Morning Report: Pain in the distressed market 12/14/15

Posted on December 14, 2015 by Brent Nyitray

Markets are lower this morning as oil continues to fall and problems at a high yield mutual fund begin to spill over.

No economic data today. The markets will be focused on the Fed and the evolving situation in distressed debt markets.

Marty Whitman’s Third Avenue Focused Credit Fund has suffered losses as the rout in high yield has reduced liquidity. Dodd-Frank has severely curtailed market-making operations at investment banks, and right now there are very few buyers of distressed credit as hedge funds face redemptions and investment banks cannot step in because of capital requirement. In fact, the regulators are considering additional steps to ensure a bank failure doesn’t bring down the entire financial system, which means that investment banks will probably de-risk further, making them even less likely to act as market-makers. This will be an interesting first test of a financial crisis in the new Dodd-Frank world.

As a general rule, in credit crunches, the long bond rallies. You saw that on Friday, where the 10 year yield fell 10 basis points in spite of strong retail sales data. This week will be interesting between the evolving Third Avenue situation and the FOMC decision on Wednesday. LOs, expect bond market volatility this week.  As a general rule, tightenings have not had a dramatic effect on mortgage rates. In fact, the yield curve has flattened during all the tightening cycles since 1979. Granted, these tightenings have taken place in context of a secular bull market in bonds, so take this analysis with a grain of salt. That said, unless the economy really starts taking off (and you start seeing wage inflation), chances are that the 10 year yield increases less than the amount of the rate hike.  Note that CoreLogic is forecasting a 4.5% 30 year fixed rate mortgage by the end of 2016.

 

Mortgage loan performance has been improving, according to the OCC. Performing loans increased to 93.9% from 93% a year earlier. New foreclosures are down 22% YOY.

Ex GMAC Ally Financial is getting back in the mortgage business. Ally CEO said this about the move: “Don’t think of this as Ally going down the road of the old GMAC,” Brown said, referring to the home lending unit that brought Ally to the brink of collapse. The ironic thing is that the “new subprime” is auto loans, and that is Ally’s bread and butter these days. They are offering 8 year loans for new cars at rates at rates substantially below the 30-year fixed rate mortgage (think 3.5% range). Given that new cars depreciate like sushi, this is a very, very mispriced loan. If you are wondering why the Fed wants to get off the zero bound even in the face of zero inflation, there you go. Those sort of rates are a function of ZIRP and the impossibility of earning a decent rate of return. It would be ironic if the ne-er do well of mortgages had simply morphed into the ne-er to well of auto lending and we see a collapse in asset backed security liquidity.

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Not The Morning Update

Posted on December 14, 2015 by Kevin S. Willis

Why, exactly, is climate not weather?

Today, on the day Paul Krugman tells us that a bunch of politicians getting together and posing for photographs and brunching excessively has saved the planet, I feel motivated to ask this question:

What do people mean when they tell us, repeatedly, that climate is not weather? Or if you wonder how we’re predicting the climate and its effects 100 years from now, when we can’t reliably predict the weather 12 hours from now, and sometimes cannot accurately predict the weather as it’s happening, why does someone shake their head sadly about what a moron you are and explains: weather and climate are not the same thing, you sad, mentally-limited man-child.

I mean, why is the answer to the observation that we are not good at predicting the future for complex systems even in the near term essentially: “Well, the stock market is not the same thing as a large river with many tributaries”. I am aware that a watermelon is not a football, but if I want to say something about the shape of the football, the watermelon might still have some relevance. Just saying: “a watermelon is not a football” does not suddenly make a watermelon a trapezoid.

The official explanation is that climate is simple while weather is complex. Which, summarized thusly, seems an absurd statement. What they actually say, in their own words:

Weather is chaotic, making prediction difficult. However, climate takes a long term view, averaging weather out over time. This removes the chaotic element, enabling climate models to successfully predict future climate change.

… isn’t much better. There is very little evidence that climate models are able to successfully predict future climate change. And I find it interesting that a site that calls itself “skeptical science” blithely asserts that the climate models are predicting the future without the most basic evidence—the actual prediction of the future.

Also, you cannot reduce the complexity of a million or a billion inputs by averaging. Again, where are the skeptics (not to mention the mathematicians) at Skeptical Science? The assertion that climate can be accurately predicted (because averaging!) while the weather 12 hours from now, much less 3 days from now, cannot reminds me of that cartoon. You know the one.

miracle

I would also observe that every time there is a severe or unusual weather event, climate suddenly becomes the cause for the weather. Which, to me, begs the question why we cannot use our infinitely accurate climate models to start predicting the weather. Wait, I know! Because we’ve tried it, and it turns out those predictions were wrong, too.

I have come to the not unreasonable conclusion that climate ≠ weather in the context of anthropogenic climate change because we have ample, daily evidence that the behaviors of a complex system cannot be predicted with any degree of accuracy. The predictions of climate change are always far in the future, and evidence of inaccuracy of such predictions so far in the past they can be dismissed, or the data massaged. Harder the argue that, yes, it was sunny yesterday, even though the leaves are still wet from all the rain.

…

Tangentially related, even mainstream, largely liberal news organs like Time and Newsweek had to observe that the Paris talks were far less about climate or “saving the planet” than they were about making money, creating markets, and allocating capital.

Off the mainstream, WND says the same thing with more chutzpah.

Finally, How Climate Change Deniers Sound to Normal People:

 

Because anybody who doesn’t agree with me ideologically is abnormal. And sounds like an idiot to all the normal people. Conform, you abberants! Conform!

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Patience You Must Learn Patience

Posted on December 14, 2015 by novahockey

Anyone know how (or want) to add this widget to the blog?

Episode VII Countdown Widget

Filed under: administrative | 3 Comments »