Facts: Mexico to U.S. Immigration

Unaccompanied Alien Children Charged in Execution-Style Murder, Media Calls Them “Baby-Faced Boys”

It appears that the recent execution-style murder of a Massachusetts man was committed by two Central American teens that came to the U.S. as Unaccompanied Alien Children (UAC) under President Obama’s open border free-for-all. Tens of thousands of illegal immigrant minors—mostly from El Salvador, Guatemala and Honduras—have entered the country through the Mexican border since the influx began in the summer of 2014 and the administration has relocated them nationwide.

News reports indicate that the 17-year-olds charged in the gruesome Massachusetts killing entered the U.S. recently as UAC’s and both have ties to MS-13, according to authorities cited by various outlets. They lived in Everett and one of the teens, Cristian Nunez-Flores, moved to Massachusetts from his native El Salvador a year and a half ago which is when the influx of Central American minors began. His parents remain in El Salvador, according to a local news article. The other gangbanger’s name is Jose Vasquez Ardon and he too is a recent arrival from Central America. Prosecutors say the teens, described in a local news article as “baby-faced boys,”shot a 19-year-old in the head. Both are being held without bail for obvious reasons. A must read summary here.

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5 facts about Mexico and immigration to the U.S.

PewResearch: Pope Francis is expected to make immigration a major theme of his visit to Mexico. By traveling northward across Mexico, he intends to symbolically retrace the journey of Mexican and Central American migrants traveling to the United States. After the pope leaves Mexico City, his route will begin in the southern state of Chiapas, which shares a long border with Guatemala, and end in Ciudad Juárez, located across the U.S.-Mexico border from El Paso, Texas, a longtime entry point to the U.S.

U.S. immigration from Latin America has shifted over the past two decades. From 1965 to 2015, more than 16 million Mexicans migrated to the U.S. in one of the largest mass migrations in modern history. But over the past decade, Mexican migration to the U.S. has slowed dramatically. Today, Mexico increasingly serves as a land bridge for Central American immigrants traveling to the U.S.

Here are five facts about Mexico and trends in immigration to the U.S.

1Mexico increases deportations of Central AmericansMexico is stopping more unauthorized Central American immigrants at its southern border. The Mexican government said in 2014 that it would increase enforcement at its southern border in response to an increased flow of Central Americans traveling through Mexico to reach the U.S. In 2015, the government there carried out about 150,000 deportations of unauthorized immigrants from El Salvador, Guatemala and Honduras, a 44% jump over the previous year. These three Central American countries alone accounted for nearly all (97%) of Mexico’s deportations in 2015.

2Despite increased enforcement by Mexico, many unauthorized Central Americans are still reaching the U.S. via Mexico. At the U.S.-Mexico border, the number of families and unaccompanied children apprehended by U.S. Customs and Border Protection officials is again rising, though it’s too early to tell how 2016 will compare with prior years. From Oct. 1, 2015, to Jan. 31, 2016, 24,616 families and 20,455 unaccompanied children – the vast majority of them from Central America – were apprehended at the southwestern U.S. border, double the total from the same time period the year before. Apprehensions of unaccompanied children rose to record levels in fiscal 2014, then decreased by 42% in fiscal 2015.

3More Cubans are also traveling through Mexico to reach the U.S. The number of Cubans migrating through Mexico to reach the U.S. spiked dramatically last year after President Barack Obama said the U.S. would renew ties with the island nation. In fiscal 2015, 43,159 Cubans entered the U.S. via ports of entry, a 78% increase over the previous year. Two-thirds of these Cubans arrived through the U.S. Border Patrol’s Laredo Sector in Texas. (Cubans who pass an inspection can enter the U.S. legally under the Cuban Adjustment Act of 1966.)

4Fewer Mexicans are migrating to the U.S. today than in the past. In fact, more Mexicans left than came to the U.S since the end of the Great Recession. Between 2009 and 2014, 870,000 Mexican nationals left Mexico to come to the U.S., down from the 2.9 million who left Mexico for the U.S. between 1995 and 2000. Of those moving back to Mexico, many cite family as the reason for their return. About 1 million Mexican immigrants and their U.S.-born children moved from the U.S. to Mexico between 2009 and 2014, and 61% said they had done so to reunite with family or to start a family, according to the 2014 Mexican National Survey of Demographic Dynamics.

5More Mexicans now say life is about the same in the U.S. and Mexico. In 2015, 33% of Mexican adults said life in the U.S. is neither better nor worse than life in Mexico, up from 23% who said this in 2007. Still, about half of Mexican adults believe life is better in the U.S. and 35% of Mexicans said they would move to the U.S. if they had the opportunity and means to do so, similar shares as in 2009.

Congress Moving to Stop BDS, Finally

BDS and the Methodist Church:

The Palestinian BDS National Committee (BNC), the largest coalition in Palestinian civil society leading the global Boycott, Divestment and Sanctions (BDS) movement, salutes the United Methodist Church (UMC) for declaring the five largest Israeli banks off limits for investment for the Church’s $20-billion Pension and Health Benefits Fund.

The BNC congratulates the United Methodist Kairos Response (UMKR) group within the Church for its relentless and effective leadership in raising awareness among Methodist communities about Palestinian rights and the need for the church to end all its investments in companies that profit from Israel’s occupation and human rights violations.

Bisan Mitri, a spokesperson for the BNC, warmly welcomed the decision: “This historic step shows, with concrete measures, the ethical commitment of the United Methodist Church to peace and justice. Israeli banks finance the decades-long occupation and oppression of Palestinians and are a key pillar in sustaining the brutality of Israel’s military, the unrelenting expansion of Israel’s settlements, and the plundering of Palestinian resources.”

(It should be noted that the Methodist Church is a large grant recipient for resettling refugees across the homeland)

Congress to Pave Way for Divestment From Anti-Israel Companies

FreeBeacon: A bipartisan coalition in both the House and Senate are pushing legislation that would authorize all state and local governments to divest taxpayer funds from any company that engages in boycotts of Israel, according to interviews with lawmakers and a copy of the bill obtained by the Washington Free Beacon.

The new bill, which was filed Wednesday afternoon, marks an aggressive push by lawmakers on both sides of the aisle to combat the growing Boycott, Divestment, and Sanctions movement, otherwise known as BDS, which advocates in favor of economic war against the Jewish state.

The bill would provide legal shelter to states seeking to divest taxpayer funds from any company that has backed the BDS movement. It also would set a legal precedent granting safe harbor for private investment companies to do the same.

The legislation comes amid a new move by the European Union to single out all Jewish goods produced in disputed areas of the West Bank, an effort that the Obama administration has supported.

Lawmakers leading the anti-BDS charge told the Free Beacon that the bill is a shot across the bow to a growing coalition of anti-Israel organizations that have lobbied state-level officials to boycott the Jewish state and products produced there.

Congress hopes to draw a line for the Obama administration, which has long been criticized in pro-Israel circles for straining U.S.-Israeli ties through policies that isolate the Jewish state.

After the political fight over the Obama administration’s nuclear agreement with Iran—which Israel opposes—lawmakers on both sides of the aisle are seeking to reassure Israel that Congress continues to stand by its side, Sen. Mark Kirk (R., Ill.) told the Free Beacon.

“After the big Iran fight, it was the right time to set a pro-Israel marker down there with members [of Congress] against the BDS movement,” said Kirk, who is jointly pushing the Senate version of the bill along with Sen. Joe Manchin (D., W.Va.).

Reps. Bob Dold (R., Ill.) and Juan Vargas (D., Calif.) are spearheading the House version of the anti-BDS legislation.

“It’s a powerful step to make sure that those around the country that want to send a very clear signal that we are standing shoulder to shoulder with Israel, that we will not stand idly by and let individuals and entities out there target, boycott, divest or sanction Israel in any way shape or form,” Dold told the Free Beacon. “This is an offensive opportunity.”

The bill employs similar legislative tactics used to encourage states and local governments to divest from companies doing business with Iran.

Both Kirk and Dold expressed concerns that a growing wave of anti-Semitism in Europe could spill over into the United States and add fuel to the BDS movement.

“We see the Muslim community and the Arab community having a political impact in the key allies—Germany, the UK—where something like BDS could catch fire and become official policy,” Kirk said. “There needs to be some pushback from the best friend of Israel.”

Dold agreed, noting that with relations between the United States and Israel at an all-time low, Congress must set down a marker.

“I’ll call it what it is—the absolutely wrong approach,” Dold said, referring to the EU effort to label Israeli goods, a policy that most pro-Israel groups view as anti-Semitic.

“Our greatest ally is Israel and we need to make sure we’re sending a very clear signal,” Dold said. “This is unacceptable: We are going to try to make sure we are going to provide cover for states, for local governments … I think it’s important they know the federal government here stands with them.”

Pro-Israel organizations that work with Congress have long been pushing for this type of legislation, saying that it could help deflate the BDS movement in America.

“Congress isn’t messing around,” said Omri Ceren, managing director at The Israel Project, a D.C.-based organization that has been at the center of fights against anti-Israel boycotts at the state and federal levels. “Polls show that their constituents want lawmakers at every level of government to stand with Israel, and senators and representatives are going to do everything in their power to make sure that happens.”

However, there is disagreement within the pro-Israel umbrella about the value of such legislation. Some maintain that anti-BDS legislation violates the First Amendment and violates existing U.S. policy.

J Street, an organization that bills itself as pro-Israel but that has been criticized by some in the mainstream Jewish community, has lobbied lawmakers to oppose similar anti-BDS efforts, according to a copy of an email that group has been sending to lawmakers since last year.

J Street quietly came out against a House resolution last year that expressed disapproval of the EU’s boycott effort.

J Street and other who share its position accuse Congress of trying to legitimize “Israeli settlement activities.”

“There are many other ways for your boss to express concern over BDS against Israel without defending settlement activity or undermining a two-state solution,” J Street argued in its letter to lawmakers.

When asked about the potential opposition to the new bill, both Kirk and Dold were dismissive of J Street and its supporters.

“We know there is opposition,” Dold said. “Which is more reason why this had to be done. This isn’t partisan and I think it’s absolutely critical we make sure it’s not. This is about doing the right thing. It’s not left versus right. It’s right versus wrong.”

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TheTower: The Palestinian BDS National Committee (BNC), the largest coalition in Palestinian civil society that is leading the global Boycott, Divestment and Sanctions movement for Palestinian rights, called today for a boycott of the Soros Fund Management and the Open Society Foundations due to the recently announced – first-quarter 2014 — investment by Soros in SodaStream stock and increased investment in Teva Pharmaceuticals, both Israeli companies that are deeply involved in violations of international law.
Ironically, Soros, through his Open Society Foundation, is known for funding many similarly oriented non-governmental organizations (NGOs). According to a special report (.pdf) compiled by the  watchdog group NGO-Monitor (emphasis added):
The first category comprises large and extensive Open Society Foundation grants to Palestinian organizations such as Al-Haq, Al-Mezan, and Palestinian Center for Human Rights, as well as Israeli political NGOs, including Yesh Din, Breaking the Silence, and Adalah. These groups are active in promoting the Durban strategy by attempting to portray Israel as a “racist” and “apartheid state” that commits “war crimes.” A primary goal of such demonizing language is to isolate Israel internationally, leading to the implementation of sanctions. Many of these NGO recipients are also leaders in the international boycott, sanctions, and divestment (BDS) and “lawfare” campaigns, including the filing of international lawsuits aimed at harassing Israeli officials.

What is YOUR Profile? Ask Google and Facebook

You have been profiled, but is it accurate? You have been sold and sold out.

Scary New Ways the Internet Profiles You

Morrison/DailyBeast: Facebook, Google, and the other Internet titans have ever more sophisticated and intrusive methods of mining your data, and that’s just the tip of the iceberg.

The success of the consumer Internet can be attributed to a simple grand bargain. We’ve been encouraged to search the web, share our lives with friends, and take advantage of all sorts of other free services. In exchange, the Internet titans that provide these services, as well as hundreds of other lesser-known firms, have meticulously tracked our every move in order to bombard us with targeted advertising. Now, this grand bargain is being tested by new attitudes and technologies.

Consumers who were not long ago blithely dismissive of privacy issues are increasingly feeling that they’ve lost control over their personal information. Meanwhile, Internet companies, adtech firms, and data brokers continue to roll out new technologies to build ever more granular profiles of hundreds of millions, if not billions, of consumers. And with next generation of artificial intelligence poised to exploit our data in ways we can’t even imagine, the simple terms of the old agreement seem woefully inadequate.

In the early days of the Internet, we were led to believe that all this data would deliver us to a state of information nirvana. We were going to get new tools and better communications, access to all the information we could possibly need, and ads we actually wanted to receive. Who could possibly argue with that?

For a while, the predictions seemed to be coming true. But then privacy goalposts were (repeatedly) moved, companies were caught (accidentally) snooping on us, and hackers showed us just how easy it is to steal our personal information. Advertisers weren’t thrilled either, particularly when we adopted mobile phones and tablets. That’s because the cookies that track us on our computers don’t work very well on mobile devices. And with our online activity split among our various devices, each of us suddenly appeared to be two or three different people.

This wasn’t a bad thing for consumers, because mobile phones emit data that enable companies to learn new things about us, such as where we go, who we meet, places we shop, and other habits that help them recognize and then predict our long-term patterns.

But now, new cross-device technologies are enabling the advertising industry to combine all our information streams into a single comprehensive profile by linking each of us to our desktop, mobile phone, and iPad. Throw in wearable devices like a Fitbit, connected TVs, and the Internet of Things, and the concept of cross-device tracking expands to potentially include anything that gives off a signal.

The ad industry is drooling over this technology because it can follow and target us as we move through our daily routines, whether we are searching on our desktop, surfing on our iPad, or out on the town with our phone in hand.

There are two methods to track people across devices. The more precise technique is deterministic tracking, which links devices to a single user when that person logs into the same site from a desktop computer, phone, and tablet. This is the approach used by Internet giants like Facebook, Twitter, Google, and Apple, all of which have enormous user bases that log into their mobile and desktop properties.

A quick glance at Facebook’s data privacy policy shows it records just about everything we do, including the content we provide, who we communicate with, what we look at on its pages, as well as information about us that our friends provide. Facebook saves payment information, details about the devices we use, location info, and connection details. The social network also knows when we visit third-party sites that use its services (such as the Like button, Facebook Log In, or the company’s measurement and advertising services). It also collects information about us from its partners.

Most of the tech giants have similar policies and they all emphasize that they do not share personally identifiable information with third parties. Facebook, for example, uses our data to deliver ads within its walled garden but says it does not let outsiders export our information. Google says it only shares aggregated sets of anonymized data.

Little-known companies—primarily advertising networks and adtech firms like Tapad and Drawbridge—are also watching us. We will never log into their websites, so they use probabilistic tracking techniques to link us to our devices. They start by embedding digital tags or pixels into the millions of websites we visit so they can identify our devices, monitor our browsing habits, look for time-based patterns, as well as other metrics. By churning massive amounts of this data through statistical models, tracking companies can discern patterns and make predictions about who is using which device. Proponents claim they are accurate more than 90 percent of the time, but none of this is visible to us and is thus very difficult to control.

In recent comments to the Federal Trade Commission, the Center for Democracy and Technology illustrated just how invasive cross-device tracking technology could be. Suppose a user searched for sexually transmitted disease (STD) symptoms on her personal computer, used a phone to look up directions to a Planned Parenthood clinic, visited a pharmacy, and then returned home. With this kind of cross-device tracking, it would be easy to infer that the user was treated for an STD.

That’s creepy enough, but consider this: by using the GPS or WiFi information generated by the patient’s mobile phone, it would not be difficult to discover her address. And by merging her online profile with offline information from a third-party data broker, it would be fairly simple to identify the patient.

So, should we be concerned that companies use cross-device tracking to compile more comprehensive profiles of us? Let us count the reasons:

Your data could be hacked: Privacy Rights Clearinghouse reports that in 2015 alone, hackers gained access to the records of 4.5 million patients at UCLA Health System, 37 million clients of online cheating website Ashley Madison, 15 million Experian accounts, 80 million Anthem customers, as well as more than 21 million individuals in the federal Office of Personnel Management’s security clearance database. And these were just the headliners that garnered media attention. No site or network is entirely safe and numerous researchers have already demonstrated how incredibly easy it is to “reidentify” or “deanonymize” individuals hidden in anonymized data.

Your profile could be sold: In fact, it typically is, in anonymized fashion. That’s the whole point. But in many cases, Internet companies’ privacy policies also make it clear our profiles are assets to be bought and sold should the company change ownership. This was the case when Verizon bought AOL and merged their advertising efforts, creating much more detailed profiles of their combined user base. Yahoo might be next should it decide to spin off its Internet properties.

Your data could be used in ways you did not anticipate: Google, Facebook, and other companies create customized web experiences based on our interests, behavior, and even our social circles. On one level, this makes perfect sense because none of us want to scroll through reams of irrelevant search results, news stories, or social media updates. But researchers have demonstrated that our online profiles also have real world consequences, including the prices we pay for products, the amount of credit extended to us, and even the job offers we may receive.

Our data is already used to build and test advanced analytics models for new services and features. There is much more to come. The Googles and the Facebooks of the Internet boast that newly emerging artificial intelligence will enable them to analyze greater amounts of our data to discern new behavioral patterns and to predict what we will think and want before we actually think and want it. These companies have only begun to scratch the surface of what is possible with our data.

We are being profiled in incredible and increasingly detailed ways, and our data may be exploited for purposes we cannot yet possibly understand. The old bargain—free Internet services in exchange for targeted advertising—is rapidly become a quaint relic of the past. And with no sense of how, when, or why our data might be used in the future, it is not clear what might take its place.

What do Banks Say About the Recession?

What do economists have in their forecasts?

It is important to watch other countries performance like China, Greece and Brazil:

Bank Of America Admits The U.S. May Already Be In A Recession

Zerohedge: Almost one year ago, in March 2015, we explained how “The Fed’s Artificial Steepening Of The Yield Curve” has resulted in many unexpected consequences, the most important of which has been the erroneous interpretation of the yield curve as a leading recessionary signal. As said back then, “the artificially steep yield curve is a reflection of policy intent not economic reality…. Where the yield curve in the all-important belly of the 5s10s might have deeply inverted in the past just prior to recession, there is no justification to expect the same attainment of absolute levels where artificial monetary intrusion has pushed the curve much, much steeper.”

One week ago, it was as if a light bulb went off over Wall Street’s head, when first Deutsche Bank’s Dominic Konstam realized the significance of the above excerpt, and admitted that far from the 4% recession odds that the Fed’s hopeless FRB/US DSGE computer model spews out when looking at the “normal” yield curve, when normalizing for the Fed’s intervention odds of a recession in the next 12 months soar to 50%!

In a special report published earlier this week, we noted that today’s near-zero interest rate regime does not allow the yield curve to freely invert or even flatten too much because of certain structural limits. For example, liabilities-driven investors who in the past could receive long rates below the fed funds rate can no longer do so once rates are floored at zero. Investment fund managers are also restricted by mandates from buying negative yielding assets that lead to mark-to-market losses on their portfolios. Pension investors, who must target returns based on liability assumptions, have been driven into high yielding non-core rate assets as their discount rates are stubbornly and unrealistically high compared to Treasury yields. These factors keep the curve artificially steep even though both short and long rates have been clearly trending downward over the years.

An “artificially steep yield curve” – almost as if that’s exactly the phrase we used before. What DB did then is the logical next step: to adjust the artificial yield curve and exclude the Fed’s intervention. 

To address the artificial steepness of the curve we corrected the 3m10y spread for the level of the rates. Specifically we regressed the spread against the short rate, leaving the residual which by definition removes for the bias of the rate level and is centered at zero. Using this new curve as model input, we found the probability of a recession in the next 12 months is 46 percent, considerably higher than the original Fed model has predicted.

But wait, there’s more, because while the short-end remains anchored, with every 25 bps tightening in the 10Y yield, recession odds rise by another 6%.

As it may be useful for investors, we attempt to handicap the relationship between the yield curve and future recessions captured in our model. Holding the 3m rate constant, every 25 bps rally in 10s (implying an equal flattening in 3m10y) raises the recession probability by 6 percent. If 10yr yields rally to 1.50%, our model predicts a 59 percent chance of recession in the next 12 months; at 1.00% 10s, the probability is 71 percent.

 

At Friday’s close, recession odds are well over 50% according to DB’s model.

Or perhaps far higher, because shortly after DB admitted what we said in early 2015, namely that everyone who was looking at the yield curve as is was wrong, Bank of America’s Ruslan Bikbov did the exact same analysis and ended up with a far more disturbing conclusion:

The US Treasury curve is still steep by historical standards. Taken at face value, this may suggest recession odds are small. However, we argue this logic is flawed because the curve is structurally steep when the Fed Funds rate is close to zero. When adjusted for the proximity of rates to zero, the curve may already be inverted and therefore may already be priced for a recession.

And numerically: “Implied recession odds are as high as 64% if the adjusted OIS curve is used

Laughably, this comes from the same bank whose chief economist Ethan Harris recently “predicted” US GDP for the next decade and forecast there will be no recession until 2027… the same Ethan Harris as profiled in “Perma-bears” 1 – BofA Economist 0.

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Below are the full wonkish details from BofA for all those Wall Street strategists who still hold on to the erroneous creed that recession odds are non-existent if simply looking at the unadjusted yield curve.

A leading recession indicator

We received numerous questions on the shape of the US yield curve and its relationship to recession odds. With the sharp weakening of US manufacturing data in recent months, recession risks are on everybody’s mind, while the curve has the reputation of one of the most powerful leading recession indicators. The basic fact is likely well known to our clients: each US recession since the mid 1950s (when Treasury bond data become available) was preceded by an inverted or extremely flat curve within one year before a recession start (Chart 8). This is, of course, intuitive because a flat curve reflects lower growth and/or inflation expectations. Some of our clients and market commentators pointed to this fact and the relative steepness of the curve to argue that current recession risks are rather low. Indeed, the 3m10s curve at 155bp is still far from being flat (Chart 8).

Mind the zero bound

However, we believe that a simple mechanical extrapolation of the past link between the curve and recession odds is flawed. In particular, curve-based models calibrated to pre-2009 data are likely to underestimate recession odds today. This is because with the Fed Funds at only 38bp risks for plausible Fed Funds paths are asymmetric. Although tighter policy paths are unconstrained, the room for further cuts is likely limited resulting in a steepening bias for the curve. To see this, imagine an extreme situation where the policy rate is at zero and negative rates are not feasible. In such a scenario the curve simply cannot invert, and must be necessarily biased steeper relative to its historical distribution.

Granted, we cannot rule out the possibility of negative rates in the US, but it is safe to say the Fed’s reaction function must be highly asymmetric around zero. Because negative rates entail significant risks for the financial stability of money market funds and the banking sector, the negative growth/inflation shock required for a cut below zero should be larger than positive shocks required for a hike of a comparable size. In addition, negative rates should be floored by the storage cost of currency, another reason for asymmetric risks around zero. In any case, the market currently sees only a small chance of negative rates in the US (Chart 9). The end result is structural steepness of the curve at near-zero Fed Funds levels.

Don’t wait for the curve to invert

Even a casual look at other countries with near-zero policy rates confirms that the curve does not need to flatten significantly for a recession to occur. Consider Japan, a country with the longest zero-rate history. Japan had a recession in 1991-1993, which was preceded by an inverted curve, consistent with past US experience (Chart 10). But note the call rate was at 8% when the curve inverted. Since 1995, the call rate has not exceeded 50bp. Over that period, Japan had four official (announced by the Committee for Business Cycle Indicators) recessions, none of which was preceded by an inverted curve (Chart 10).

A number of other G10 countries adopted near-zero rate policy regimes since 2008 and experienced recessions since then. Some of these recession episodes are analyzed in Table 3. We use two methods to identify recessions: technical definition (at least two consecutive quarters of negative growth) and recession dates reported by Economic Cycle Research Institute (ECRI), which employs methodology similar to that of the NBER in the US. For each recession episode, we report the range of the 3m10s government curve and the policy rate observed for a year immediately before the beginning of a recession.

Again, an inverted curve did not emerge to signal an imminent recession. In fact, in some cases the curve ahead of recessions was steeper than in the US today. As an illustration, Chart 11 shows the historical German curve. Consistent with typical US experience, the curve flattened to extreme levels ahead of each of the pre-2009 recessions. However, Germany also had a technical recession in Q4 2012-Q1 2013 when the ECB rate depo rate was at zero. Not surprisingly, the curve remained steep before that recession. In fact, the curve did not flatten below 120bp in the one-year period ahead of the recession.

Adjusting the curve for zero-rate effects

Although the curve cannot be taken at face value in a near-zero rate regime, we believe it may still provide useful information about recession odds if adjusted for the zero bound effect. The idea is to estimate a model-implied curve that could be prevalent today if negative rates were just as feasible as positive. The curve adjusted in such a way may be directly compared to its historical distribution. As a result, it may be a better recession signal than the observed curve.

Turning to technical details, we model forward rates with a truncated (at zero) normal distribution, calibrated by matching its mean and standard deviation to forward rates and at-the-money option prices. We then compute adjusted forwards as the mean of the corresponding distribution without truncation (hence, using a symmetric distribution around the mean and allowing for negative rates). Although the choice of the truncated normal distribution is somewhat arbitrary, it provides a simple tool to model the core of our argument. Because very long-dated options are not liquid, we analyze 3m5s rather than 3m10s (normally used in academic literature) Treasury curve for this analysis. We found only a small deterioration in R2 statistics for recession forecasting probit models when the 3m5s curve is used instead of 3m10s. Consistent with intuition, the 3m5s curve adjusted in such a way has been significantly flatter than actually observed curve (Chart 12).

Technical factors contributed to Treasury curve steepness

Further, the Treasury curve may be currently skewed steeper by technical factors. Treasury bonds in the belly of the curve dramatically cheapened in the past few months, which is evident from extremely tight levels of swap and OIS/Treasury spreads. As a result, the Treasury curve now looks very steep to OIS. While the 3m5s Treasury curve is at 92bp, the corresponding OIS curve is only at 56bp (Chart 13). The likely reason for this is reserve selling of foreign central banks who need to support national currencies against the recent USD appreciation. International reserves of world central banks declined by about $1tn since September 2015. At the same time, the ability of dealers to absorb the supply has declined in recent years due to regulatory pressures on balance sheets.

Conventionally, academic literature on recession forecasting uses Treasury curve data. But the Treasury curve may not be the best measure of market expectations, presumably the key component of the curve predictive power. Because of the technical nature of the recent Treasury cheapening, the OIS curve should be a better measure of market expectations, and therefore may be more relevant for  assessing recession risks.

 

The curve may be priced for a recession

Applying our methodology to the OIS curve, we found that the adjusted 3m5s OIS curve at -30bp is already inverted. This suggests that the curve already could be priced for a recession (Chart 12). Granted, our methodology signaled a false alarm in 2012 when the curve was also inverted but a recession did not follow (Chart 12). However, at that time the curve flattened to extreme levels because of the forward guidance, an unprecedented event in the history of US monetary policy. In contrast, this time the curve flattened following the Fed hike, which looks more like a typical curve inversion episode. In fact, the Fed was hiking in all previous historical episodes where the curve inverted ahead of US recessions (Chart 8). From this point of view, the current curve flattening may be more worrisome.

Implied recession odds

Our economics team sees only about a 20% probability of a recession in the next year. They argue that the two most important causal factors in recession–aggressive Fed tightening in a battle against above-target inflation and very high oil prices–are not evident today. They also argue that both “real” and financial bubbles are small. The only sector that overexpanded in the recovery is the tiny oil and gas sector (about 2% of the economy at the peak) and the high yield sector overshot fundamentals, but it is much less important than the housing and equity market bubbles of the last two cycles.

Nonetheless, clearly markets are worried and an indicator we have developed confirms their concerns. To quantify implications from the inversion of the adjusted curve, we follow academic literature to compute model-implied recession probabilities from a standard probit regression based on the curve. We acknowledge this type of a model is highly simplistic and does not take into account all the complexities of today economic environment. Still, model probabilities may be interesting to know given the curve’s track record.

We estimated a standard probit model to pre-2009 sample when zero rates were not an issue. We then computed implied probability of a recession within next 12 months with different assumptions about the proper curve to be used in the current regime (Table 4). The model implies about 32% recession odds if the Treasury curve is taken at face value. Just using OIS instead of Treasury rates brings this probability to about 42%. Implied recession odds are as high as 64% if the adjusted OIS curve is used (Table 4).

SCOTUS to Rule on Obama’s Executive Order

Primer: This is the White House official Fact sheet and Executive Order being challenged.

The Supreme Court has often dealt a big blow to presidents in their second term.

LATimes: Harry Truman was rebuked for claiming the power to seize strike-bound steel mills during the Korean War. Richard Nixon resigned shortly after the court ruled unanimously he must turn over the Watergate tapes.

Bill Clinton’s impeachment was triggered by the court’s decision that he must answer questions under oath in the Paula Jones sexual harassment case. And George W. Bush lost before the court when he claimed his power as commander in chief gave him almost unfettered authority over prisoners held at the Guantanamo Bay prison.

Now, as President Obama begins his last year in office, the court is set to render a verdict on his use of his executive authority. The justices will decide whether he violated the law by authorizing more than 4 million immigrants living in the U.S. illegally to come out of the shadows without fear of deportation and obtain work permits.

There are signs that at least some of the justices are ready to rein in the president’s ability to take such bold action without the approval of Congress.

Never before has the high court ruled that a president violated his constitutional duty to “take care” that laws are “faithfully executed.” Yet when justices agreed to hear the immigration case, they surprised many by asking both sides to present arguments on whether Obama’s actions violated the rarely invoked “take care” provision. That question had not even been at issue when lower courts blocked Obama’s plan from taking effect.

In a separate pending case this term, the court also will rule on whether the president and his healthcare advisors went too far by requiring Catholic charities and other faith-based employers to formally opt out of providing a full range of contraceptives to their female employees by citing their religious objections.

The faith-based entities argued that by notifying the government of their decision to opt out — which triggers a process under which employees would get contraceptive coverage by other means — they would be “complicit” in supplying “abortion-inducing drugs.”

The decisions, both due by summer, will help answer a question that looms over Obama’s presidency. Has he properly used his power as chief executive to circumvent congressional gridlock on issues such as immigration, climate change and healthcare, or has he gone too far and violated his duty to enforce the laws as set by Congress?

The cases come before the court with a backdrop of Republican claims that the president has overreached and abused his power. Former House Speaker John A. Boehner said Obama was “acting like a king” and “damaging the presidency” when he announced the deportation-relief plan now before the high court.

On the campaign trail, Sen. Ted Cruz of Texas promises GOP voters that, if he is elected president, his first task on his first day in the White House will be to “rescind every illegal and unconstitutional executive action of Barack Obama.”

White House officials and supporters of the president counter that Obama’s actions are not only legal and well within his discretionary authority, but that Congress has left him no choice by refusing to take action on pressing national problems.

Conservative scholars think Obama has left himself vulnerable by announcing broad executive actions on policies that had been considered and rejected by Congress, and which even he once said were beyond his authority.

In his first term, Obama told Latino activists who were pushing him to take unilateral action that he could not “waive away the laws Congress put in place” regarding the removal of immigrants who entered the country illegally. But later the president decided he did have the power to suspend deportation and offer “lawful presence” and work permits to as many as 5 million of those immigrants.

So far conservatives have mostly failed to derail Obama in the Supreme Court. Twice, the justices upheld the president’s healthcare law against conservative attacks, with Chief Justice John G. Roberts Jr. casting his vote with the court’s four liberals.

Four years ago, in a key test of state-versus-federal power, the court ruled for Obama after his administration sued to block Arizona from enforcing a law to crack down on immigrants in the country illegally.

In 2011, Obama and then-Atty. Gen. Eric H. Holder Jr. raised ruffles on the right when they announced the administration would not defend in court the Defense of Marriage Act, which recognized only marriages between a man and a woman. House Republicans took up the cause, but two years later the high court agreed with the administration and struck down key parts of the law as unconstitutional.

But the new immigration and contraceptive cases pose a tough test for Obama’s lawyers. In last year’s healthcare case, they were defending a law that had won approval in Congress, when both chambers were controlled by Democrats. “We must respect the role of the legislature and take care not to undo what it has done,” Roberts said in upholding its system of insurance subsidies.

This year, by contrast, Obama is defending an executive action on immigration that was taken without the approval of Congress and in the face of fierce Republican criticism.

Similarly, the “contraceptive mandate” was not spelled out in the Affordable Care Act, as lawyers for Catholic bishops often point out. It was adopted later in a regulation issued by Obama’s healthcare advisors.

But Obama’s defenders, including immigration law experts, say the critics are missing the crucial point that the deportation laws give the chief executive a free hand to decide how or whether to deport those living here illegally. Contrary to what many assume, the law does not say federal officials must arrest and deport such people. Rather, it says they are “subject” to removal, based on policies and priorities set by the executive branch.

Obama’s administration says it wants to focus on deporting criminals, security threats, gang members and drug traffickers, not parents and grandparents who have children in the United States legally.

The administration can quote a powerful voice to back up its view of the matter. “Aliens may be removed” if they entered the country illegally and committed crimes, said Justice Anthony M. Kennedy, but “a principal feature of the removal system is the broad discretion exercised by immigration officials…. Federal officials, as an initial matter, must decide whether it makes sense to pursue removal at all. As a general rule, it is not a crime for a removable alien to remain present in the United States.”

Kennedy spoke for the court four years ago in rejecting Arizona’s claim that immigrants who could not prove their citizenship should be arrested, and Roberts agreed. Kennedy’s explanation of the deportation system may also defeat any claims that Obama is violating his duty to “faithfully execute” the law.

“The president is not claiming a constitutional authority to not enforce the law. He’s claiming authority based on the immigration statute,” said Walter Dellinger, a White House lawyer under President Clinton. “And if the court says he is wrong, then he will comply with that.”