The Fed shrinks its balance sheet using this one weird trick..10/12/16

Vital Statistics:

Last Change
S&P Futures 2130.8 -4.0
Eurostoxx Index 339.6 -0.6
Oil (WTI) 50.8 0.0
US dollar index 88.4 0.1
10 Year Govt Bond Yield 1.79%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.54

Stocks are down again after getting roughed up yesterday. Bonds and MBS are down as well.

Mortgage applications fell 6% last week as purchases fell 3% and refis fell 8%.

Job openings decreased by 400k to 5.4 million in August, according to the BLS. The quits rate (which is probably the best indicator for strength in the labor market) was steady at 2.1%. I wonder if we are seeing employers begin to hire the long-term unemployed, which would account for the drop in openings and the flat quits rate. The labor force participation rate is beginning to pick itself off the floor, as we saw in the latest jobs data.

We will get the FOMC minutes from the September meeting at 2:00 pm EST today. Be aware of possible market movement around then, especially if the minutes turn out to be a bit more dovish than expected. On Sunday, Fed Vice Chairman Stanley Fischer said that September’s decision to wait on hiking rates was a “close call.” The minutes will hopefully shed further light on that statement.

The biggest problem with QE is what to do with all of these assets that now sit on the Fed’s balance sheet. The Fed can’t sell the Treasuries it bought without withdrawing liquidity from the system. That would be contractionary, and the economy (or at least the financial system) might be too fragile to handle it. That would be the case even if the Fed just lets it run off by not re-investing maturing proceeds. There is now a school of thought that the Fed’s balance sheet should simply remain the size it is now, and we shouldn’t return to pre-bubble levels. The thinking is that governments should simply consolidate the Fed’s assets onto its own balance sheet. (called “permanent monetization”) Given that central banks are ultimately owned by the government, its Treasuries would effectively “cancel out” the debt issued by the government. This is why looking at the debt to GDP ratio is somewhat misleading: about a quarter of our debt is owned by the central bank. It is like taking out a loan and leaving the money in your savings account. In nominal terms, your debt is up, but your net worth is unchanged. One thing is for sure: none of this is in the econ textbooks. We are all making it up as we go along.

A Federal Appeals court ruled yesterday that the CFPB’s structure is unconstitutional. The director of the CFPB is appointed for a 5 year term, and can only be fired for cause by the President. The court found that this structure puts too much power in the hands of one person, and is more or less unaccountable. Rob Chrisman takes a look at what is going on.

A study from the Urban Institute forecasts that the homeownership rate will continue to decline. The question ultimately rests on whether the Millennials are going to follow a different path than previous generations, or are they simply late bloomers who will eventually marry, have kids, and want a place in the suburbs. Note that the homeownership rate started going vertical in 1994, with the Clinton Administration’s policies to encourage homeownership, as a tool for social engineering. Post-crisis, the rates has returned to its previously undisturbed rate.

14 Responses

  1. It’s not just that the DC Circuit ruled as it did – it is how and why. It incorporated Scalia’s universally acclaimed great dissent in Morrison V. Olson.

    Ted Olson lost that case as a party 8-1, but he won this one as counsel! And rightfully so, IMHO.


    • mark:

      It incorporated Scalia’s universally acclaimed great dissent in Morrison V. Olson.

      So does this mean that Scalia was right and the others were wrong, or does this mean that the "living" words of the Constitution have "evolved" and therefore come to mean something closer to what Scalia mistakenly thought they meant back in 1988? /snark

      **edit – just to clarify, Mark, my snark is not directed at you, just the theory of a “living” constitution to which half the Court ostensibly subscribes.


      • Scott – you will like this video after you watch it more than you could possibly imagine before you watch it.


        • mark:

          Scott – you will like this video after you watch it more than you could possibly imagine before you watch it.

          I have to admit that I find the chumminess between justices with such diametrically opposed understandings of their job and of American democracy to be somewhat disturbing. It makes me think that they view it all as little more than a game of no significant or lasting import.


          In Scalia’s Obergefell dissent, he literally called the Court majority a “threat to American Democracy”.

          He said that the Court had “rob[bed] the People of the most important liberty they asserted in the Declaration of Independence and won in the Revolution of 1776: the freedom to govern themselves.”

          He called the decision a “judicial Putsch” and said that the Court had essentially declared itself a “super-legislative—power; a claim fundamentally at odds with our system of government.”

          Yet these people are (were) his pals? Disturbing.


    • Mark:

      I actually read through Scalia’s opinion in Morrison. I thought it was an interestingly subdued Scalia, missing the sharp barbs and caustic asides that mark a lot of his later opinions. Although there was the occasional hint of it:

      That the Court could possibly conclude otherwise demonstrates both the wisdom of our former constitutional system, in which the degree of reduced control and political impairment were irrelevant, since all purely executive power had to be in the President, and the folly of the new system of standardless judicial allocation of powers we adopt today.

      Heh…our former constitutional system.

      And his conclusion aptly describes the kind of approach that has become all too typical of the Court:

      The ad hoc approach to constitutional adjudication has real attraction, even apart from its work-saving potential. It is guaranteed to produce a result, in every case, that will make a majority of the Court happy with the law. The law is, by definition, precisely what the majority thinks, taking all things into account, it ought to be. I prefer to rely upon the judgment of the wise men who constructed our system, and of the people who approved it, and of two centuries of history that have shown it to be sound. Like it or not, that judgment says, quite plainly, that “[t]he executive Power shall be vested in a President of the United States.”


  2. Novel interpretation of the separation of church and state… Liberals in the government trying to influence the Catholic Church’s stances (presumably on abortion, gay marriage, and obamacare coverage of contraceptives)…

    And of course the only place you will find any info on wikileaks is your conservative Facebook or Twitter feed.


  3. Worth a read.

    “John F. Edland, Attica’s heroic medical examiner
    By Radley Balko
    October 12 at 12:19 PM”

    I wouldn’t expect this to happen today. I think that in general, professional ethics have declined considerably from the past.


  4. Warren gets a scalp.

    “Wells Fargo CEO steps down in wake of sham accounts scandal”

    Liked by 1 person

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