All Things in Moderation

Markets are higher this morning as commodities continue to rebound. Bonds and MBS are down.

Import Prices fell 0.1% in September and are down almost 11% on a year-over-year basis.

Wholesale inventories rose 0.1% in August, while wholesale sales fell 1%. Both numbers were worse than expectations. The increase in the inventory to sales ratio is a worrisome sign., You typically see the ratio build ahead of a cyclical recession.

The FOMC minutes confirmed what everyone suspected – that international worries prompted the Fed to hold interest rates steady at the September FOMC meeting. Overall, the Committee seemed rather constructive on the US economy in general. The Fed Funds futures are currently handicapping a 10% probability of a hike at the October meeting and something like 40% in December.

Note that while the Fed is sanguine on the US economy, economists are generally more cautious. A survey of strategists and economists puts the chance of a US recession at 15% over the next 12 months. It is important to note that the Fed’s forecasts for economic growth have been consistently high since the Great Recession.

Representative Kevin McCarthy withdrew his name from consideration for the next House speaker after allegations of an affair ended up on a Wikipedia page. This leaves current speaker John Boehner in charge for the time being. Interestingly, the Wikipedia edit emanated from the US government itself – someone in the Department of Homeland Security. After the Secret Service started distributing confidential information on Representative Chaffetz, it looks like the worker bees in the government are going directly after Republican politicians. It will be interesting to see if anyone in the Obama administration actually cares.

Hillary’s plan for the financial system. A surtax on banks with over $50 billion in assets, an increase in the statute of limitations for financial crimes, and toughening the Volcker rule regarding proprietary trading.

Note that margin debt is falling on the stock exchanges. This could be a reaction to the turmoil in overseas markets. Generally speaking margin selling tends to exacerbate downward moves, so having less margin debt is actually a good thing.

The share of foreign homebuyers is at an 8 year low in California.

Markets are lower this morning on overseas weakness. Bonds and MBS are up.

Third quarter earnings season starts tonight with the traditional report out of Alcoa.

Initial Jobless Claims fell to 263k last week, the lowest since July.

The minutes from the September FOMC meeting will be out at 2:00 pm EST. Be aware of possible bond market volatility as the market digests it.

The Bloomberg Consumer Comfort Index rose to 44.8 from 43 last week.

Fannie Mae is announcing further reps and warranties guidance for loans starting Jan 1. It will include new alternatives to repurchase if the loan has a defect. The government is sick and tired of tight credit, especially at the lower end of the credit spectrum. These are intended to ease credit by giving lenders more certainty. The government is clearly worried given that the big banks like JP Morgan are backing away from FHA originations.

A case for allowing student loan debt to be discharged in bankruptcy is winding its way through the courts. There is about $1.2 trillion in student loan debt outstanding.

It looks like a strike at Fiat-Chrysler has been avoided. It sounds like the union got some of what they wanted so we could start seeing the beginnings of increasing wages.

Larry Summers makes the case for going big on expansionary fiscal policy. His argument is that China’s slowdown threatens to drag the global economy into a secular stagnation similar to what Japan has been going through. He argues that monetary policy is pretty much played out: rates are at zero, and the stimulative effect of additional QE with the 10 year at 2% would be de minimus. He argues for a new “New Deal” where the government deficit spends on infrastructure spending. Of course this isn’t a new idea in the modern age: Japan has been doing precisely that for 25 years and has nothing to show for it except for a debt to GDP ratio of 2.3x. That would be like the US spending $40 trillion over 25 years. Before we advocate spending that kind of money, we should figure out  why it hasn’t worked in Japan.. And if over 1 quadrillion yen is not enough, then what is? We need a better answer than the un-falsifiable “More Cowbell.” If the Rx only works in theory, then maybe the answer is to just slug it out until the economy corrects on its own.

Mortgage applications rose 25% last week as purchases rose 27%% and refis rose 24%. That is a surprising result given the Bankrate 30 year fixed rate mortgage rose 5 basis points last week. Some think that it was partly TRID-driven.

Janet Yellen’s intention to let the labor market run hot for a few years has some Fed watchers worried. The criticisms range from fears about creating another 1970s – style inflationary environment to worries about the Fed’s credibility. We are in uncharted territory with the amount of control central banks worldwide are exercising over the economy. FWIW, I do not see much in the way of similarities between the 1970s and today: capacity utilization is low, and the chance of an oil shock is pretty remote. In fact we have the exact opposite situation. The inflation hawks make the case that monetary policy acts with such a lag that the die may already be cast for higher inflation (a similar argument that some of the global warming alarmists make with respect to CO2 in the atmosphere) The other point is more valid: the evidence that the Fed can influence wages and labor force participation is weak and the Fed is setting up unrealistic expectations that could damage its credibility down the road.

Of course the other unintended consequence of ZIRP is the pressure it puts on pension funds. That probably is going to be the next crisis. We saw this movie before, in the 1950s.

As we contemplate higher interest rates, foreigners are selling US Treasuries. While economic fundamentals will ultimately matter more than foreign fund flows, but it looks like foreign investors are cutting exposure ahead of higher rates. It probably will affect volatility, as primary dealers have pulled back market-making activity and Treasury markets have become less liquid in general.

Now that house prices are approaching the 2006 peaks, some are arguing that we are in another bubble. Affordability is down as wages have gone nowhere, and scarcity is driving up prices. FWIW, bubbles are psychological phenomenons – the occur when buyers (and lenders) believe an asset is special and cannot go anywhere but up. We won’t see another housing bubble in the US, but our grandkids might.

Stocks are up this morning on no real news. Feels like end of month / quarter window dressing. Bonds and MBS are down small

The economy added 200,000 jobs in September, according to ADP. This is bang in line with the Street estimate for payrolls on Friday. Note that the initial reports of late summer payrolls seem to consistently miss on the downside and are usually revised upward in subsequent months.

Mortgage Applications fell 6.7% last week as purchases fell 5.6% and refis fell 7.5%.

The ISM Milwaukee index fell to 39.44 from 47.7 last month. The Chicago Purchasing Manager Index fell to 48.7 from 54.4. The strong dollar is taking its toll on manufacturers.

All cash sales dropped to 31% in June, according to Corelogic. The historical, pre-bubble average is close to 25%. This speaks to the lack of first time homebuyers. It also speaks to an increase in gettable loans as that number reverts to the mean, even if home sales remain flat.

One of the big questions facing the Fed concerns falling unemployment and a falling labor force participation rate. Intuitively, you would think that as unemployment falls, people who are not currently in the labor force but want to be would find jobs, which would push up the participation rate. If the labor force participation rate remains low, that means the potential growth of the economy remains low, which means a slow, plodding recovery that won’t feel like any sort of economic boom. It also means inflation should, at least in theory, come back as companies bid up the wages of the fewer workers that are left. So far we aren’t seeing that. Millennials should be picking up the slack of retiring boomers but so far it hasn’t happened. And if Millennials don’t do it, then you need to pick up immigration.

Elizabeth Warren is mad that the government is selling distressed mortgages to hedge funds and private equity firms and wants them sold to non-profit firms. She is of the opinion that hedge funds and private equity firms pursue foreclosure too quickly and said “The heart of it is these loan sales need to come with strings attached with basic outcomes for homeowners.” She is either posing for the cameras or completely uninformed: They do come with strings attached. You usually cannot foreclose for at least a year and must hold the loans for a period of several years.

Heading into campaign season, Americans’ trust in the media is at an all time low.

Markets are up this morning on good economic news overseas. Bonds and MBS are up small.

Slow news day.

The S&P Case-Shiller index of home prices rose 0.37% month-over-month and is up about 4.7% year-over-year.

Consumer Confidence increased to 103 in September from 101.3.

NAR is saying they expect TRID to delay closings by up to 15 days. There will undoubtedly be a learning curve for the industry. TRID is the biggest change to the industry since the implementation of Dodd-Frank. CFPB claims they will use discretion in not going after lenders who make mistakes but are making a good-faith effort to work within the rules.

NAR put out the list of the 20 hottest real estate markets. While some at the top are not surprising (San Francisco) some of the other names are more associated with the economic dumpster fires we saw as the collapse began. Cities like Stockton CA and Detroit MI are included in the 20 hottest markets.

Glencore (which used to be called Xstrata) is a Swiss commodity trader who has been subject to solvency rumors. The stock has gotten hammered over the past year (down over 80%) but is up big today after addressing market rumors about solvency problems. While real estate types don’t typically have to worry about what happens in the area of precious metals, energy, and ag, stress in these markets can spill over to the rest of the financial sector. What does this mean for LOs? Stress = lower interest rates.

Speaking of stress, mutual funds that mimic hedge fund strategies may find themselves wrapped around the axle if we have a period of stress. Hedge fund arbitrage strategies typically require leverage and often invest in illiquid assets. Hedge funds at least have quarterly redemptions, which makes it easier to exit positions if need be. Mutual funds have no wiggle room – they have to accept redemptions daily. This could get ugly if markets turn south.