Morning Report: The adverse market fee is gone

Vital Statistics:

 LastChange
S&P futures4,266-52.2
Oil (WTI)69.14-2.55
10 year government bond yield 1.22%
30 year fixed rate mortgage 3.08%

Stocks are lower this morning as investors fret about new COVID-19 cases in Asia. Bonds and MBS are up.

The upcoming week will begin the deluge of earnings reports. In terms of economic data, we will get housing starts and existing home sales. We won’t have any Fed-Speak as we are in the quiet period ahead of next week’s FOMC meeting.

On Friday, the FHFA eliminated the adverse market fee of 50 basis points on refinancings. “The COVID-19 pandemic financially exacerbated America’s affordable housing crisis. Eliminating the Adverse Market Refinance Fee will help families take advantage of the low-rate environment to save more money,” said Acting Director Sandra L. Thompson. “Today’s action furthers FHFA’s priority of supporting affordable housing while simultaneously protecting the safety and soundness of the Enterprises.” The fee was supposed to protect the government from credit losses stemming from COVID, however the low number of GSE loans in forbearance and rising home prices have mitigated the need for extra reserves.

The NAR has released a study finding a “dire shortage” of housing which requires a “once-in-a-generation” response. The US housing stock grew at a 1.7% pace from the 1970s through the 1970s, however it has averaged only 1% since, and has fallen to 0.7% over the past decade. They estimate that the supply gap is about 6.8 million units, which would require housing starts of more than 2 million units per year. In 2020, housing starts came in at 1.3 million, however COVID did impact those numbers slightly. Housing starts have returned to historical normalcy, however over the course of this chart, the US population has almost doubled.

The decrease in interest rates appears to be a warning regarding growth going forward. There was a study conducted by Reinhart and Rogoff, which said that a debt to GDP ratio of 90% was sort of a governor on economic growth, which negatively affects GDP growth by at least 1%. Countries with debt to GDP ratios above 90%, generally see growth in the low 2% rates.

This study was a bit of a political football about a decade ago, when leftist economists like Paul Krugman and Robert Reich were agitating for more and more government spending to support the economy. They wanted to avoid austerity, which is a loaded word meant to imply fiscal tightening when that isn’t the case. Austerity really just means spending as a percent of GDP is falling. If the government is spending 150% of GDP and it falls to 149.9% of GDP, that is austerity. In other words, you can still have highly accommodative fiscal policy and austerity simultaneously.

Back in the Great Recession, the US debt to GDP ratio was sitting just around 90%, which made for an interesting debate in Econ Twitter. Fast forward to today, where our debt to GDP ratio is 130%. IMO, this is something that has been absent from discussion (I suspect this is mainly because the press and left Econ doesn’t like the implications), however it will have a big impact on inflation going forward. If you look at the Fed’s economic projections, it sees long-term growth around 1.8% – 2%. This would be consistent with Rogoff and Reinhardt, which is simply not a conducive environment for inflation.

It may turn out that the model for the US going forward is not 1970s style inflation, but something more similar to Eurosclerosis and Japan. I would add that slow, tepid recoveries are a feature of post-residential real estate bubbles, and they typically take decades to play out.

I suspect the fast money shorting bonds right now is going to be disappointed.

42 Responses

  1. KosKidz mad at Tucker again.

    https://www.dailykos.com/stories/2021/7/17/2040402/-Why-is-Tucker-Carlson-still-on-the-air#comment_81381674

    What’s fascinating to me is the absolute belief that there cannot be good faith disagreements, only enlightenment and ignorance.

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    • So true. The right now is always a The Most Ever.

      Thanks Ken, I’ll skip your Civil War Doc then.

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      • The left is so melodramatic. You would be forgiven if you forgot democrats hold the presidency, the house and the senate.

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        • This. Very much this. Although I can understand why many of them would see that as transient. However they seem to vacillate between “everybody wants everything we’re doing, the GOP will never win another election” and “we’ve only got a year before the Republicans get supermajorities in the house and senate!

          Ironically the Democrats make the best argument against themselves with such things. The Republicans sure don’t make a great argument against them.

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        • The Republicans sure don’t make a great argument against them.

          I think the Republicans are letting the left’s id do the talking right now, which is wise. Let them overreach.

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        • I would like to think it was wisdom and not lethargy. But I expect lethargy. But ultimately—-yes. Take the Joe Biden approach and run as “not those lunatics” and they’ll clean up in the midterms.

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      • Like

        • “domestic terrorism” The judge sounds like an AOC-level twit

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        • No shit, there I was, knee deep in MAGA hats and selfies.

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        • Execute that seditious bastard!

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        • It’s not the judge who said that. It’s the prosecutor.

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        • On the one hand, that sort of stuff makes light of inappropriate and irresponsible behavior by people who were basically antifa-light (very light) that ended up contributing to the deaths of some of the Capitol police and a few protesters. So it was more than wandering around taking selfies.

          At the same time it was clearly not an attempted coup or an act of domestic terrorism as such should be plainly understood. There was no threat to the Republic there.

          I think there was an opportunity to build a pretty unified “this was bad” coalition but instead they’ve used it to make their political opponents into domestic terrorists.

          Actual conversations seem very difficult these days. Everything is about packaging and defending a narrative, typically one with little or no relation to the facts.

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      • Like

        • Is there a better indication of the politicisation of the Justice Department?

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        • no, because it is only politicization if democrats are affected.

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        • The true indication is the difference between that and the treatment of the Antifa who were firebombing the federal courthouse and ICE center in Oregon and having the charges repeatedly dismissed.

          Everyone can see the two different standards now, even if they refuse to admit it.

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        • One man’s freedom fighters are another man’s terrorists.

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        • Everyone cheering this on from the left has forgotten “what goes around comes around”.

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        • Everyone cheering this on from the left has forgotten “what goes around comes around”.

          The media will memory-hole the left’s prior behavior and will spin the narrative that this is unprecedented totalitarianism.

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        • The left is going to get hoisted by its own petard by other members of the left—just different enough to hate each other. Not the right, that’s not happening.

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      • Like how every Republican president is the worse ever until the next one.

        I would think post Pearl Harbor and WWII were pretty fraught. The Great Depression was a bummer for sure. The Vietnam war. The race riots. Watergate. The election of Ronald Reagan. The Great Recession. All of the 70s, obviously.

        Ken Burns is right, though, if you redefine the world as being whatever Twitter acts like it is, all the time. If you dismiss 98% of the world and only focus on social media like it is everything, then this is definitely the most fraught time ever #TotallyFraught.

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    • If you had told me 40 years ago that it would be the left who wanted to throw journalists in jail, i would have said you were crazy.

      Yet here we are.

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      • Well, Wilson, the Progs Prog certainly did as did the fascists and their brethren the commies. There’s always been a difference between liberal and progressive though.

        Decrees initiated because it will Save One Life will be the death of us all.

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      • They square that circle by excluding people they don’t like from the definition of “journalist”.

        I’m surprised that they haven’t pushed for professional licensing journalists.

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      • Interesting observation:

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      • The left is doing pretty much everything it used to be against from domestic surveillance and outright censorship to militarizing the (Capitol) police (not to mention the wall they built around the Capitol) and cozying up to the surveillance state and becoming champions of mega corporations and advocating for their power … and they are doing that all by redefining terms to where racism on the left is anti-racism, surveillance state when they do it is just fighting right wing terror (and there is no left wing terror so of course you do that) and big corporation should have unlimited power because reasons that are good now that we are in bed with them.

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    • You can’t make a good faith argument for Satan, silly!

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  2. “On Friday, the FHFA eliminated the adverse market fee of 50 basis points on refinancings.”

    So this is good for lenders?

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  3. This is why people don’t take climate change seriously. The disconnect between the words and the deeds of those arguing it’s an existential threat. See also Obama bragging about having more oil and gas under his administration.

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  4. This is probably the most generous reading of Kendi I’ve seen. Worth a read to see him make his case in his own words with a friendly interviewer.

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  5. It’s a stumper.

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  6. um, perhaps because pollsters are in the influencing business, not the measuring business

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    • Pollsters are also primarily in the selling the results the client wants. Sometimes reselling the same poll but tabulating the data so the result favors one side one time and the other the next.

      Many pollsters are on the business of their own DC influence so accuracy is not as important as sounding smart when they are explaining their doomed predictions.

      And they can swear they’ve improved the model every year, so don’t worry about how wrong they were last time. Also they can now blame Republicans and conservative from lying intentionally or refusing to answer the polls, skewing their numbers.

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  7. Once you get past the obligatory “Orange Man Bad” disclaimer necessary to publish in the Atlantic, this isn’t a bad piece:

    “What Is Happening to Our Apolitical Military?

    Remarks by America’s most senior military officer mark the latest step in the continued erosion of relations between the armed forces and their civilian leaders.

    By Kori Schake”

    https://www.theatlantic.com/ideas/archive/2021/07/us-military-politicization-mark-milley/619472/

    Like

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