Morning Report: Bond Market Bubble talk 6/12/15

Stocks are lower as both the EU and Greece dig in their heels over a rescue package. Bonds and MBS are up small.

Inflation remains muted at the wholesale level. The Producer Price Index rose 0.5% in May, however that is energy driven. Ex food and energy, it was up 0.1%, or 0.6% year-over-year. The PPI is not that critical of an inflation index – the Fed uses the PCE deflator – but it shows that inflationary pressures remain contained. IMO we won’t see any sort of inflation until we see wage gains, and we are only just starting to see that.

Higher energy prices are not denting consumer sentiment according to the University of Michigan. June Consumer sentiment rose to 94.6 from 90.7 in May.

A couple Fed researchers have crunched the numbers and believe that the natural rate of unemployment is about 4.3%, versus the 5.2% number the Fed currently uses. They focus on labor’s share of income, which has fallen from 72.2% in 2001 to 62.9% now. If correct, that means the Fed has room to let the economy run. The bigger question is why the number has fallen so much. Is it weak bargaining power? Is it the fact that the emerging companies in the US need less employees? (For example, GE has a market cap of $276B and has 305,000 employees. Facebook has a market cap of $228B and has only 10,000 employees). IMO, it will come down to the labor force participation rate. Are the people who have involuntarily exited the labor force coming back?

Cash sales make up 35% of all home sales, according to CoreLogic. That is down from the peak of 46.5% in Jan of 2011, but still well above the pre-crisis level of 25%. So for originators, this means more “gettable” business even if existing home sales don’t improve all that much. I guess you can use cash sales as a proxy for distressed sales, and the places with the biggest foreclosure inventory and lowest price appreciation have the highest cash sales percent.

The raging debate in bond circles is whether we are in a bond bubble. Certainly sovereign debt yields are telling you that inflation is never, ever, ever coming back. However the bigger issue is corporate debt, which is being issued at a record pace as companies lock in low borrowing costs. If they were using that cash to build out capacity and invest in the business then there would be less concern. However, they are levering up to fund buybacks and M&A activity. That is a bigger issue. The biggest issue is that the holdings of corporate debt are now very, very concentrated in bond mutual funds, foreign investors and insurance companies. When there are bond fund redemptions, they have to sell. And new regulations regarding proprietary trading and bank capital mean that trading desks at the big investment banks are not going to absorb all that selling pressure. In addition, hedge funds are getting fewer and bigger as well. Corporate debt could get slammed hard if everyone heads for the exit all at once. Right now, the stock market is anticipating no problems when the Fed starts raising rates. That may end up being a bad bet.

59 Responses

  1. If gender is subjective, why not race?

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  2. I guess we need a ruling from Yello.

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  3. Someone should ask Elizabeth Warren for comment

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  4. I’ll look east for smoke signals.

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  5. I came here to share this link:

    http://www.thedailybeast.com/articles/2015/06/12/how-did-this-white-woman-convince-everyone-she-was-black.html

    But I see everybody beat me to it.

    As a personal anecdote, I was once walking to my car with a black coworker and the car stereo of another coworker started blasting out loud gangsta rap. The black lady just stopped and said, “Damn, I had no idea John was a {portmanteau combining ‘white’ and a vulgar racial slur’}.” It seems a lot of people associated with Rachel Dolezal are having the same reaction.

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  6. Like

  7. Ruthanne Dolezal said the family’s ancestry is Czech, Swedish and German. She said the family does have some “faint traces” of Native American heritage as well. She provided a copy of her daughter’s Montana birth certificate listing herself and Larry Dolezal as Rachel’s parents.

    Meanwhile, an inquiry is being opened at Spokane City Hall, where Dolezal identified herself in her application to the Office of Police Ombudsman Commission as having several ethnic origins, including white, black and American Indian.

    Pretty sure that qualifies her to be a law professor at Harvard.

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    • Meanwhile, an inquiry is being opened at Spokane City Hall, where Dolezal identified herself in her application to the Office of Police Ombudsman Commission as having several ethnic origins, including white, black and American Indian.

      I wonder how many genders she claims to have.

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  8. She may be related to Navin R. Johnson

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  9. Do you agree?

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  10. It’s a shame and demonstrates how far we have to go before Transrace even reaches current acceptance level of transgender. We forced this woman to live a lie, agreed? If not,why not?

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    • McWing:

      We forced this woman…

      How do you know she’s a woman? Or that he’s not a man? Or whatever?

      Oppressor.

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  11. Like

  12. Because SHE identifies as a woman. That’s all WE need to know.

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  13. Like

  14. Yello, do you support this woman’s transracialism? If not, why not?

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  15. So identity politics may have actually reached it’s moment when it’s pointed out that the Emperor has No Clothes?

    This could not have had better ironic timing vis-a-vis Bruce Jenner.

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  16. That would be this guy, right?

    Because of course the BBC can’t tell the difference between an outlandish, obviously fake social-justice obsessed parody account and a normal member of the public.

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  17. Yello, do you support her transracialism?

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  18. Like

  19. That Daily Kos piece is hilarious:

    “Should we be discussing Mrs. Dolezal in the terms of racial hijacking or culture theft, as has been the discussion on many forums? Or should we be discussing her in the same terms of self-identity which we discuss transgender identity?”

    Because of course in the world of political correctness there’s only one correct way that you are allowed to discuss it so it’s important to get it right off the get go and browbeat everyone else to go along.

    At least he included the trigger warning:

    “(I know I’m going to be discussing some emotionally delicate topics here… and I hope none of my points are misconstrued as intending to offend. I’m a white cis male, and I know I’m writing about intensely personal issues; race, gender, and identity, from a distanced perspective. If there is anything that you feel I’ve trivialized, please let me know, as it likely comes from a place of ignorance.)”

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  20. So, I guess if you are a white guy, you now have to cite the legal disclaimers before you give your opinion?

    Sounds like the beginning of an investor conference call. “This call will contain forward-looking statements…”

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  21. http://tinyurl.com/okcpppr

    It is hard to understand why the bill’s authors would have gone to the trouble of authorising federal exchanges if they intended to render them useless by denying them subsidies.

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    • Gruber, of course, except using his “reasoning” it would make no sense to have federal exchanges at all. So by the time it gets to the Committee they have forgotten Gruber, I think.

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      • Mark:

        Gruber, of course, except using his “reasoning” it would make no sense to have federal exchanges at all.

        So you think the sole function of exchanges was to serve as subsidy providers? Seems like an awful lot of complexity to achieve a simple goal.

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        • Seems like an awful lot of complexity to achieve a simple goal.

          No shit, Sherlock!

          But Gruber wanted to penalize states that did not comply, which would have been simply achieved by not having federal exchanges, which were clearly somebody else’s afterthought.

          This was a groupthink committee clusterfuck, dictated largely by two major lobbies, as George is fond of noting.

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        • Mark:

          No shit, Sherlock!

          Perhaps the exchanges were not as single-purposed as you think.

          But all of that is neither here nor there in any case. The question facing the Supreme Court is what the law says, not what the Dems who carelessly rushed it through reconciliation meant it to say.

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        • Actually, the Ds carefully and triumphantly but foolishly avoided reconciliation, when Scott Brown was elected.

          Here is the key to the government’s argument:

          Section 18031(b)(1) expressly directs that “[e]ach State shall *** establish an [Exchange].” But to afford “State flexibility,” the Act further provides that if a State does not or cannot establish the “required Exchange” for itself, then HHS “shall *** establish and operate such Exchange within the State.” 42 U.S.C. 18041(c)(1) (emphasis added). The term “such Exchange” conveys that an Exchange HHS
          establishes as a statutory surrogate for a State fulfills Section 18031(b)(1)’s requirement that “[e]ach State” establish an Exchange. For purposes of the Act, therefore, such an Exchange is “an Exchange
          established by the State under Section 18031.” The Act’s definition of “Exchange” underscores that conclusion by defining the term to mean “an American Health Benefit Exchange established under section 18031.”
          ———————————————
          Here is the language in the bill as passed and signed:

          SEC. 1321. STATE FLEXIBILITY IN OPERATION AND ENFORCEMENT OF
          EXCHANGES AND RELATED REQUIREMENTS.

          
          (c) FAILURE TO ESTABLISH EXCHANGE OR IMPLEMENT REQUIREMENTS
          .—
          (1) IN GENERAL
          .—If—
          (A) a State is not an electing State under subsection
          (b); or
          (B) the Secretary determines, on or before January
          1, 2013, that an electing State—
          (i) will not have any required Exchange operational
          by January 1, 2014; or
          (ii) has not taken the actions the Secretary deter-
          mines necessary to implement—
          (I) the other requirements set forth in the
          standards under subsection (a); or
          (II) the requirements set forth in subtitles A
          and C and the amendments made by such sub-
          titles;
          the Secretary shall (directly or through agreement with a not-for-profit entity) establish and operate such Exchange within the State and the Secretary shall take such actions as are necessary to implement such other requirements.
          ————
          The argument that the HHS is by this statute acting in lieu of the state to provide the same or similar benefits to individuals is easy. The argument that it is acting for the state is a seeming stretch. So if the argument can succeed based on an in lieu power to provide the benefits to individuals it could be said to be a clear and necessary implication, but it seems to me that the argument
          will leave the statute murky, and “plain meaning” construction will cause at least 3 members of the Court to vote against the government, while it will cause at least 4 members to vote that murky means deference to IRS is permitted under Chevron.

          But if the government wins on murky=Chevron deference to IRS, then a R Admin IRS could change its mind.

          So I don’t know that the result of this case has much meaning in the long run.

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        • Mark:

          Actually, the Ds carefully and triumphantly but foolishly avoided reconciliation, when Scott Brown was elected.

          Nope. Scott Brown’s election forced them to use reconciliation. Any changes to the Senate-passed bill that came out of a House/Senate conference negotiation would have been subject to another Senate vote, which would have been filibustered by the R’s after Brown’s election. So to avoid that filibuster, the House agreed to pass the Senate bill without any changes, but then to change it to what it actually wanted via the reconciliation process and the Health Care and Education Reconciliation Act, which could not be subject to a filibuster.

          Here is the key to the government’s argument:

          Yes, I know. We discussed exactly this almost a year ago, at which point I told you:

          The claimed ambiguity derives from just two simple words: “such exchange”. In the contingency provision allowing for the creation of a federal exchange should a state fail to create an exchange, the statute states that the secretary “shall…establish and operate such exchange in the state…” The law mandates “exchanges established by the states”, and the defense claims that “such exchange” therefore means an exchange established by the state. So, applying logic that strikes me as pure, unadulterated sophistry, the defense concludes that if the Feds establish “such an exchange”, then the Feds have established an “exchange established by the state”.

          You didn’t seem to believe that this was the crux of the government’s defense back then, so I am glad you finally see that it is. However, I still maintain that only through pure sophistry can one claim that an exchange not established by the state is, in fact, an exchange established by the state.

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        • I still think what I wrote then is correct – the statute as a whole is designed to serve individuals, not states, but when you get down to this part of the statute the gov is arguing as I suggested here and as you suggested then. And the same three Justices I said would take the microscope then and say this is twisted beyond plain meaning will do so now and the same four will take a broader view and I do not know what Roberts and Kennedy will do. And the same construction arguments apply and you can get from here to there on either side of the case. And I am not arguing which view is “correct”. Either view is plausible, because strict construction is not required in this case.

          What I am suggesting here is that the case means less than what the media is suggesting. If the gov wins, it will surely be partly on Chevron grounds and thus subject to change by a R IRS, on its own. If the plaintiffs win then a bunch of citizens in states will be paying taxes and not getting services and that landscape will change, too.

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        • Mark:

          Either view is plausible, because strict construction is not required in this case.

          What determines whether it is required or not?

          BTW, I don’t think it could ever be plausible that an exchange not established by the state is in fact an exchange established by the state.

          If the plaintiffs win then a bunch of citizens in states will be paying taxes and not getting services and that landscape will change, too.

          Getting a bunch of citizens to pay taxes for services rendered to other people is pretty much what the progressive project is all about!

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        • Getting a bunch of citizens to pay taxes for services rendered to other people is pretty much what the progressive project is all about!

          A given. However, it will be an R issue. See:

          http://tinyurl.com/an-R-problem

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        • Mark:

          However, it will be an R issue.

          Yes, of course. Politics is always present, and in their ignorance or prejudices many voters can always be counted on to punish the wrong people with their votes. And politicians, including R’s, can be counted on to cower in the face of such voters.

          But I still think it is a bigger deal than you allow. Yes a future R prez could instruct the IRS to actually follow the law and stop the illegal subsidies, but how likely is that? Blutarsky’s GPA, I’d say. (See the above point.) Once those subsidies are given the SCOTUS seal of approval, they aren’t going anywhere but up. For sure, if SCOTUS surprises everyone and actually applies the law, the R’s will have a political problem to solve. But in solving it they will at least have some leverage to make Obamacare a little less horrible than it is meant to be.

          Such a ruling would also have the added benefit of being the correct ruling, regardless of the political outcome.

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        • For sure, if SCOTUS surprises everyone

          I am going to make my prediction now. 5-4, government loses; 6-3 [or 7-2, +Alito] ruling is stayed in effect until a fixed future time, say the end of the Congressional term, or the insurance year expiration, with a suggestion to Congress to clarify the statute.

          This is the proper outcome, btw, based on precedent, IMHO.

          NoVA, what do you think Congress will do on a delayed mandate ruling?

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        • Mark:

          I am going to make my prediction now. 5-4, government loses

          You’ve got a good track record so far, I think. You called Roberts to vote with the left-wing the last time, didn’t you?

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        • I called the tax argument, after I heard the orals, but before the opinion, yep.

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        • Mark:

          This was a groupthink committee clusterfuck, dictated largely by two major lobbies, as George is fond of noting.

          And who in their right mind could have expected/predicted that, right? Usually the federal government is so very efficient and logical, with private interests rarely capturing the process. That’s why we want the federal government to manage big things like health care.

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  22. The NYT reports that we are poised to place tanks in the Baltic, without troops. From the article:

    Mark Galeotti, a professor at New York University who has written extensively on Russia’s military and security services, noted, “Tanks on the ground, even if they haven’t people in them, make for a significant marker.”

    Unless the Baltic armies have the personnel to drive the tanks, this is not a significant marker, at all. It is the placement of an easy target.

    Either there are Baltic tank commanders ready to drive those whales, or there must be Americans, Canadians, and Brits on the ground.

    I am not purposely dissing French and Italian and German tank forces – I just have no idea of their states of readiness.

    The “significant marker” statement struck me as facile and ridiculous.

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    • Brian Thornton, a non-lefty at PL, wrote that Euro news says we will place 5000 troops in the Baltic. That would make sense, I think.

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  23. Baucus.

    http://www.c-span.org/video/?c4477322/max-baucus-subsidies

    It’s all moot though, Roberts will fuck us again, as we all know.

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  24. Dogget seems to agree with Gruber and Baucus.

    http://www.myharlingennews.com/?p=6426

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  25. Especially health care records!

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  26. ” I’m a white cis male, and I know I’m writing about intensely personal issues; race, gender, and identity, from a distanced perspective. If there is anything that you feel I’ve trivialized, please let me know, as it likely comes from a place of ignorance.)”

    oh shut the fuck up. this whole thing reminds be a of Dennis Leary bit.

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  27. What’s the difference between Rachel Dolezal and Caitlan Jenner?

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  28. i’m going to guess one white penis. and yet again, it’s the cause of all problems in the world.

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    • it’s the cause of all problems in the world.

      A friend of mine wrote that in an essay in English class in eighth grade. He was not asked to read it aloud in class.

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  29. You are of course accepting at face value the government’s argument that absent the subsidies, the insurance markets in those states will collapse.

    I disagree. Those people will simply not be covered as they will qualify for the hardship exemption and thus won’t be compelled to purchase insurance.

    The government uses these sorts of coercive funding mechanism all the time to end run federalism concerns. A prime example is tying federal highway funds to things like setting a uniform speed limit and drinking age.

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    • You are of course accepting at face value the government’s argument that absent the subsidies, the insurance markets in those states will collapse.

      Not I. To whom were you replying?

      Like

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