Morning Report – Disappointing retail sales 8/13/14

Stocks are higher this morning after a disappointing retail sales report means the Fed is not going to be increasing rates any time soon. Bonds and MBS are up.

Mortgage Applications fell 2.7% last week as purchases fell 1% and refis fell 4%. The average 30 year fixed rate mortgage was steady at 4.35% despite a 7 basis point rally in the 10 year. Refis were 54% of loans. We have seen mortgage rates and TBAs not follow the bond market rally lately. TBAs did follow bonds higher, so mortgage rates should have dropped. According to the Fed’s Senior Loan Officer Survey, credit standards are loosening on mortgages, which means more higher rate loans.

Retail Sales were flat in July, below the .2% Street forecast. Ex-autos and gas, they rose .1%, lower than the Street forecast of 0.4%. Soft retail sales are not a recipe for inflation, so the Fed will probably continue to be sanguine about inflationary risks to the economy. Note that we are in the middle of the back-to-school shopping season, which is second only to the holidays in importance and usually predicts whether holiday shopping will be strong or muted.

Note that the Fed is starting to think about the idea of secular stagnation – an idea that was in vogue during the Great Depression and is starting to come back. The idea is that a maturing economy begets a lack of investment ideas, which are necessary to fuel future growth. Fed Vice Chairman Stanley Fischer hinted at the possibility in a recent speech. The upshot: a mid-2015 tightening might be the earliest possibility, and the Fed is probably going to err on the side of being too loose. I continue to believe that the Fed isn’t going to move in a meaningful manner until we start seeing wage inflation of 4%. And we aren’t even remotely close to seeing that.

FHFA is seeking input from market participants on a single TBA for Fannie and Freddie loans. This is part of the move towards a common securitization platform, which is going to be a multi-year project. Expect Ginnie Is and Ginnie IIs to be merged as well, although Ginnie Is have been trading behind IIs for a while now, so it is kind of moot.

We have been hearing about how income inequality has been an issue in this country. It turns out that the income gap between the richest and poorest metropolitan regions is at a record as well. Places like Austin, TX are experiencing a boom, while rust belt cities continue to struggle. The high income areas, like Boston and San Jose are seeing the biggest price appreciation, and the most apartment construction. Which means these areas are seeing the most jobs in construction, which is a big employer of lower and middle income people. The places that need jobs the most – places like Akron OH, for example, are seeing little home price appreciation, and therefore little construction. Which means job growth remains depressed in these areas, and this accounts for the fact that housing starts remain mired at a level that is about 30% below what they should be.

40 Responses

  1. The latest outrage from the regulatory state:

    BAGPIPERS have expressed their fear over a new law which led to two US teenagers having their pipes seized by border control staff at the weekend.

    Campbell Webster, 17 and Eryk Bean, 17, both from New Hampshire had their pipes seized while travelling between Canada and the US, just two days before they were due to fly to Scotland for the World Pipe Band Championships.

    Mr Webster’s pipes, which were previously used by his father in his role as an official piper to the Queen, were confiscated by officials because they are made out of ivory.

    New laws brought in earlier this year mean that owners of pipes containing ivory must get a Convention on International Trade in Endangered Species (CITES) certificate from the US Fish and Wildlife Service in order to transport their pipes across borders.

    The pipers, BTW, actually had the required CITES certificate, but it turns out that the certificate is only valid at a limited number of entry/exit points in the US, and the crossing between New Hampshire and Canada isn’t one of them. As Mark Steyn wryly observes:

    Why don’t they just put a big sign up on the border? “US Government Paperwork Not Accepted At This US Government Border Post.”

    The “new laws”, of course, were implemented not by legislators elected by the citizens of the US, but instead by unelected bureaucrats at the US FIsh & Wildlife Service as an “administrative action” answering the call of an Executive Order from the Big O.

    I continue to search the constitution in vain for any indication that this is the way the founders intended law to be imposed on the nation.

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  2. Why do you hate elephants, bagger?

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  3. I crossed into the USA (Vermont) from Quebec on a really rural checkpoint. took a wrong turn. beautiful drive, but the customs agent was accustomed to locals only. rolled up with the top down on our rented mustang. 30 mins and search later we were on our way to the Ben and Jerry’s factor. AmericaCone Dream, baby

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  4. NoVA, do you happen to know what the technical insurance term is for charging all members of an employer group health policy the same rate?

    Had a discussion yesterday at the yacht club (yes for real) with a guy who owns a payroll company. He said that the issue that our company saw with the pricing changes will be even more prevalent next year when the new regulations go from employers with under 50 staff to those with under 100 staff.

    He used a technical term for the pricing model (sounded like “composite” but that wasn’t it) and I was going to do some research.

    Edit: Looks like it is composite.

    http://www.ehow.com/facts_5793207_composite-rating-insurance_.html

    Edit 2: Looks like it’s the result of a CMS regulation.

    http://www.lifehealthpro.com/2012/12/28/hey-marilyn-make-ppaca-work

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  5. Shoulda keester stashed those bagpipes, IYKWIMAITYD!

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  6. composite or sometimes also referred to as community rating.

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

    ACA allows modified community rating. smoking and age are the only factors, outside of group size and geography.

    http://www.americanhealthline.com/analysis-and-insight/question-and-answer/q-and-a-community-rating

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  7. Brent, I assume you’ve seen this. Does it match your assessment?

    “A top mortgage industry executive explains why banks don’t want to take a chance on some borrowers​

    By Dina ElBoghdady
    August 13 at 9:59 AM”

    http://www.washingtonpost.com/blogs/wonkblog/wp/2014/08/13/a-top-mortgage-industry-executive-explains-why-banks-dont-want-to-take-a-chance-on-some-borrowers%E2%80%8B/?tid=collaborative_1.0_strip_3

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  8. jnc, oh hell yes. Although I am sure the administration’s response to this issue will be to hit the banks with fair lending lawsuits.

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  9. That of course would be perfectly in character for Mel Watt.

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  10. I guess obama would rather please the peanut gallery and kick around the banks than have a robust economy.

    Question: Do you think he cannot put two and two together, or he just doesn’t care about economic growth?

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  11. I don’t think he cares. whatever is easiest.

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  12. To be charitable, I think he doesn’t believe that his policies are inhibiting growth. I think in his mind, he is just limiting profits and limited access to credit is due to racism. Of course, if you never spent a day working for an entity that cares about profit, commercial logic will not be your strong suit.

    I think he has the mindset of they typical PL-er.

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  13. That was awesome. it was one big “justify my stereotype. don’t’ indicate you’re learning to act in a political fashion. be a comment board caricature!”

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  14. reason has a post up on Waldman’s post

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  15. Obama believes his own bullshit. Everyone else just is greedy for not doing what they should.

    & here’s the link for the post that NoVA references.

    http://reason.com/blog/2014/08/13/washington-post-writer-seriously-asks-wh

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  16. Looks like even the progressive policy shops have figured out what Brent has been saying for years.

    http://www.urban.org/UploadedPDF/413053-Lifting-the-Fog-around-FHA-Lending.pdf

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  17. To be honest, I do not see lenders making much in the way of changes until obama is gone and it is clear that whoever takes over is going to be more reasonable.

    I simply do not see the financial industry doing anything besides hunkering down and watching expenses for the rest of obama’s term.

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  18. Thanks for linking the article, jnc, I was trying to figure out where NoVA was coming from there. Although his synopsis is spot on. 🙂

    About the nicest thing I can say about Paul Waldman right now is that he’s better than Ryan Cooper.

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  19. This is why our betters want central planning.

    We’re shtooopid and they’re not.

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    • McWing:

      HHS, AARP, and ACS agree health care choice is overwhelming because of “consumer illiteracy about insurance.”

      The height of irony, given that what these people call “insurance” is not even remotely that.

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      • There’s an article today in the WSJ about how the EPA is about to issue new regulations tightening air-quailty standards for ground level ozone from levels that it already tightened back in 2008. The article is about the huge cost these new regulations will impose on industry and the economy in general, but what interests me (as always) is where exactly the EPA gets the constitutional power to do this.

        By way of analogy, if we assume that congress can constitutionally delegate to the regulatory bureaucracy the power to determine, and routinely change, specific levels of pollutants that will be allowed, under the same principle can congress constitutionally delegate to the Secretary of the Treasury or the IRS the power to determine, and routinely change, specific levels of taxation that will will be required? If not, why not?

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        • can congress constitutionally delegate to the Secretary of the Treasury or the IRS the power to determine, and routinely change, specific levels of taxation that will will be required? If not, why not?

          Within limits, yes. EPA has to stay within limits, too. Else they lose lawsuits in fed court – which they do, from time to time, right here in TX.

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        • Mark:

          Within limits, yes.

          My understanding is that the justification for the existence of the regulatory bureaucracy is founded upon the “necessary and proper” clause. In what way could it be construed to be either necessary or proper for congress to delegate its authority to set tax rates, and specifically its authority under the 16th amendment, to unelected bureaucrats?

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        • delegate its authority to set tax rates,

          Off hand I do not think that would be within the limits.

          The question was broader, as I read it. I think Congress can/could give Treasury discretion to impose or waive penalties and or interest, to do payout agreements, to determine if exempt qualifications are met, to determine who to audit, perhaps even to determine what categories of wealth or property accretion are not taxable income [that would be one subject to challenges until it was narrowed down, I’m sure]. Just determining that certain levels of income or gifts are “de minimus” and not subject to reporting is something that Congress might leave to Treasury. For example, the level of income a Trust must report has a de minimus exception that I am not sure is statutory, although it probably is. I could look it up but I am lazy and busy. I also don’t recall if the Christmas gift de minimus exception is statutory or regulatory.

          You get my drift. It is line drawing between big shit and little shit.

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        • mark:

          Off hand I do not think that would be within the limits.

          How is it that congress can constitutionally delegate to the bureaucracy authority to define the precise percentage of a given pollutant corporations are allowed by law to produce, but it can’t constitutionally delegate to the bureaucracy authority to define the precise percentage of income a person/corporation is required by law to pay as income tax?

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        • The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
          The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.

          Scott, I am going to replace the Internal Revenue Code in large part with the following:

          In order to pay the debts and provide for the common defence and general welfare of the United States, the Tax Setting Agency (TSA or Agency) established under Part One of this Act, shall, in compliance with the Administrative Procedure Act, lay and collect Taxes, Duties, Imposts, and Excises that shall be uniform throughout the United States. The Agency shall consider all sources of derived income in laying an income tax. Any tax which becomes law by reason of successful compliance with the Administrative Procedure Act shall then be collected and enforced by the Treasury Department.

          Fun and games. I was assuming that you did not think that taxation dependent upon full compliance with APA was a real world possibility. Congress could not delegate this to IRS or the Executive Branch but it probably could create its own “Agency” or “Commission” like the SEC or the EPA to propose taxes and post them in the FR and then have two or three years of administrative review and lobbying of its agency or its commission, and finally have a tax.

          How much worse could it be, actually? It might be more transparent that way.

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        • mark:

          I’m still trying to understand how it could be construed to be both necessary or proper to delegate such authority to unelected bureaucrats. With regard to taxation at least, it seems to me manifestly not “necessary”, as congress has been able to set tax rates all by itself for many years. And if it is not necessary, it isn’t constitutional, no?

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        • That makes sense to me, Scott, but what if Congress deems it necessary? Does the Court intervene or does it say Congress determines what is necessary so long as it does not infringe on a right granted elsewhere in the Constitution? McCulloch v Maryland says you can have a national bank if congress says it is necessary and if it is in furtherance of an express power. All implied powers are supported from that seminal case.

          If I am in the Congress I never vote to delegate taxation to a commission. If I am a Justice, well, I would be open to being convinced, but I doubt I’d say my sense of unnecessary trumped Congress’s.

          Addendum: I’m gone until Tuesday – McDonald Observatory and Davis Mountains State Park.

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        • Mark:

          All implied powers are supported from that seminal case.

          The question here, though, seems to me somewhat different. Surely there is a difference between whether Congress has the implied power to do something in furtherance of an enumerated power, and whether congress has the implied power to transfer its enumerated power to a branch of government that the constitution doesn’t even mention or contemplate. That congress has the implied power to create a National Bank does not itself imply that Congress also has the power to, for example, transfer its power to lay taxes to that bank.

          I think we have pretty clearly moved well beyond the implications of Mc v MD. Mc v MD may (note – may) imply that congress can pass laws regulating air pollutants despite the fact that such is not an enumerated power, and it may further imply that congress can create the EPA in order to implement the laws it passes to regulate air pollutants despite the fact that creating such an agency is not an enumerated power. But I don’t see how Mc v MD implies that congress can then empower the EPA to make laws itself, which it quite clearly now does.

          I would acknowledge that there can be a gray area between a regulatory agency stipulating how it interprets and will enforce a law written and passed by congress, and that same regulatory agency writing new law itself. But there is a difference between these two things, and when congress writes vague, ill- or even undefined laws and charges the agencies with filling in the blanks, we have moved well out of that gray area. The courts should recognize this.

          It is also worth noting that, unless I am mistaken, regulatory agencies did not exist until the 1930s. If Mc v MD did indeed implicitly recognize the power of congress to transfer its lawmaking powers to such a bureaucracy, its seems somewhat odd to me that this recognition lay dormant and undiscovered for over 100 years. I suspect that the courts which ultimately ruled on the constitutionality of these agencies had to take at least an incremental step beyond McCulloch in order to get to where they got. And we have since taken even more incremental steps in order to get to the Alice-in-Wonderland world which we inhabit today.

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        • Congress can’t be its own judge of what is necessary and proper, and can’t delegate its own legislative powers. I think those are pretty clearly understood as undisputed principles. Agency rule making and actions have to be justified as part of enforcement and execution. Much of what agencies do goes far beyond.

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        • qb:

          Much of what agencies do goes far beyond.

          Exactly.

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      • Government: we need health care and insurance regulation because they are too complicated for you to understand.
        People: but they are complicated because of your regulations.
        Gov: yes, exactly. What’s your point?

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  20. 30 mins and search later we were on our way to the Ben and Jerry’s factor.

    Waterbury, VT is also home to Cabot Cheese. My wife and I went to the old Ben and Jerry’s Factory on our honeymoon and took our kid to this new one a few years ago.

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  21. What’s really ironic is that these people are all in favor of pumping hundreds of billions off Federal dollars into the coffers of evil insurance companies

    It’s hard not to believe that these people deserve more power.

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  22. @ScottC: “There’s an article today in the WSJ about how the EPA is about to issue new regulations tightening air-quailty standards for ground level ozone from levels that it already tightened back in 2008.”

    God bless Richard Nixon for his vision and foresight.

    I’m all for this new regulation. A giant batch of ozone fell on my head the other day. I hate it when that happens.

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  23. @ScottC: “I continue to search the constitution in vain for any indication that this is the way the founders intended law to be imposed on the nation.”

    I’m pretty sure there’s something in the constitution about “and the people shall be lorded over by petty bureaucrats and exist as defacto serfs of their governmental lords and their insular fiefdoms”. I may have the wording wrong. But it’s there in a penumbra or emanation, I’m sure of it.

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  24. @ScottC: “n what way could it be construed to be either necessary or proper for congress to delegate its authority to set tax rates, and specifically its authority under the 16th amendment, to unelected bureaucrats?”

    It is necessary and proper that they can shrug and then tell their constituents “I didn’t do it!”

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