An “independent”, agenda-setting bureaucracy 10/24/16

Posted on October 24, 2016 by ScottC

There is an op-ed article today in the WSJ, unfortunately behind the firewall, that unwittingly lays bare the unconstitutionality of the regulatory state as it currently exists in the US. The article was written by former Chairman of the SEC, Arthur Levitt Jr., and is ostensibly a critique of Senator Elizabeth Warren’s call for current SEC Chairman Mary Jo White to be removed for failing to implement a “rule” regarding corporate political donations that Warren favors. Levitt correctly calls out Warren for improperly trying to influence the SEC’s “agenda”, but his reasoning reveals the mindset of these unelected bureaucrats and how shamelessly unmoored from the Constitution the regulatory state has become.

Levitt says:

No rule—no matter how merited—is worth the damage that would be caused if the SEC were compelled by political intimidation to write it. That’s not how good regulations emerge, and what’s worse, it would poison the regulatory process for all time. The moment the SEC loses its ability to set its own agenda is the moment it loses its ability to protect the investing public.

The SEC does not operate as a pass-through entity for Congress, merely following congressional direction. Rather, it’s an independent agency, and its chairman is empowered to set the agenda for the agency’s work. This agenda takes shape in many forms—rule makings, speeches and enforcement actions—and must be set by the chairman, not Congress. This is by design.

Say what? The “agenda” of unelected bureaucrats agency “must be” set by themselves and not by the elected members of Congress? Perhaps Levitt would like to point out where in the Constitution such bureaucrats have been granted this rather awesome power. Contrary to what Levitt seems to think, that the SEC is supposed to operate as a “pass-through” entity for Congress, following its direction, is the only way it can operate that would justify its existence.

Levitt goes on to say:

That’s not to say the agency should be free from congressional oversight. Throughout its history, politicians from both parties have sought to influence its work. That’s to be expected, and a good regulator welcomes outside views, especially those coming from elected leaders who write the laws the SEC implements. Ultimately, Congress holds the power to pass laws requiring agency action; and that option is available to Sen. Warren.

But Congress must respect the SEC’s independence, and thus freedom, to focus on a fixed agenda. Once confirmed to lead the SEC, its chairman has a singular goal: To meet the agency’s mandate to protect investors, facilitate capital formation, and ensure fair and orderly markets.

Well, isn’t that generous. Good regulators should “welcome” the “outside” views of elected representatives, the very people who are actually empowered by the Constitution to write legislation.

Levitt is of course correct to inform Warren that if she wants to impose a new law, Congress has the power to do exactly that through actual legislation. But it is precisely the vaguely defined regulatory “mandate” that Levitt himself embraces which allows the likes of Warren to think that she can impose new laws without the hassle of actually going through the constitutional process.

This is an excellent example of how pervasive and shameless the undemocratic, unconstitutional mindset that typifies the regulatory bureaucracy has become.

(This link may or may not work to get the article…not sure: http://on.wsj.com/2e3zIc8)

Filed under: big government, Constitution, Economy, politics | 37 Comments »

Morning Report: Home prices rise 5% 9/27/16

Posted on September 27, 2016 by Brent Nyitray

Vital Statistics:

Last Change
S&P Futures 2142.2 2.0
Eurostoxx Index 338.6 -1.0
Oil (WTI) 44.8 0.5
US dollar index 86.4 -0.2
10 Year Govt Bond Yield 1.56%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.47

Markets are lower this morning on no real news. Bonds and MBS are up small.

Donald Trump and Hillary Clinton had their first debate last night. Early polls are showing Hillary won, however the debates went up against Monday Night Football, so the sample is going to skew female. Major media outlets are declaring the winner based on their ideological leanings: Bloomberg says Hillary won, and the WSJ says that Trump won. Did the debate change anyone’s vote? We’ll see, but my suspicion is that people’s minds are more or less made up at this point.

Global bonds have been rallying, but the US 10 year hasn’t been following suit. The German Bund is now back at -15 basis points. Meanwhile, Blackrock is advising caution in Treasuries as the Fed starts hiking rates. Global central banks are selling Treasuries, which is putting pressure on yields.

Tim Duy says December is a good bet for another tightening, but next year’s voting members will skew more dovish than the current FOMC.

Home prices were flat month-over-month and are up 5% for the year, according to the Case-Shiller home price index. The real estate indices are beginning to show a slowdown in home price appreciation. Until we start seeing wage inflation, real estate prices will be stretched versus incomes. The labor market continues to send mixed signals.

Filed under: Debates, Economy, Morning Report, politics | 3 Comments »

Morning Report: Donald Trump was a mortgage broker 8/22/16

Posted on August 22, 2016 by Brent Nyitray

Vital Statistics:

Last Change
S&P Futures 2179.0 -3.0
Eurostoxx Index 340.7 -0.1
Oil (WTI) 47.8 -1.0
US dollar index 85.7 0.2
10 Year Govt Bond Yield 1.56%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.5

 

Stocks are slightly lower this morning after Stanley Fischer said the US economy was close to hitting all of the Fed’s targets. Bonds and MBS are down small.
Not a lot of market-moving data this week, aside form the second revision to GDP on Friday. Note central bankers will be out in Jackson Hole this week, so there is the possibility of comments moving the markets. Otherwise, it looks to be a dull week in late August.
The Chicago Fed National Activity Index came in better than expected at .27, but the 3 month moving average is negative, indicating the economy is growing slightly below trend.

Fannie Mae is forecasting the Fed will maintain rates throughout 2016, and they believe the economy will strengthen. “Second quarter growth was a disappointment, but consumer spending appears solid heading into Q3, and we expect inventory investment to balance out after a surprising drawdown in Q2,” said Fannie Mae Chief Economist Doug Duncan. “Credit expansion, combined with improving labor market conditions and strengthening household balance sheets, should continue to support consumers, who will likely be the primary driver of growth again in the second half of the year. The positive July jobs report may encourage some Federal Open Market Committee members to argue for a Fed rate hike at the September meeting. However, we remain convinced that the Fed will hold the target rate steady this year given global uncertainties and anemic output growth. Although much of the financial volatility from Brexit has subsided, long-term Treasury yields continue to face downward pressure and we expect them to remain low for some time.”

More from Fannie on the housing market: “Housing market fundamentals remain a mixed bag. During the second quarter of 2016, both new and existing home sales rose to expansion highs, while single-family starts pulled back, remaining historically low for an expansion,” said Duncan. “Tight housing inventory from a lack of new construction continues to create affordability challenges, particularly at the lower end of the market. Robust rental demand during the second quarter of the year has created the lowest rental vacancy rate in decades. In addition, the homeownership rate dropped to below 63 percent in the second quarter, but we are seeing some tentative signs of older Millennials moving toward homeownership. We expect homebuyers will benefit from improving job and wage growth, more favorable lending standards, and continued low mortgage rates through the rest of the year, with the 30-year fixed-rate mortgage rate projected to average 3.4 percent during the fourth quarter.”

Talk about bad timing: Donald Trump got into the mortgage business in 2006. He did make an interesting point about bubbles and the madness of crowds. “Are you the type of person who takes advantage of positive situations when they present themselves, riding them out as long as they last? Or do you heed every message of doom and gloom, avoiding risks that could be some remarkable opportunities?” If you sold stocks in 1996 when Alan Greenspan discussed “irrational exuberance” in the stock market, you missed out on the lion’s share of the growth. Also, the most money is made right at the end of the move when it goes parabolic.
Following on Donald Trump, many recognize we have a bubble in sovereign debt. Black Rock believes that supply-demand imbalances will keep the bubble inflated for the near term. Meanwhile, Paul Singer suggests that bonds come with a warning label: “Hold such instruments at your own risk; danger of serious injury or death to your capital!”
Note that the European Central Bank and the Bank of Japan are now buying private placements from corporate issuers.  I guess the big question is “what happens when these bond issues go bad?” The European Central Bank is supporting 3.3 trillion euros of assets on 100 billion euros of capital, or about a 32:1 leverage ratio. The Fed is even worse, supporting $4.5 trillion in assets on just $40 billion worth of capital for a 112:1 leverage ratio. It won’t take much of a move in asset prices to wipe out the equity of either entity.

Filed under: Economy, Morning Report, politics | 34 Comments »

Morning Report: DJT lays out his financial vision 8/8/16

Posted on August 8, 2016 by Brent Nyitray

Vital Statistics:

Last Change
S&P Futures 2179.0 3.0
Eurostoxx Index 351.5 0.5
Oil (WTI) 42.6 0.8
US dollar index 87.0 -0.2
10 Year Govt Bond Yield 1.60%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.5

Markets are flattish on no real news. Bonds and MBS are down.

There isn’t much in the way of economic data this week – the week after the jobs report is invariably data-light. There will be no Fed-speak either.

TIAA agreed to buy EverBank Financial for about $2.5 billion.

3 month LIBOR hit 81 basis points this morning, which is the highest since May 2009. This will affect ARM pricing.

While US Treasuries have some of the highest yields in the world, foreign investors who want to hedge their currency risk are buying them for a negative yield. New money market rules will go into effect this fall, which will change the landscape for banks. Expect tightened credit conditions.

Donald Trump will lay out his vision for financial regulation today with a speech in Detroit. He proposes a moratorium on new financial regulations, a repeal of Dodd-Frank, eliminating the estate tax, dropping the corporate income tax to 15%, creating 3 tax brackets for individuals, and making bureaucrats in DC more focused on creating jobs.

The CFPB updated their mortgage servicing regulations.

The July Fed Labor Market Conditions index rose by a point in July.

Filed under: Economy, Morning Report, politics | 17 Comments »

Open Secrets 7/27/16

Posted on July 27, 2016 by novahockey

Open Secrets is a great tool. Come for the lobbying disclosure reports. Stay to see the DNC selling seats on boards and commissions.

http://www.opensecrets.org/news/2016/07/leaks-show-dnc-asked-white-house-to-reward-donors-with-slots-on-boards-and-commissions/

Filed under: politics | 7 Comments »

Morning Report: Glass-Steagall is a solution in search of a problem 7/19/16

Posted on July 19, 2016 by Brent Nyitray

Vital Statistics:

Last Change
S&P Futures 2167.0 5.0
Eurostoxx Index 336.3 1.0
Oil (WTI) 45.4 0.2
US dollar index 87.4 0.1
10 Year Govt Bond Yield 1.56%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.52

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

Housing starts came in at 1.19 million units, the highest since February. May was revised lower. Building Permits rose to 1.15 million units. Starts seem to have found a level here at 1.2 million per year, which is still depressed.  Housing starts have historically averaged closer to 1.5 million units (even before the real estate bubble) and inventory remains tight. This is helping push up prices, but the side effect is that the first time homebuyer remains on the sidelines due to affordability issues. Given the tight inventory out there, starts should be closer to 2 million per year, and that makes a huge difference in economic growth.

Now that Brexit hasn’t caused the world to end, the Fed is back to thinking about hiking rates again. The Fed Funds futures are now pricing in a 45% chance of a rate hike this year versus a 20% chance last week. Next week’s FOMC meeting just went from being a sleeper to potentially big. It might also mean that people who are waiting for a 1.37% 10-year bond yield to refinance might be waiting a while. The big driver will be overseas rates, and if European bonds head back into negative territory, US yields will follow. Absent the overseas influence, rates would be a lot higher in the US than they are.

Note that Morgan Stanley is calling for a 1% 10-year yield by the end of the year.

The Republican platform now includes reinstating Glass-Steagall which would break up the big banks. I guess the idea is that JP Morgan would split back into JP Morgan and Chase, Citi would spin off Smith Barney, and Bank of America would spin off Merrill. FWIW, Glass-Steagall is a solution in search of a problem, and it really had nothing to do with the financial crisis.

For a quick history lesson, Glass-Steagall was instituted during the Great Depression, but the reason for it is largely forgotten. At the beginning of the Depression, investment banks were choking on failed underwritings. In an underwriting, Company XYZ comes to an investment bank and says “I want to borrow $100 million by issuing bonds.” The investment bank gives Company XYZ $100 million and takes the bonds. The investment bank now has to sell these bonds to the public in order to get their money back. In the early 30s, there were no buyers for bonds, so the investment banks were stuck with a lot of stock and bond issues they couldn’t sell. Since these investment banks also owned commercial banks and insurance companies, they basically “sold” the failed underwritings to their subsidiaries who bought them at their inflated full value, not market value. When these banks and insurance companies failed, the regulators saw that much of their assets were worthless bonds bought from the parent investment bank. Thus Glass-Steagall was born – it prohibited investment banks from using their captive commercial banks and insurance companies as a buyer of last resort for failed underwritings. All transactions had to be arm’s length after that.

Fast forward to the late 1990s. Plain vanilla derivatives like currency and interest rate swaps were a huge business as Corporate America was doing more and more business overseas. The arena for these derivatives was highly competitive, and big foreign banks like Credit Suisse, Deutsche Bank, Barclay’s and Nomura were able to offer much better rates to Corporate America than Goldman or Merrill because they had access to cheap capital: deposits. Banks like Nomura could borrow for free, while Morgan Stanley had to borrow at LIBOR. Washington saw that “Wall Street” was beginning to mean foreign banks and not US banks. The rest of the world doesn’t separate investment banking and commercial banking. Indeed, the rest of the world doesn’t even recognize a difference. Washington decided that Glass Steagall was handicapping US banks versus the international competition (and it was). And thus Glass Steagall was repealed.

It is important to realize that the financial crisis was not the result of JP Morgan selling CDO squareds to Chase. Nor was Citi selling crap paper to Travelers. The financial crisis was the result of a residential real estate bubble, which are the Hurricane Katrinas of banking. Banking systems almost never survive a nationwide real estate bust, derivatives or no derivatives. See the busts in Japan and Sweden in the early 90s, and watch what happens in other places with massive bubbles. I guess the hope is G-S can address too big to fail, however if a hedge fund nearly brought down the system (LTCM), then an investment bank failure will as well. I am sure plenty in Washington are licking their chops at further regulating the banks and using them as a policy tool for social engineering. This is the model for many European banks.

If GS gets re-instated and the big banks break up, you could see a similar effect to when the government busted up AT&T in the 80s and investors cleaned up on all the baby bells.

Anyway, re-installing Glass Steagall might be politically popular, but it is a solution in search of a problem.

Filed under: Economy, Morning Report, politics | 20 Comments »

Morning Report: Big change in the market’s forecast for rate hikes 7/18/16

Posted on July 18, 2016 by Brent Nyitray

Vital Statistics:

Last Change
S&P Futures 2158.0 5.0
Eurostoxx Index 338.8 1.0
Oil (WTI) 45.3 -0.6
US dollar index 87.4 0.1
10 Year Govt Bond Yield 1.57%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.52

Markets are higher this morning despite the coup attempt in Turkey over the weekend. Bonds and MBS are down.

We have a relatively data-light week coming up, at least as far as market-moving data. We will get a lot of housing related data however, with the NAHB Homebuilder sentiment, housing starts, building permits, the FHFA House Price Index and existing home sales. We will also get earnings from Pulte, D.R. Horton, and NVR.

The Republican National Convention kicks off today in Cleveland. The #NeverTrump crowd is still trying to find a way to derail his nomination, but without a candidate it looks impossible. Mainstream Republicans are largely avoiding the convention altogether, so expect a bunch of celebrities to kill time with speeches. The protests from the left will probably be the most interesting part, as “law-and-order” promises to be the big theme of the convention.

Bond yields rose 17 basis points last week as US economic data came in stronger than expected, and global yields rose. The German Bund hit 0% late last week after starting the week at a yield of -18 basis points. As people realize Brexit didn’t cause the end of the world, risk appetites returned and with it, expectations of a rate hike. The Fed Funds futures are now pricing in a 44% chance of a rate hike this year, from 20% a week ago. That is huge, and indicates this is more than just a pull back in a market that went too far too fast.

That new forecast for rate hikes makes next week’s FOMC meeting all that more important. A week ago, I would have said it wouldn’t be market-moving. Now I am not so sure.

Are we in danger of living in a new housing bubble? Not really. Housing is expensive because inventory is tight, not because of loose lending standards.

Homebuilder sentiment slipped in July to 59 from 60 the prior month.

Filed under: Economy, Morning Report, politics, Republican Party | 9 Comments »

Morning Report: Trust in government is at a record low 7/5/16

Posted on July 5, 2016 by Brent Nyitray

Markets are lower this morning as bond yields push lower globally. Bonds and MBS are up, with the 10 year trading below 1.4%. The German Bund now yields negative 16 basis points.

We have a short week, but a lot of data. The biggest events will be the FOMC minutes on Wednesday and the jobs report on Friday. Given the Brexit backdrop, I see the FOMC minutes as a nonevent, and the jobs report shouldn’t be market moving unless wage inflation accelerates.

This morning, the ISM New York Index rose from 37.2 to 45.4. Still, a reading below 50 is indicative of a slowing economy.

Economic Optimism slipped in July to 45.5 from 48.2 a month ago.

Factory Orders fell 1% in May after increasing 1.8% in April. Durable Goods orders fell 2.3% while capital goods orders, which is a proxy for business capital expenditures, fell 0.3%.

Last week stocks rallied as it looks like Brexit didn’t trigger a financial crisis. Bonds continued their march higher and yield curves flattened, which is a recessionary pattern. Generally speaking, when the stock market and the bond market disagree, the bond market is usually right. That said, Italy is injecting more capital into its weak banking system, but that issue predates Brexit.

Speaking of Italy, they may be the next one out of the EU, as they have issues with their banks and cannot come to the aid of banks without giving investors a haircut according to EU rules. Since about half of Italian bank debt is held by ordinary Italians, no politician wants to suggest that investors lose money on a bailout. Plus their debt to GDP ratio is 1.3x, which gives them little maneuvering room.

Brexit and the rise of Donald Trump are symptoms of a bigger problem: a lack of trust in government and institutions like the media. Some say we need to learn to trust the government. Other say we need to push Facebook to use its algorithms in order to show opposing viewpoints more often. Bottom line, we are more polarized than ever before, and no matter who wins in November, gridlock will be the name of the game. Both parties are focused on one thing: a potential 3 or 4 Supreme Court nominees, which would ideologically skew the Court for a generation.

Home prices rose 5.9% in May, according to Corelogic.

Loan performance increased in the first quarter, according to the OCC. Performing loans are up 0.7% YOY, while foreclosures have declined to 0.4% to 0.9%.

Filed under: Economy, Morning Report, politics | 53 Comments »

Morning Report: Brexit 6/24/16

Posted on June 24, 2016 by Brent Nyitray

Stocks are getting sold this morning after the UK voted to leave the EU. Bonds and MBS are up.

Last night the UK voted to leave the EU, which was a surprise to the markets. European stocks are getting crushed this morning, and the biggest ones taking a hit are the banks. Barclay’s is down 17%, Santander is down 18%, for example, so there is the distinct possibility of some sort of banking crisis over there. Note we are not seeing a huge move in US banks, so it looks like any crisis over there isn’t going to spill over to the US banking sector.

Big picture: The Fed is doing nothing – in fact there will be calls for the next move to be a rate cut. This could cause a mild recession over here, which means lower rates.  In fact, durable goods orders were terrible this morning, down 2.2%. One of the big investment banks was calling for a 1.4% 10 year bond yield if the UK left. The 2 year bond yield dropped 14 basis points to 64 bps, That will be the one to watch to get a read on what the market thinks the Fed will do.

In terms of mortgage rates, the TBAs (which determine mortgage rates) will lag the move downward in yields. For example, the Fannie Mae TBAs are up this morning, but nowhere near the move in bonds. So, while the 10 year bond yield will get everybody excited, don’t expect a huge move downward in mortgage rates, at least initially. Once the 10 year finds its level, TBAs will find their level, probably over the next few weeks or so. If the European banking system goes into full crisis mode, the impact on mortgage rates will probably be a pull-back in jumbo pricing, which is the most vulnerable since it relies on a private securitization market. FN and GN pricing should not be affected. So basically, we will see some drama in the stock and bond markets, and not so much in the mortgage markets.

Filed under: Economy, EU, Morning Report, politics, UK | 25 Comments »

Morning Report: Republicans address problems with Dodd Frank 6/8/16

Posted on June 8, 2016 by Brent Nyitray

Markets are higher this morning on no real news. Bonds and MBS are flat

Mortgage applications rose 9% last week as purchases rose 11.7% and refis rose 7.4%. Interest rates were flat for most of the week until the jobs report on Friday, so these are good numbers, all things considered. The 10 year continues to bump to see resistance at the 1.7% level.

Job opening increased to 5.8 million in April, according to the JOLTS report, which matches a record set last July. Hires and quits fell however, which is another reason for the Fed to stand pat at the FOMC meeting next week.

Separately, a survey of CFOs indicates that companies are holding off hiring due to uncertainties regarding regulation and the general machinations in DC. Interestingly, hiring and retaining skilled labor came in as the #2 concern from #5 last year. That corroborates what the JOLTS report is saying: there are a lot of openings for skilled labor, but hirings are down because skilled labor is tough to find. On the other side of the coin, unskilled labor is becoming more expensive due to the recent spate of minimum wage hikes, which is creating an even bigger glut as companies substitute technology for labor.

Meanwhile in banking, machine learning continues to displace more and more workers. What can be automated ultimately will be.

Hillary Clinton won California and has enough delegates to sew up the nomination. Donald Trump continues on his mission to alienate as many people as possible. The big question is Bernie Sanders. Given the backdrop of the FBI investigation, he may decide to stick around until that is settled. That said, Obama has signalled that Hillary did nothing wrong, and I am sure his DOJ and his FBI has taken note. The Democratic establishment is going to put more and more pressure on Bernie to throw his support behind Hillary and unite to defeat Trump.

Was the big miss in payrolls just a spurious data point or is it the start of a downturn in the labor market?  Citi says to watch the initial jobless claims number tomorrow. Typically you should see a spike in initial jobless claims following such a weak number.

Republicans are drafting a bill to fix some of the issues with Dodd-Frank, particularly Volcker rule and some of the issues with the CFPB. Banks that meet capital requirements will be allowed to prop trade, and the CFPB will come under Congressional oversight and have a Board instead of a single director. There are two issues this is intended to fix. First, market making almost doesn’t exist any more as banks are afraid to venture too close to proprietary trading and the Volcker rule. The next crash (and there will be one) investors will be in for a rude awakening when they cannot sell their less liquid stocks because there is no bid. It will be even worse for bonds, and could be a major issue for ETFs. The second issue is the CFPB, which is regulating by enforcement action. Consumer advocates are getting sick and tired of tight credit, which is creating some consternation with other members of the left who still think the banks are unregulated and need to be reined in. Elizabeth Warren is leading the charge against this, which makes sense since the CFPB is her baby.

Filed under: Economy, Morning Report, politics | 6 Comments »

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