Morning Report: Trump calls for 100 basis points and more QE

Vital Statistics:

 

Last Change
S&P futures 2922 0.5
Oil (WTI) 56.11 0.44
10 year government bond yield 1.55%
30 year fixed rate mortgage 3.78%

 

Stocks are flat this morning on no real news. Bonds and MBS are up.

 

No economic data this morning, and we wait for Jackson Hole comments later this week.

 

Trump called on the Fed to cut rates by 100 basis points and should re-embark on quantitative easing. “Our Economy is very strong, despite the horrendous lack of vision by Jay Powell and the Fed, but the Democrats are trying to ‘will’ the Economy to be bad for purposes of the 2020 Election,” Trump tweeted. “Very Selfish! Our dollar is so strong that it is sadly hurting other parts of the world. [Interest Rates] over a fairly short period of time, should be reduced by at least 100 basis points, with perhaps some quantitative easing as well….If that happened, our Economy would be even better, and the World Economy would be greatly and quickly enhanced-good for everyone!”

 

The Home Despot reported better than expected earnings this morning. Falling lumber prices caused them to take down their sales estimates, and they are worried about how tariffs will impact sales. “We are encouraged by the momentum we are seeing from our strategic investments and believe that the current health of the U.S. consumer and a stable housing environment continue to support our business,” CEO Craig Menear said in a prepared statement. “That being said, lumber prices have declined significantly compared to last year, which impacts our sales growth. As a result, today we are updating our sales guidance to account primarily for continued lumber price deflation, as well as potential impacts to the U.S. consumer arising from recently announced tariffs.”

 

Ballard Spahr weighs in on the new disparate impact rule. Disparate Impact is a concept that was intended to put the burden of proof on the defendant, not the plaintiff. If a lender’s customer base doesn’t reflect the demographics of the relevant market, then it is assumed the lender is guilty of discrimination. While a Texas court upheld the concept, it did institute some guardrails to prevent abuse. HUD’s new guidance was intended to reflect that decision.

 

The relief for lenders turns on the use of algorithms to make lending decisions. Since most lenders use DU or LP automated underwriting systems, the big question is whether this insulates them from discrimination charges. Ballard Spahr believes it does. “However, if the use of the model is an “industry standard,” the defendant is relieved from liability if it uses the model “as intended by the third party” that created it.  It appears that the second defense could apply in a variety of situations, including when a mortgage lender uses the automated underwriting systems of Fannie Mae or Freddie Mac.”

 

The Business Roundtable officially ended the era of shareholder value yesterday and declared that it would focus on “all stakeholders.” Though this document is largely symbolic, it is an attempt by business to play along with the new populism emerging in the Democratic Party. “The American dream is alive, but fraying,” said Jamie Dimon, Chairman and CEO of JPMorgan Chase & Co. and Chairman of Business Roundtable. “Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term. These modernized principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans.

 

To me, this document is indicative of several trends: first the emerging populism in both political parties, second a tight labor market, and third the emergence of indexing as the primary long-term investing vehicle. We are seeing the left become more comfortable in their historic role of being a check on big business, while the right is talking about antitrust and Big Tech. Neither party seems particularly hospitable and the “third way” Democrats are battling an increasingly mobilized left. The tight labor market is also playing a part, as companies need to attract employees and this might be the second-to-last resort to try and attract them. Of course the last resort is to raise wages and hire the long-term unemployed, and that may be on the horizon.

 

The indexing angle is probably the most significant. When most of the largest shareholders in the S&P 500 are index funds and ETFs, you have take into account they don’t have the motivations that money managers had a couple decades ago. 20 years ago, money managers were paid to beat the market and pick good stocks. Those that did so were rewarded with inflows and their managers were paid big bonuses. That was the Peter Lynch model. Today, the biggest money managers aren’t interested in beating the market. They aren’t paid to do that. They are paid for minimizing tracking error and fees, which means they aren’t paid much since the skill set is completely different. They couldn’t care less if XYZ Inc’s CEO is a bum who makes bad decisions – as long as their fund holds the requisite 2.49856% of net asset value in XYZ, they have done their job. Indexers largely vote the way Institutional Shareholder Services (ISS) recommends, and ISS has its own set of priorities. Punch line: companies can get away with this because their largest shareholders don’t have any skin in the game.

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