Morning Report: Global risk appetite is at an extreme 1/23/18

Vital Statistics:

Last Change
S&P Futures 2833.5 -1.8
Eurostoxx Index 403.1 0.9
Oil (WTI) 63.7 0.3
US dollar index 84.3 -0.1
10 Year Govt Bond Yield 2.62%
Current Coupon Fannie Mae TBA 103.591
Current Coupon Ginnie Mae TBA 103.688
30 Year Fixed Rate Mortgage 4.03

Stocks are down as the government shutdown is over for the moment. Bonds and MBS are up on the back of the Bank of Japan continuing its stimulative measures.

Democrats agreed to end their filibuster over funding the government yesterday in exchange for an extension of the CHIP program. We will re-convene in 3 weeks to discuss immigration, etc. It turned out that the polls never really went the way Democrats had hoped.

The global risk appetite is about as extreme as it has ever been, according to Goldman. So far this year, stocks have been the big winner, while bonds have been the big loser. Is this misplaced? Global growth is the best it has been in a decade, and the world’s second biggest economy (Japan) may have finally turned the corner. Bank executives in Davos are worrying about financial complacency and the possibility of bubble-style thinking. I think it pays to differentiate between what the markets are saying and what is actually happening for businesses right now. While investors may be willing to pay anything for growth, business in general is not. US business has been in maintenance mode with respect to capital expenditures for the past decade and the fear of having too high of a cost structure is still greater than the fear of missing out on business. It has been this way since the stock market bottomed, and might have more to do with global central bank liquidity measures than actual business psychology. The million dollar question: does this circle get squared via a more robust business expansion? Or does it happen via a stock market deflation as global central banks normalize policy?

China is mulling a property tax to tame its real estate bubble. The normal transaction costs that are seen in the US (6% brokerage fees, property taxes) are much lower in China, which has helped fuel their bubble. When it bursts, they will probably deal with it the way Japan did – imposing so many costs to transacting that sales dry up. It prevents fire sales, but it also means the economy will be stuck in a deflationary environment for a long time.

Delinquencies increased in December, primarily driven by the hurricanes last fall and general seasonality. On the other hand, foreclosure starts hit a post-crisis low, falling to 44,500. The number of homes in foreclosure decreased by 32% YOY.

27 Responses

  1. The million dollar question: does this circle get squared via a more robust business expansion? Or does it happen via a stock market deflation as global central banks normalize policy?

    I get the first part. A more robust expansion will encourage management taking more risk. But I am unclear on the second. Falling stock market prices might lead to investors taking more risk, but why would it lead to managers doing so?

    As a former manager, albeit in a law practice, I only took risks based on perceived demand. Easy money, low rents, and available labor made risk taking less formidable, so extrapolating from that are you equating a stock downturn with a liquidity upturn? Or an expanded labor pool? Surely not the latter.


    • I am just saying that if Main Street doesn’t catch up with Wall Street then stock prices are vulnerable. It doesn’t necessarily mean a crash, but maybe stocks go nowhere for a period while earnings rise. It would mean multiples compress. Multiples should compress anyway, as they are a function of interest rates and rates are rising..


      • I completely misunderstood – thought you were suggesting that managers were looking for circumstances to justify more risk taking.

        Thanks for the reply.


  2. I laughed.


  3. Gotta love the media’s take on the Nassar situation…


    • The media just gets grosser and grosser every day.


      • Cause 30 years of sexually assaulting minors and an off-color comment 10 years ago are totally the same thing…

        Liked by 1 person

        • Well this is certainly interesting:

          During the conversation, according to the report, [John] Kerry asked Agha to convey a message to Abbas and ask him to “hold on and be strong.” Tell him, he told Agha, “that he should stay strong in his spirit and play for time, that he will not break and will not yield to President Trump’s demands.” According to Kerry, Trump will not remain in office for a long time. It was reported that within a year there was a good chance that Trump would not be in the White House.

          Kerry offered his help to the Palestinians in an effort to advance the peace process and recommended that Abbas present his own peace plan. “Maybe it is time for the Palestinians to define their peace principles and present a positive plan,” Kerry suggested. He promised to use all his contacts and all his abilities to get support for such a plan. He asked Abbas, through Agha, not to attack the US or the Trump administration, but to concentrate on personal attacks on Trump himself, whom Kerry says is solely and directly responsible for the situation.


        • Logan Act!!1!!1!! Eleventy!!


        • In the last 2 months the NYT has written at least 7 articles about Flynn’s alleged violation of the Logan Act. I look forward to a similar amount of coverage regarding Kerry’s plain violation of it.


        • I look forward to a similar amount of coverage regarding Kerry’s plain violation of it.

          You can count on it. The Old Gray Lady is the paper of record for the nation! They’ll get the facts out.


        • That’s a huge problem in the identity/tribal politics arena, but it seems especially pernicious on the left. I don’t feel like there is even a real comparison. Progressives and the left conflate everything. There is just no difference between building a wall to protect our southern border and the Berlin wall, despite the obvious differences in purpose. There’s no difference between cutting taxes and restricting who can travel into the US and the mass-murder of Jews in concentration camps. And an off-color comment, plus a history of walking through the dressing room at the Miss Universe contest (something pretty much every male with sufficient clout and association to a pageant has done forever) is the same as the intentional abuse and molestation of children over 30 years.

          Aaaaaand . . . that’s why you have Trump.


        • “Cause 30 years of sexually assaulting minors and an off-color comment 10 years ago are totally the same thing…”

          Trump’s also been credibly accused of sexual assault as well by multiple women.


  4. I’ll be talking about this tomorrow, but Mick Mulvaney sent this email to his staff at the CFPB. Sounds like sanity is returning….

    Click to access Mulvaney-Memo.pdf


    • Outstanding memo from Mulvaney.


    • The CFPB Is Now the Predatory Lender Protection Bureau

      While I agree that payday loan folks are basically scum, somewhere below used cars salespeople and only a few steps above lawyers and politicians, is it really healthy for the CFPB to be in the business of protecting everybody who can’t get their shit together from their own bad decisions, or, more likely, just point those bad decisions in potentially worse directions, more towards loan sharks, let’s say?

      Since then, the bureau has dropped a lawsuit into a group of online payday lenders who’d (allegedly) tricked low-income consumers into taking on loans with interest rates as high as 950 percent a year; signaled that it will abolish a rule that requires payday lenders to verify a borrower’s ability to repay loans within 45 days; and called off an investigation into an installment lender whose business model depends on giving bad financial advice to heavily indebted poor people.

      I suspect all of this is completely or at least mostly true. That being said, people shouldn’t be idiots. If there’s a problem here, it’s with public education: there should be classes that walk people through what financing your life through payday lenders does to your life, how to look for credit cards, how to get a secured credit card to build credit, what the value to your life of being creditworthy is. Something other than claiming the problem is payday lenders, who are really doing nothing more than profiting off of other people’s stupidity.


      • The sky-high interest rates are annualized returns for one-week loans, including the fees. Payday lenders serve a market (people who generally don’t pay their bills). Would all of these people wringing their hands over payday lenders prefer the corner loan shark? Cause I’ll guarantee the CFPB ain’t gonna like his collection strategies…


        • Exactly. Without the payday lenders (who are simply serving a market of stupid people, just like the people who produced Jersey Shore or put out Real Housewives of Atlanta or anything related to a Kardashian) they’ll redirect those bad decisions in worse ways into worse areas.


    • He’s a consumer-hating mad man!

      And we will be prioritizing. In 2016, almost a third of the complaints into this office related to debt collection. Only 0.9% related to prepaid cards and 2% to payday lending. Data like that should, and will, guide our actions.

      Doesn’t he know JUSTICE and MORAL OUTRAGE should guide our government to take absurd, fact-ignoring, completely intuitive emotional action against THE BAD PEOPLE!?!?!


    • Dudes like Mulvaney, and the Gorsuch appointment to SCOTUS, make Donald Trump worth it (especially over HRC), irrespective of his “tainting of the presidency”, bad twitter habits, or hot sex with porn stars.


      • The Presidency should be tainted, we’re not a monarchy and it feels that way. A clown helps realign it.

        Also, the D’s in Congress should appreciate the power that is returning to Congress. Dude’s a gift that keeps on giving.

        The spending that’s going to occur when the D’s take over the House will boggle the mind.

        Liked by 1 person

  5. Click to access 16-349_c07d.pdf

    This is a unanimous judgment affirming a Circuit Court’s interpretation of a federal statute and thus is totally non-controversial. I cite for those of you who are interested in style as well as substance.

    IMHO Kagan and Roberts are the two best current writers on the Court and Scalia was never worse than the third best in his tenure and often the best.

    Gorsuch wrote this Opinion. I think it is stylistically awful, like some of Kennedy’s, but even worse.

    Why does style matter? Well, read it and look at the rabbit trails. It’s a bright line easy ruling made to look like some sort of monumental exercise for a law school exam, with points for each possible argument and straw man to be posed and shot down.


    • Mark:

      It definitely lacked the wit and style of Scalia, but I didn’t think it was that bad. As for the rabbit trails, if the petitioners made certain arguments, crazy as they may be, shouldn’t the Court address them in its decision?


      • …shouldn’t the Court address them in its decision?

        Absolutely not. A trial court can do that. The Court of Appeals can do that to signal to the Supremes what they thought was irrelevant. But the Supremes make the policy of the law and thus should limit their opinions to deciding serious precedential issues. There was but one such issue here – did collecting a debt for another include collecting a debt for oneself if the debt was purchased from another.

        Scalia or Kagan might have had some fun with the words, but either would have written a three page opinion on this one, max. Roberts might have written even less, being of the SDO’C school of minimalism.

        All would have pointed out the issue NOT presented – that this entity also collects debts for others and might come under the definition if that issue had been preserved – implicitly signalling another approach for another day. however, it answers the potential law professor criticism that a professional debt collector must be covered, and probably addresses the continuing validity of certain other Court of Appeals decisions, so it had to be stated that the issue was not presented.


        • Mark:

          But the Supremes make the policy of the law and thus should limit their opinions to deciding serious precedential issues.

          I don’t think I have ever read a SCOTUS opinion that limited itself just to serious precedential issues, although perhaps that is because most of the opinions I have read have been very high profile, political cases, and so maybe the writing Justices see it as a chance to pontificate to a wider audience.

          That being said, if I were presenting a case to SCOTUS, I would be rather irritated if the Justices literally ignored my arguments and ruled against me without ever addressing what was actually argued. As a layman it seems rather bizarre to me that they wouldn’t, frankly.


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