Morning Report: You have to pay to lend money to Portugal

Vital Statistics:

 

  Last Change
S&P futures 3653 -19.6
Oil (WTI) 46.43 0.94
10 year government bond yield   0.92%
30 year fixed rate mortgage   2.80%

Stocks are down as stimulus negotiations stall. Bonds and MBS are up.

 

Initial Jobless Claims rose to 853,000 last week. Meanwhile job openings increased to 6.52 million.

 

Inflation at the consumer level remains under control. The Consumer Price Index rose 0.2% month-over-month and 1.2% year-over-year. If you strip out food and energy prices, it rose 0.2% MOM and 1.6% YOY.

 

Homeowner equity rose 10.8% in the third quarter, which was the highest gain since 2014. Overall equity rose by $1 trillion, which works out to be about $17,000 on average for each homeowner. The average home with a mortgage had $194,000 in equity. The increase in home prices has been a huge boost to an otherwise difficult economy.

 

Lawmakers are looking at including an eviction moratorium until February 2021. This would only apply to people earning less than 50% of their area’s median income, so we would be talking about people making in the $30k and below range.

 

Remember the PIIGS crisis from about 8 – 10 years ago? The PIIGS was an acronym for the struggling European economies of Portugal, Italy, Ireland, Greece, and Spain. These countries had severe economic problems, which drove up the funding costs. Greece actually defaulted on its debt in 2015. Fast forward to today. The Portuguese 10 year is trading with a negative yield. Yes, if you want to lend money to the Portuguese government, you have to pay them. Spanish 10 year bonds yield 2 basis points. Italy and Greek yields are lower than the US 10 year. Let’s not forget that the Greek 10 year yielded 35% 5 years ago.

We are truly in the midst of a government-created experiment in direct market intervention like the world has never seen before. Global central banks have manipulated interest rates to the point where the signal-to-noise ratio is close to zero. Academics are setting the price of money the way Soviet bureaucrats set quotas for the Volograd Tractor Plant. There is zero market-driven influence on risk-free interest rates in the world right now.

If these rates were market-driven it would mean the market is telling you that we will experience a global deflationary wave, similar to what Japan has experienced for the last 30 years.

The planet’s collective bond markets are at a party. Germany and Japan are passed out in the corner. Spain and Portugal are puking in the bathroom, and the US and the UK are still staggering at beer pong table. But hey, they are the most sober ones there.

What does this mean for investors? No idea, since this is completely unprecedented. In the short term, I cannot see how US bond yields manage to escape the global vortex pulling down rates. While it is hard to argue that US rates will go negative, I think that the path of least resistance for rates in the US is down, even after the economy recovers. In other words, the mortgage business should continue to experience a refi boom.

15 Responses

  1. “Greece actually defaulted on its debt in 2015”

    Didn’t they end up paying in full after a delay?

    Like

    • Didn’t they end up paying in full after a delay?

      I don’t think so. Last I recall [maybe two years ago] Greece refinanced much of the debt with no payments for several years so it could make the payment schedules on the remainder. But maybe Greece won the lottery since then or struck oil in their part of the Med.

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  2. Click to access 20201210142206254_Pennsylvania%20Opp%20to%20Bill%20of%20Complaint%20v.FINAL.pdf

    Paxson, as some of you know, is under indictment for securities violations and also being investigated for bribery while in office. When he filed this absurd case I immediately thought “pardon fishing”. But then 17 states joined and it cannot be that all of their Attorneys General are pardon fishing.

    The reply brief, above, is entertaining.

    Like

    • I agree it’s entertaining in the abstract but It’s not that entertaining IRL..More like bizarre and I’m still trying to figure out how Republicans can support overturning state’s rights………………it’s a weird year though……….LOL

      Like

      • lms:

        I’m still trying to figure out how Republicans can support overturning state’s rights.

        Perhaps they are tired of always being on the short end of left’s heads-I-win-tails-you-lose approach to Constitutional interpretation.

        Like

        • I’m not sure they are trying to overturn state’s rights. It seems to me the approach being used is primarily a legalistic and if successful is not particularly a huge violation of states rights.

          Also, you play not on the field you wish you had but the field you actually have. The one we actually have is where one side is actively opposed to states rights and uses their success their to impose their will, in many cases.

          I find this whole approach interesting. At this point I don’t think a Trump victory is a positive in the way it might have been on election night, so ultimately I think the Republicans need to lose this. However, I do hope it urges at least some of these states to get their houses in order vis-a-vis elections so there can’t even be the appearance of impropriety.

          Like

        • KW:

          However, I do hope it urges at least some of these states to get their houses in order vis-a-vis elections so there can’t even be the appearance of impropriety.

          I”m sure most of the effort will indeed go towards eliminating the appearance of impropriety. Unfortunately probably not so much towwards the acts of impropriety.

          Like

        • I do hope it urges at least some of these states to get their houses in order vis-a-vis elections so there can’t even be the appearance of impropriety.

          What is their incentive to do so?

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        • Unwanted attention. Depends on the motivations of those involved. Florida got its house in order eventually. It can happen.

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      • lms, I think the Court will dismiss in a one sentence, unanimous, per curiam order.

        They could do more, but I am guessing they will not.

        Like

    • There has to be some sense that a Biden presidency is going to be relatively toothless towards them, then? Seems like a bad idea to make an active enemy of the future president. Although the Trump era indicates that’s not necessarily true, I suppose.

      Like

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