Morning Report: Global risk appetite is at an extreme

Vital Statistics:

	Last	Change
S&P Futures	2833.5	-1.8
Eurostoxx Index	403.1	0.9
Oil (WTI)	63.7	0.3
US dollar index	84.3	-0.1
10 Year Govt Bond Yield	2.62%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.03

Stocks are down as the government shutdown is over for the moment. Bonds and MBS are up on the back of the Bank of Japan continuing its stimulative measures. 

Democrats agreed to end their filibuster over funding the government yesterday in exchange for an extension of the CHIP program. We will re-convene in 3 weeks to discuss immigration, etc. It turned out that the polls never really went the way Democrats had hoped.  

The global risk appetite is about as extreme as it has ever been, according to Goldman. So far this year, stocks have been the big winner, while bonds have been the big loser. Is this misplaced? Global growth is the best it has been in a decade, and the world's second biggest economy (Japan) may have finally turned the corner. Bank executives in Davos are worrying about financial complacency and the possibility of bubble-style thinking. I think it pays to differentiate between what the markets are saying and what is actually happening for businesses right now. While investors may be willing to pay anything for growth, business in general is not. US business has been in maintenance mode with respect to capital expenditures for the past decade and the fear of having too high of a cost structure is still greater than the fear of missing out on business. It has been this way since the stock market bottomed, and might have more to do with global central bank liquidity measures than actual business psychology. The million dollar question: does this circle get squared via a more robust business expansion? Or does it happen via a stock market deflation as global central banks normalize policy? 

China is mulling a property tax to tame its real estate bubble. The normal transaction costs that are seen in the US (6% brokerage fees, property taxes) are much lower in China, which has helped fuel their bubble. When it bursts, they will probably deal with it the way Japan did - imposing so many costs to transacting that sales dry up. It prevents fire sales, but it also means the economy will be stuck in a deflationary environment for a long time. 

Delinquencies increased in December, primarily driven by the hurricanes last fall and general seasonality. On the other hand, foreclosure starts hit a post-crisis low, falling to 44,500. The number of homes in foreclosure decreased by 32% YOY.