Morning Report: More on volatility 2/7/18

Vital Statistics:

Last Change
S&P Futures 2700 5.0
Eurostoxx Index 376.7 -8.8
Oil (WTI) 63.2 -0.8
US dollar index 83.9 0.0
10 Year Govt Bond Yield 2.78%
Current Coupon Fannie Mae TBA 103.591
Current Coupon Ginnie Mae TBA 103.688
30 Year Fixed Rate Mortgage 4.33

Stocks are flat this morning after recovering about half of Monday’s losses. Bonds and MBS are up.

Mortgage applications were up 0.7% last week as purchases were flat and refis rose 1%. This is despite an increase in rates. Spring Selling season is more or less upon us. Inventory will continue to be an issue, especially if wage growth continues.

Here is a Bloomberg story discussing the volatility we saw on Monday. Much of it traces back to an ETF – the inverse VIX or XIV. This was the easiest way for retail investors to play the volatility in the market. The XIV had been rising all through last year and the beginning of this one as volatility compressed in the equity markets. This shows the possible unintended consequences of some of these products. The XIV is basically a proxy of a proxy of a proxy. In other words, it is an easily-tradeable proxy for the VIX, which is a proxy for how index options are trading. Hedging activity ultimately drove the volatility of the underlying index and arbitrage activity caused the movement in the underlying stocks. Bottom line, the catalyst for the sell-off is probably over.


Note the price action in the XIV. Some investment activities are like picking up nickels in front of a steamroller. It works until it doesn’t, and when it no longer works, it can wipe you out. $145 to $7 – worse than Bitcoin.  Note Goldman thinks most cryptocurrencies are doughnuts.

Remember when the story was that Millennials wanted to be urban dwellers? Well, now they want the suburbs. The article includes some of the most desirable suburbs based on income growth, affordability, etc.

Dallas Fed Chairman Robert Kaplan said yesterday that he doesn’t think the nascent upward wage pressure is going to translate into higher inflation. He believes that businesses simply don’t have the market power to increase prices (in other words, the environment is too competitive). Interesting theory, and certainly supports the prevailing view of the Fed that there is no inflation problem on the horizon. The lack of pricing power is more or less borne out in the various business sentiment surveys. This in turn will cause central banks worldwide to continue to “feed the beast” according to Yale economist Stephen Roach.

56 Responses

  1. Delicious.


    • These people will never be satisfied…


      • They want to be constantly at war. There will always have to be Good Guys and Scary Others, and they will always consider themselves part of the Good Guys.

        If they got rid of all white guys and all men today, they’d immediately stratify and find new reasons why their identity group was superior to (and a victim of) all others.


  2. It’s hard not to love John Kelly, even though he was an officer. Nobody’s perfect I guess.


  3. “Remember when the story was that Millennials wanted to be urban dwellers? Well, now they want the suburbs.”

    Of course they do. The suburbs are awesome. The idea that they were going to want to live in efficiency apartments forever because of easy access to the bike path and a food truck was always kind of dumb.


  4. remember when i floated the “they’ll extend CHIP another 4 years” as a pay-for?

    watch what happens later today/tomorrow.


  5. The pointlessness of the Republican party on full display.

    “Congressional leaders unveiled a sweeping budget deal Wednesday that would add more than $500 billion in federal spending over the next two years, delivering the military funding boost demanded by President Trump alongside the increase in domestic programs sought by Democrats.”


    • lesser of two evils…


      • Lesser being in the .0003% range of “lesser”.


      • I’m not sure that’s true anymore. I’d actually take Obama over the current incarnation of the Republican party with Roy Moore, Trump, etc.

        You can make a pretty good case that he was actually more fiscally responsible than the current crew.


        • The restraint under Obama was a Republican Congress who’s base wanted to exercise control over the executive. Now you have the base of two parties who want an all powerful executive and are arguing over whom it should be, that is the lesson that Teabggers took home, if you can t beat them, join them.

          Among the many lessons Trump’s election has taught is that there is no real Fiscal Conservative constituency. The electoral backlash against the party that actually reforms spending and entitlements will be massive and, I think, reverse those reforms and make everything worse than it’s previous, unreformed trajectory.

          Universal education has done it’s job, yeah for mandatory public schooling!

          We’re headed for a crash at some point, our body politic is reactive, not proactive, one should prepare as best as One can.

          I do acknowledge that I have been fundamentally wrong on the US’s capacity for debt. I’m not an MMT’r but I think we have many trillions to go before problems become noticeable.


        • McWing;

          The restraint under Obama was a Republican Congress who’s base wanted to exercise control over the executive.

          I totally agree. I’ve presented the analysis here many times in the past, so there is no need to link to it again, but the historical data suggests that the degree of fiscal “responsibility” is directly correlated with the party that controls congress, not the executive. When Dems control congress, spending is out of control. When control of congress is split, it is somewhat less out of control. And when R’s control congress it is least out of control (albeit certainly still out of control in any event).

          When you include the executive in the mix, then it is clear that the most “responsible” result comes from an R congress and a D president. Then next best is an R congress and an R president. The worst is a D congress and a D president, followed closely with a D congress and an R president.

          In any event, I agree that whatever fiscal responsibility that might have been observed under Obama was a direct consequence of the existence of an R congress, not anything that O brought himself.


        • There seems no way to get politicians whose public life is on the short term to think in the long term necessary to cyclically balance budgets. Ds want to spend and Rs want to cut taxes, in order to get elected next time.

          The human problem.

          Liked by 1 person

        • “The restraint under Obama was a Republican Congress who’s base wanted to exercise control over the executive.”

          Yeah, you are right. We need divided government again.

          Gridlock for life.

          But the “Grand Bargain” budget deal that Obama and Boehner were close to was better than what’s come out now. The whole sequester has turned out to be a joke.

          Liked by 1 person

        • All spending restraint is illusory.


        • jnc:

          I’d actually take Obama over the current incarnation of the Republican party with Roy Moore, Trump, etc.

          Didn’t you take Obama over the previous incarnation of the Republican party, too?

          Liked by 1 person

        • Yeah, over McCain/Palin. With Romney I went with Gary Johnson.

          George W. Bush was the last Republican I voted for for President.


        • On the other hand, this may well be a positive development:

          “Why Donald Trump makes Democratic voters uneasy about Medicare-for-all
          “Before this particular administration, I had a lot more trust in the government.”

          By Dylan Scott
          Feb 8, 2018, 8:30am EST ”


        • “Universal education has done it’s job, yeah for mandatory public schooling!”

          Mandatory public schooling (given my job) is something I was argue for in the abstract. I think it’s a net good, and was much better when it focused on teaching people concrete things related to real life.

          Not a huge fan of common core. Not enough real-world math, but the math is not horrible. The Commonlit curriculum sucks, IMO. Bad, mostly contemporary stories, article and poems, and vague, ambiguous questions that insist there is one right answer when there could be two or three. It’s strategically designed to make clear thinking about things impossible. But that’s common core–public schooling was not always thus.


  6. Like

  7. I know they are VERY IMPORTANT but why do I continue to think wedding cakes are de minimus as a focal point of federal constitutional litigation?

    Click to access 5a79d28c1e6fc.pdf.pdf


    • Every knee shall bend.


    • Nothing screams “oppression” like the inability to force some Jesus-freak to bake you a cake…

      Liked by 1 person

    • Mark:

      I know they are VERY IMPORTANT but why do I continue to think wedding cakes are de minimus as a focal point of federal constitutional litigation?

      Having dispensed with any fidelity to the Constitution by jumping on the slippery slope of so-called public accommodations law in the first place, it really shouldn’t be a surprise that we are riding that slope to its logical and inevitable conclusion.


  8. It’s not like Google and Facebook can’t afford to import hot chicks from Thailand (they’re just hanging around Pinay, Phuket and Bangkok and would literally kill for a green card and a chance to hook-up with a round-eye, geek or no) for these nerdy beta-cucks. It’d get them off their broad co-workers backs, they’re not interested in these geeks anyway, they want the bad-boy alpha-dudes that’ll treat them like shit.

    Liked by 1 person

    • Don’t dip your pen in the company ink…


    • You are correct but it’s almost illegal to acknowledge any of that, so Google and Facebook definitely won’t. Also, the headlines would start immediately appearing that Google and Facebook are trafficking in sex slavery.

      And if you just enable the ladies to come over, 6 months max before they dump the nerds and move on to bad-boy alpha-dudes that treat them like shit. There’s an expiration date on being happy to be in a better country and just taking what your given regarding the dude. There are more than a few stories of shlubby but well-heeled guys getting a super hot chick from a 2nd world country and her moving on to a tennis pro, hot bar tender, or guy-riding-motorcycle in no time flat, once she’s over here. Although they often try to double-dip and keep access to shlubby guy’s wallet.


    • Also, this #MeToo policy barely needs to apply to any of the grunts at any of these companies. This is way more an “upper management” issue. Anybody who can imply that to keep moving forward in the company, you better go out with me, is more the problem.

      Interesting that they are making their companies less-and-less pleasant for the guys who actually do the innovation and crank out the code to work at. I can see in 5 or 10 years we’ll have some other, new huge tech company entirely populated by former employees of Google and Facebook.


  9. And kudo’s for Drudge’s headline tonight , “Pelosi Stands For 8 Hours!”


  10. So the Senate is going to pass this thing, and then it will go to the House, where it also will pass. and the CR nonsense stops. and then the left will come out angry because it raises budget caps, extends CHIP an additional 4 years and has a host of health care sweeteners. but does not accommodate illegal immigrants. also, they’re planning to throw themselves in front of a military parade b/c trump is trolling them and they can’t help but fall for it.


  11. from JNC’s vox link:

    Bruce, a 61-year-old who works in human resources, summed it up nicely as we discussed who would be responsible for deciding what care should be covered in a government-run system:

    My wife worked for the federal government for 34 years. I think there are a core group of dedicated federal professionals who are committed to their mission.

    And if the mission of this group is to make decisions as to what medical procedures should be covered, at what stage, what drugs should be administered, and what the appropriate amount of time is for a doctor to see a patient for such and such a condition: I believe … I have faith that there are people who are committed to making these decisions, and I would trust them to do that.

    As long as we can depoliticize it — and that’s the hard part. How do you get the politics out of it?

    What have i been saying for years? You can’t get politics out of it. that’s the whole point.


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