Morning Report: Dec fed funds futures still forecasting 3 hikes this year 6/8/18

Vital Statistics:

Last Change
S&P futures 2767 -8.25
Eurostoxx index 385.56 -0.38
Oil (WTI) 65.78 -0.17
10 Year Government Bond Yield 2.93%
30 Year fixed rate mortgage 4.59%

Markets are lower this morning on negative news out of Apple. Bonds and MBS are down small.

Something to watch: We are seeing bigger bets against emerging markets currencies and some European bonds. These trades will bump up against Treasury shorts, which were increased last week in the wake of the Italian election results. One of the biggest trades in the hedge fund community is short Treasuries – which means hedge funds are betting on rising rates. A sell-off in Euro bonds and emerging markets will add buying pressure to Treasuries on the flight to quality trade. So, expect some volatility in Treasuries as fast money enters and exits the market.

Rising interest rates are creating another phenomenon – increased flows into money market funds. Money market funds had been a moribund asset class after the crisis, with interest rates at 0% and the memories of breaking the buck still fresh in many investors minds. Money market funds are seeing the biggest inflows since 2013. Expect to see more of this as bond investors also look for ways to shorten duration. This is yet another reason why hedge funds are short Treasuries.

After the Italian led drop in rates, the market adjusted its prediction for the Fed Funds rate. Still sitting at a 60-40 bet for 3 or less hikes this year / 4 or more.

Warren Buffett and Jamie Dimon are exceedingly bullish on the US economy. “Right now, there’s no question: It’s feeling strong. I mean, if we’re in the sixth inning, we have our sluggers coming to bat right now” is how Warren Buffet characterized it. Jamie Dimon’s view: “The way I look at it, there is nothing that is a real pothole,” he said. “Business sentiment is almost at the highest level it’s ever been, consumer sentiment is at its highest levels, markets are wide open, housing’s in short supply and my guess is mortgage credit will expand a little bit.”

Buffett and Dimon are also arguing for companies to stop providing earnings guidance. They claim that focusing on short term quarterly earnings causes companies to de-emphasize long-term growth. Berkshire Hathaway does not provide any sort of guidance to the Street. It is an interesting idea, however companies provide guidance to the Street because investors as a general rule prefer predictable companies to unpredictable ones.

How not to “teach your servicer a lesson.” Yikes. If you think your lender is making a mistake, or you are unhappy with the service, don’t stop paying as a means of retaliation.

The OCC is taking a more constructive approach with the banks. At the top of the agenda: re-writing community reinvestment rules to be less onerous for the industry. Obama’s head of the OCC was a career regulator who made a point of challenging the perception that the OCC was too close to the banks it regulated. The Obama administration pushed hard for banks to take less credit risk, and I wonder how much of the issue with a lack of housing construction is due to that. While this wouldn’t affect the Lennars of the world, most construction is with smaller builders who would have to go to their local community bank for financing.

43 Responses

  1. why is it that “inclusion” invariably means “laser-like focus on the tiny SJW professional left contingent?”

    Liked by 1 person

  2. This sucks:

    “A note to readers
    by Charles Krauthammer
    June 8 at 12:01 PM”

    https://www.washingtonpost.com/opinions/a-note-to-readers/2018/06/08/3512010c-6b24-11e8-bea7-c8eb28bc52b1_story.html

    Liked by 1 person

  3. What do you think the left would do if Trump pardoned Mumia?

    Like

  4. Like

    • Angela looks like she is giving a lecture on manspreading, Trump is all IDGAF and Abe looks like “not this shit again….”

      Like

  5. Spent the week in the Great Smokies with the family.

    Came back and learned that DJT dissed the entire remainder of the G7 and also suggested Russia should be readmitted. He cited national security reasons for screwing with our relationship with Canada while dissing national security warnings from intel and military leaders to allow a Chinese telecomm outfit to get off the floor and back into our country.

    No one here seemed to have an opinion on this.

    I think it is awful. And I think Congress would act under less benighted leaders – Republicans who actually still gave a shit about free trade and the western alliance. I know many do, probably a lot more than Ds, and it was always one of the issues on which I “lined up” R. But I guess McConnell and Ryan aren’t having any break from DJT on their watch.

    Does anyone here agree with me that DJT’s national security tariffs against our allies are awful? That his helping those poor Chinese workers while ignoring national security advice is awful? That inviting Russia into the G7 is awful?

    Kevin, I share your belief that in the long run authoritarianism is not going to work. I think that lefty populism, everything for everybody for “free” at the expense of the evil rich [there being no good rich, of course], and righty populism, tribal nativism and blaming all troubles on “outsiders”, are doomed, too. But the Trump-Sanders axis of politics scares the hell out of me anyway.

    I may not live long enough to see it get better.

    Late addendum – an influential and knowledgeable conservative Republican agrees with my assessment of the world, and I can plausibly infer that he would agree with my assessment of the President at the G7.

    http://www.atlanticcouncil.org/blogs/new-atlanticist/director-of-national-intelligence-dan-coats-russia-is-attempting-to-influence-us-midterms-divide-transatlantic-alliance

    Like

    • What is the threat the Western Alliance must defend itself from, ie, what’s its organizing principal today? If it’s the Ruskies, what capability do they have in countries without a large ethnic Ruskie population?

      If the original organizing principal no longer is operative, what’s the value of the relationship to the US?

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      • what’s the value of the relationship to the US?

        The organizing principle of NATO was to meet the Soviet military threat to Europe. The organizing principle of the G7 is freer and fairer world trade with rules that apply to all. But it is plausible to ask the question as if the two are related, because they probably were, by coincidence of interest. So I will respond as if both are implicated here, which I also think is plausible.

        These seven nations have shared political values of individual liberty.

        Along with Australia, a nation that should be the next to join, they share intel relatively freely and with trust.

        They are all generally globalist and pro free trade, and thus they enrich each other when they enrich themselves. This was Adam Smith’s capitalist response to mercantilism.

        Together they are a force against authoritarian tyranny. An imperfect one to be sure, but they did handle the Yugo breakup well. They will stand for the Baltic States, I hope. The adventures in the Middle East? Not so much.

        Neither Russia nor China, nor any of the totalitarian regimes, are trustworthy business partners. They steal inventions, they confiscate private partnerships, they have no respect for trade norms, and in China’s case they legitimize serfdom and forced labor.

        It is very much in the American interest to foster the G7 and to extend its influence, immediately as a united front against Chinese trade abuses. Disagreements within the G7 are negotiable and have continued to be handled quietly for years by all the partners, until this.

        Meanwhile, Russia is messing around in all western politics according to the intel units in each of our allied nations and our own. Putin sees in the discord a chance to extend his Russian hegemony over eastern Europe, again.

        Is that a reasonable reply? And regardless of Trump’s political pitch at home, it seems he doesn’t realize either that foreign leaders of representative governments also answer to their voters, or that German and Japanese auto makers hire more American auto workers in the USA by far than American companies hire auto workers in Japan and Germany. Canada’s auto industry is so tied with ours that I assume we can cause more job loss there than they can here. In any case, I think throwing an inhibitory tariff on steel, aluminum, and cars is irrational and destructive on its own.

        Do you agree about any of my assertions?

        Like

    • As for trade issues, is it your belief that Trump won’t take some silly conciliation, sell it to the rubes that elected him as a yuge victory and move on to banging the Next Hot Porn Queen?

      Like

    • “Does anyone here agree with me that DJT’s national security tariffs against our allies are awful?”

      Yep.

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      • Thanks, Joe.

        Scott, Congress still has the power to stifle the President’s trade moves, and as I made clear, I know that a lot of Rs would be willing to do so absent the wrong-headed leadership’s apparent iron hand.

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        • Mark:

          Congress still has the power to stifle the President’s trade moves

          I understand, but that is Constitutionally backwards. From a Constitutional point of view, it is the imposition of tariffs that requires Congressional action, not the prevention of the imposition of tariffs. The Constitution gives Congress the power to pass laws, and gives the executive the power to veto those laws, not vice versa.

          Like

        • Why is it now an issue I wonder?

          Like

        • McWing:

          Why is it now an issue I wonder?

          For me it has always been an issue, but certainly there are a lot of people who have no problem with the imperial presidency, indeed even value it, except when the emperor turns out to be Trump.

          Like

        • Remember that Congress gave this power to the POTUS as a “national security” matter and that it had only been invoked in uranium matters [and IIRC, during the oil crisis of the early 70s]. IOW, there is a statute that permits this, so it will take a statute to end it.

          It isn’t quite the over reach that Obama’s immigration orders on so called priorities was, but it is an unintended consequence of giving a POTUS an emergency power to do a legislative action without the legislature.

          Like

        • Mark, why didn’t the Democrats do this the last time they controlled the Executive and Legislative branch?

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        • 2009-10: was there a “national security” commerce clause issue like this one? I don’t remember.

          2011: R Congress with D support maybe could have prevented Libyan intervention by Obama. Or at least stopped it after the initial so-called war powers time period expired.

          So go back to ’09-10 and refresh my memory, please.

          Like

        • Is it the stated reasoning for the tariff’s being implemented by Trump that is causing you consternation? If so, do you think the anger by the recipients of these tariffs is because of that reasoning or because they are being implemented at all?

          Also, do you agree with Trump that all tariffs, subsidies and regulations that raise the cost of goods traded between G7 nations should be eliminated?

          Like

        • I think the tariffs, imposed unilaterally without coordination with the trading partners we rely upon as allies, is an international error with bad consequences for the USA and the west. I would think that if Congress had done it, but the fact that the POTUS abused his national security exception power is an additional sore point.

          The goals of reducing tariffs are laudable but there will be tariffs that all will agree to for the obvious survival/protection of some domestic industry or agricultural product. An interesting experiment would be to drop all G7 tariffs on agriculture. Would nations be inclined to stop subsidizing farming and ranching or step up subsidizing? IDK.

          Addendum: which BHO actions did you think a D Congress in ’09-10 should have stopped as an infringement on Congressional authority?

          Like

        • So your position is that tariffs are ok and your consternation is in the justification of the tariff, not the tariff itself?

          You wouldn’t be in favor of eliminating, between G7 countries, all tariffs, subsidies and regulations that raise the cost of goods and services that are being traded?

          Like

        • Tariff reduction is a worthy goal. Tariff elimination, even according to Adam Smith, the father of free trade, will have exceptions imposed by local political or economic realities (particularly the “fledgling industry” exception IIRC), but in any case retaliatory tariffs are bad.

          Again, George, these nations had reached a broad equilibrium on tariffs, by agreement. Supposedly net zero with Europe, and a bit favoring the USA vs. Canada and Japan, a round of retaliatory tariffs is unworthy and every economist from right to left agrees with me, AFAIK.

          Like

        • Mark,

          I think all things should be reviewed periodically, don’t you? I’ve no idea if trade situations can be improved but I’m far from certain that the current situation is the ideal for today. I think reasonable people can argue about whether G7 nations should be at a broad equilibrium or if there should be a deference towards the US. Either position is defensible I think, but given the size of the US economy as well as the Pax Americana provided by our treasure and blood that has allowed these other G7 countries to flourish, I favor a trade environment that gives deference to the United States. I tend to think that implementing this ideal will require brinksmanship and bellicosity.

          What were arguing over is style. I’m guessing you believe Trump will cause lasting damage to our relationships with other G7 nations. I don’t care if it does, as I think we’ve shorted the American people for years with the concept of broad equalization and if these countries don’t like the new deal, they can go. Countries often have to be dragged kicking and screaming into a new deal that is seemingly less advantageous as the old one and often the only way to do it is by bullying and bellicosity.

          Next up, expelling China from the WTO. agreed?

          Like

        • Next up, expelling China from the WTO. agreed?

          Absolutely.

          And to achieve that goal would take the cooperation of others, don’t you agree?

          Like

        • I don’t understand your question. Are you saying that there are countries suffering the same abuse as the US that would refuse to expel China from the WTO? If so, why would they refuse? In what way would being abused by China be in their national interest?

          Like

        • MarK:

          Remember that Congress gave this power to the POTUS as a “national security” matter…

          Yes, I know. But from what I can see in the Constitution, Congress is not actually authorized to delegate its powers to other branches of government.

          Like

        • Congress is not actually authorized to delegate its powers

          Of course, delegating started from the perfectly rational place the Founders thought it should – that ministerial details could and should be left to the other branches. Thus Congress had the power to establish the Federal Courts and the statutory framework for criminal and civil litigation but the rules of evidence and procedure and decorum were left to the court system to authorize because thats what courts did, not legislatures, at the time of the Revolution and the Founding. And since the President executed the laws within comprehensible principles and budgetary constraints, how he went about it day-to-day was generally an executive decision.

          But of course it grew to be something else, as we have discussed many times. I think it was often unavoidable.

          Like

    • Mark:

      No one here seemed to have an opinion on this.

      My opinion is that Congress, not the President, has the Constitutional power to impose tariffs, and so this isn’t so much a problem of Trump specifically as it is a problem of the unconstitutional nature in which come to be ruled over the last century.

      Like

  6. This broad reminds me of an old joke,

    Q: How do you bring a woman to orgasm?

    A: Who cares?

    Like

  7. The organizing principle of NATO was to meet the Soviet military threat to Europe. The organizing principle of the G7 is freer and fairer world trade with rules that apply to all. But it is plausible to ask the question as if the two are related, because they probably were, by coincidence of interest. So I will respond as if both are implicated here, which I also think is plausible.

    These seven nations have shared political values of individual liberty.

    It’s a nice sentiment but I have very serious doubts about the EU’s commitment to individual liberty. One way liberty is expressed is in how direct is the representation, ie, are you governed most by a local state/province? A county? A Nation State? Or mostly by unelected bureaucrats in a far off capital in another country?

    Along with Australia, a nation that should be the next to join, they share intel relatively freely and with trust.

    I guess so, though we know Obama spied in the krauts as well as others, so…

    They are all generally globalist and pro free trade, and thus they enrich each other when they enrich themselves.

    Well, they’re certainly outwardly globalist, true. How true is it that they are for free trade with entities outside the EU? As Ken Kesey wrote in Sometimes a Great Notion, “all they’re looking for is their fair advantage. There are tariff and regulations galore designed to protect industries in each country. Agriculture comes to mind. Ask African countries what happens when they use GMO seeds and try to sell their products to the EU? Krauts put a 10% tariff on American built cars, we put around a 1.5% tariff. Their commitment to real Free Trade is lip service at best. In fact, Trump offered to drop all tariffs among the G7 and not one of those swinging dicks called his bluff.

    https://www.google.com/amp/s/www.cnbc.com/amp/2018/06/09/trump-says-at-g-7-summit-trade-should-be-tariff-free-barrier-free-subsidy-free.html

    Free traders my ass.

    So, if it’s my tariffs are good yours are bad, then shouldn’t the US Purdue it’s own “fair advantage”? If not, why not?

    This was Adam Smith’s capitalist response to mercantilism.
    Together they are a force against authoritarian tyranny. An imperfect one to be sure, but they did handle the Yugo breakup well.

    The dead Muslim Kosovoans were unavailable for comment. By the way, who ended up protecting them?

    They will stand for the Baltic States,

    How? The same way they stood up for the Ukrainians? The Baltic’s have high populations of ethnic Russians, so the Ruskies are going to meddle. Tell me where the Europeans have stood up the the Ruskies without the US doing it for them?

    I hope. The adventures in the Middle East? Not so much.

    And our work there, on our own and on behalf of Europe has really paid off.

    Neither Russia nor China, nor any of the totalitarian regimes, are trustworthy business partners.

    Were they ever? No. Did allowing the Chinese into the WTO benefit the US? Not so sure. It did benefit the Chinese however. So, what to do, have them outside the tent pissing in, or inside, pissing out?

    They steal inventions, they confiscate private partnerships, they have no respect for trade norms, and in China’s case they legitimize serfdom and forced labor.

    And in spite of all that we let them into the WTO.

    It is very much in the American interest to foster the G7 and to extend its influence, immediately as a united front against Chinese trade abuses.

    So, you agree they should be expelled from the WTO and all Chinese imports banned? Again, where are the rest of the G7 going to go? Don’t they all suffer the same abuses?

    Disagreements within the G7 are negotiable and have continued to be handled quietly for years by all the partners, until this.

    So, we agree that all countries use tariffs and regulations for political reasons and that what’s really bothering you is the negotiating tactics. Why shouldn’t we treat the rest of the G7 as our bitch? Our economy is greater than all theirs combined. It’s 4 times larger than the next largest economy Japan. Why shouldn’t we leverage the hell out of that? We provide ALL of their security, which by their lack of military spending they don’t think they need, so it’s time to extract new terms, no? If not, why not? Where else are they going to go?

    Meanwhile, Russia is messing around in all western politics according to the intel units in each of our allied nations and our own.

    When has this not been true?

    Putin sees in the discord a chance to extend his Russian hegemony over eastern Europe, again.

    When did he ever stop? How many American soldiers are you willing to sacrifice for Ukrainians or Latvians?

    Is that a reasonable reply?

    I don’t understand the question. Did I imply that certain answers were unreasonable?

    And regardless of Trump’s political pitch at home, it seems he doesn’t realize either that foreign leaders of representative governments also answer to their voters,

    I believe he knows that more than they do.

    or that German and Japanese auto makers hire more American auto workers in the USA by far than American companies hire auto workers in Japan and Germany. Canada’s auto industry is so tied with ours that I assume we can cause more job loss there than they can here.

    I’ll ask again, is it your position that he will not take literally ANY conciliation and sell it to his rubes? Really? Again, all countries use tariffs, and they all negotiate around the edges.

    In any case, I think throwing an inhibitory tariff on steel, aluminum, and cars is irrational and destructive on its own.

    I believe you believe that. Name a POTUS that has not added steel tariffs?

    Do you agree about any of my assertions?

    See above.

    Like

    • And I don’t think Trump gives a shit about adding Russia to the G7, it’s a negotiating tactic as well as a tweet to domestic political opponents.

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    • I am not arguing for zero tariffs. Until two weeks ago, while tariffs among the G7 varied by product, it was true that the United States had tariffs that were slightly higher, on average, across all its imported products than Canada or Japan, and exactly equivalent to the four European nations in the G-7, based on some agreed formulation. Item by item tariffs differed, but the overall effect was to neutralize tariffs while meeting local needs.

      Like

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