Morning Report: Will the US have a Wile E Coyote moment in 2019?

Vital Statistics:

Last Change
S&P futures 2765.5 -19
Eurostoxx index 385 -3.9
Oil (WTI) 65.16 0.1
10 Year Government Bond Yield 2.91%
30 Year fixed rate mortgage 4.57%

Stocks are lower this morning on trade fears. Bonds and MBS are up.

We will get a lot of housing-related data this week, but nothing should be market-moving. We will get housing starts and building permits tomorrow, existing home sales on Wednesday, and house prices on Thursday. Otherwise, should be a relatively quiet week.

The NAHB Housing Market Index (a sentiment indicator for the homebuilders) fell to 68 last month from 70. Rental markets are softening in some of the more pricy MSAs.

OMB official Kathy Kraninger is supposedly the front-runner to replace Mick Mulvaney as the permanent director of the CFPB. The confirmation process will probably take at least through the end of the year. She is not viewed as any sort of financial regulatory expert, so expect to see a lot of objections from Democrats over the nomination.

Ben Bernanke thinks the US economy will have a Wile E Coyote moment in 2019 or 2020 when the tax cut stimulus wears off. His point is that we are enacting fiscal stimulus at “exactly the wrong time” when the economy is already at full employment. Of course the statement about full employment is debatable. The unemployment numbers indicate we are, but the employment-population ratio does not. The employment-population ratio currently stands at 60.4%, and pre-crisis, we were around 63%. That 2.6% difference works out to be about 8.5 million people. We are getting some modest real wage growth (average hourly earnings are up 2.7% YOY and the core PCE index is growing at 2%) however broad-based wage growth probably isn’t going to happen until the EP ratio gets back up around 63%. Yes, there is a demographic element to this with the baby boomers retiring, but that is overplayed. Many people who are retiring in their 60s would rather work. You can see just how bad the Great Recession was. Most of the gains that started in the 60s with women entering the workforce were given back. The “retiring boomers” narrative has a kernel of truth in it, but it isn’t driving it.

The FAANG stocks are now worth more than the entire UK stock market. While people talk about short Treasuries as being the most crowded trade on the Street, it doesn’t hold a candle to the FAANGs

Goldman’s model now suggests the US economy grew at 4% in the second quarter. Friday’s Empire State Manufacturing Survey was the catalyst for the upgrade.

The government is trying to clarify the Volcker Rule, which prohibits banks from proprietary trading. So far, it seems to be clouding the issue as opposed to clarifying it. Ultimately trades held for less than 60 days are considered proprietary trades although there is a carve-out for hedging and market-making. Given the drop in commissions over the past 20 years, and sub-penny bid ask spreads, the economics of market-making are terrible to begin with, but the regulatory uncertainty probably seals the deal. The next crash is not going to be pretty.

10 Responses

  1. This is both stupid and probably unconstitutional:

    “The new legislation, from Sens. Chris Murphy, D-Conn., and Tammy Duckworth, D-Ill., would prevent Trump from withdrawing troops from South Korea unless the secretary of defense says it’s in the interest of national security and that it would not undermine the security of allies in the region.”

    The President doesn’t report to the Secretary of Defense. It’s the other way around.

    Liked by 1 person

    • Wouldn’t that require a constitutional amendment? And doesn’t the Commander-in-Chief ultimately prosecute a war (such as the Korean War?), such that it’s the executive branch that decides to do whatever?

      These stories always resonate, to me, with Eisenhower’s warning about the military-industrial complex. Anything to preserve an arms customer!

      Although give the people, I don’t know. Chris Murphy is generally a dove and wants to take money away from Defense and channel it into, of course, foreign aid (not domestic spending, because why should American tax payer money be spent in America?). But he is on the Senate Foreign Relations Committee.

      Tammy Duckworth was in the military, but doesn’t seem to be on any significant committee. Although sponsors Armed Forces and National Security bills more than anything else, so maybe.

      Good luck getting this one to stick.

      Liked by 1 person

    • give it time and Trump can probably get those 2 to call for increased troop deployments to Korea.

      Liked by 2 people

      • Or maybe they’ll vote to start a war with Korea (and Russia) because justice.

        I’ve heard more on the MSM about how oppressive and awful North Korea is since the Trump talks started ramping up than I think I ever have in my entire life. Strange they didn’t really seem to notice before.

        Liked by 1 person

  2. “The FAANG stocks are now worth more than the entire UK stock market. While people talk about short Treasuries as being the most crowded trade on the Street, it doesn’t hold a candle to the FAANGs”

    What is the risk/threat here? It just *feels* like too many eggs in one basket, but I don’t know what the actual potential problem is.

    Liked by 1 person

    • I don’t think it is a big deal. The stocks are overvalued, but that happens. If they crash, I don’t really see any sort of economic effect.

      Liked by 1 person

  3. WTF?

    I’ll just wait till they finally teach sheep to cook.

    Liked by 1 person

    • Check out The Forever War — decent science fiction book.
      but the ending, which I won’t give away, is what I think these folks aspire too.


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