Morning Report: Fed week 9/14

Markets are flattish this morning as overseas markets stabilize. Bonds and MBS are up.

No economic data today. We will have some important economic data this week retail sales and industrial production on Tuesday, with housing starts on Wednesday.

The big event this week will be the FOMC meeting on Wednesday and Thursday. The announcement will come on Thursday. For mortgage bankers, the focus will be in the Fed Funds rate, and also “reinvestment tapering.” Reinvestment tapering has to do with the Fed’s re-investment of maturing Treasuries and MBS that it bought during QE. Currently, the proceeds from any maturing MBS are re-invested back into the MBS market, in order to keep the Fed’s balance sheet constant. At some point, they will stop doing that, and you may see mortgage spreads widen. This means that mortgage rates could increase, even if the 10 year goes nowhere. Note that they probably will taper, meaning they won’t stop re-investing maturing proceeds all at once. They’ll probably cut it by $5 billion a month, similar to how they executed the tapering in the first place.

The Fed Funds futures are currently projecting about a 30% chance the Fed will tighten this week. Fed Vice Chairman Stanley Fischer is advocating moving before the inflation numbers begin to rise. “There is always uncertainty and we just have to recognize it,” he told CNBC television on Aug. 28. Asked if the Fed should delay an increase until it had an “unimpeachable case” that a move was warranted, Fischer replied, “If you wait that long, you will be waiting too long.” On the other side of the coin, many in the Fed are worried about repeating the mistake of 1937, where the Fed tightened (really only by a little bit) and the economy dove back into recession.

Exhibit (A) in the “ZIRP is not free” argument: Petrobras sold 100 year (!) bonds last June, and as oil has dropped so have these bonds. They dropped into the 60s recently. What does this have to do with ZIRP? Everything. When central banks hold down rates artificially, the price signals the market uses to assign risk (interest rates) become distorted and investors are forced to reach for yield. You see it mainly with pension funds and insurance companies, which have to hit a return bogey based on longevity and health care inflation. Yes, getting 6.85% in this interest rate environment is attractive, but, you are lending to a Brazilian oil producer for 100 years and only getting 6.85% a year! The last 3 times the Fed raised rates (94,99, and 05) they blew up the MBS market, the stock market bubble and the residential real estate bubble. This bond issue shows how much of a credit bubble we currently have. The Fed may have painted themselves into a corner, but until inflation comes back, they can wait.

Presidential candidates are beginning to put out their tax and spending plans. Jeb Bush recently put out his tax plan, and there are some items that will directly affect those in the real estate business. First, his plan reduces rates and limits deductions. State and local taxes will no longer be deductible. Second, there will be a cap on itemized deductions, which means people who have a large mortgage and pay a lot of mortgage interest will find themselves with a higher tax bill. This will probably have a negative effect on the jumbo side of the market, although it will present an opportunity for LOs to try and pitch refinancing from 30 year mortgages to 15 year mortgages. While the mortgage interest deduction is as American as apple pie and may in fact be a political third rail, economists believe that it hasn’t really increased the homeownership percentage, as it was intended to do – it just encouraged people to buy bigger houses.

14 Responses

  1. This is a good summation of Trump’s appeal

    “But it’s the third and key element—empowerment—where he shines.

    He’s able to consistently evoke issues in a way that makes people feel anger, rather than fear. (Some of his opponents use fear; for example, at the Conservative Political Action Conference, Ted Cruz told the crowd that the IRS “would start going after Christian schools, Christian charities, and…Christian churches.”)

    And though Trump frequently raises issues that could elicit fear—terrorism, crime, economic collapse—he does so with indignation, which suggests that the audience should feel that way, too.

    He’s angry, but not fearful.”

    http://www.newrepublic.com/article/122807/why-donald-trump-so-compelling-two-advertising-experts-explain

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  2. Good Rolling Stone interview with one of Trump’s biographers.

    “Donald Trump: Embracing Contradiction, Not Thinking Too Much
    ‘He really does, in many ways, reflect what the United States is,’ says Trump biographer Gwenda Blair

    By Lauren Kelley
    September 11, 2015”

    http://www.rollingstone.com/politics/news/donald-trump-embracing-contradiction-not-thinking-too-much-20150911

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  3. i’m a few years into a 30 year fixed at 4.5%. i’m seriously considering a 15 year arm that’s 2.89 with a “relock” option. i’d consolidate a lot of debt at 2.89 for 5 years.

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  4. Don’t worry, the science behind AGW is Rock.Fucking.Solid

    https://dl.dropboxusercontent.com/content_link/RN2MJ6xWgKVkyJgUK6f3VBGIm3zsMnC84n0iECIFJ0Sk1Yslctnx8VJ7cqZJsuEh?dl=1

    From the link: “The most interesting objection to the project was raised by Jeffrey Settleman, the Laurel Schwartz Professor of Medicine at Harvard Medical School, Director of the Center for Molecular Therapeutics and Scientific Director of Massachusetts General Hospital Cancer Center. Dr. Settleman, it should be mentioned, has enough grant money to pay 8 postdocs, 9 research technologists and technicians, one graduate student, one lab manager, and an administrative assistant.
    And this is what he said: “You can’t give me and Julia Child the same recipe and expect an equally good meal.”
    tleman’s argument is an insidious one, more so since Science decided to highlight it in the article. Dr. Settleman essentially claims that he and no other person in the world can obtain the results that he had obtained. His results presumably depend on a golden touch or a idiosyncratic talent that no one else in the world possesses.

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  5. “First, his plan reduces rates and limits deductions. State and local taxes will no longer be deductible.”

    In other words: don’t vote for me, says Bush! Backdoor tax hike. Thanks, Jeb!

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    • KW:

      In other words: don’t vote for me, says Bush! Backdoor tax hike. Thanks, Jeb!

      Perhaps, like Henry Clay, he’d rather be right than president.

      State and local taxes should not be deductible for the purposes of federal taxes. There is no reason people from high tax states should pay less to the fed than people in low tax states.

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  6. @mcwing: “Don’t worry, the science behind AGW is Rock.Fucking.Solid”

    The science behind AGW is rock solid. It’s the conclusions that are highly suspect. Then the solutions proposed to deal with the questionable conclusions are highly, highly suspect. It’s the ongoing attempt to suggest that if you’re opposed to their questionable conclusions and the highly questionable solutions then you are also against science, because you are denying that carbon dioxide has heat retaining properties. And also that the earth is round.

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  7. Shit just got real

    “How China’s Economic Woes Could Hurt the Revenues of American Universities

    Colleges in the U.S. have become increasingly dependent on students from abroad, who pay full sticker prices to attend.

    Svati Kirsten Narula
    Sep 13, 2015”

    http://www.theatlantic.com/business/archive/2015/09/chinas-economic-woes-could-ripple-to-us-colleges/404785/

    Like

  8. @Scottc1: “Perhaps, like Henry Clay, he’d rather be right than president.
    State and local taxes should not be deductible for the purposes of federal taxes. There is no reason people from high tax states should pay less to the fed than people in low tax states.”

    While true, it’s not going to go down well, because it’s essentially a tax hike on everybody who pays state and local taxes.

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    • KW:

      While true, it’s not going to go down well, because it’s essentially a tax hike on everybody who pays state and local taxes.

      Not if you lower tax rates at the same time. One could project additional tax revenues at current rates without the deduction, and then lower rates so that net revenues remain the same. Then some people would be winners and some people would be losers. Those in high tax states would be losers, and high tax states tend to go to the D’s anyway.

      Like

  9. @mcwing: “U.K. To Ban Sex Robots, Rosy Palm Hardest Hit!”

    UK Express to Provide Free Advertising for Sex Robots under Guise of a News Story! Multiple films at 11.

    Just the beginning of this market. And, lord, how can you argue that gender is “assigned” at birth and that anybody who wants to change their secondary sex characteristics should be able to because they want to, and folks of the same gender should be able to marry each other because of love and tolerance and what not . . . but a dude shouldn’t be able to get a sex robot? I don’t see that flying.

    Like

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