Morning Report: Irrational exuberance in the bond market? 8/1/17

Vital Statistics:

Last Change
S&P Futures 2475.5 7.5
Eurostoxx Index 380.1 2.2
Oil (WTI) 49.9 -0.3
US dollar index 85.9 0.1
10 Year Govt Bond Yield 2.32%
Current Coupon Fannie Mae TBA 102.93
Current Coupon Ginnie Mae TBA 103.81
30 Year Fixed Rate Mortgage 3.95

Stocks are higher this morning on overseas strength. Bonds and MBS are down a touch.

Personal income was flat in June, as a drop in interest / dividend income offset an increase in compensation. Inflation remains nowhere to be found as the PCE price index (the Fed’s preferred measure of inflation) was flat MOM and up 1.4% YOY. Ex-food and energy, the numbers ticked up 0.1%.

Home prices rose 1.1% in June and are up 6.7% YOY, according to the CoreLogic Home Price Index. Want to know how tight inventory is? Unsold inventory as a percentage of households stands at 1.9%, which is the lowest in 30 years.

Manufacturing strengthened slightly in June, according to the ISM and PMI manufacturing indices. Construction spending fell 1.3% in June as public construction spending fell. Residential construction was down 0.3% MOM, but is up 9% YOY.

Remember “irrational exhuberance?” That was Alan Greenspan’s warning to investors that there was a stock market bubble. Unfortunately for him, he issued the warning on 12/5/96, about 39 months before the stock market actually peaked. Well, he is back, warning of a bond market bubble. He is warning of an abrupt pop in the bond market, and a return to 1970s stagflation. Color me somewhat skeptical of the abrupt pop in the bond market argument. Below is a chart of interest rates going back to World War 1. As you can see, interest rate cycles are long. Aside from the disastrous Fed hike after the crash of 1929, rates stayed below 4% from 1924 to 1959.

100 years of interest rates

FWIW, the 1970s stagflation was largely due to the oil shocks combined with the guns and butter policies of the Johnson administration coming home to roost. The 1970s came after decades of economic strength, while today we are coming out of a decade of economic weakness. Housing starts averaged 1.75 million units per year for the entire 1970s. Since 2010, we have averaged about half that. During the 1970s, capacity utilization was running close to 83%. Since 2010, it has been 76%. Wage growth is stuck stubbornly at 2.5% growth, and there is still slack in the labor market. I just don’t see the conditions in place for a return to 1970s stagflation.

Financial regulators are working on a rewrite of the Volcker rule, which prohibits FDIC insured banks from proprietary trading. No one is sure what is actually being proposed – it may turn out that the re-write will merely provide some bright lines to separate prop trading from market-making. Between a drop in commissions and cloudy guidance over prop trading, market making has dried up, and liquidity is suffering in many markets as a result. Any changes will have to pass muster with a panoply of regulatory agencies, so this is going to take some time.

20 Responses

  1. @gbowden41:

    Climate change is real. When monks correct ontological errors in Biblical texts when copying them, they are just perfecting the Word of God. They aren’t “lying”.


    • I have always said that, for a group of people who supposedly have the facts and science on their side, the environmental left sure as hell doesn’t act like it…


      • They talk as if they believe there is an emergency but they don’t behave as if they believe there is an emergency.

        Liked by 1 person

      • Sort of like Trump and covering up.


      • Yup. And they seem to have some facts on their side, and certainly an argument for research and preparation for potential changes in climate. Certainly plenty of reason for scientific observation and analysis.

        But there’s so much politics in it, and some much evangelical faith on the part of the True Believer in the First Church of Climate Change, that the common assertion that whatever they think about the environment is “science” is little different from a preacher asserting that have “Received Truth” right from the Mouth of God.

        Purportedly, when Isaac Newton’s own laws told him his belief that the earth was only about 5000 years old was way, way off, he spent a great deal of time fiddling with the model to make it fit his preconceived belief (based on a young earth Creationism) rather than recognize his model was telling him something much closer to the truth than his faith. I think a lot of the data fudging is like that, especially in areas where the data is not uniform and open to interference. If it says something different than what they expect, they think there’s something wrong with the data, and it has to be adjusted to move closer to the “truth”.

        And there are lots of incentives. I imagine a number of the folks working in these agencies like their paychecks, and don’t want to be the one to say: “it’s getting colder. The sea isn’t getting any higher. Please fire me.”


  2. Good piece:

    “The New Yuppies
    How the aspirational class expresses its status in an age of inequality.
    By J.C. Pan
    August 1, 2017

    According to Currid-Halkett, the aspirational class isn’t limited to billionaires. Rather, it includes people of varying income levels who share a belief in meritocracy and, consequently, desire to express their acquisition of knowledge. It encompasses both the well-off partner in the law firm and the liberal arts school graduate working as an unpaid publishing intern, so long as both know to consume the same organic farmers market berries, discuss the latest Rachel Maddow segment, and quote lines from the musical Hamilton.”


    • The PWC class (and middle professional class) is about to get the shit kicked out of them by AI…


      • Some more than others. But there will be a point within the next 30 years where AI suddenly becomes much better at thinking and making decisions about almost everything people do than people are. And most careers will involve maintaining, supporting, or dialoging with the AI.

        And supporting the increasingly insane government reporting-on-everything requirements, which will still require people to act as mediators because you don’t want to drive the AI insane.


      • On the plus side, you’ll see the end to a lot of overseas out-sourcing. Once you can provide better tech support from a rack of servers than a warehouse full of low-paid workers reading scripts, phone support is going full AI. And it will be just awful enough at the outset that we’ll never notice how much better it is than anything we ever had before 5 or 10 years down the road. 😉


  3. Interesting piece:

    “Ted Cruz’s Thesis Adviser on How He’s Changed Since College

    The senator and his mentor look back on the 25-plus years since they met at Princeton.

    Caroline Kitchener”


  4. Don’t fall afoul of the PC police lest you get banned by Google and YouTube

    It is amazing how easily these big companies are buffaloed by the Professional Left

    Liked by 1 person

    • These companies get overwhelmed with trolls flagging the victim as span or violating terms of service or whatever, and under the “where there’s smoke, there’s fire” theory, they just get banned. I expect the review of his account was checking that a lot of people had flagged him as being bad, and ended there until the article got published.

      Companies have to have some guidelines, and they crowd source a lot of the policing. Which makes it possible to game their systems.

      The left needs to keep in mind that what tactics gives to one, tactics gives to all. They’ll start getting attacked in just the same way, as long as the system allows it.


    • This should be interesting:

      “What Steve Bannon Wants to Do to Google

      The White House strategist reportedly wants to treat tech giants as public utilities, an idea that some Democrats also support.

      Robinson Meyer”

      Stories like the one above help to feed that.


      • Great. Turn one of the greatest success stories of the past decade into Ma Bell.


      • I am of two minds about this. Not sure how you could successfully turn search or ads or most of what Google does into a public utility, or why you would need to. I would understand–and expect we eventually will–turn the infrastructure into public utilities. Which will primarily be public wifi and Google Fiber, in the case of Google. But I don’t see any way in which Facebook or Twitter becomes a public utility.


    • Why should “insuring everybody” be anybody’s goal? What improvement in outcomes does health insurance actually convey, in a statistical sense, aside from preventing medical bankruptcies? Why is everything couched in urgent terms of “saving lives” when it’s all about financial management, and all that would be needed to prevent medical bankruptcies is catastrophic care insurance?


Be kind, show respect, and all will be right with the world.

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