Morning Report: Banks pass stress test 6/30/16

Vital Statistics:

Last Change Percent
S&P Futures 2067.7 0.9 0.04%
Eurostoxx Index 2838.7 6.5 0.23%
Oil (WTI) 48.86 -1.0 -2.04%
LIBOR 0.631 0.004 0.64%
US Dollar Index (DXY) 95.7 -0.069 -0.07%
10 Year Govt Bond Yield 1.50% -0.02%
Current Coupon Ginnie Mae TBA 106.1
Current Coupon Fannie Mae TBA 105.4
BankRate 30 Year Fixed Rate Mortgage 3.54

Stocks are taking a breather after a ferocious two-day rally. Bonds and MBS are up.

Initial Jobless Claims came in at 268k, up 9k from the previous week. Claims have now been below 300k for a year, which is an astounding run.

In other economic data, the Chicago Purchasing manager index rose while the Bloomberg Consumer Comfort index fell.

Last night, the Fed released the results of its stress tests and most, if not all, US banks passed. After the close, the tape was dominated by news of banks raising dividends and buybacks. Deutsche Bank failed to pass. Deutsche Bank’s market cap stands at just under $19 billion, roughly the same size as M&T or Suntrust. Citi’s market cap is $123 billion. This gives you an idea how hard the banking system has been rocked in Europe.

George Soros believes Brexit will be the catalyst to unleash a financial markets crisis. He believes it will be concentrated in Europe, where their economies are stuck in a deflationary trap, similar to Japan. His prescription is for European governments to adopt deficit spending en masse to boost aggregate demand. Of course Japan has been doing exactly that for over 25 years. All they have to show for it is negative interest rates, flat GDP and a debt to GDP ratio of 2.2x. He is also predicting a hard landing in China, which would add fuel to the fire. Punch line: Deflationary forces emanating out of Asia and Europe will keep the US dollar strong (which will dampen inflation in the US) and interest rates low.

When talking about interest rates, it is important to remember that interest rate cycles are long. Below is a chart of long term Treasury yields in the US going back 90 years. The relevant comparison for the global economy right now is the 1930s. The crash was in 1929, (versus 2008) and rates kept falling for another 11 years. It looks like rates bottomed around 1940. Rates remained unusually low until the late 1950s. To put a parallel on that, we would be looking for rates to bottom out somewhere around 2020, and then have another 10 years where these exceptionally low rates increased only gradually. Note the trough-to-peak time was about 40 years. Of course history doesn’t repeat – it only rhymes, however those looking for a cataclysmic top in the bond market might be waiting a while.

Treasury yields long term

Fun fact: There are now $11.7 trillion worth of bonds with negative yields right now. The notional amount of bonds with negative yields and maturities of 7 years or longer is $2.6 trillion. This number has doubled since April. The UK 10 year is still positive, yielding .95%, but who knows how long that will last. This is the thing to keep in mind: with global rates near or below zero, there will be a natural bid for Treasuries. It is inevitable as global investors sell bonds yielding nothing to buy bonds yielding something.

32 Responses

  1. Frist!

    @markinaustin: Curious what a lawyer thinks about this:

    Guy claims he invented the iPhone in 1992 by having prepared a sci-fi concept of an all-in-one handheld device that seems designed to cover anything that might be subsequently invented as far as handheld devices go.

    However, he never paid the patent fees, so he doesn’t hold the patent. Shouldn’t that just be the end of the suit? No patent, he holds no patent, so where does he have leverage to claim ownership of the iPhone and other handheld devices, and what about the absurdity of his supposed iPhone patent (in which he patented the idea of having an all-in-one handheld device, which frankly Douglas Adams came up with well before him in the form of the Hitchiker’s Guide to the Galaxy) entitled him to 1.5% of all future Apple revenues? And what lawyer takes this case with these demands?


    • “And what lawyer takes this case with these demands?”

      I will bet it would be a lawyer in CA.

      From what you describe, it gets laughed out of court.


  2. If the FBI wants to make someone an informant, the no fly list is apparently a useful tool to do so.


  3. I took the implicit bias test for race and women in sciences:

    I apparently have a strong bias towards African-Americans and no bias about women in the sciences one way or the other.

    I’m not sure this testing is scientific.


    • “The Reaction to Brexit Is the Reason Brexit Happened
      By Matt Taibbi
      June 27, 2016”


      • As I commented when ScottC originally corked you on this, I feel like Taibbi is going to be persona-non-grata if he keeps this up. I think he’s exactly right: a big reason you’ve got #Brexit and Trump is how the elites and the folks that imagine themselves soulmates with the elites publicly and vociferously regard the hoi polloi, the huddled masses, and flyover country, whether in America or Europe. The Andrew Sullivan argument that Democracy must be dispensed with when it results in bad decisions and mobocracy is, ironically, the last case they need to be making if they want to minimize the Trump/Brexit phenomenon. All they are doing is confirming that these Very Important and Powerful People don’t want them, middle class blue-collar and white-collar folks, to have a say in the government that runs their lives or the kind of country they live in. Ezra Klein and Andrew Sullivan and the Plum Line folks don’t believe the running of the country should be left to the citizens, who simply don’t know what’s good for them.

        Which is one thing to think, but quite another thing to say, publicly and repeatedly, with no sense—apparently—that the rural bumpkins and Gods-n-Guns crowd aren’t simply going to vanish or surrender in the face of their eloquent rhetoric, but will continue to #Brexit and Tea Party their way into mucking up the utopian visions of their intellectual betters.


    • Christian Amanpour exemplifies the kind of elitist, you’re-only-motivation-is-racism nonsense that makes people want to #Brexit in the first place. And most of them seem completely unaware of the fact.


      • Not that objecting to a high degree of Muslim immigration is an entirely illegitimate position, because it’s not.


      • I love how CNN could only find man-on-the-street interviews where they wanted to kick the foreigners out. “Kick ’em all out!”

        It wasn’t like there was some objection to the EU trying to ban electric tea kettles, toasters, that it had banned high-powered vacuum cleaners and “inefficient” electric ovens, or that Internet routers, hand-dryers, mobile phones and patio jet-washers were also on the block for the EU’s wiser-than-thou regulations, some of which could easily be seen as targeting the UK. Nothing to do with fishing limits, either, I’m sure.

        In the case of Brixham, England’s largest commercial fishing port, many here want Britain to regain control of the waters within 200 miles of shore. Those fishing grounds are now managed by Brussels and packed with European vessels that trawl with nets and sometimes scrape the seabed.

        I’m sure nobody with an objection to the EU coming for their electric tea kettles was available to discuss the issue with the press, given how few people in England drink tea.

        Not to mention a little part where the UK paid $13 billion to the EU and got $4.5 billion back, meaning $8.5 billion of UK taxpayer dollars went out to Brussels and never returned.

        Justifiable or not, I can’t imagine there was nobody who was concerned about the return on investment of taxpayer money funneled to the EU. No, they just all want the foreigners out.

        Bah. News media is completely worthless.


        • Kev, you forgot the banana curvature Euroreg. This is a real thing. I only began to understand Brexit in the light of the banana curvature regulation.


        • Mark:

          I only began to understand Brexit in the light of the banana curvature regulation.

          My favorite EU regulatory horror story came from my time in the UK, when a local green grocer was closed down and had his scales confiscated for having the temerity to sell his produce in pounds and ounces, as he had for a generation, rather than in metric measurements as EU regulations required.


        • Every knee shall bend.


  4. Anyone else think half of the post #Brexit hate crimes and hate graffiti are actually hoaxes?


  5. Am I the only one irritated about the Elizabeth Warren meme where she says “Profiting on Student Loans is Obscene.. It is morally wrong. It is Obscene.”

    I mean the student loan industry is nationalized and the interest rate is heavily subsidized.. What more does she want?

    Fuck, for the last generation, the government has increased aid and universities have responded by hiking tuition.


    Liked by 1 person

    • Brent:

      Am I the only one irritated about the Elizabeth Warren meme…

      You could have left it at that and I would have joined you.


    • I’m sensing A LOT of racism against fake native Americans.

      Liked by 1 person

    • She could have summarized her position more concisely: profit is obscene and morally wrong. Period, end of sentence.


    • Am I the only one irritated about the Elizabeth Warren meme where she says “Profiting on Student Loans is Obscene.. It is morally wrong. It is Obscene.”

      In OT ethics, which Christians, Jews, and Muslims all pretend to follow, loans for a profit making venture are permitted interest but loans for personal survival [loans to the poor widow to get food, in OT terms] are not.

      So maybe she confused ed loans with personal survival loans. And maybe she confused the gummint with a community charity. I am pretty certain they should fall in the category of producing a profit maker, but that’s just me, and I am pretty sure that the loans are at subsidized low rates as it is.

      The Muslim community in Austin does no interest college loans on the handshake stipulation of “pay it forward”. That is, when the loan is paid off, and the young engineer is self supporting, he is to loan money to another promising Muslim student on the same no interest terms. But that is a community norm. Not a gummint mandate.

      EW just pisses me off in general.

      If HRC is indicted before the DNConvention and there is an open convention, who do you think the Ds would nominate? Sanders? EW?
      They have some awful choices. Oh well.

      Bill Clinton did a stupid thing talking to the AG b/c now she has to publicly support any professional staff/FBI recommendation. The AG did a stupid thing as a pol, but not as a prosecutor. Any time someone close to an investigation wants to volunteer info to a prosecutor [s]he should be all ears.


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