Morning Report – More bubblicious behavior in the bond market…12/15/14

Markets are higher this morning after stocks got slammed in Asia last night. Bonds and MBS are down.

The NAHB Homebuilder Sentiment Index fell to 57 in December. Sentiment is still on the strong side, although the Street was clearly spooked by Toll’s numbers last week.

Wall Street is betting that inflation will remain dead for a long time. Treasury Strips are back (which basically slices and dices a long term Treasury into a bunch of zero coupon bullet bonds). This strategy has been a winner this year, rallying almost 50%. Foreign bond investors have had a great year with the the currency and bond markets posting big gains. The thing to remember is that US investors aren’t the only ones who play the Treasury market – and foreign bond investors are often looking at their domestic bond markets and finding more value in the US. To put this in perspective – the US 10 year yields 2.12%. The German Bund (10 year) yields 64 basis points. The Japanese JGB (another 10 year) yields under 38 basis points. The Spanish 10 year yields 1.79%. There is a global relative value trade happening here.

Strategists have gotten the bond market wrong all year. This is a case where the textbook response – sell Treasuries as the economy improves – has been dead wrong, overwhelmed by events overseas. Keep this in mind when thinking about rates in the US – strong data might not be enough to push bonds lower and originators might be getting a gift here. It won’t last, and the snap-back could be vicious. Second, anyone buying a 30 year zero at 43 which yields 2.86% should have their head examined. This is bubble behavior, and is the bond market equivalent of buying Cisco Systems at 70 (or 132x earnings) in 2000. Bonds will crack at some point, but keep in mind that bond market cycles are long.

Speaking of strong economic data, Industrial Production rose 1.3% in November and capacity utilization topped 80% for the first time since March of 2008. This production number was the highest since 2010. On the other side of the coin, the December Empire Manufacturing Index fell in December.

The FOMC meets this week, and the decision will be released Wednesday at 2:00 pm EST. This one should have a press conference, along with updated economic projections and a press conference. The focus is on the timing of rate hikes, and investors will key in on language regarding the labor market.

In the budget deal last week, some regulations were relaxed for the big Wall Street banks, particularly the provision requiring derivatives to be housed in an entity without recourse to the parent FDIC – insured bank. This sparked a big rebellion on the left, but it ended up going nowhere. FDIC insured banks may now use credit default swaps as hedging instruments for their own books. To hear the left tell the story, this basically returns us back to the bad old days of 2005. To the industry, this is a common-sense relaxation of a rule that went too far in the first place. That said, banks were always allowed to use these products, but had to post more collateral than they wanted to. This is a knotty question, as many “hedges” are really speculative bets when you delve into the details. I suspect JP Morgan’s 2012 London Whale trading loss was intended to act as a hedge in the first place.

Finally, there was a bit of dishing on this place in PL yesterday…

30 Responses

  1. Digby linked to this which is worth a reread given the current media climate.

    http://www.nytimes.com/2001/11/05/business/media/05TORT.html

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    • jnc:

      Digby linked to this which is worth a reread given the current media climate.

      To me the problem that the torture issue raises derives from our inevitable lack of perfect knowledge as humans. If we could know with certainty that Chicago will be incinerated and million of lives snuffed out if terrorist X is not waterboarded, and if we could know with certainty that all those lives will be saved if terrorist X is waterboarded, then the moral calculus is a no-brainer. Of course waterboarding the terrorist in such a circumstance is justified. But in the real world we don’t and can’t have certainty. We don’t know for sure that waterboarding will save anyone, nor do we know for sure that failure to do so will result in millions of deaths. Human judgement is necessary, and human judgment can be wrong.

      I am highly sympathetic to the notion that our default position should be that waterboarding is wrong, just as our default position is that killing is wrong, and that the threshold for acting against that default position should be extremely high. But to say flatly that, unlike killing, it can never be justified no matter the circumstances and it is necessarily everywhere and always wrong, makes no sense to me at all. It also strikes me as highly ironic coming from people who otherwise argue against the idea of moral certainty and generally pride themselves for seeing nuance and shades of gray while criticizing others for their black and white moral outlook.

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      • Scott, you seem to be coming around to the view that torture is wrong, but can be excused after the fact in extreme circumstances. Good. It is incapable of justification but it is capable of excuse.

        These are different ideas entirely. As you suggest, the efficacy of torture even in an extreme circumstances is debatable, because there are so many ways to elicit information. We cannot rationally define in advance a circumstance where torture is justified, as we can with homicide. We can understand when it is excusable, after the fact.

        You are making good progress here.

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        • Bernie Mark:

          Scott, you seem to be coming around to the view that torture is wrong, but can be excused after the fact in extreme circumstances

          Nope. I haven’t said anything about “excusing”. I have been very consistent in analogizing waterboarding to killing. We generally consider killing wrong, but find it to be justifiable in certain circumstances. So too we can generally consider waterboarding wrong, but find it to be justifiable in certain circumstances. You continue to resist the obvious analogy, but for reasons that remain a mystery.

          We cannot rationally define in advance a circumstance where torture is justified, as we can with homicide.

          Sure we can. You yourself have already provided two instances when it could be justified. You can call it “excusable” rather than justified if you want, but there doesn’t seem to be any relevant or practical distinction.

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  2. “To me the problem that the torture issue raises derives from our inevitable lack of perfect knowledge as humans.”

    I’m more irritated about the people who pretend that torture stopped with Obama and have no problems (or even interest) in renditions.

    I’m with Dershowitz on setting up a warrant process for any extraordinary interrogations/torture to add some accountability to a process that I view as inevitable in any mass causality attack on the US.

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    • jnc:

      I’m with Dershowitz on setting up a warrant process for any extraordinary interrogations/torture to add some accountability to a process that I view as inevitable in any mass causality attack on the US.

      Seems like a reasonable idea to me.

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  3. Should it be legal for businesses to boycott an individual as described in this article (i.e. vis-a-vis the gay wedding cake issue)?

    http://www.washingtonpost.com/blogs/in-the-loop/wp/2014/12/15/after-anti-marijuana-effort-rep-andy-harris-not-welcome-at-capitol-hill-bikes/?tid=trending_strip_6

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    • jnc:

      Should it be legal for businesses to boycott an individual as described in this article (i.e. vis-a-vis the gay wedding cake issue)?

      Yes.

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  4. bloodbath in oil…

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  5. Mark, where would you fall on interrogation by chemical means? I.e. say give them Ecstasy or some other truth serum that has no permanent side effects but that renders them cooperative and receptive to questioning?

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    • jnc:

      Mark, where would you fall on interrogation by chemical means?

      And if that is not necessarily and always wrong, the natural follow-up is: Under what circumstances does it become justified?

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    • JNC, according to my former Naval Intelligence contact, drugs are much faster and more reliable than any other extreme method, when they work at all. It is apparently favored within the spy services, on the one hand, but doesn’t work well on people who are not suggestible, on the other. Think “good hypnosis subjects” vs. “bad hypnosis subjects”, is what I have been told.

      From police experience, I would sooner strap “suspects” to a polygraph with a skilled operator. Even failure to answer will be accompanied by a readable reaction. To get totally within the bounds of Geneva, I believe that polygraphing selectively would be permissible, but I must go back and check. I think voice stress analysis is also permissible. As much as I loath KSM, who forever looks like a rumpled and hungover John Belushi to me, I honestly think we would have got more faster from him under a polygraph than by repeated waterboarding.

      While drugged interrogation is supposedly very effective when it is effective at all, I think it is prohibited by Geneva and I know it is under US Army conduct. I agree with the idea that it falls short of being that which we commonly perceive as torture.

      Scott, I actually thought you had, by your examples, shown an understanding of the difference between predefining an extreme circumstance that would justify torture and the post-action acceptance of an excuse for leniency. Not only did I misunderstand you, but apparently I insulted you, if it caused you to compare me with the “Bernie” who haunted PL.

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      • Mark:

        Scott, I actually thought you had, by your examples, shown an understanding of the difference between predefining an extreme circumstance that would justify torture and the post-action acceptance of an excuse for leniency.

        I can recognize a difference between a justified action and an unjustified action that deserves leniency, but not in the way you seem to be suggesting.

        An unjustified action that deserves leniency is one that I would want to have prevented if I was aware of it prior to being undertaken and had the power, but for which there are mitigating circumstances which, post-act, make it less worthy of punishment than if those circumstances didn’t exist. An example of this might be, say, a mother who, rushing her dying child to a hospital, inadvertantly clips and kills a pedestrian with her car. The act of killing the pedestrian is clearly unjustified, but the mitigating circumstance of her attempt to save her dying child might make it more deserving of leniency than, say, a driver who kills a pedestrian while texting on his phone.

        However, in the two situations that you proposed, saving Chicago or a kidnapped child, I most decidedly would not want to have prevented the action of the waterboarder or the police had I known about them beforehand. I would be willing to neither allow Chicago to be incinerated nor to allow the kidnapped child to die in a box (or wherever he/she was). And so, having decided that I would not have prevented the action even if I had the power, I conclude that it was justified and not deserving of any punishment.

        I don’t sense that this is the kind of distinction you are talking about, because I don’t sense that in the hypothetical situations we have been talking about, you actually would have wanted to prevent anything, given the power to do so. Like me, I sense, you actually prefer the outcome of having waterboarded the bomber or beating the suspect, ie saving Chicago or the child, to the outcome of not doing so. I sense this because the punishment you would mete out, a slap on the wrist, clearly isn’t designed to be a disincentive to engaging in the act. It is designed, it seems to me, to simply maintain the pretense of disapproval while actually approving of the results.

        Not only did I misunderstand you, but apparently I insulted you, if it caused you to compare me with the “Bernie” who haunted PL.

        Your comment that “You are making good progress here” struck me as precisely the kind of condescension that was Bernie’s stock in trade. If that wasn’t your intention, my apologies for the invidious comparison.

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        • Scott, that is a valid distinction. But so, I think, is this: before the fact we cannot know if torture will bring reliable information. Before the fact we cannot know if it will bring timely information. For example, water boarding according to the CIA officials defending it was never done in the same time frame as interrogation. It was a softening technique. The Chicago example and my forty six year old kidnapping example are of beatdowns, of pain inflictions concurrent with questions. If we cannot know that it will work in advance then we cannot justify it in advance. We can forgive it under rare circumstances, but we cannot justify it.

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        • Mark:

          If we cannot know that it will work in advance then we cannot justify it in advance.

          I very much disagree. Our inevitable lack of perfect knowledge neither prevents us nor excuses us from making reasonable judgements. I will return to the inevitable analogy. A lack of perfect knowledge doesn’t prevent us from justifying a killing does it? Is it wrong to kill someone in presumable self-defense if I’m not absolutely certain that the gun pointed at me is actually loaded? That the attacker is not just joking? That he really does intend to harm me? Was it wrong to target and kill OBL in the absence of ontological certainty that he was still actively funding and planning terrorist plots and that those plots would definitely succeed if we didn’t take him out, and that they won’t succeed if we do?

          Human actors are always acting with imperfect information, most especially with regard to future events. It is certainly reasonable for society to establish an after-the-fact panel to determine if the judgements made to undertake an otherwise prohibited action under particular circumstances were reasonable and justifiable. But to say flatly that the absence of perfect information necessarily renders those actions to be unjustified neither makes sense to me, nor is it reflected in the justice system we have that has evolved over centuries. Again, killing is the perfect analogy to demonstrate this fact.

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        • Incidents of self defense by individuals are common. However, torture as a response to a perceived threat is virtually unknown to individuals. Torture is essentially within the realm of government action. We could analogize to warfare, but our denial of justification for torture grows out of our experience in warfare, as well as our historic experience of what the state can do and has done to its own citizens when torture is permitted. The parallel to self defense and justifiable homicide fails.

          I conclude where I began. An incidence of torture may be excusable, forgiveable, and worthy of leniency. However, torture itself must never be pre-legitimized as a tool of the state, lest that state become what all states were when torture was condoned.

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        • Mark:

          Incidents of self defense by individuals are common. However, torture as a response to a perceived threat is virtually unknown to individuals. Torture is essentially within the realm of government action.

          I don’t think the relative frequency of an action has anything to do with whether or not it can be justifiable or not. Nor do I think the role of the actor in society, whether private citizen or government employee, is relevant to the question either. Society may, as a legal matter, decide that certain actions are better undertaken by the government than by individuals, and therefore regulate such actions with regard to private citizens, but still that doesn’t have any bearing on the moral character of the actions.

          We could analogize to warfare, but our denial of justification for torture grows out of our experience in warfare, as well as our historic experience of what the state can do and has done to its own citizens when torture is permitted.

          The problem with this claim is that, as was demonstrated by the poll I linked to the other day, it just isn’t true that “we” deny any justification for torture, or at least certain kinds of things that you would characterize as torture. A majority of people believe that the CIA interrogation techniques were justified. You may deny that it was just, but that doesn’t mean that “we” as a society do.

          (As an aside, that you deny the justice of an act which “society” itself accepts as just demonstrates to me that you do implicitly believe that morality does have objective existence, ie is something that exists “out there” independently of what people think.)

          The parallel to self defense and justifiable homicide fails.

          I still don’t see your logic here, but we can focus on the analogy of justified killing by the government.

          An incidence of torture may be excusable, forgiveable, and worthy of leniency. However, torture itself must never be pre-legitimized as a tool of the state, lest that state become what all states were when torture was condoned.

          Ah, but this is an entirely different topic. This is not a claim about the moral nature of torture and whether circumstances can ever justify it, but is instead a claim about the nature of government and the possible effects of granting government certain powers even if doing so is justified in a given instance. To say that the government should never be granted legal power to do X under any circumstances because it will inevitably use that power unjustly is not to say that it is necessarily unjust to use that power under any circumstances. It is a practical consideration, not a moral consideration, that says even if the power might be justified in a given circumstance, it still should not be explicitly sanctioned because the corruptible nature of humans in government will tend to expand the use of the power beyond circumstances that justify it.

          As it happens, I actually have considerable sympathy with that argument as a general matter. It is, for example, why I am wary of federal encroachment on state power even if such an encroachment is justified on moral grounds to prevent a state from perpetrating an injustice. To accept the encroachment in a given circumstance on moral grounds can open the door to the expanded use of that power for all manner of (unjustifiable) reasons in the future. I agree that holding the line against granting the state a given power can conceivably make sense even if using the power would be justified in the instance at hand.

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  6. interrogation by chemical means

    If we were going to throw the Geneva Conventions under the bus, this would have been a much more. . . palatable way to do it.

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    • Mich:

      If we were going to throw the Geneva Conventions under the bus, this would have been a much more. . . palatable way to do it.

      The Geneva Conventions quite specifically and deliberately do not apply to combatants like Al Qaeda.

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      • From Part one, Article 2 of the Geneva Convention Relative to the Treatment of Prisoners of War. (Page 81 from here: https://www.icrc.org/eng/assets/files/publications/icrc-002-0173.pdf )

        Emphasis added:

        In addition to the provisions which shall be implemented in peacetime, the present Convention shall apply to all cases of declared war or of any other armed conflict which may arise between two or more of the High Contracting Parties, even if the state of war is not recognized by one of them.

        The Convention shall also apply to all cases of partial or total occupation of the territory of a High Contracting Party, even if the said occupation meets with no armed resistance. Although one of the Powers in conflict may not be a party to the present Convention, the Powers who are parties thereto shall remain bound by it in their mutual relations. They shall furthermore be bound by the Convention in relation to the said Power, if the latter accepts and applies the provisions thereof.

        Al Qaeda is not a contracting party to the convention, and at least as far as I am aware it neither accepts nor applies the provisions contained within it. Hence, it does not apply to Al Qaeda combatants.

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  7. The Geneva conventions should have been amended in 2001 to specifically address non-state actors like Al Queda.

    The analogy with piracy in the 16th, 17th & 18th centuries still seems to me to be the most ideal template. Hostis humani generis.

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

    However, it would have been ideal to have made that explicit at the time and codified it rather than have support ebb and flow based on the passage of time.

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    • jnc:

      The Geneva conventions should have been amended in 2001 to specifically address non-state actors like Al Queda.

      To me the more interesting question is how do you think it should have been amended? I agree that piracy is the closest (albeit not perfect) analogy to the terrorist problem, but does that provide us any guidance on, say, how KSM should have been treated as a prisoner?

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  8. I’d have the conventions explicitly define unlawful combatants as outside of it’s protections.

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    • jnc:

      I’d have the conventions explicitly define unlawful combatants as outside of it’s protections.

      You mean have them say explicitly what they already say by implication. I’m not sure that would make any difference to those who are intent on insisting that such combatants are covered. It’s not as though the conventions as written are ambiguous on the point.

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  9. The Geneva conventions should have been amended in 2001 to specifically address non-state actors like Al Queda.

    Yep

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  10. They are due to the protocols about armed rebels that were added in the 1970’s.

    I.e. how is Al Queda different from the Viet Cong or the FMLN or the FSLN?

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    • jnc:

      They are due to the protocols about armed rebels that were added in the 1970’s.

      The US never ratified those protocols.

      Like

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