Morning Report: WH adviser Gary Cohn resigns 3/7/18

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S&P Futures 2703.3 -21.0
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US dollar index 83.5 -0.3
10 Year Govt Bond Yield 2.86%
Current Coupon Fannie Mae TBA 102.25
Current Coupon Ginnie Mae TBA 102.5
30 Year Fixed Rate Mortgage 4.4

Stocks are lower this morning on the prospect of a trade war. Bonds and MBS are up.

White House Economic Adviser Gary Cohn has resigned after losing the argument on tariffs. Cohn, a Democrat, was one of the more moderate voices in the Trump Administration, and his resignation cements the idea that the Administration is turning away from globalization, which has marked Washington establishment for decades.

So far the potential trade war hasn’t had much of an effect on the Fed Funds futures, which are handicapping a 86% chance of a hike in May and have centered on 3 hikes for the full year. The impact of a trade war will be an interesting question for the Fed. On one hand, they raise prices, which should translate into higher inflation. On the other, they depress economic activity which should translate into slower growth and higher unemployment. The first effect is more near term, while the second order effect is longer-term.

Bolstering the Administration’s case for tariffs is the fact that the trade deficit rose to a 9 year high last month.

Atlanta Fed President Raphael Bostic says that the Fed should take a “wait and see” approach to a trade war. While the Trump Administration may be pushing back from globalization, Congress has not, and the courts provide another speed bump to tariffs. Note as well, that the US “ask” in trade negotiations usually centers on intellectual property protection, and that means Hollywood and Big Tech. Their partisanship will probably come back to haunt them. Think Trump is going to care about the Chinese pirating the latest Michael Moore flick? Or the latest left-wing Netflix “documentary?”

The economy added 235,000 jobs in February, according to the ADP Employment survey. The Street is looking for 205,000 jobs in Friday’s jobs report. The ADP report has been coming in higher than the BLS reports lately, so this should have a muted effect. Secondly, the focus on the jobs report (at least from the Street’s perspective) has shifted from payroll growth to wage inflation.

Mortgage Applications rose 0.3% last week as purchases fell 1% and refis rose 2%. The average 30 year mortgage rate rose 1 basis point to 4.65%, the highest since early 2014.

Nonfarm productivity for the fourth quarter was revised upward to flat, while unit labor costs were revised upward to 2.5% from 2.0%. Compensation costs drove the increase. So far, companies have been unable to pass on higher costs in the form of higher prices, which should mean profit margins will come in, making stocks vulnerable.  This should translate into lower interest rates at the margin.

A real estate startup called Knock is looking to disrupt the real estate industry by acting as a market maker for homes. They will buy a seller’s home, move them into a new one, and then sell the old home. The benefit for the home seller is that they will now be able to compete in bidding wars without having any sort of home sale contingencies. That said, this is clearly a bull market phenomenon, and in this market the tough part is not selling your current house – it is getting (and winning) your new one. Still an interesting idea.

31 Responses

  1. “Democrats to unveil $1 trillion infrastructure plan, seek reversal of GOP tax cuts to finance it”

    They are starting to realize they have a polling problem.


  2. If i understand this model, Knock is basically acting as an all-cash buyer on your behalf and is making its cut on a 3% commission on the sales price of your current home?


    • I think they are making a real estate bet…hanging onto the home for a few months and then reaping the appreciation.


  3. Proof the “trade war” is just about meaningless signalling:

    1 billion is a fraction of the monthly volatility of the trade deficit.


  4. Tucker Carlson is doing a weekly show on men during this month (women’s history month).

    The feminist left cannot even. Literally Shaking.


  5. Brent…hope you are home and safe and with power. Total shit show for me trying to get home. Train stopped in Stamford and made us get out…told us we were on our own. My wife managed to come get me, but roads are horrendous and trees are hanging low everywhere. Snow is tremendously heavy. Had to dig my car out at Talmadge Hill and then almost ran into my wife going down the hill when my car wouldn’t stop. It’s pretty treacherous out there. For once the forecasts were right.


    • My God! Please stay safe!

      I hope the power at least stays on for you!

      Keep us updated.


      • Thanks. Warm and dry in the house finally, power still on for now. But supposed to keep snowing/raining until about 6am. Got a robocall for the town emergency management system…apparently 76 roads in town are currently impassable due to fallen trees/limbs.


        • Scott and Brent –

          How are y’all this morning? Do you have heat? Internet?

          Is this storm affecting DC – Bawlmer – NoVa – Richmond as well?

          In any case, especially if your roads are icy, stay safe.


        • Thanks Mark. All pretty good. I never lost power, and the streets are all cleaned up this morning, at least of the snow. Still quite a lot of trees down blocking roads, and a small tree in my front yard came right out of the ground and is laying on its side. But I was able to get to a train in order to get into the city. Had to drive to Stamford, as my train line is still shut down, but it wasn’t a big problem. Temp is supposed to be up into the 40s today, so the big melt will commence.

          On a different note, CA is apparently the new Confederacy:

          I actually think the comparison is unfair…to the Confederacy. At least the South seceded first, which is an open and honest way of rejecting the legitimacy of the federal government. Progressives in CA want to have it both ways, maintaining the benefits of being a part of the Union, while at the same time ignoring and indeed actively subverting federal law that they object to.


        • Scott, I have not read the three CA statutes so I am not vouching for CA AG Becerra when he says that each one of them sets out its subordination to federal law explicitly. Still, CA has won its lawsuits over these matters previously.

          In short, it may be that Sessions is grandstanding, which is not beyond belief. CA may have gone too far, OTOH, which is not beyond belief, either. Both could even be true!

          If I get a chance, I will look up the three statutes and post them here in either a link or in a full post so that we can all argue about them with actual knowledge.

          Have looked at the USA’s petition and were I an attorney representing an employer I would think my client was put to a hard choice by the CA statute. It is explicitly subordinate to federal law but it also has severe penalties for voluntarily complying with federal requests that are not in the form of warrants. There may be difficult choices for a client to determine on the spot whether federal or state laws control. I would prefer that the CA statute did not exist so that the choice did not involve jeopardy for the employer whether he chose to tell the Federal officers to “come back with a warrant” or whether he invited them in.


        • Mark:

          Still, CA has won its lawsuits over these matters previously.

          Given the hyper-politicized nature of Constitutional law these days, I don’t take the result of a lawsuit involving policy to be indicative of much of anything other than the probable political leanings of the judges involved.

          But I will say that this whole topic is another good demonstration of the twilight zone world in which we live, a world in which the same people who 2010 vociferously argued that it was illegal for Arizona to pass laws explicitly designed to help the federal government enforce existing federal immigration law are now vociferously arguing that it is perfectly legal for California to pass laws explicitly designed to deter the federal government from enforcing existing federal immigration law. I find it difficult to imagine that these two positions are in fact reconcilable, but if indeed they are, it is a horrible indictment of the state of current Constitutional law.


        • Thanks for that Federalist article.

          Here is a general description of one of the statutes from the Sacramento Bee:

          Here’s some of the things local and state law enforcement cannot do under the bill:

          ▪ Inquire about an individual’s immigration status.

          ▪ Detain someone on a hold request for the federal government, unless there’s a felony warrant or the person has been convicted of one of the more than 800 crimes.

          ▪ Arrest someone for a civil immigration warrant alone.

          ▪ Be deputized as immigration agents.

          ▪ Participate in border patrol activities.

          ▪ Participate in joint task forces with the federal government if the primary purpose is immigration enforcement.

          ▪ Notify the federal government of someone’s release or transfer someone to federal custody, unless there’s a federal warrant or the person has been convicted of one of the more than 800 crimes listed in a revised Trust Act.

          Preliminarily I think the CA law enforcement standards would stand up but the CA inspection of Fed facilities will be struck down and I have got to get a better grip on the employer related stuff – I hope it gets struck down but I don’t have a handle on it.



          Volokh chimes in, says Sessions’ best argument is on the CA state mandate on employers, which I hope is correct.

          Says the only detainee facilities to be inspected are either state or private ones, not federally owned, so CA must win on the state ones and probably on the privately owned ones, but I disagree on the privately owned ones if they are wholly leased to ICE.


        • I’m going to be contrarian here and salute California. They are spearheading state nullification of Federal law! I’m hoping more states exercise nullification, we need more checks on Federal power.


        • McWing:

          They are spearheading state nullification of Federal law!

          Although I think the Feds have accrued far too much power and therefore I am all for greater checks on that power, I still think that there are some things that federal power legitimately and Constitutionally exists to accomplish, so I’m not in favor of nullification just for the sake of nullification. If CA decides that it no longer wants to subordinate itself to the feds with regard to things like immigration, then it should be honest and announce that it wants to withdraw from the Union. Frankly I think the departure of CA progressivism from the Union would have a wonderful effect on restraining federal power.


        • I think encouraging state nullification will fascilitate the dissolution of the Union. The more states nullify Federal law, the more that drives overall dissatisfaction with the current state of the Union which in turn drives more nullification. I actually think the best outcome from a dissolution standpoint will be SCOTUS not allowing the Federal government to withhold various grants to States as a mechanism for compliance. If states get their Fed teat money regardless of their adherence to the rules behind the grant money, the more states will ignore those rules. This will lead to further dissatisfaction with the Federal government and fuel dissolution desires.



        • McWing;

          I think encouraging state nullification will fascilitate the dissolution of the Union.

          If dissolution is your goal, that is probably a reasonable strategy.


    • I lost power last night around 8:00 pm. Have had power for just about 24 hours since last Friday… Sucks..


      • Brent:

        I lost power last night around 8:00 pm.

        I have a portable generator that you are welcome to borrow if you want.


        • Thanks, Scott. I have one, but it is on the fritz..It sounds like NYSEG will have a lot fixed today… Thanks for the offer though


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