Dow Tanks 724 Points on China Tariff Announcement, VIX Spikes To 23.34 (Trump Wants Quid Pro Quo)

The US plans to impose tariffs on up to $60bn in Chinese goods and limit the country’s investment in the US in retaliation for years of alleged intellectual property theft (such as my book which is sold in China, yet I have never received a penny in royalties). But it is more about inequality in tariffs where China has higher tariffs on US imports than the US has on Chinese imports.

As Dr. Hannibal Lecter once uttered, “Quid pro quo.”


Financials and Industrials led the way down.


The VIX spiked to 23.34.


The media ignores the fact that Fed rate increases coupled with balance sheet decay has helped make the equities markets more fragile.


Strange Brew! FHFA House Price Index Rises 0.8% MoM In January (And 7.30% YoY While Hourly Earnings Growing At 2.6% YoY)

Strange brew! The FHFA’s house price index rose 0.8% in January, double what analysts forecast.

Not surprisingly, the Pacific region and the Mountain region led both MoM and YoY growth.


While the national HPI Purchase Only index rose at 7.30% YoY, too bad the average hourly earnings grew at 2.6% YoY. That is close to 3 times hourly earnings growth!


And note the trajectory of YoY house price growth!

Is that Mose Schrute introducing Cream playing Strange Brew?



Fed Comes A Little Bit Closer To Taylor Rule (Raises Target Rate To 1.75% While TR Rudebusch Calls For 6.62% — Only 447 Basis Points To Go!)

Yes, Jay (Powell) and the Americans (FOMC) came a little bit closer to The Taylor Rule (Rudebusch Model) with the FOMC voting to increase their target rate to 1.75%. The lower bound is now 1.50%.


The Taylor Rule (Rudebusch Model) calls for a Fed Funds Target rate of 6.62%. Only 447 basis points left to go, Jay!


The sentiment for 4 rate hikes in 2018 is growing.


The Fed Dots Plot for today’s meeting shows optimism over economic growth.


I was hoping that Jay Powell was going to sing a ballad to former Fed Chair Janet Yellen.


Fed Enters Brave New Forecasting World Beset With Same Old Data (Actual data look very similar to those Fed faced in December)

The Fed’s Open Market Committee (FOMC) is meeting today and tomorrow to decide what to do. Well, it is pretty much a foregone conclusion that the Fed Funds Target Rate (upper bound) will be raised to 1.75% from 1.50%.


But what is different at this meeting than at the last meeting in 2017? In short, GDP is expected to growth at a faster pace and inflation is rising ever so slowly.

(Bloomberg) -By Jeanna Smialek- Federal Reserve officials will face an unusual predicament as they update their economic projections this week: Everything has changed but the data.

In many ways, it feels like a brave new world. Chairman Jerome Powell makes his debut with an expected interest-rate increase, replacing Janet Yellen. Financial conditions have tightened and the five rate increases under Yellen since December 2015 are finally being felt in the real economy, at least in mortgage rates. Tax reform has passed and Congress is lifting government spending caps, boosting the near-term growth outlook.

Yet Fed officials swear by their data dependence, and the numbers look strikingly similar to when the policy-setting committee last met. The inflation pickup officials have been waiting for still hasn’t materialized, wages are ticking higher but hardly surging, economic growth is chugging along and the job market continues to pull people off the sidelines.


And if we look at the Rudebusch Model for the Taylor Rule, it is screaming for a Fed rate hike even with unemployment rate at 4.1% and Core PCE Inflation at 1.52%.


While The Fed forecasts GDP to grow at 2.5%,


the Atlanta Fed’s GDPNow Forecast for Q1 has fallen to 1.8%. Be warned! This is one noisy forecast model!!


Home prices keep growing at over twice that of hourly wage growth.


Part of The Fed’s Brave New World is trying to cope with housing prices rising over twice as fast as wage growth.



My Kuroda! Not a Single Japanese 10-Year Bond Traded Tuesday (Bank of Japan Bought 75% Of Government Bonds Issued In Last Year)

(Bloomberg) — Some jobs might be threatened by automation. But when it comes to government bond trading in Japan, the biggest threat might be the country’s central bank.

The Bank of Japan has vacuumed up so much of the government bond market — in excess of 40 percent — that it’s left fewer securities for others to buy and sell. Some other buyers, such as pension funds and life insurers, also tend to follow buy-and-hold strategies.

That’s the backdrop to Tuesday’s session, when not a single benchmark 10-year note was traded on exchange, according to Japan Trading Co. data. Barclays Securities Japan rates strategist Naoya Oshikubo, summed it up, with perhaps an understatement: “the JGB market was generally thin.”

Governor Haruhiko Kuroda noted to lawmakers Wednesday that the central bank has bought 75 percent of the government bonds issued in the fiscal year ending this month.

The Japanese sovereign curve remains negative for tenors under 10 years. And the Yen swaps curve is negative for tenors less than 6 months.


You can see how well BOJ’s low interest rate policies have helped housing prices.  … NOT!


This is clearly a time to roll-out the song by The Knacks entitled “My Kuroda!”


30-year Treasury Auction Strong With $13 Billion Sold To Public (None Bought By The Fed)

Today’s US Treasury 30-year bond auction was strong. $13 billion were sold to the public  and none purchased by The Fed for the first time since the December 12, 2017 auction.


So far, so good. Despite massive Federal spending and projected budget deficits, Treasury auctions are going well.

The 10-year T-Note Volatility index (TYVIX) has declined to around 4.


Fed Boogie: Cboe Equity Put/Call Ratio Nearing Pre-meltdown Levels

The Cboe Equity Put/Call Ratio is nearing pre-meltdown levels. Since the index measures the volume of equity puts versus calls, it will rise on an increase in bearish bets and fall when demand is greater for bullish ones. The ratio peaked this year at .88 on Feb. 9 following the market’s 10 percent drop to start that month.


The CBOE S&P500 Volatility Index (or VIX) is almost back to pre-meltdown levels too,


The 10-year T-Note volatility index is actually below the February meltdown level, but above the January and early February levels.


The market is stabilizing as The Fed engages in The Fed Boogie.


Interest rates: Get up, get up.


Treasury 3-year High Yield Zooms To Highest Since 2007 on Fed Unwinding

Today’s 3-year Treasury auction brought a high yield of 2.280%, the highest since 2007.


As The Fed keeps to their balance sheet unwinding (via letting notes and bonds mature), the  3-year note high yield keeps rising (rapidly).


Now, the KC Fed’s Esther George (a non-voting FOMC member) wants to speed-up The Fed’s unwind of its balance sheet.

Federal Reserve Bank of Kansas City President Esther George warned Thursday the languid pace of the central bank’s balance sheet shrinkage effort may be causing negative effects on financial markets, in remarks that again called for continued rate increases.

“Asset prices may have become distorted relative to the economic fundamentals” due to the now completed central bank bond buying effort that took place during and after the financial crisis, Ms. George said in the text of a speech to be presented in Lincoln, Neb.

Ya think, Esther?


UPDATE! The 10-year auction showed a slight in increase in the bid-t0-cover ratio, but a nice spike in the 10-year high yield rate to 2.88%.


Danger! Libor-OIS Spread Rises To Highest Level Since January 2012 (Last Time Core Inflation Was Above 2% YoY)

Danger, Will Robinson, danger! The US Libor-OIS spread has risen to its highest level since January 2012.


Q1 2012 was the last time that Core PCE Growth YoY (aka, “inflation”) was above 2%.


(Bloomberg) — Short-term borrowing costs in the U.S. have risen to levels unseen since the financial crisis, and recent moves in two closely watched indicators — the London interbank offered rate and its spread with the Overnight Index Swap rate — are causing some consternation. The spread has expanded to its widest level in more than six years, raising questions about whether risks might be brewing within credit markets. While the recent widening may be technical and doesn’t suggest a systemic risk, several factors in funding markets are likely to prevent a “lasting retracement,” according to analysts.

1. What is Libor?

The London interbank offered rate, or Libor, is a benchmark that’s regarded as a gauge of credit market conditions. Every day, various major banks submit to an administrator estimates of what interest rate they would have to pay to borrow in the interbank market, and these are compiled to establish benchmark rates in five different currencies across seven different loan periods. Those benchmarks underpin interest rates on a range of financial instruments and products from student and car loans to mortgages and credit cards.

2. What’s OIS?

The Overnight Index Swap rate is calculated from contracts in which investors swap fixed- and floating-rate cash flows. Some of the most commonly used swap rates relate to the Federal Reserve’s main interest-rate target, and those are regarded as proxies for where markets see U.S. central bank policy headed at various points in the future.

3. Why does the Libor-OIS spread matter?

It’s regarded as a measure of how expensive or cheap it will be for banks to borrow, as shown by Libor, relative to a risk-free rate, the kind that’s paid by highly rated sovereign borrowers such as the U.S. government. The Libor-OIS spread provides a more complete picture of how the market is viewing credit conditions because it strips out the effects of underlying interest-rate moves, which are in turn affected by factors such as central bank policy, inflation and growth expectations.

4. Why are people worried?

The Libor rate for three-month loans in dollars has climbed to 2.09 percent, a level it hasn’t reached since 2008. Its spread over the OIS rate has also widened quite dramatically following a Congressional deal on the U.S. budget and debt ceiling on Feb. 8. That gap widened from 25 basis points at the end of January to 44 on March 9, the most since 2012, and the speed of the move up is giving some investors pause for thought.

5. What pushed it up?

Several factors. One has to do with the torrent of Treasury bill supply that the government has unleashed since lawmakers last month resolved their impasse over the nation’s borrowing limit. With that crisis passed, the Treasury has been replenishing its cash balance and that has meant a flood of debt sales, particularly of shorter-dated securities. That has driven up borrowing costs not just for Uncle Sam, but also for other borrowers in the short-term market who rely on instruments such as repurchase agreements and commercial paper.

6. So that’s the only reason it’s widening?

No, the tax legislation passed by Congress in December is also playing a role. The new law offers incentives for corporations to bring money back to the U.S. that they had previously stashed overseas. Much of that offshore hoard has tended to be kept in short-term instruments like commercial and bank paper, and a dwindling of those overseas cash piles is likely to mean reduced demand for these products. And that means higher borrowing costs.

7. Anything else?

Yes. The Federal Reserve is shrinking its $4.4 trillion balance sheet, which means there will be less reserves sloshing around in the financial system. As the U.S. central bank pulls back from providing support, banks are going to have to compete more for funding, and that could force short-term rates higher.

8. So where do Libor and the OIS spread go from here?

Since it appears as though investors are already pricing in events that will take place over the next 9 to 18 months, there is a chance that the pace of Libor increases will slow and that we see some retracement of the Libor-OIS spread widening. Nomura fixed income strategist George Goncalves expects some stability in Libor-based spreads after an anticipated rate hike later this month from the Fed. It’s also worth bearing in mind that similar measures for other currencies such as the euro and yen haven’t shown similar signs of stress, suggesting that we are not currently facing a global crunch.



U.S. Senate Advances S.2155 Banking Bill (Attempt To Level Playing Field Distorted By Dodd-Frank’s Regulatory Capture)

Phil Hall at National Mortgage Professional Magazine penned this piece on the Banking bill to reduce some of the damaging effects of the Dodd-Frank legislation from The Great Recession.

Seventeen Senate Democrats joined with Republicans Tuesday to advance a bipartisan regulatory relief bill for the banking industry, an early sign that the bill can clear the Senate in the coming days.

The U.S. Senate voted 67-32 to end debate on a motion to proceed with S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, which is widely seen as the first significant legislative effort to roll back portions of the 2010 Dodd-Frank Act.

The bill, introduced by Sen. Mike Crapo (R-ID), would amend the Truth-in-Lending Act (TILA) to allow institutions with less than $10 billion in assets to waive ability-to-repay requirements for certain residential-mortgage loans. It would also amend the Bank Holding Company Act of 1956 to exempt banks with assets valued at less than $10 billion from the Volcker Rule, and it would also amend the U.S. Housing Act of 1937 to reduce inspection requirements and environmental-review requirements for certain smaller, rural public-housing agencies.

The bill has been the rare piece of legislation to have some Democrats crossing the aisle in support, with 17 members of the party joining their GOP colleagues in voting affirmatively. Several Democrats who have been touted as 2020 presidential candidates—including Massachusetts’ Elizabeth Warren, New York’s Kirsten Gillibrand and California’s Kamala Harris—voted against it. Senate Majority Leader Mitch McConnell (R-KY) welcomed the vote, stating, “By streamlining regulations, it will bring relief to the small financial institutions who have been hurt by Dodd-Frank’s one-size-fits-all approach.”

Dodd-Frank and the resistance to a repeal or defanging of it can be explained by Nobel Laureate economist George Stigler’s Regulatory Capture argument. Regulatory capture is a form of government failure which occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or political concerns of special interest groups that dominate the industry or sector it is charged with regulating. When regulatory capture occurs, the interests of firms or political groups are prioritized over the interests of the public, leading to a net loss for society. Government agencies suffering regulatory capture are called “captured agencies”.

Who are the capture government agencies? Try The Federal Reserve, Federal Deposit Insurance Corporation and other regulators. The same regulators that permitted the merger and growth of large banks into Too-Big-To-Fail (TBTF) institutions.


Who did the capturing? The largest TBTF banks. Who was suffering? Institutions with less than $10 billion in assets.

Senate Bank bill S.2155 attempts to encourage mid-size and smaller-size banks to get back into the lending game.  Institutions with less than $10 billion in assets to waive “ability-to-repay requirements” for certain residential-mortgage loans.

What are the ability-to-repay requirements? The Consumer Financial Protection Bureau amended Regulation Z, which implements the Truth in Lending Act (TILA). Regulation Z prohibits a creditor from making a higher-priced mortgage loan without regard to the consumer’s ability to repay the loan. The final rule implements sections 1411 and 1412 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which generally require creditors to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan) and establishes certain protections from liability under this requirement for “qualified mortgages.”

Bear in mind, Dodd-Frank and its creation, the Consumer Financial Protection Bureau, has played a role in denying lower credit score households a mortgage. (Chart courtesy of GMU finance majors Belle Matthews and Brent Ferris). Rules such as the ability-to-repay requirements actually hurt marginal households trying to shift from renting to owning, keeping them locked into renting.


Senate Bank bill S.2155 would also amend the Bank Holding Company Act of 1956 to exempt banks with assets valued at less than $10 billion from the Volcker Rule. The Volcker Rule is overly complex and smaller banks are less able to cope with its complexity. Even larger banks have problems with the complexity of the Volcker Rule.

S.2155 does not eliminate Dodd-Frank or the Consumer Financial Protection Bureau. It simply attempts to level the playing field that has been stacked in favor of the largest, Too-Big-To-Fail banks.

The so-called “subprime crisis” which spawned the Dodd-Frank legislation was far more complicated than portrayed by the Financial Crisis Inquiry Commission (that interviewed me over the causes of the crisis) or the book/film “The Big Short” or “Margin Call.”  It was not solely caused by lenders originating no-doc loans or subprime loans. It was also caused by an enormous housing bubble caused in part by a construction boom fueled by The Fed lowering its target rate to near zero around the 2001 recession.


So, there were lots of parties responsible for the financial crisis and in the attempt to prevent another one, Congress looked almost solely at ALT-A and subprime lending as the root cause.

Please see my paper with Gerald Hanweck and FDIC economist Gary Fissel on bank failures surrounding the financial crisis.