Morning Report: Short Squeeze in Treasuries 3/31/16

Markets are flattish on no real news. Bonds and MBS are flat as well.

Initial Jobless Claims rose to 276k from 265k last week.

In other economic data, the ISM Milwaukee rose to 57.8 while the Chicago purchasing Manager Index jumped. Consumer comfort fell however to 42.8.

Job cuts fell 13,4k to 48.2k in March, according to outplacement firm Challenger Gray, and Christmas.

Note that Boeing announced 4500 job cuts yesterday, and the financial industry is going through another round of lay-offs.

Not everything is grim in the labor markets, however. Some parts of the country are seeing outsized wage growth.

Mohammed El-Arian on what to look for in tomorrow’s jobs report. The numbers to watch: wage growth and the labor force participation rate.

TRID issues have shut the jumbo securitization market down for the moment. Non-bank jumbo originators are sitting on the sidelines at the moment because they can’t move their inventory. Another unintended consequence of TRID.

One unappreciated fact relating to the 10 year has been the massive short position that built up in them ahead of the Fed’s hiking rates. Now that the Fed is becoming more dovish, it is creating a short squeeze in Treasuries, which is pushing down rates. The punch line is that the bid under Treasuries (and thus the forces pushing yields down) are somewhat temporary.

29 Responses

  1. Amusing read:

    “Barney Frank Is Not Impressed by Bernie Sanders
    “Bernie Sanders has been in Congress for 25 years with little to show for it.”
    By Isaac Chotiner ”

    http://www.slate.com/articles/news_and_politics/interrogation/2016/03/barney_frank_is_not_impressed_by_bernie_sanders.html

    Related:

    “Don’t Break Up the Banks. They’re Not Our Real Problem.
    By STEVE EISMAN
    FEB. 6, 2016”

    http://www.nytimes.com/2016/02/07/opinion/dont-break-up-the-banks-theyre-not-our-real-problem.html?_r=0

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    • It never ceases to amaze me how the Fed’s monetary policy gets a pass on what happened in the mid-90s onward and serial bubbles..

      The Fed cares deeply about too much money chasing too few goods, but sees no issue with too much money chasing too few assets.

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    • jnc:

      Interesting article on not breaking up the big banks. It is notable to me that he correctly diagnoses the housing market and the lowering of credit standards as a prime cause of the 2008 crisis, yet when he goes on to list all of the great new regulations now in place to prevent it from happening again, not one of them is related to the very thing that caused the crisis.

      And I would be remiss if I didn’t note this:

      The problem of derivatives — they can increase risk, rather than reduce it, as they were designed to do — has not been completely solved.

      No, that is not “the problem” of derivatives. While it is true that an individual institution can either increase or decrease its own risk profile through the use of derivatives, in fact derivatives do not introduce any new net risk into the financial system. The net risk associated with any derivatives contract is zero. The risk taken on by one party to the contract is, necessarily, completely and exactly offset by the risk taken on by the other party to the contract.

      And the “systemic” risk that the derivatives market could conceivably pose, ie the concentration of credit risk to a few institutions, has in fact been “solved” by concentrating it almost entirely into a single clearing house with requirements for holding excess capital (margin) against the value of the contracts.

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  2. Gene Weingarten, the Pulitzer Prize winning columnist for the Washington Post, this week named a historical figure who he finds even more reprehensible than the current Republican presidential candidates. He names Supreme Court Justice James Clark McReynolds, a key figure in the 1930s attempt to declare the New Deal unconstitutional. He was an unrepentant racist and anti-Semite who sat on the Court for 26 years.

    Okay, so this is a truly loony political season — the looniest I have seen in my life — featuring as GOP frontrunners the two seemingly most disagreeable people on Earth. Trump is Trump, and Cruz is, by consensus, the most loathed man in the Senate. (If you have not seen Lindsey Graham discuss Cruz with Trevor Noah, you must. Graham was magnificent; he’s a truly funny man.)

    The appearance of these two loathsome and contemptible men led me to wonder if there has ever been a more loathsome and contemptible powerful person in Washington. Then I remembered Joe McCarthy and his mini-me, Roy Cohen, so the answer is yes.

    But that didn’t satisfy me. Roy and Joe are too tritely contemptible. They are cliche contemptible. So I dug deeper and found the person I think might have been worse than the tetrad of Cruz, Trump, Roy and Joe COMBINED.

    Ladies and gentlemen, may I nominate Supreme Court Justice James Clark McReynolds.

    McReynolds was appointed by Woodrow Wilson in 1914. Wilson, a noted racist, was rewarding McReynolds for his service as U.S. Attorney general; McReynolds had ably provided legal cover to allow Wilson to re-segregate the federal workforce after the uber-progressive Roosevelt and Taft administrations had taken pains to integrate it. Wilson and McReynolds set the civil rights movement back a generation.

    But it would be unfair to simply label McReynolds a racist, though he was, because he was so much more than that. He was also an antisemite, an unrepentant misogynist, and, by acclamation, the nastiest man most everyone who met him had ever encountered. He was quite the sweetheart. He called FDR “that crippled son of a bitch in the White House.”

    McReynolds became the leading force in a four-man cabal on the court to destroy the New Deal by declaring each of its programs unconstitutional. McReynolds felt that it was not the role of government to rescue the country from the Depression. (He so exasperated the president that FDR infamously tried to pack the court so as to overwhelm the malign influence of McReynolds and his cronies.) Oh, he also ruled to overturn a child labor law he deemed too restrictive on private enterprise; the case was brought by a father who felt the government had no right to tell him that his 15-year-old son could not work a 60-hour week. McReynolds concurred with the daddy. His vote was pivotal.

    On the bench, McReynolds was lazy to the point of incompetence — he often didn’t read up on cases until they were literally standing before him, so he was utterly unprepared to rule on them, though he always did anyway, always in line with his reactionary, Neanderthal politics — and he was an almost cartoonish boor. During his tenure, there were very few women who practiced before the high court, but whenever any of them stepped forward he would say “I see the female is here,” and leave.

    There was at the time a distinguished black lawyer, Charles Hamilton Houston, the father of the civil rights movement and mentor to Thurgood Marshall, a giant of American jurisprudence. When Houston argued a case before the high court in 1938, McReynolds swiveled his chair to face the wall.

    I am not making any of this up.

    Oh, he also did not like Jews, which mattered a lot because he needed to get along with three of the most distinguished justices of all time — Benjamin Cardozo, Felix Frankfurter and Louis Brandeis — each of whom was Jewish, and each of whom, alas, McReynolds despised. When any of them were speaking, McReynolds would often snap open a newspaper and hide his face behind it, or vacate the premises.

    There is no official photo of the 1924 court. Try to guess why.

    Nope, it’s impossible to get this right, because it is so petty. There is no photo because the seniority of the judges dictated that McReynolds would have to sit next to Brandeis for a minute or two, and McReynolds refused.

    Taft, who was at that point Chief Justice, once remarked that when the justices met together to discuss cases, much more work got done if McReynolds was not in the room; his vicious sarcasm and peremptory dismissal of the ideas of others was a constant impediment.

    He was a man of promiscuous prejudices. When interviewing law clerks, he specifically noted that certain persons need not apply: “Jews, drinkers, blacks, women, smokers, married or engaged individuals.” When Taft once asked the members of the court to travel with him to Philadelphia for a ceremonial event, McReynolds begged off, informing his chief justice: “As you know, I am not always to be found when there is a Hebrew aboard.” Two other members of the court — fellow conservatives — quit the country club of which McReynolds was also a member because, according to one account, his behavior to others was rude “beyond their endurance.”

    There is no official record of McReynolds’s feelings about gay people, but there is a clue: He disliked wristwatches because he felt they made men “look effeminate.”

    McReynolds died in 1948 after a long illness, and was, according to John Knox, a former law clerk of his, “without a single friend or relative at his beside. ”

    (Much of the previous was drawn from Wikipedia and Ian Millhiser’s excellent book “Injustices.”)

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    • But was he wrong about the law?

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      • But was he wrong about the law?

        Often, and inexcusably.

        I see no critique about the underlying law.

        Then you missed the one where he voted to overturn a child labor law.

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        • Mark:

          Often, and inexcusably.

          Examples?

          Then you missed the one where he voted to overturn a child labor law.

          His opinion was condemned, but I didn’t see an actual critique.

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      • “But was he wrong about the law?”

        He was certainly wrong about his duties and responsibilities vis-a-vis the court.

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        • KW:

          He was certainly wrong about his duties and responsibilities vis-a-vis the court.

          I’m not sure I understand. How so?

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        • During his tenure, there were very few women who practiced before the high court, but whenever any of them stepped forward he would say “I see the female is here,” and leave.

          There was at the time a distinguished black lawyer, Charles Hamilton Houston, the father of the civil rights movement and mentor to Thurgood Marshall, a giant of American jurisprudence. When Houston argued a case before the high court in 1938, McReynolds swiveled his chair to face the wall.

          Taft, who was at that point Chief Justice, once remarked that when the justices met together to discuss cases, much more work got done if McReynolds was not in the room; his vicious sarcasm and peremptory dismissal of the ideas of others was a constant impediment.

          He refused to speak to fellow justice John Clarke, which is unprofessional, no matter how much you dislike somebody if it’s part of your job to converse with them. He’d blow off work to go duck hunting without telling anybody, apparently.

          During Cardozo’s swearing-in ceremony, McReynolds pointedly read a newspaper,[38] and would often hold a brief or record in front of his face when Cardozo delivered an opinion from the bench.[40] Likewise, he refused to sign opinions authored by Brandeis.[13]

          Unprofessional. His legal opinions may have been okay (none of the one’s I have read seem particularly objectionable to me, in fact I’ve agreed with the small sample I’ve read) but see how liberals and progressives would ultimately forgive him for his unprofessionalism and bigotry:

          He forbade smoking in his presence. He is said to have been responsible for the “No Smoking” signs in the Supreme Court building, inaugurated during his tenure.

          But most people in life are mixed bags:

          However, he was reportedly “extremely charitable” to the pages who worked at the Court, and had a great love of children. For example, he gave very generous assistance and adopted thirty-three children who were victims of the German bombing of London in 1940, and left a sizable fortune to charity. When Oliver Wendell Holmes’s wife died, McReynolds broke down and wept at her funeral. Holmes wrote in 1926: “Poor McReynolds is, I think, a man of feeling and of more secret kindliness than he would get credit for.” He would often entertain at his apartment, and even passed cigarettes to his guests on occasion. He often invited people for brunch on Sunday mornings. According to William O. Douglas, “On these informal occasions in his own home he was the essence of hospitality and a very delightful companion”. Once, when riding to his office on a street car, a drunk got on board and fell out in the aisle. McReynolds picked him up, helped him back to his seat, and sat beside him until they reached the top of Capitol Hill, leaving him only after giving explicit instructions to the conductor. And when due to absence of more senior justices it fell on him to preside in court, “he was the soul of courtesy, graciously greeting and raptly listening to the arguments by lawyers of both sexes”. The public Justice McReynolds was noted for his hospitality. He entertained frequently at the Willard Hotel with guest lists of 150 people, including his fellow justices, and at an annual eggnog party which was one of the social highlights of the Christmas season. Alice Roosevelt, one of many friends, requested the services of his cook, Mrs. Parker, for her wedding breakfast to Nicholas Longworth.

          Also, this: “McReynolds never married”

          Perpetual bachelors in that era . . . well, you know what they say.

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    • I see no critique about the underlying law.

      Like

    • way to leave this out:

      Justice McReynolds wrote two early decisions using the Fourteenth Amendment to protect civil liberties: Meyer v. Nebraska 262 U.S. 390 (1923), and Pierce v. Society of Sisters 268 U.S. 510 (1925). Meyer involved a state law that prohibited the teaching of modern foreign languages in public schools. Meyer, who taught German in a Lutheran school, was convicted under this law. McReynolds wrote that the liberty guaranteed by the Due Process Clause of the Fourteenth Amendment included an individual’s right “to contract, to engage in any of the common occupations of life, to acquire useful knowledge, to marry, to establish a home and bring up children, to worship God according to the dictates of his conscience, and generally to enjoy privileges, essential to the orderly pursuit of happiness by free men”. These two decisions survived the post-Lochner era.[16]

      Pierce involved a challenge to a law forbidding parents to send their children to any but public schools. Justice McReynolds wrote the opinion for a unanimous Court, holding that the Act violated the liberty of parents to direct the education of their children. McReynolds wrote that “the fundamental liberty upon which all governments in this Union repose excludes any general power of the State to standardize its children by forcing them to accept instruction from public teachers only”. These decisions were revived long after McReynolds departed from the bench, to buttress the Court’s announcement of a constitutional right to privacy in Griswold v. Connecticut 381 U.S. 479 (1965), and later the constitutional right to abortion in Roe v. Wade 410 U.S. 113 (1973).

      so you have a bigot to thank for those.

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      • I noticed that when I read the full Wikipedia article after posting the Weingarten tirade. It does make for a nicely ironic footnote. Which would you rather have, Lochner re-instated or Griswold overturned?

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        • me? lochner — that’s easy.
          i have no objection to BC or any other drug for that matter.

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        • yello:

          Which would you rather have, Lochner re-instated or Griswold overturned?

          I don’t understand the either/or choice.

          Maybe I misunderstand, but I don’t think the Lochner era and the post-Lochner era are opposite sides of a two-sided coin. I thought that Lochner prevented state regulation, while post-Lochner allowed federal regulation. There is a third alternative which would allow state regulation but prevent federal regulation. And that alternative fits in nicely with a reversal of Griswold, in which states retain the power to regulate themselves. That is what true federalism would look like.

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        • There is a third alternative which would allow state regulation but prevent federal regulation.

          Not under the US Constitution.

          This Constitution, and the laws of the United States which shall be made in pursuance thereof; and all treaties made, or which shall be made, under the authority of the United States, shall be the supreme law of the land; and the judges in every state shall be bound thereby, anything in the Constitution or laws of any State to the contrary notwithstanding.

          Liked by 2 people

        • Mark:

          Not under the US Constitution.

          The section you have cited neither says nor implies that all regulatory powers are vested in the federal government. The key phrase is “in pursuance thereof”. In other words, only federal laws that themselves are constitutional are the “supreme law of the land”, and of course the constitution was written for the precise purpose of laying out the limited areas in which the federal government could assert power. I understand that you and the court have come to read the commerce clause as basically an “anything goes” clause for the feds, but that is not what it says, not what it originally meant, nor what it was intended to be.

          Indeed US history is replete with states regulating where the feds could not and did not. Perhaps in the best example, prior to the passage of the 18th amendment, many states (and localities) passed laws regulating or even banning the sale of alcohol, despite the fact that the feds had no power to pass such regulations. In order for the feds to be able to constitutionally enact such regulation, a constitutional amendment was required, because it was well understood that no such power existed in the constitution. Of course, under today’s expansive (ie, incorrect) reading of the commerce clause, the 18th amendment would never have been needed.

          With regard to the specific regulation at issue under Lochner, there is no reason that the court could not have ruled (as it eventually did) that the due process clause does not imply a right to contract, thus allowing NY to regulate work hours, without at the same time granting the feds that same power under an expansive reading of the commerce clause.

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        • The section you have cited neither says nor implies that all regulatory powers are vested in the federal government.

          Correct, but you have altered the premise with which I disagreed.

          Previously you suggested that the Feds were prevented from regulating, shile the states could regulate.

          This has never been the case under the Constitution. The Executive has always had discretion in implementation of and execution of the law. That discretion can be either unbridled, as it was for King George III, however subject to litigation when the King stomped on civil rights and liberties, or it can be circumscribed by regulations that are published for comment, argued about for months, and made binding only after the comment period. An Executive with unpublished powers of implementation and execution would be a Due Process nightmare.

          Where you and I may often agree is on the non-Cabinet regulatory agencies, the 4th branch that is not in the Constitution, but which is a creature of the political branches.

          But I find it difficult to believe that you think the Executive itself should have carte blanche in its implementation of a statute, or that you think there is a viable theory that the feds are prevented from regulating.

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        • Mark:

          Previously you suggested that the Feds were prevented from regulating, while the states could regulate.

          Yes, and I gave an example of exactly that, ie prohibition. Prior to the passage of the 18th amendment, the feds could not and did not prohibit the sale of alcohol, even as individual states could and did. It literally required a change in the constitution in order for the feds to retain the power to prohibit alcohol sales.

          Perhaps you are mistaking my argument about the specific regulation involved in Lochner with a generic argument about regulation as a general matter. Of course it is the case that the feds have some constitutional powers to regulate. The dispute has always been about when or in what circumstances it has those powers, not whether it has those powers at all. I have never argued that it never has such powers. I have only rejected the “anything goes” interpretation of the commerce clause which claims that the feds have the power to regulate pretty much anything and everything.

          With regard to Lochner, it seems to me that it is perfectly reasonable to argue that under the US Constitution, states like New York do indeed have the right and power to regulate working hours and wages if it wants to, but the commerce clause does not extend that power to the feds such that the feds can impose its own regulations over hours and wages on states that don’t want them.

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    • Wonder what party he was affiated with?

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      • The Confederates.

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        • What party were they affiliated with?

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        • Noted and corrected:

          “McReynolds was appointed by Woodrow Wilson in 1914. Wilson, a noted progressive, was rewarding McReynolds for his service as U.S. Attorney general;”

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        • “McReynolds was appointed by Woodrow Wilson in 1914. Wilson, a noted racist, was rewarding McReynolds for his service as U.S. Attorney general;”

          FTFY

          Wilson appointed McReynolds to the Supreme Court where he could only irritate eight other people because nobody in the Justice Department could stand him. He had all of the people skills of Ted Cruz but none of the charm.

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        • Like I said, corrected from the original.

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        • Eh, he was not as progressive as Teddy Roosevelt. And was definitely a racist (which as not incompatible with progressivism at the time; perfecting humanity through eugenics ceased to be such a progressive position after WWII). Wilson was definitely a One Worlders and a globalist, so . . . a complicated man.

          Like

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