Morning Report: Retail sales increase

Vital Statistics:

S&P futures4,35612.2
Oil (WTI)71.840.25
10 year government bond yield 1.34%
30 year fixed rate mortgage 3.12%

Stocks are up this morning after good retail sales numbers. Bonds and MBS are flat.

Retail Sales rose 0.6% last month, which was better than expectations. If you strip out vehicles and gas, they rose 1.1%.

Ginnie Mae is considering increasing the capital requirements for GNMA servicers. In addition to the $2.5 million and 0.35% of the GNMA servicing book UPB, they are looking at require 0.25% of the UPB of a servicers agency book. When the foreclosure moratorium ends, servicers will have a lot of wood to chop.

DoubleLine bond investors Jeffrey Gundlach sees similarities between the current economic environment and the 1970s. “When you look at real interest rates on long-date Treasurys, it looks like Jimmy Carter area,” said Gundlach. “We’re talking about the CPI at 5.4%, and if we want to use the 10-year Treasury it’s not even at 1.4%, that’s a negative 4% interest rate. That’s Jimmy Carteresque.”

IMO the similarities to the 1970s are not that great. While LBJ’s Guns and Butter policies do resemble today, the big driver of 1970s inflation was probably the Arab Oil embargoes in the early 1970s, which drove oil prices up 6 times over the decade. That would be like oil increasing to $425 a barrel today.

In addition, US factories, which were built in the early 20th century were beginning to show their age and incremental production was more expensive given that capacity utilization was already high. Today, we have much more of an IP-driven economy and low capacity utilization. In addition, globalization was not yet a thing in the 1970s. That started more in the late 80s and 1990s.

To me, the big question is what happens when this big COVID-related rebound is done and the supply chain shortages are fixed. Then what? Does growth return to 3% – 4%? Or does it return to 1% – 2%? If the latter, then the model isn’t the US in the 1970s, it is Japan in the 2000s.


Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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