Morning Report – The wages of ZIRP 4/21/15

Stocks are higher this morning as earnings come in better than expected. Bonds and MBS are up.
Housing advocates are urging the government to investigate and intervene in communications between MBS holders and servicers. They claim that MBS investors (read Wall Street Sharpies) are urging servicers to forego modifications and to pursue “unnecessary foreclosures.” Surprisingly, they hold up Ocwen as pillar of servicing virtue. Of course Ocwen is fighting for its life and will do anything it possibly can to make the government happy.
New simpler mortgage disclosure forms are coming August 1, and they could slow closings as professionals learn to navigate the new system.
M&A activity is picking up, with an interesting situation in the pharma sector. Mylan, who last week launched a hostile bid for Perrigo, now faces an unsolicited bid from Teva. A combination of low interest rates and high stock prices make growth by acquisition an attractive strategy. Teva’s biggest drug faces generic competition so they need to replace that revenue. Mylan / Teva is going to face antitrust scrutiny. This situation looks like a fun one for the arbs.
While ZIRP is helping to drive M&A activity, the unintended consequence is that insurers and pension funds are getting hammered as they cannot earn enough on their assets to cover their estimated liabilities. There are two ways out of the box: either assume it away with rosy estimates of asset return and liability inflation, or take a lot more risk. This is part of the reason why the Fed wants to get rates up to a more normal level. I suspect they fear we are going to have to bail out the state pension funds and / or insurance companies.
High end real estate has replaced gold as the go-to asset for storing wealth. Real Estate and contemporary art are the new store of value of choice for foreign investors. Gold, which used to have that role, cannot get out of its own way. Why? Blame the financial crisis, where gold sold off just like every other asset in a situation tailor-made for it. If gold was unable to rally in that sort of crisis, what good is it? Note that high end real estate in places like London, New York, and Vancouver are owned largely by Chinese investors, and China has its own issues, as even state-owned companies are now defaulting on their debt. As their real estate bubble bursts, it will be interesting to see if they liquidate overseas property. Generally in a crisis, you sell what you can, not necessarily what you want to.

13 Responses

  1. I keep waiting for the long promised wave of hyperinflation to erode away my fixed rate mortgage. I’m beginning to think it’s never going to get her.

    Oh, and Frist.


  2. The central banks of the world are on a mission to create inflation. Eventually they will succeed.


  3. The big question on inflation comes down to wage growth. When is the slack in the labor market used up? And that is a function of baby boomers who may or may not come out of retirement.


    • And that is a function of baby boomers who may or may not come out of retirement.

      Brent, I am guessing that it is a function of more than one variable.

      But multivariate analysis is the first time calculus gets hard.

      So I will stick with just guessing.

      The local example I see is that Austin employment is booming and people are moving here at a rate that will totally clog our highways into parking lots any day now. It is not an energy boom but a brain job boom. Local evidence says that high tech and biotech core areas have fast growth – but they demand lots of trained folks.

      On a smaller scale, Madison WI is feeling the same thing.


      • I think it is likely that HRC was not instrumental in either the soliciting of funds from Russians or the granting of an undesirable permission from the State Department. But it stinks anyway and should be investigated and points up how casual the Clintons are and were about mixing business and public affairs.
        Mark Rich. Mark Rich. Mark Rich.

        FWIW: I never thought Halliburton [KBR] got all those Iraqi contracts because the VP had lots of Halliburton stock in escrow. Halliburton was arguably better positioned for that heavy stuff in the Middle East than Fluor, or Schlumberger, or HB Zachry, or Hughes, or even Bechtel. {IDK}. But it still looked bad. I mention it because in some ways this is parallel. In one way it is not – that is, considering the Clinton history of no boundaries.


  4. you have to check out ace’s front page. it’s over.


  5. Who hears this and is persuaded?


    • McWing:

      Who hears this and is persuaded?

      I am. I definitely think that Hillary predates Warren as a disingenuous demagogue.


      • This Wisconsin story is pretty unbelievable.

        For dozens of conservatives, the years since Scott Walker’s first election as governor of Wisconsin transformed the state — known for pro-football championships, good cheese, and a population with a reputation for being unfailingly polite — into a place where conservatives have faced early-morning raids, multi-year secretive criminal investigations, slanderous and selective leaks to sympathetic media, and intrusive electronic snooping.

        Yes, Wisconsin, the cradle of the progressive movement and home of the “Wisconsin idea” — the marriage of state governments and state universities to govern through technocratic reform — was giving birth to a new progressive idea, the use of law enforcement as a political instrument, as a weapon to attempt to undo election results, shame opponents, and ruin lives.

        Most Americans have never heard of these raids, or of the lengthy criminal investigations of Wisconsin conservatives. For good reason. Bound by comprehensive secrecy orders, conservatives were left to suffer in silence as leaks ruined their reputations, as neighbors, looking through windows and dismayed at the massive police presence, the lights shining down on targets’ homes, wondered, no doubt, What on earth did that family do? This was the on-the-ground reality of the so-called John Doe investigations, expansive and secret criminal proceedings that directly targeted Wisconsin residents because of their relationship to Scott Walker, their support for Act 10, and their advocacy of conservative reform.

        Someone needs to explain to me how it is possible for the victims of these kinds of government actions to be bound by “secrecy orders”. Surely any sane understanding of due process requires the ability to mount a public defense of oneself.


  6. Thomas Edsall continues his analysis of the fall off in support for redistribution:



      Neighbors of Mr. Sarao told The Telegraph that he was married with two children and lived in a house opposite his parents’ home. “He drives that broken down green car, it belongs to his parents,” a neighbor told The Financial Times. Mr. Sarao is scheduled to appear in a London court today.


    • jnc:

      Thomas Edsall continues his analysis of the fall off in support for redistribution:

      Sounds like the reason is because people like the redistribution they already have.


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