can be toxic. In other words, the shelling from Washington may not only continue, but it could get worse.
The IMF is warning about housing bubbles all over the world. Where are houses cheapest relative to long-term trends? Japan, S Korea, Germany, and the U.S. Where are they the highest? New Zealand, Australia, Canada, and Belgium. All of this global central bank stimulus has to go somewhere, and housing seems to be the place. If there is one thing Europe needs like another hole in the head, it is to see its housing bubbles in France, Belgium, Norway, the UK and the Netherlands collapse.

48 Responses

  1. If there is one thing Europe needs like another hole in the head, it is to see its housing bubbles in France, Belgium, Norway, the UK and the Netherlands collapse

    Eventually they do though!

    Frist……………….every now and then.


  2. LMS, I think the spotty growth in the nation also ties to Brent’s observation about home building. Few new entry level homes are being built, nationally, in response to young people carrying too much college debt to afford to buy. However, suburban Austin does have some major home building of small homes – but people [like us] are buying them to rent to young people with good jobs but no credit yet. In Durham, in the healthiest part of NC, we saw an apartment building boom.

    This makes me think that, in growth areas, rental property will be a good investment for a few years to come.


  3. Our son and family recently relocated to Longmont, CO 😦 and are renting until they become familiar with the areas around his new job, he finally gave up being an entrepreneur, and had a great deal of difficulty finding a decent place to rent. The excuse was always the “oil boom”.

    I agree re Brent’s observation re college debt and first time buyers. I was only referring to his comment re a European housing bubble.

    As much money as our daughter is making, and it’s more than anyone else in the family has ever made, she won’t buy until her loans are paid off. At least that’s what she says now. She’s still driving her old (2002) Mitsubishi too until it completely dies.


  4. “Brent, do you know what fuels the growth in WVa?”

    I think they have a lot of shale gas…


  5. “This makes me think that, in growth areas, rental property will be a good investment for a few years to come.”

    I’m looking at getting a new house and I’m on the fence about keeping my existing starter home (first one I bought back in 1998 that’s currently on a 15 year note) as a rental, or just selling it so I don’t have to deal with the headaches.


  6. jnc, don’t ask me for advice…………….hahahaha


  7. Why wouldn’t I? You seem to have been successful at it and I’d be interested in your opinion if in hindsight the aggravation was worth it?


  8. I’m happy with my rental situation — but I have a property manager who gets 8%.
    I break even on a monthly. but they’re paying off my mortgage.

    Ive had to replace some appliances, which is a pain, but I can depreciate them. we weren’t quite upside down when we converted it, but it was close enough that selling wasn’t a real option.

    If you ever wanted to refi, do it before you convert it.

    I also like the idea have having a real asset. If something happened and we needed to sell our more expensive home, well, i just don’t renew the lease. easy downsizing. or i could swap. rent out our house and move back to the condo. options and exit strategies.

    I’m also only 30 mins away. if it were further away, probably wouldn’t keep it. then you’re relying completely on the manager. i’ve done some light maintenance myself. like fixing the dishwasher. thanks youtube. but $30 and 2hrs vs. a service call.

    edit — the key is tenant selection. single women and married couples. no guarantees of course. and make it very clear that the rent gets paid first. no excuses. Don’t pay on time, my manager files eviction paperwork the next day. but that’s avoidable with good tenants. and i’m on any maintenance issues fast.


  9. Ok, I’m sold on Brat:

    “He’s a typical libertarian (albeit with a theological twist). And so along with his commitment to end corporate welfare, one would presumably need to take the bitter with the sweet. He thinks it’s unfair that people pay less into Medicare and Social Security than they take out so these programs have to be slashed or eliminated. He believes that Obamacare should be scrapped along with employer-based insurance so that people will buy their own health policies, which will (he doesn’t say how) eliminate the problem of preexisting condition exclusions. ”


  10. I’ve already refied to less than 4.5% fixed for 15 years (mortgage payment is about $1100 a month with all taxes, etc) and I’ll be within 30 minutes drive. The whole street is about 1/2 rentals now (older brick ranchers from the late 1940’s and 1950’s).

    My other concern is I overbuilt the house for the neighborhood while residing there so I have things like a hot tub, full kitchen and bath renovations with granite, stainless steel and marble that I’m worried about renters trashing and then I have to deal with expensive repairs.


  11. ” typical libertarian (albeit with a theological twist”

    i’ll have to do some more reading .. but I wonder if he’s more like me in that regard. but i wouldn’t be comfortable with the public display of it (personally)


  12. Ho-ly Shit!

    Dave Brat digs Max Weber!

    How many political “journalists” had non-Marxist sociology or Econ professors and therefore would have actually heard of Weber? (My effete Soc.Prof instructed a Active Duty Marine Gunny, just off the drill field that it’s pronounced “Veh-ber.” He responded with a disgusted “Whatever.”)



  13. ditch the hot tub and charge more for the upgrades. there’s a mental switch, but if they trash it, you’re insured and replace it with lower end stuff.

    and price out a “fire policy” with your insurer.

    edit — and i upped my umbrella policy.


  14. Okay jnc to be serious, it was definitely worth it. Keep in mind though the house is only about 3 miles from our current residence, it’s been paid off since 1991, we’ve kept up with property improvements and upgrades, and kept the rent slightly below market. We also live in a community that is very desirable and short on rentals.

    Our current tenant is moving out by June 30 and we put an ad in yesterday, both in the local paper and on Craig’s list (somewhat dicey btw), and have already had about 50 inquiries. We’re hoping to only need a week to clean and make any repairs this time but generally we need at least a month or even longer. Vacancy or non-payers means you need access to money if you count on the income, as we do, for either current mortgage payments (rental or residential) or personal living expenses. When we first started this in 1987, we didn’t have much of a cushion and it was a little scary sometimes.

    2012 cost us about $22,000 and put a real dent in our savings and lifestyle.


  15. Thanks everyone.


  16. it’s going to be Kevin McCarthy as majority leader.


  17. Is Sessions not gonna challenge him?


    • Senator Sessions?

      One does not have to be a Rep to be Speaker, but I think one must be a Rep to be MajLdr in the House.


  18. Yes … sorry, I should have said that that’s my bet.
    Hensarling withdrew.


  19. In my mind’s eye, I see Frank Underwood and his deputy whips scrambling over this one.


  20. Rules Committee Chairman Pete Sessions (R-TX 32)

    Not Sen. Jeff Sessions (R-AL)


    • Pete Sessions (R-TX 32). Oh, got it.

      Joey Crawford is the head ref tonight. This usually means the Spurs have NO CHANCE. Kawhi will get called for fouling James while he is on the bench.

      Truly, Crawford is a perpetual nightmare for the Spurs.

      I think the bad blood between him and the Spurs organization is of long standing. See


  21. you know, i haven’t watched House of Cards. or read This Town or whatever it is. i tend to avoid political stuff on my downtime.


  22. Fascinating TNR piece about plagiarizing by Chris Hedges. I got this link via a Jonah Goldberg post at NRO.

    I’ve never heard of Chris Hedges but it seemed pretty conclusive to me.


  23. This is a quote from Thad Cochran,

    “He joked that he grew up playing in the country, picking pecans and doing “all kinds of indecent things with animals” in the area

    Maybe I’m wrong about the guy.

    Is anyone else turned on?


  24. of course. if its not racism. it’s the other one.


  25. OK Nova, which of these establishments would rank high enough to get you to cut a check?


  26. bobby vans .. i’ve been there so many times. it’s a whole lot of okay.
    easy lunch spot.

    i think i might have to start going to fundraisers. word has come down that we need to step it up. we’ve got PAC $ itching to be spent. i’m not excited about it.

    but I hear that fundraisers at Hill country BBQ are fun.


    • McWing:

      This one’s for Scott.

      Very good. In my office we actually have a term for that certain kind of someone that we deal with. A TWSA – Typical Wall Street Asshole. We were discussing just the other day how we actually have an informal No Asshole hiring policy, although I think it has been recently violated (which is why it came up).

      And for those of you thinking to yourself right now “Oh how ironic”, I will have you know that I may be an asshole, but I am definitely not a TWSA.


  27. Harrison Ford Injured by Millennium Falcon, Airlifted to Hospital


  28. Back when I was at Bear, Bobby Vans by Grand Central was a hangout. It was Son of Luger’s without having to go to Brooklyn…


    • Brent:

      Back when I was at Bear, Bobby Vans by Grand Central was a hangout.

      Still there…one block from my office. But there’s a bar next door that is a better hangout. A place called Lea…used to be the tie shop.


  29. Banned/John disabused me of the whole carried interest tax increase idea a while back with this:

    “How to Dodge a Carried Interest Tax Hike
    John Carney | @carney
    Tuesday, 24 Jan 2012 | 4:27 PM ET”

    You’d have to equalize the treatment of capital gains & earned income.


    • I agreed with Don John then, but this is a new slant:

      Section 707(a)(2)(A) of the tax code, enacted in 1984, directs the Treasury Department to write regulations addressing this kind of compensatory arrangement between a partner and the partnership. The Treasury has broad discretion to recharacterize transactions where the partner is not acting in one’s capacity as a partner but, rather, as a service provider. Remarkably, the Treasury has never issued these regulations in the 30 years since. Perhaps now is the time to do so.

      Taxing fund managers as service providers under section 707 would be at odds with the legislative history — an oft-cited Senate Finance Committee Report — which cited uncertainty as to the amount of compensation as an important factor in distinguishing partners from mere service providers. Still, there is no legal requirement that the regulations follow the legislative history, so long as the regulations are a reasonable interpretation of the statute. And the statute in question leaves plenty of room for the Treasury Department to follow this approach where, as here, the arrangement as a whole more closely resembles one of a service provider to the partnership and not a joint venture.


  30. Yes, but the article is still envisioning the managing partner as not having put up money directly. The no recourse loan method (which wouldn’t be reflected in the partnerships organization documents or its tax returns) end runs that.


    • If IRS characterizes all profits to the manager as ordinary income, neither timing nor the nature of the investment by the manager should be relevant. Are you expecting the manager to -uh- lie?

      JNC, licensed realtors must report all their profits from real estate as ordinary income; this would be the same theory.


      • Flat tax. One rate, all income regardless of source. No deductions. Simple, sensible, and as fair as an income tax can possibly be. Plus it would free up a boatload of tax accountants to do something productive.


  31. And would eliminate tax-free muni bonds and the horrendous waste that goes with it!


  32. Plus it would free up a boatload of tax accountants to do something productive.

    A very tangible example of the economic concept of a deadweight loss…


  33. “markinaustin, on June 12, 2014 at 6:23 pm said:

    If IRS characterizes all profits to the manager as ordinary income, neither timing nor the nature of the investment by the manager should be relevant. Are you expecting the manager to -uh- lie?”

    I didn’t see where the article addressed the idea of the partner who happens to have management responsibility also holds an ownership stake by virtue of having invested his own capital, however it was acquired. If in fact the profits are being distributed based on capital investments with no explicit share set for the act of managing, I’m not sure how the IRS can distinguish between the two different classes of investors.

    I.e. the management activities are being performed as uncompensated activity.

    “JNC, licensed realtors must report all their profits from real estate as ordinary income; this would be the same theory.”

    Even if it’s their own house being sold?


    • I’m not sure how the IRS can distinguish between the two different classes of investors. [Reporting requirement burden on the manager to show that his income was proportional, presumption of earned income would be rebuttable].

      Even if it’s their [solely] own[ed] house being sold? NO.


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