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The most simple dynamic binary allocation strategy is 50-your age strategy. It might work even if market is rigged, and in those days market is definitely rigged. Financial stocks are example number one. But look like others are as well Icahn vs. Ackman Stay Away From Stocks Manipulated by the 1%, Says Munson Breakout
An important additional way to make 50-your_age strategy more effective is "above/below 200 days" average strategy arbitrage. In this case you make more aggressive allocation for stock part of the allocation (let's say 60 stocks 40 bonds) if 200 days moving average is above 200 days simple average and more defensive (40/60 allocations) in case it is below. Siegel described the extreme variant of this strategy with rations (0:100 and 100:0) in his book "Stocks for the long run".
Enhancing this "binary" age based allocation with arbitrage-based moves ("buy low"- "sell high") or "prepare for the crash" is tempting and decrease your 401K volatility due to rigged markets, but in practice timing is difficult and few 401K plan provide ability to make several large reallocations during the same year. Sill one a year selling extra returns due to excessive valuations looks pretty safe, as we are making prediction that each large stock index will eventually return to normal valuations sooner or later. This return to average affect is unscientific but is a good, useful heuristic. You need to try exploiting large deviations from, say, 200 days average as the proxy for overvaluation of stocks.
One of the first (and rather questionable) published attempts of using this kind of arbitrage in 401K portfolio in addition to buy and hold strategy (actually in the book this strategy is proposed as the alternative to "buy-and-hold" strategy as well as cost-averaging strategies) was "Yes, you can time the market" which is still available on Amazon. While technical details of authors strategy are highly questionable (they artificially select 15 years averages) the key observation about cost averaging is valid: people who use cost -averaging buy on faith and can get crushed by the market at some point when things get priced back on fundamentals. Make no mistake, the financial markets remains "buyer beware" as holders of technology-loaded 401K portfolios quickly found out after year 2000....
My advice here is simple -- ignore the siren song of sophisticated investments strategies. Adhere to KISS principle: keep it simple stupid. Don't own more then three mutual funds -- they all replicate the same stocks and bonds, just in different proportions, so you do not diminish the risk by diversifying into larger number of funds. It might well be that owning junk bond fund -- Tips fund combination is as good or better then owning, say S&P500 and Tips.
One additional argument for simplicity here is that complex investment strategy in 401K (and especially complex investment strategies which are based on mixes recommended by a particular "Financial alchemist" are implicitly making some assumptions about socio-economic dynamics of the USA. Among the questions which would greatly influence total return of your assets are the following
Is Fed de facto got a new dual mandate based on the trade-off between Nominal GDP growth (or macro-economic stability), and Financial Sector Stability (preventing excessive system-wide leverage levels).
Is this "the end of growth" due to constrains of hydrocarbons extraction?
Is the US empire in irreversible decline (as Iraq, Afghanistan military defeats and the economic rise of China and Asian tigers suggests ) or those are temporary difficulties. Whether the USA lives on borrowed time like the last decades of the USSR or this is business as usual. Can the country with its standard mythology survive rise of financial oligarchy and the efforts of the three recent administrations in redistribution of the country wealth toward the most wealthy and creating hereditary aristocracy (abolishing of estate tax is the vital step in this direction).
Will dollar survive as the reserve currency in foreseeable future ?
Will manufacturing and finance centers move to Asia ?
What will be future price of oil?
Most of those factors are belong your control. That's why it is so fanny to read old books with recommended allocations. See for example, The Age of Nixon for an example of such analysis (some comments are actually as interesting as the article itself). Contrary from what neo-classical jerks are teaching in corrupted economics departments, economics could never be separated from politics. It is always political economy, never economics.
Starting with the tax cuts by US president Ronald Reagan of 1981, and especially after collapse of the USSR in 1991, the regulatory, budgetary, and especially tax policies began univocally favor the rich. This meant redistribution of wealth and greater pools of free capital, once spread more or less evenly among the broad middle class, began to be concentrated in fewer hands of those at the very top of the income pyramid (the top 1%). This process dramatically accelerated after election of George W Bush in 2000, and the passage and implementation of tax cuts heavily skewed toward the rich by his administration in 2000-01.
In opinion of Paul Craig Roberts, the last recovery was artificial and did not solve any structural problems. It was based on extremely low interest rates orchestrated by the Federal Reserve[Roberts2006a]. The low interest rates discouraged saving, but the low rates reduced the mortgage cost of real estate, inflated home prices and encouraged consumers to refinance their homes and to spend the equity. That naturally led to market dominance of hedge funds. Some pundits are even more gloomy (Economist Caution Prepare For 'Massive Wealth Destruction'):
Marc Faber, the noted Swiss economist and investor, has voiced his concerns for the U.S. economy numerous times during recent media appearances, stating, I think somewhere down the line we will have a massive wealth destruction. I would say that well-to-do people may lose up to 50 percent of their total wealth.
If hedge funds were a country and the hedge-fund assets under management (AUM) represented a nation's gross domestic product (GDP), it would rank eighth in the world, according to the World Bank, just behind Italy and ahead of Spain. Institutional Investor reported in 2005 that the average salary for top hedge-fund managers was $363 million; the reputed top earner, James Simons, of Renaissance Technologies Corp, is reported to have taken home $1.5 billion in 2005. Julian Delasantellis in his alarmist Asia Times article noted:
On June 1 the European Central Bank (ECB) warned of the risks to market stability from what it called the "correlation of hedge-fund returns". If all the hedge funds are doing the same thing - such as placing huge leveraged bets on the Indian stock market, a major casualty of the post-May 11 global selloff - then all their returns will be "correlated" or, in non-economist terms, similar. ECB vice president Lucas Papademos stated: "The increasingly similar positioning of individual hedge funds ... is another major risk for financial stability."
It has happened before. In September 1998, one of the top hedge funds in the world was Long Term Capital Management (LTCM), which had on its board Nobel Prize for Economics winners Robert Merton and Myron Scholes. Unfortunately, the shining stature of Merton and Scholes apparently blinded the funds' investors to the risks LTCM was actually taking. When the firm realized that the massive bets it had made in the global bond markets were going horribly against it, the fund was looking at $4.6 billion in losses, many times its capital base. The New York Federal Reserve, fearing that an LTCM bankruptcy could initiate a cascading series of bankruptcies among the big banks that comprised LTCM's creditors, then the creditors' creditors, etc, stepped in to arrange an emergency bailout of LTCM.
In the eight years since the LTCM crisis, with the proportion of income in the developed capitalist democracies remaining heavily skewed toward the upper classes, the concomitant amount of global wealth controlled by hedge funds has grown tremendously. With all of them investing similarly, the risks of the market turning against their positions, resulting in a tremendous destruction of global capital liquidity, have also grown apace.
See also [PDF] An Econometric Model of Serial Correlation and Illiquidity In ...
After recession of 2001-2002 we became wiser, but right now immunity to hype started to wear out. That raise an important and rather explosive question: what percentage of 401K investors will be able to have returns enough to get their money back ? That's why the most important is to avoid experiments with your money inspired by some recent investment advice books. Please remember that most of those published around year 2000 are completely forgotten or even laughed at six years later.
That includes "Intelligent investor" and "Stocks for the long run" that we mentioned before: they just failed to pass the five year test. I can only imagine what will be their residual value of current books in ten years.
And remember that cards are stacked against you. For example, in 2009-2013 Feb helped inflate the biggest bond market bubble in history ... in order to mop up the damage from the biggest housing bubble in history. As Bill Gross put in in May 2013 (at the hight of bond bubble):
"PIMCOs advice is to continue to participate in an obviously central-bank-generated bubble but to gradually reduce risk positions in 2013 and perhaps beyond. While this Outlook has indeed claimed that Treasuries are money good but not good money, they are better than the alternative (cash) as long as central banks and dollar reserve countries (China, Japan) continue to participate....a bond and equity investor can choose to play with historically high risk to principal or quit the game and earn nothing."
Sep 14, 2020 | www.bloomberg.com
High-yield bond default rates may double as companies struggle with a protracted economic downturn even as the Federal Reserve props up valuations, said Jeffrey Gundlach.
The investment grade corporate debt market has skewed toward lower quality BBB- rated debt, but if just 50% of that were to be downgraded it could fuel a near doubling of the high-yield market, Gundlach said Tuesday on a webcast for his firm's flagship DoubleLine Total Return Bond Fund .
Gundlach's views reflect broad skepticism about the market's connection to economic realities. He criticized the Fed's emergency actions as buoying asset prices and spurring unsustainable corporate borrowing binges.
Risk assets such as equities and high yield credit markets are responding to this support, and government stimulus, disproportionately as the Covid-19 pandemic remains a threat to the recovery, he said.
"It's foolhardy to believe that one can have this kind of a shock to an economy and it just gets healed through a one-shot deal" from the Treasury, he said.
Gundlach pointed out that the global GDP forecast is -3.9%, whereas the U.S. lags at -5% despite the country's response to the Covid-19 crisis being "one of the highest in the world."
Highlighting the effect of the weekly $600 stimulus checks, he called it a distortion of the personal-income spending picture akin to the Fed's effect on the markets.
"This is a large incentive to stay on public assistance," Gundlach said, noting that benefit payments have exceeded many workers' regular income.
Gundlach also snubbed one of the market's favorite trades on a U.S. recovery, saying he's "betting against" the inflation-linked bond market. TIPS products have seen some of the strongest monthly inflows in four years, and market-implied expectations for inflation have touched a 2020 high. Gundlach repeated that the impact of the pandemic is deflationary.
Sep 10, 2020 | www.zerohedge.com
As investors, we have several tools and indicators at our disposal.
Whether it is technical indicators such as Fibonacci levels, moving averages, or price supports, or fundamental indicators such as corporate earnings or economic data, we have a lot of information to use when making decisions.
Today's chart incorporates both. Junk Bonds play a critical role in highlighted investor sentiment. When junk bonds (lower-rated debt) is performing well, then that means investors are taking more risks. When junk bonds struggle, that means investors are taking on less risk.
So today, we highlight the Junk Bonds ETF (JNK). Using technical analysis, we can see that JNK is trading near line (A), a price level that has served as support and resistance over the past several years. It is currently serving as price resistance.
At the same time, there is a divergence between the stock market (the S&P 500 made new all-time highs) and Junk Bonds (well below all-time highs and 5 percent off 2019 highs).
So this is an important resistance test for junk bonds. Will Junk Bonds (JNK) break down from here (bearish) or break out (bullish).
What happens here will send an important message to stocks (and investors)!
In Asia, In Asia, Toyota Motor (TM), at $141, yields 2%, has a cash-rich balance sheet, and trades for about 10 times forward earnings. Hong Kongbased conglomerate CK Hutchison Holdings (CKHUY), at about $10, offers almost 4%. European drugmakers outpaced their U.S. peers last year, amid optimism about their product pipelines. Novartis (NVS), at $95, yields 3%, and GlaxoSmithKline (GSK), at $47, yields 4%. Among exchange-traded funds, Among exchange-traded funds, Among exchange-traded funds,
iShares Core EAFE MSCI(IEFA), at $65, yields 3.2%; iShares Core MSCI Emerging Markets (IEMG), at $54, yields 3.3%; and Vanguard FTSE Europe (VGK) at $58, yields 3.3%.
U.S. Dividend Stocks
There are still plenty of income pockets in a record stock market that allow investors to put together a portfolio with roughly double the 1.8% yield on the S&P 500.
Exxon Mobil (XOM), at $70, yields 5%, and Chevron (CVX), at $120, yield 4%. Pfizer (PFE), at $39, yields almost 4%, and cruise industry leader Carnival (CCL), at $50, yields 3.9%. United Parcel Service (UPS), at $117, yields 3.3%. Kraft Heinz (KHC), the biggest loser in the food group in 2019, has the top yield among its peers at 5% after cutting its payout by 36% last year.
David King, manager of the Columbia Flexible Capital Income fund (CFIAX), is partial to General Mills (GIS), which, at $53, yields 3.7%. The company has cut debt since its 2018 purchase of Blue Buffalo Pet Products, potentially paving the way for its first dividend increase since 2017 in its fiscal year that starts in May, he says. Oil refiners are a good source of income, with King favoring one of the largest, Valero Energy (VLO), which at $93, yields 3.8%.
There are plenty of dividend-focused mutual funds and ETFs, including top-performing Vanguard Dividend Growth fund (VDIGX), which reopened to investors last year. Large ETFs include Vanguard High Dividend Yield Index (VYM) which yields 3%, and the ProShares S&P 500 Dividend Aristocrats (NOBL), which features companies with long histories of annual payout increases, rather than those with the highest yields. It pays 1.9%.
Wall Street warmed to real estate investment trusts, which returned 29% (including dividends) based on the broad and popular Vanguard Real Estate ETF (VNQ). That nearly matched the S&P 500 in 2019.
J.P. Morgan 's REIT analysts recently forecast an 8% to 9% total return for REIT stocks in 2020, based on a combination of dividends -- now averaging more than 3% -- and 4.3% growth in funds from operations, or FFO, an important measure of cash flow .
The negative is that REIT valuations are near record highs at about 20 times estimated 2020 FFO. The J.P. Morgan analysts wrote that those valuations could "act as a cap on absolute upside from here."
Industrial REITs were standouts. Warehouse leader Prologis (PLD) gained 50%, as investors sought direct plays on the e-commerce boom. Mall REITs suffered from the same trend and had the worst performance in the group. Simon Property Group (SPG), the largest mall REIT, lost 11%, while the smaller Taubman Centers (TCO) declined 32%. Reflecting elevated risk in the mall sector, Simon yields 5.7% and Taubman, 9%, against Prologis at just 2.4% and the Vanguard REIT ETF at 3.4%.
Investors now favor apartment REITs, such as AvalonBay Communities (AVB) and Equity Residential (EQR), which yield 3%. Top New York office REITs Vornado Realty Trust (VNO) and SL Green Realty (SLG) are contrarian plays because of concerns over new Manhattan office supply and the high cost of upgrading older buildings. Vornado and SL Green yield 4% and trade below some analysts' estimates of their asset values.
U.S. Telecom Stocks
The sector offers a combination of elevated yields and depressed valuations.
Verizon Communications (VZ), at about $61, was up less than 10% in 2019 and has a secure 4% dividend. AT&T (T) was the sector standout, rising 37%, to $39, thanks to an ultralow valuation at the start of 2019 and pressure from activist investor Elliott Management, which took a stake during 2019. AT&T yields over 5%. Verizon trades for 12 times projected 2020 earnings of $5 a share, while AT&T trades at 11 times earnings. Both are cheap, relative to the market's price/earnings ratio of 18.
A related play is Comcast (CMCSA), the largest U.S. cable company. Its growth outlook is better than the telecoms, thanks to its lucrative broadband services. Comcast's stock, at $45, yields less than 2%, but trades for a reasonable 14 times projected 2020 earnings.
Often overlooked, convertibles are stock-bond hybrids designed to provide the upside of stocks and the downside protection of bonds. They did that in 2019, returning 22%, as measured by the SPDR Bloomberg Barclays Convertible Securities ETF (CWB). There are two main types of convertibles: traditional bonds with a fixed maturity date and so-called mandatory convertibles that are equity substitutes.
Traditional convertibles have more downside protection. Tesla (TSLA) demonstrated that feature, as the company's 2% convertible held up well at midyear when the electric-car manufacturer's stock cratered, and it has rallied along with the stock in recent months. Technology and biotech companies are major issuers of convertibles because they can get low borrowing costs of 2% or less.
Mandatory convertibles from electric utilities normally have three-year maturities and provide higher yields than common shares. But they have less upside than the stocks. DTE Energy (DTE), parent of Detroit Edison, has a 6.25% issue due in 2022, and American Electric Power (AEP) has a 6.125% issue due in 2022.
After a rocky 2018, the market had one of the its best years in a decade, returning 14% based on the Bloomberg Barclays U.S. Corporate High Yield Bond Index. With the average junk bond now yielding just 5.1%, down from 8% at the start of 2019, returns may be modest in 2020.
Marty Fridson, the chief investment officer at Lehmann Livian Fridson Advisors, says a total return around 3.5% is possible in 2020, based on an assumption of a slight rise in Treasury yields and little change in the spreads between junk bonds and Treasuries.
Investors favored better-quality junk issues in 2019, but the most speculative part of the market, bonds rated CCC, rallied in December, helped by gains in hard-hit energy debt.
The large Vanguard High-Yield Corporate fund (VWEHX) bested most of its peers in 2019, gaining almost 16%. The two largest ETFs are iShares iBoxx High Yield Corporate(HYG), yielding 4.3%, and SPDR Bloomberg Barclays High Yield (JNK), yielding 5%.
Junk-rated energy debt offers a high-yielding alternative to riskier common shares. Examples include Southwestern Energy 7.5% bonds due in 2026, at a 8.75% yield; Range Resources 4.875% bonds due in 2025, at 8%; and Diamond Offshore 4.875% bonds due in 2043, at nearly 10%.
Tax-Exempt Muni Bonds
The municipal market is getting treacherous in the wake of a rally that dropped yields as much as a percentage point in 2019.
Muni-bond funds had returns of 6% to 11% in 2019, but they will be hard-pressed to repeat that in 2020, given current low rates.
Absolute yields on AAA-rated 10-year munis now stand at 1.4%, about 78% of the yield on the comparable-maturity Treasury, against an average of close to 85% in recent years. Many munis yield less than the current 2% U.S. inflation rate.
Alan Schankel, muni bond strategist at Janney Montgomery Scott, thinks that muni returns will run at 2% to 3% in 2020. One supporting factor could be continued strong flows into mutual funds after a record 2019, when an estimated $90 billion of new money poured into funds.
The largest fund is the Vanguard Intermediate-Term Tax-Exempt (VWIUX), with a 2.7% trailing 12-month yield, and the biggest exchange-traded fund is iShares National Muni Bond (MUB), yielding 2.4%
High-yield munis are popular as investors search for yield. This demand enabled Nuveen, which runs Nuveen High-Yield Municipal Bond (NHMAX), the largest open-end fund with a low-grade focus, to bring to market a closed-end fund with a similar strategy: Nuveen Municipal Credit Opportunities (NMCO), which yields 5%. Muni closed-end funds are no longer bargains after 20%-plus total returns in 2019.
Taxable Muni Bonds
Tax-law changes that took effect in 2018 restricting the ability of state and local governments to refinance tax-exempt debt have led to a boom in taxable muni bonds. Total issuance approached $70 billion in 2019 and may hit $100 billion this year, against an annual average of $30 billion for much of the decade. Big issuers include California and the Dallas/Fort Worth airport.
One advantage of taxable munis over corporate bonds is that they are generally tax-exempt in the issuer's home state, although they are subject to federal income taxes. With top state rates now at 10% or above in places like California, that is a nice bonus.
Closed-end funds focused on the sector include BlackRock Taxable Municipal Bond Trust (BBN) and Nuveen Taxable Municipal Income (NBB). Both yield over 5%. Another play is the Invesco Taxable Municipal Bond ETF (BAB), which yields about 3.7%.
A group of high-quality issuers like Georgetown University and the University of Pennsylvania have issued 100-year munis in recent years that now yield in the 3.25% to 4% range. Beware of rate risk with such ultralong maturity dates.
Many professional investors have long sneered at electric utilities as richly valued and low growth. Yet the group, as measured by the Utilities Select Sector SPDRETF (XLU), has delivered an 11.6% annualized total return in the past decade and 10% during the past five years.
It is harder, however, to make a strong case now for utilities, after a 25% gain in the XLU during 2019 that lowered its dividend yield to 3.1%. Four leading utilities, Dominion Energy (D), Southern Co. (SO), Duke Energy (DUK), and American Electric Power (AEP), now trade for an average of 20 times projected 2020 earnings -- a premium to the market.
The largest utility, renewables-rich NextEra Energy (NEE), is valued at 27 times forward earnings. The bull case is that utilities are defensive and can produce mid-single digit profit growth in the coming years.
Preferred stock looks less appealing after a strong run in 2019. The iShares Preferred & Income Securities ETF (PFF) returned 16%, including dividends, for the year. It now yields about 5%.
Banks are the largest issuers, and some preferred shares from JPMorgan Chase (JPM), Morgan Stanley (MS), and Bank of America (BAC) now yield less than 5%.
That is a nice premium above the 30-year Treasury, which yields just 2.3%. But there are risks. Preferreds are typically perpetual, while issuers are able to redeem them at their face value in five years if rates fall.
That means a lot of downside -- some preferred stocks fell 20% in price during the late-2018 interest-rate rise -- and limited upside. One plus is that most preferred dividends get preferential tax treatment, like those of common stocks.
"It is heads, you win a little, and tails, you lose a lot," Dan Fuss, the veteran bond manager and chief of the Loomis Sayles Bond fund, told Barron's in the fall.
A recent JPMorgan preferred with a 4.75% dividend rate now yields 4.64%, and a Morgan Stanley 4.875% issue yields 4.80%. With most of these securities trading at a premium to face value, investors should look at the lower "yield to call," which is based on an assumed redemption at the call date five years after issuance, rather than the higher current yield.
Preferred-focused closed-end funds, such as Nuveen Preferred & Income Opportunities (JPC) and John Hancock Preferred Income (HPI), have returned more than 30% this year. They look fully priced.
The best thing about Treasuries is their defensive value. U.S. government bonds have often moved inversely with equities and thus offer put-like qualities -- and some yield.
Treasury yields, however, are paltry, ranging from 1.5% on T-bills to 2.3% on the 30-year bond. No wonder that prominent investors like Warren Buffett and DoubleLine Capital CEO Jeffrey Gundlach aren't enamored of them.
Treasury inflation-protected securities, or TIPs, are an alternative to U.S. Treasuries, since the inflation break-even is about 1.8% for the 10-year and 30-year -- below the current 2% inflation rate.
"The ultimate enemy of fixed-income investors is inflation," says Stephen Cianci, senior global portfolio manager at MacKay Shields. TIPs offer protection against rising inflation at a good price, he adds.
Exchange-traded funds, such as iShares TIPS Bond (TIP), can offer a smart way to invest in Treasuries. Others range from the safe iShares Short Treasury (SHV) to the riskier iShares 20+Year Treasury Bond (TLT).
Given the narrow yield gap between short and long Treasuries, it may pay to stay shorter.
Write to Andrew Bary at firstname.lastname@example.org
Jan 08, 2020 | www.morningstar.com
Jan 08, 2020 | www.kiplinger.com
High-yield bonds (avoid the oil patch), emerging-markets bonds and dividend-paying stocks such as real estate investment trusts and utilities are good places to hunt for yield. Funds to consider include Vanguard High Yield Corporate ( VWEHX ), yielding 4.5%, and TCW Emerging Markets Bond ( TGEIX ), yielding 5.1%. Schwab US Dividend Equity ( SCHD , $56), a member of the Kiplinger ETF 20 list of our favorite ETFs, invests in high-quality dividend payers and yields just over 3%. Spath, at Sierra Funds, is bullish on preferred stocks. IShares Preferred and Income Securities ETF ( PFF , $37) yields 5.5%. (For more ideas, see Income Investing .)
Jan 08, 2020 | www.kiplinger.com
Market value: $71.3 billion
SEC yield: 1.6%
Expense ratio: 0.17%
Suppose my outlook for the bond market is either wrong, or at best, premature. Bond yields could fall next year, or just stay relatively flat. That's why it usually makes sense to own more than one bond fund.
Vanguard Intermediate-Term Tax-Exempt Investor ( VWITX , $14.41) should hold up pretty well if rates rise only a small amount in 2020, and it could trounce the other funds in this article if rates fall.
VWITX's duration is 4.9 years. That means if bond yields rise by one percentage point, the fund's price should decline by 4.9%. That wouldn't be fun for investors, but it would hardly be catastrophic, especially when you factor in the yield.
Like most Vanguard bond offerings, Vanguard Intermediate-Term Tax-Exempt Investor is plain vanilla, and that's OK. It sticks almost entirely to high-quality municipal bonds. Its weighted average credit quality is a sterling AA.
VWITX also has been a decent performer, at an annualized 3.1% total return over the past five years.
Learn more about VWITX at the Vanguard provider site.
Jan 07, 2020 | old.nasdaq.com
me width=5 Energy ETFs to Buy for Higher Oil Prices January 03, 2020, 01:55:35 AM EDT By Kiplinger
Energy stocks and exchange-traded funds (ETFs) were a miserable bet in 2019. Indeed, the energy sector was the worst-performing sector by a mile, gaining less than 5% - far below the S&P 500's 29% return, and significantly lagging even the second worst sector, health care (18%).
However, despite tepid analyst outlooks for oil and gas prices in 2020, energy ETFs and individual stocks are suddenly being thrust in the spotlight once more.
On Jan. 2, the Pentagon confirmed that the U.S. military killed Qasem Soleimani - a top Iranian general who headed the Islamic Revolutionary Guard Corps' elite Quds Force - with a drone airstrike in Iraq. While the Pentagon said the attack was meant to deter "future Iranian attack plans," Iran nonetheless has vowed "severe revenge." The clear, abrupt escalation in Middle East tensions immediately sent oil prices higher in response.
Whether oil continues to climb is unclear. Tensions could de-escalate. Also, American fracking has changed the playing field. "The major potential risk - to oil markets - is mitigated by the fact that the U.S. is now the largest producer of oil and essentially approaching Energy independence," says Brad McMillan, Chief Investment Officer for Commonwealth Financial Network. "Our oil supplies are much less vulnerable than they were, and the availability of oil exports from the U.S. means that other countries have an alternative source."
However, if the conflict worsens - especially if oil tankers and infrastructure are targeted in any violence - oil might continue to spike, regardless.
Here, we explore five energy ETFs to buy to take advantage of higher oil prices. But approach them with caution. Just like increases in crude-oil prices should benefit each of these funds in one way or another, declines in oil have weighed on them in the past, and likely would again.SEE ALSO: The 20 Best ETFs to Buy for a Prosperous 2020
Invesco Dynamic Energy Exploration & Production ETF
Market value: $25.6 million
Dividend yield: 1.7%
Expenses: 0.63%, or $63 annually on a $10,000 investment*
Exploration and production (E&P) companies are among the energy stocks most heavily dependent on commodity prices. These firms seek out sources of oil and natural gas, then physically extract the hydrocarbons. They typically make their money by selling oil and gas to refiners, who turn them into products such as gasoline, diesel fuel and kerosene.
While costs to extract those hydrocarbons vary from company to company, in general, the more they can sell those hydrocarbons for, the fatter their profits.
The Invesco Dynamic Energy Exploration & Production ETF ( PXE , $16.69) is a smaller energy ETF that allows you to buy the industry broadly, providing access to 30 U.S. stocks that are primarily engaged in E&P. These companies include the likes of Marathon Oil ( MRO ), Devon Energy ( DVN ) and ConocoPhillips ( COP ).
While many sector funds will simply assign weights to each stock based on their relative size (e.g., the largest stocks account for the largest percentages of the fund's assets), PXE does things a little differently. For one, its underlying index evaluates companies based on various criteria, including value, quality, earnings momentum and price momentum. It also "tiers" market capitalization groups, ultimately giving mid- and small-cap stocks a chance to shine. Roughly half of PXE's assets are allocated to small companies, and another 36% are in midsize firms, leaving just 14% to larger corporations.
These smaller companies sometimes react more aggressively to oil- and gas-price changes than their larger brethren - good news for PXE when commodity prices spike, but more painful when they slump.
* Includes a one-basis-point fee waiver good through at least Aug. 31, 2021.
Learn more about PXE at the Invesco provider site.SEE ALSO: The 11 Best ETFs to Buy for Portfolio Protection
Energy Select Sector SPDR Fund
Market value: $11.1 billion
Dividend yield: 3.7%
The Energy Select Sector SPDR Fund ( XLE , $60.58) is the de facto king of energy ETFs, with more than $11 billion in assets under management - No. 2, Vanguard Energy ETF ( VDE ), has just $3.2 billion. But it's also a much different creature than the aforementioned PXE - and that affects how much it can benefit from oil-price spikes.
For one, the Energy SPDR is a collection of the 28 energy stocks within the S&P 500, so most of the fund (83%) is large-cap stocks, with the rest invested in mid-caps. There are no small companies in the XLE.
More importantly: While the XLE owns pure E&P plays, including some of PXE's holdings, it also invests in other businesses that have different relationships with oil prices. For instance, refiners - who take hydrocarbons and turn them into useful products - often improve when oil prices decline, as that lowers their input costs. Middle East flare-ups can negatively affect some refiners that rely on crude oil supplies from the region, too, while lifting those that don't. This fund also carries energy-infrastructure companies such as Kinder Morgan ( KMI ), whose "toll booth"-like business is more reliant on how much oil and gas is going through its pipelines and terminals than on the prices for those products.
Then there's XLE's top two holdings: Exxon Mobil ( XOM ) and Chevron ( CVX ), which collectively command 45% of assets. Exxon and Chevron integrated oil majors, meaning they're involved in almost every aspect of the business, from E&P to refining to transportation to distribution (think: gas stations). As a result, they can benefit from higher oil prices ... but it's a complicated relationship.
Still, XLE typically does improve when oil and gas prices do, and it holds large, well-funded companies that are better able to withstand price slumps than smaller energy firms. It also offers up a generous 3.7% dividend yield that will help you withstand small disruptions in energy prices.
Learn more about XLE at the SPDR provider site.SEE ALSO: The 7 Best New ETFs of 2019
iShares North American Natural Resources ETF
Market value: $496.0 million
Dividend yield: 5.6%*
The iShares North American Natural Resources ETF ( IGE , $30.17) provides broad-based energy-sector exposure similar to the XLE, but with a number of twists.
The first has to do with the name. Whereas the XLE is a collection of U.S. companies within the S&P 500, the IGE's holdings are within all of North America. U.S. companies still dominate the fund, at 77%, but the remaining assets are spread across numerous Canadian companies, including multinational Enbridge ( ENB ).
IGE also invests more broadly, across 100 energy-sector companies. The fund is cap-weighted, so Chevron and Exxon are still tops, but they make up far smaller percentages at the fund - roughly 10% each, versus about 22% each in XLE.
Another difference is found in the name: "natural resources." In addition to heavy investment in energy industries such as integrated oil and gas companies (26%), E&P (19%) and storage and transportation (17%), IGE also owns gold mining (7%) and even construction materials (3%) companies, among other non-energy firms. Thus, while IGE will move on changes in oil and gas prices, its movement can be affected by other commodities, too.
* IGE's most recent distribution included a special one-time distribution from Occidental Petroleum ( OXY ) as part of its acquisition of Anadarko Petroleum. This has skewed the dividend yield data at providers such as Morningstar. While Morningstar lists a trailing 12-month yield of 5.6%, iShares' listed trailing 12-month yield of 2.8%, as of Nov. 29, 2019, is much closer to what investors can expect. XLE's stated yield of 3.7% excludes a separate special payout it made closer to the end of the year related to its exposure to Occidental.
Learn more about IGE at the iShares provider site.SEE ALSO: 3 Preferred Stock ETFs for High, Stable Dividends
iShares Global Energy ETF
Market value: $852.2 million
Dividend yield: 7.0%*
The iShares Global Energy ETF ( IXC , $31.08) takes geographical diversification another step farther, and unlike IGE, it focuses completely on energy.
A reminder here that "global" and "international" mean different things. If a fund says it's international, chances are it holds no U.S. stocks. A global fund, however, can and will invest in American stocks as well as international ones ... and often, the U.S. is the largest slice of the pie.
The IXC is no exception, holding a 52% slug of American companies. It also has another 12% of its assets invested in Canadian companies. However, the U.K. (16%) and France (6%) are significant weights in the fund, and it also allows investors to reach energy companies in Brazil, China and Australia, among a few other countries. International top holdings include France's Total ( TOT ) and Dutch-British oil giant Royal Dutch Shell ( RDS.A ).
Like other energy ETFs, IXC's holdings are primarily driven by oil and gas prices. But other factors are at play, such as the fact that some of these companies have distribution businesses that are reliant on strong gasoline demand, which can be affected by a country's economic strength. Investing across several countries can help reduce such risks.
* Like IGE, IXC's most recent distribution was affected by a special one-time distribution from Occidental Petroleum. While Morningstar lists a trailing 12-month yield of 7.0%, iShares' listed trailing 12-month yield of 4.0%, as of Nov. 29, 2019, is much closer to what investors can expect.
Learn more about IXC at the iShares provider site.SEE ALSO: 7 ESG ETFs to Buy for Responsible Profits
United States Oil Fund
Market value: $1.2 billion
Dividend yield: N/A
But what if you want to invest closer to the source? That is, what if rather than buying oil companies, you wanted to invest in crude oil itself?
The United States Oil Fund ( USO , $12.81) is one of a few energy ETFs that let you do that ... but be warned that it's not as straightforward as it seems.
The USO is an "exchange-traded security designed to track the daily price movements of West Texas Intermediate ("WTI") light, sweet crude oil" - what most refer to as "U.S. crude." However, unlike some commodity funds, such as the iShares Gold Trust ( IAU ), that actually hold the physical commodity, USO invests in crude oil futures, as well as other financial instruments to generate its returns.
The problem? USO holds "front-month" futures, so every month it must sell any contracts that are about to expire and replace them with futures expiring in the next month. This can result in cases where USO is selling contracts for less than what it's buying up new ones from - or sometimes the opposite, buying for less than what it's selling for.
In short, this means that sometimes USO will reliably track WTI, but sometimes it won't - it might go lower when West Texas crude goes higher, and vice versa. The fund's expenses further throw off performance.
USO clearly is far from perfect. But it remains a more direct play on oil than publicly traded companies, and it generally will follow WTI's direction over time.
Learn more about USO at the USCF provider site.SEE ALSO: The Kip ETF 20: The 20 Best Cheap ETFs You Can Buy
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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This article appears in: Investing , Stocks Referenced Symbols: PXE , XLE , IGE , IXC , USO
Dec 21, 2019 | peakoilbarrel.com
HHH x Ignored says: 12/12/2019 at 11:27 pmPrice of oil does have problem that will play out over next 6-8 months. Without a trade war and Brexit hanging over markets. There isn't a whole lot of reason to be holding government bonds which yield next to nothing or less than nothing in some cases. Fed is buying bills so Repo market won't implode into another 2008. Only problem is they need to be buying coupons or treasuries also. They are buying some treasuries but it's not near enough to hold interest rates down. Yields on debt are going to rise without something like a trade war holding them down. That is a problem if your long oil.
Keep an eye on 10 year US treasuries. If they become just a little less liquid and yields rise as i believe they will. These OPEC cuts aren't going to mean as much as some might think.
Dec 07, 2019 | economistsview.typepad.com
Joe -> Joe... , November 30, 2019 at 09:53 PMhttps://www.bloomberg.com/news/articles/2019-11-30/record-2-4-trillion-bond-binge-is-threatening-investor-returnsJoe -> Joe... , November 30, 2019 at 10:03 PM
An unprecedented frenzy of debt sales around the world is threatening to cool this year's hot returns on corporate bonds.
Companies have sold a record $2.43 trillion so far this year across currencies, surpassing previous full-year records. Investors rushed to snap up all this debt because they were desperate for yield as central banks cut rates. That has pushed up valuations.
Now, some troubling signs for the direction of those valuations are converging. Recent data suggest that the worst may be over for the global economy, which means many central banks could have less reason next year to guide down borrowing costs. That will all make it harder to top the double-digit returns that some investors scored on corporate bonds this year.
Wealthy made some real money betting on our government bailouts, in Europe an the US. Now the yields are gone, where to? China, the only rational central banker left means, park your money in China.https://finance.yahoo.com/news/while-the-us-chilled-this-thanksgiving-week-china-moved-forward-125657666.htmlPaine -> Joe... , December 01, 2019 at 06:22 AM
What this means now is that things will only get more complicated for Beijing from here on out. Chinese President Xi Jinping bet on letting the people of Hong Kong decide, and they did. Only it was against him.
We'll return to the political situation in Hong Kong momentarily, but before we do, another major development, this time on the business front.
On Tuesday, Alibaba executed a slam-dunk secondary offering in Hong Kong, raising $12.9 billion. That easily surpassed Uber's $8.1 billion IPO in May, making it the biggest public offering of 2019. For those who were predicting the death of Hong Kong -- and they've been doing that for decades, (and Kyle Bass and others are still at it) -- that again appears to be premature.
Clueless reporting. Xi came out of this looking great. He has one country three systems, he now has a sound central banking, investment is flowing in, not out. They are immune from sanctions, and even the trade tariffs are expanding Chinese influence in Asia, Iran, Russia and China can look forward to a new global banking system, absent the dollar. Belt and suspenders is moving forward.
I like it, I have no priors, I can point this fact without contradiction. Go Xi.This in fact is poisonous
Bourgeois think heresy
The struggle inside the party continues
Zero real sovereign note
up and down the term structure
A Lerner mark up cap and trade net
For the big corporate players
A huge expansion
of the social payments system
transition to a 100 percent George tax on land lots
Immediately begin a three staged
Of Tibet Hong Kong
Cut North Korea loose
to unite with the south
Allow open elections at the neighborhood level
Oct 26, 2019 | www.zerohedge.com
Authored by Mike Shedlock via MishTalk,
What's behind the ever-increasing need for emergency repos? A couple of correspondents have an eye on shadow banking.
- The shadow banking system consists of lenders, brokers, and other credit intermediaries who fall outside the realm of traditional regulated banking.
- It is generally unregulated and not subject to the same kinds of risk, liquidity, and capital restrictions as traditional banks are.
- The shadow banking system played a major role in the expansion of housing credit in the run up to the 2008 financial crisis, but has grown in size and largely escaped government oversight since then.
The above from Investopedia .
Image courtesy of my friend Chris Temple.Hey It's Not QE, Not Even Monetary
Yesterday, I commented Fed to Increase Emergency Repos to $120 Billion, But Hey, It's Not Monetary .
Let's recap before reviewing excellent comments from a couple of valued sources.
The Fed keeps increasing the size and duration of "overnight" funding. It's now up $120 billion a day, every day, extended for weeks. That is on top of new additions.Three Fed Statements
Three Mish Comments
- Emergency repos were needed for " end-of-quarter funding ".
- Balance sheet expansion is " not QE ". Rather, it's " organic growth ".
- This is "not monetary policy ".
- Hmm. A quick check of my calendar says the quarter ended on September 30 and today is October 23.
- Hmm. Historically "organic" growth was about $2 to $3 billion.
- Hmm. Somehow it takes an emergency (but let's no longer call it that), $120 billion " at least " in repetitive " overnight " repos to control interest rates, but that does not constitute "monetary policy"
I made this statement: I claim these "non-emergency", "non-QE", "non-monetary policy" operations suggest we may already be at the effective lower bound for the Fed's current balance sheet holding .Shadow Banking Suggestion by David Collum
Pater Tenebrarum at the Acting Man blog pinged me with these comments on my article, emphasis mine.Reader Comments
While there is too much collateral and not enough reserves to fund it, we don't know anything about the distribution [or quality] of this collateral . It could well be that some market participants do not have sufficient high quality collateral and were told to bugger off when they tried to repo it in the private markets.
Such market participants would become unable to fund their leveraged positions in CLOs or whatever else they hold.
Mind, I'm not saying that's the case, but the entire shadow banking system is opaque and we usually only find out what's what when someone keels over or is forced to report a huge loss.
- Axiom7: Euro banks are starving for dollar funding and if there is a hard Brexit both UK and German banks are in big trouble. I wonder if this implies that the EU will crack in negotiations knowing that a DB fail is too-big-to-bail?
- Cheesie: How do you do repos with a negative interest rate?
- Harry-Ireland: [sarcastically], Of course, it's not QE. How can it be, it's the greatest economy ever and there's absolutely nobody over-leveraged and the system is as healthy as can be!
- Ian: Taking bad collateral to keep banks solvent is not QE.
In regards to point number four, I commented:
This is not TARP 2009. [The Fed is not swapping money for dodgy collateral] Someone or someones is caught in some sort of borrow-short lend-long scheme and the Fed is giving them reserves for nothing in return. Where's the collateral?
Pater Tenebrarum partially agrees.Guessing Game
Yes, this is not "TARP" - the Fed is not taking shoddy collateral, only treasury and agency bonds are accepted. The primary dealers hold a huge inventory of treasuries that needs to be funded every day in order to provide them with the cash needed for day-to-day operations - they are one of the main sources of the "collateral surplus".
We are all guessing here, so I am submitting possible ideas for discussion.Rehypothecation
I am not convinced the Fed isn't bailing out a US major bank, foreign bank, or some other financial institution by taking rehypothecated , essentially non-existent, as collateral.Current Primary Dealers
Rehypothecation is the practice by banks and brokers of using, for their own purposes, assets that have been posted as collateral by their clients.
In a typical example of rehypothecation, securities that have been posted with a prime brokerage as collateral by a hedge fund are used by the brokerage to back its own transactions and trades.
- Amherst Pierpont Securities LLC
- Bank of Nova Scotia, New York Agency
- BMO Capital Markets Corp.
- BNP Paribas Securities Corp.
- Barclays Capital Inc.
- Cantor Fitzgerald & Co.
- Citigroup Global Markets Inc.
- Credit Suisse AG, New York Branch
- Daiwa Capital Markets America Inc.
- Deutsche Bank Securities Inc.
- Goldman Sachs & Co. LLC
- HSBC Securities (USA) Inc.
- Jefferies LLC
- J.P. Morgan Securities LLC
- Merrill Lynch, Pierce, Fenner & Smith Incorporated
- Mizuho Securities USA LLC
- Morgan Stanley & Co. LLC
- NatWest Markets Securities Inc.
- Nomura Securities International, Inc.
- RBC Capital Markets, LLC
- Societe Generale, New York Branch
- TD Securities (USA) LLC
- UBS Securities LLC.
- Wells Fargo Securities LLC.
The above Primary Dealer List from Wikipedia as of May 6, 2019.
Anyone spot any candidates?
My gosh, how many are foreign entities?
It's important to note those are not "shadow banking" institutions, while also noting that derivative messes within those banks would be considered "shadow banking".Tenebrarum ReplyPreparation for End of LIBOR
In this case the problem is specifically that the primary dealers are holding huge inventories of treasuries and bank reserves are apparently not sufficient to both pre-fund the daily liquidity requirements of banks and leave them with enough leeway to lend reserves to repo market participants.
The Fed itself does not accept anything except treasuries and agency MBS in its repo operations, and only organizations authorized to access the federal funds market can participate by offering collateral in exchange for Fed liquidity (mainly the primary dealers, banks, money market funds,...).
Since most of the repo lending is overnight - i.e., is reversed within a 24 hour period (except for term repos) - I don't think re-hypothecated securities play a big role in this.
But private repo markets are broader and have far more participants, so possibly there is a problem elsewhere that is propagating into the slice of the market the Fed is connected with. Note though, since the Treasury is borrowing like crazy and is at the same time rebuilding its deposits with the Fed (which lowers bank reserves, ceteris paribus), there is a several-pronged push underway that is making short term funding of treasury collateral more difficult at the moment.
So I'm not sure a case can really be made that there is anything going on beyond what meets the eye - which is already bad enough if you ask me.
What about all the LIBOR-based derivatives with the end of LIBOR coming up?
The Wall Street Journal reports U.S. Companies Advised to Prepare for Multiple Benchmark Rates in Transition from LiborRepro Quake
Libor is a scandal-plagued benchmark that is used to set the price of trillions of dollars of loans and derivatives globally. A group of banks and regulators in 2017 settled on a replacement created by the Federal Reserve known as the secured overnight financing rate, or SOFR. Companies must move away from Libor by the end of 2021, when banks will no longer be required to publish rates used to calculate it.
"We don't expect that 100% of the Libor-based positions today will migrate 100% to SOFR," Jeff Vitali, a partner at Ernst & Young, said this week during a panel at an Association for Financial Professionals conference in Boston. "It is going to be a scenario where entities are going to have to prepare and be flexible and build flexibility into their systems and models and processes that can handle multiple pricing environments in the same jurisdiction."
I invite readers to consider Tenebrarum's " Repro Quake - A Primer " but caution that it is complicated.
He informs me "a credit analyst at the largest bank in my neck of the woods sent me a mail to tell me this was by far the best article on the topic he has come across".
Note: That was supposed to be a private comment to me. I placed it in as an endorsement.
Tenebrarum live in Europe. Here are his conclusions.What Else is the Fed Missing?
Effective Lower Bound
- Contrary to similar spikes in repo rates in 2008, it was probably not fear of counterparty risk that led to the recent repo quake. What's more, the Federal Reserve without a doubt knew that something like this was coming. We say this because even we knew it it was not a secret. A number of analysts have warned of just such a situation for months.
- It is astonishing that the Fed somehow seemed unprepared and quite surprised by the extent of the liquidity shortage. We would submit that this fact alone is a good reason for markets to be concerned. If the Fed is not even able to properly gauge such a "technical problem" in advance, what else is there it does not know?
Finally, Tenebrarum commented: " I agree on your effective lower bound comment, since obviously, the 'dearth' of excess reserves was pushing up all overnight rates, including the FF rate ."
For discussion of why the effective lower bound of interest rates may be much higher than zero, please see In Search of the Effective Lower Bound .
argento3 , 4 hours ago linkDoge , 4 hours ago link
my gut tells me (I have no tangible evidence)
that some of this money is leaking out to continue to prop up the stock market. I've been trading for 46 years and current valuations are beyond ridiculous. for example, Tesla made a buck a share in the last quarter. woop di do. and the stock zooms to $300++ a share with a market cap of $58 bil. 60% more than Ford???!!! We know that Porsche and BMW and Mercedes and Audi are going to build a much better EV. another one, Cintas. They rent uniforms. what a sexy business! valued at a p/e of 32 with a $28 bil. market cap. Book value of $29 a share. the stock is at $270 !!! the list goes on and on and on Carvana, etc.
personally, I have 5% bitcoin 5% gold and have a nice chunk in a very high quality diversified commodity mutual fund. Commodities (relative to stocks) are at multi decade lows. a deep value trade. very best wishes to you. Argentoargento3 , 4 hours ago link
Can you name the commodity fund you own?Let it Go , 6 hours ago link
i like both DCMSX and PCRAX (DFA and Pimco)
this sector has under performed stocks as written above. so the returns have been negative (for now)namrider , 6 hours ago link
On occasion, it is important to revisit issues that have been swept under the rug or simply overlooked. For most people, the derivatives market falls into this category, partly because they don't understand exactly what derivatives are or why this market is so important.
Anyone paying attention knows that the size of the derivatives market dwarfs the global economy. Paul Wilmott who holds a doctorate in applied mathematics from Oxford University has written several books on derivatives. Wilmott estimates the derivatives market at $1.2 quadrillion, to put that in perspective it is about 20 times the size of the world economy.
http://Derivatives Could Explode Like A bomb!html
That is an OLD guess... today it is estimated that derivatives exceeds $2 quadrillion, and that just commodity derivatives approaches the old figure. Interest rate based derivatives still dominate, my guess is much higher.
Sep 17, 2019 | economistsview.typepad.com
Joe , September 16, 2019 at 12:11 PMPaine -> Joe... , September 16, 2019 at 02:01 PM
One of the key U.S. borrowing markets saw a massive surge Monday, a sign the Federal Reserve is having trouble controlling short-term interest rates.
Amid the settlement of Treasury coupon auctions and the influx of quarterly corporate tax payments, the rate on overnight repurchase agreements soared by 153 basis points to 3.80%, the largest daily increase since December, based on ICAP pricing.
The would be Treasury trying to tilt the curve, deposit short borrow long. Finance, in general, is rescaling to accommodate the next 2 trillion in debt while rolling over trillions of 'Uncle can do it later' debt. A quick downturn, readjustment, and the 'Uncle do it later' payments to the wealthy will continue.
This is common, our progressive tribe has moles who suddenly rush off and do a deal with the wealthy leaving the rest of us in the dark.The end time nearsJoe , September 17, 2019 at 06:08 AMhttps://thehill.com/blogs/blog-briefing-room/news/461692-cost-for-recent-government-shutdowns-estimated-at-4b
Repo Squeeze Threatens to Spill Over Into Funding Markets
By Stephen Spratt
September 17, 2019, 3:19 AM PDT Updated on September 17, 2019, 5:24 AM PDT
Cross-currency basis, FX forwards, eurodollar futures shift
Sale of $78 billion in Treasuries led to sudden cash squeeze
Treasury is ahead of finance in paying for the 'Uncle do it later' trick. The short rate has jumped 10 basis points, not much but there was a reading on the overnight market of 7%. This may mean nothing, but more likely means higher consumer credit charges. W have to pay for 'Uncles later'.
Sep 04, 2019 | finance.yahoo.com
Sep.04 -- Sean Carney, head of municipal strategy at BlackRock, discusses the municipal bond market posting its best returns since 2014. He speaks with Bloomberg's Taylor Riggs in this week's "Muni Moment" on "Bloomberg Markets."
Aug 17, 2019 | economistsview.typepad.com
anne , August 07, 2019 at 09:17 AMhttps://www.nytimes.com/2019/08/07/opinion/tariff-tantrums-and-recession-risks.html
August 7, 2019
Tariff Tantrums and Recession Risks
Why trade war scares the market so much
By Paul Krugman
If the bond market is any indication, Donald Trump's escalating belligerence on trade is creating seriously increased risks of recession. But I haven't seen many clear explanations of why that might be so. The problem isn't just, or even mainly, that he really does seem to be a Tariff Man. What's more important is that he's a capricious, unpredictable Tariff Man. And that capriciousness is really bad for business investment.
First things first: why do I emphasize the bond market, not the stock market? Not because bond investors are cooler and more rational than stock investors, although that may be true. No, the point is that expected economic growth has a much clearer effect on bonds than on stocks.
Suppose the market becomes pessimistic about growth over the next year, or even beyond. In that case, it will expect the Fed to respond by cutting short-term interest rates, and these expectations will be reflected in falling long-term rates. That's why the inversion of the yield curve -- the spread between long-term and short-term rates -- is so troubling. In the past, this has always signaled an imminent recession:
[That scary yield curve]
And the market seems in effect to be predicting that it will happen again.
But what about stocks? Lower growth means lower profits, which is bad for stocks. But it also, as we've just seen, means lower interest rates, which are good for stocks. In fact, sometimes bad news is good news: a bad economic number causes stocks to rise, because investors think it will induce the Fed to cut. So stock prices aren't a good indicator of growth expectations.
O.K., preliminaries out of the way. Now let's talk about tariffs and recession.
You often see assertions that protectionism causes recessions -- Smoot-Hawley caused the Great Depression, and all that. But this is far from clear, and often represents a category error.
Yes, Econ 101 says that protectionism hurts the economy. But it does its damage via the supply side, making the world economy less efficient. Recessions, however, are usually caused by inadequate demand, and it's not at all clear that protectionism necessarily has a negative effect on demand.
Put it this way: a global trade war would induce everyone to switch spending away from imports toward domestically produced goods and services. This will reduce everyone's exports, causing job losses in export sectors; but it will simultaneously increase spending on and employment in import-competing industries. It's not at all obvious which way the net effect would go.
To give a concrete example, think about the world economy in the 1950s, before the creation of the Common Market and long before the creation of the World Trade Organization. There was a lot more protectionism and vastly less international trade then than there would be later (the containerization revolution was still decades in the future.) But Western Europe and North America generally had more or less full employment.
So why do Trump's tariff tantrums seem to be having a pronounced negative effect on near-term economic prospects? The answer, I'd submit, is that he isn't just raising tariffs, he's doing so in an unpredictable fashion.
People are often sloppy when they talk about the adverse effects of economic uncertainty, frequently using "uncertainty" to mean "an increased probability of something bad happening." That's not really about uncertainty: it means that average expectations of what's going to happen are worse, so it's a fall in the mean, not a rise in the variance.
But uncertainty properly understood can have serious adverse effects, especially on investment.
Let me offer a hypothetical example. Suppose there are two companies, Cronycorp and Globalshmobal, that would be affected in opposite ways if Trump imposes a new set of tariffs. Cronycorp would like to sell stuff we're currently importing, and would build a new factory to make that stuff if assured that it would be protected by high tariffs. Globalshmobal has already been considering whether to build a new factory, but it relies heavily on imported inputs, and wouldn't build that factory if those imports will face high tariffs.
Suppose Trump went ahead and did the deed, imposing high tariffs and making them permanent. In that case Cronycorp would go ahead, while Globalshmobal would call off its investment. The overall effect on spending would be more or less a wash.
On the other hand, suppose that Trump were to announce that we've reached a trade deal: all tariffs on China are called off, permanently, in return for Beijing's purchase of 100 million memberships at Mar-a-Lago. In that case Cronycorp will cancel its investment plans, but Globalshmobal will go ahead. Again, the overall effect on spending is a wash.
But now introduce a third possibility, in which nobody knows what Trump will do -- probably not even Trump himself, since it will depend on what he sees on Fox News on any given night. In that case both Cronycorp and Globalshmobal will put their investments on hold: Cronycorp because it's not sure that Trump will make good on his tariff threats, Globalshmobal because it's not sure that he won't.
Technically speaking, both companies will see an option value to delaying their investments until the situation is clearer. That option value is basically a cost to investment, and the more unpredictable Trump's policy, the higher that cost. And that's why trade tantrums are exerting a depressing effect on demand.
Furthermore, it's hard to see what can reduce this uncertainty. U.S. trade law gives the president huge discretionary authority to impose tariffs; the law was never designed to deal with a chief executive who has poor impulse control. A couple of years ago many analysts expected Trump to be restrained by his advisers, but he's driven many of the cooler heads out, many of those who remain are idiots, and in any case he's reportedly paying ever less attention to other people's advice.
None of this guarantees a recession. The U.S. economy is huge, there are a lot of other things going on besides trade policy, and other policy areas don't offer as much scope for presidential capriciousness. But now you understand why Trump's tariff tantrums are having such a negative effect.
Jun 05, 2019 | www.nakedcapitalism.com
djrichard , June 5, 2019 at 6:32 pm
I just assume the 10Y yield is reverting to trend – the trend downward it has had since 1982. The counter trend move upward in 2018 assumed the fiscal spigots were going to be turned on, that the deficit was no longer a dirty word and therefore inflation was no longer a dirty word. It's just taken til now to capitulate that none of that's going to happen.
Seems the Federal Reserve was caught by surprise by this too. Otherwise I don't think they would have raised their Fed Funds rate to where it is. Because now that the 10Y yield has capitulated, it's actually lower than the Fed Funds rate, creating an inverted yield curve. Which is unusual because normally an inverted yield curve is created on purpose by the Federal Reserve – they raise their rate above the 10Y yield rather than wait for the 10Y yield to drop below their rate. Still, every good trader knows an inverted yield curve is bad juju. So what's the Fed Reserve to do? Sit on its hands and let the inverted yield curve work its magic and create a recession?
Seems to me that the Federal Reserve doesn't want the market to crash on Trump's watch. At least not until after the 2020 election. So the Fed Reserve is signaling to the traders, "we feel your pain", they'll lower their rate to bring it back below the 10Y yield. They just need a pretext on why they're doing so, something that doesn't simply smack of the Fed Reserve propping up the stock market. "It's the PMI, it's the employment report, it's trade, it's one of those, yeah that's the ticket."
Anyways, even if the fiscal spigots get turned on, I don't see the 10Y yield reversing trend until spiraling wage inflation is a thing again. I.e. when people aren't worried about their exposure to inflating prices as long as their wages are increasing / tracking with inflation. Making it safe for them to take on debt at increasing interest rates – i.e. generating inflation. And I don't see that happening anytime soon unless there's some kind of JG program.
Until then, the trend line of the 10Y yield is downwards. Giving the Federal Reserve less and less room for their Fed Funds rate to operate in without inverting the yield curve. Seems like that won't be able to continue at some point. Interesting years ahead.
May 16, 2019 | www.bloomberg.com
The fourth-quarter stock market rout that wiped out $12 trillion in shareholder value and sparked a bout of Christmas Eve panic may have quickly been forgotten by most Americans, but not by the salespeople and financial engineers of Wall Street.
No, the selloff, it would appear, wound up triggering fears that time was running out on the longest bull market in history. And so, when early 2019 delivered a miraculous rebound, they wasted no time in peddling all sorts of deals and arrangements that test the limits of risk tolerance: from health-food makers fast-tracked into public hands to stretched retailers wrung for billions by private equity owners in the debt market.
Junk bonds are flying out the door once again. Deeply indebted companies are borrowing even more to pay equity holders . And while you can't say the megadeal IPOs got rushed to market, two that were held up as heralding a return to IPO glory days have been flops. It's quickly turning Uber and Lyft into poster children for Wall Street eagerness amid an equity-market bounce that has all but banished memories of the worst fourth quarter in a decade.
"At some point, people are going to get burned," said Marshall Front, the chief investment officer at Front Barnett Associates and 56-year Wall Street veteran. "People want to take their companies public because they don't know what the next years hold, and there are people who think we're close to the end of the cycle. If you're an investment banker, what do you do? You keep dancing until the music stops."
May 03, 2019 | www.kiplinger.com
For more than a decade, income investors have been plagued by paucity wrapped in misery. The bellwether 10-year Treasury note has doled out an average 2.6% interest since 2008. Although the Federal Reserve has nudged its target interest rate range to 2.25% to 2.50%, it has signaled that it's done raising rates for now. Even worse, the yield on the 10-year T-note briefly sank below the yield on the three-month T-bill -- an unusual inversion that can sometimes herald a recession and lower yields ahead. The takeaway: Locking your money up for longer periods is rarely worth the negligible increase in yield. What could increase your yield these days? Being a little more adventurous when it comes to credit quality. When you're a bond investor, you're also a lender, and borrowers with questionable credit must pay higher yields. Similarly, stocks with above-average yields probably have some skeletons in their balance sheets.
You can ameliorate credit risk -- but not eliminate it -- through diversification. Invest in a mutual fund, say, rather than a single issue. And invest in several different types of high-yielding investments -- for example, investment-grade bonds, preferred stocks and real estate investment trusts -- rather than just one category. Despite such caveats, income investing is not as bad as it was in 2015, when it was hard to milk even a penny's interest out of a money market. Now you can get 3.3% or more from no-risk certificates of deposit at a bank. We'll show you 33 ways to find the best yields for the risk you're willing to take, ranging from 2% all the way up to 12%. Just remember that the higher the payout, the greater the potential for some rough waters.
SEE ALSO: 20 of Wall Street's Newest Dividend Stocks Prices, yields and other data are as of April 19.
Check OutKiplinger's Latest Online Broker Rankings
Short-term interest rates largely follow the Fed's interest rate policy. Most observers in 2018 thought that would mean higher rates in 2019. But slowing economic growth in the fourth quarter of 2018 and the near-death experience of the bull market in stocks changed that. The Fed's rate-hiking campaign is likely on hold for 2019. Still, money markets are good bets for money you can't stand to lose. Money market funds are mutual funds that invest in very-short-term, interest-bearing securities. They pay out what they earn, less expenses. A bank money market account's yield depends on the Fed's benchmark rate and the bank's need for deposits.
The risks: Money market mutual funds aren't insured, but they have a solid track record. The funds are designed to maintain a $1 share value; only two have allowed their shares to slip below $1 since 1994. The biggest risk with a bank money market deposit account is that your bank won't raise rates quickly when market interest rates rise but will be quick on the draw when rates fall. MMDAs are insured up to $250,000 by the federal government. How to invest: The best MMDA yields are from online banks, which don't have to pay to maintain brick-and-mortar branches. Currently, a top-yielding MMDA is from Investors eAccess , which is run by Investors Bank in New Jersey. The account has no minimum, has an annual percentage yield of 2.5% and allows six withdrawals per month. You'll get a bump from a short-term CD, provided you can keep your money locked up for a year. Merrick Bank , in Springfield, Mo., offers a one-year CD yielding 2.9%, with a $25,000 minimum. The early-withdrawal penalty is 2% of the account balance or seven days' interest, whichever is larger. The top five-year CD yield was recently 3.4%, from First National Bank of America in East Lansing, Mich.
SEE ALSO: 7 Best Ways to Earn More on Your Savings
Your primary concern in a money fund should be how much it charges in expenses. Vanguard Prime Money Market Fund (symbol VMMXX , yield 2.5%) charges an ultralow 0.16% a year and consistently sports above-average yields. Investors in high tax brackets might consider a tax-free money fund, whose interest is free from federal (and some state) income taxes, such as Vanguard Municipal Money Market Fund ( VMSXX 1.6%). To someone paying the maximum 40.8% federal tax rate, which includes the 3.8% net investment income tax, the fund has the equivalent of a 2.7% taxable yield. (To compute a muni's taxable-equivalent yield, subtract your tax bracket from 1, and divide the muni's yield by that. In this case, divide 1.6% by 1 minus 40.8%, or 59.2%). The fund's expense ratio is 0.15%.
SEE ALSO: 12 Bank Stocks That Wall Street Loves the Most //www.dianomi.com/smartads.epl?id=4908
Muni bonds are IOUs issued by states, municipalities and counties. At first glance, muni yields look as exciting as a month in traction. A 10-year, AAA-rated national muni yields 2.0%, on average, compared with 2.6% for a 10-year Treasury note. But the charm of a muni bond isn't its yield; it's that the interest is free from federal taxes -- and, if the bond is issued by the state where you live, from state and local taxes as well. As with tax-free money funds, investors should consider a muni fund's taxable equivalent yield; in the case above, it would be 3.4% for someone paying the top 40.8% federal rate.Yields get better as you go down in credit quality. An A-rated 10-year muni -- two notches down from AAA but still good -- yields 2.3%, on average, or 3.9% for someone paying the top rate. The risks: Munis are remarkably safe from a credit perspective, even considering that defaults have inched up in recent years. But like all bonds, munis are subject to interest rate risk. If rates rise, your bond's value will drop (and vice versa), because interest rates and bond prices typically move in opposite directions. If you own an individual bond and hold it until it matures, you'll most likely get your full principal and interest. The value of muni funds, however, will vary every day.
SEE ALSO: 9 Municipal Bond Funds for Tax-Free Income
How to invest: Most investors should use a mutual fund or ETF, rather than pick their own individual bonds. Look for funds with rock-bottom expenses, such as Vanguard Limited-Term Tax-Exempt ( VMLTX , 1.8%). The fund charges just 0.17%, and yields the equivalent of 3% for someone paying the highest federal tax rate. It's a short-term fund, which means it's less sensitive to interest rate swings. That means its share price would fall less than longer-term funds' prices if rates were to rise. The average credit quality of the fund's holdings is a solid AA–. Fidelity Intermediate Municipal Income ( FLTMX , 2.0%), a member of the Kiplinger 25 , the list of our favorite no-load funds, gains a bit of yield (a taxable equivalent of 3.4% for those at the top rate) by investing in slightly longer-term bonds. The fund's expense ratio is 0.37%; the largest percentage of assets, 39%, is in AA bonds. Vanguard High-Yield Tax-Exempt Fund Investor Shares ( VWAHX , 2.9%) also charges just 0.17% in fees and yields 4.9% on a taxable-equivalent basis for someone at the highest rate. The extra yield comes from investing in a sampling of riskier bonds. But the fund's average BBB+ credit rating is still pretty good, and its return has beaten 96% of high-yield muni funds over the past 15 years.
SEE ALSO: How Smart a Bond Investor Are You? //www.dianomi.com/smartads.epl?id=4908You get higher yields from corporate bonds than you do from government bonds because corporations are more likely to default. But that risk is slim. The one-year average default rate for investment-grade bonds (those rated BBB– or higher), is just 0.09%, going back to 1981, says Standard & Poor's. And corporate bonds rated AAA and maturing in 20 or more years recently yielded 3.7%, on average, while 20-year Treasury bonds yielded 2.8% and 30-year T-bonds, 3.0%. You can earn even more with bonds from firms with lightly dinged credit ratings. Bonds rated BBB yield an average 4.0%. The risks: The longer-term bond market moves independently of the Fed and could nudge yields higher (and prices lower) if inflation worries pick up. Though corporate defaults are rare, they can be devastating. Lehman Brothers, the brokerage firm whose bankruptcy helped fuel the Great Recession, once boasted an investment-grade credit rating.
How to invest: Active managers select the bonds at Dodge & Cox Income ( DODIX , 3.5%). This fund has beaten 84% of its peers over the past 15 years, using a value-oriented approach. It holds relatively short-term bonds, giving its portfolio a duration of 4.4 years, which means its share price would fall roughly 4.4% if interest rates rose by one percentage point over 12 months. The fund's average credit quality is A, and it charges 0.42% in expenses. If you prefer to own a sampling of the corporate bond market for a super-low fee, Vanguard Intermediate-Term Corporate Bond Index Fund Admiral Shares ( VICSX , 3.6%) is a good choice. Vanguard recently lowered the minimum investment to $3,000, and the fund charges just 0.07%. Interest-rate risk is high with Vanguard Long-Term Bond ETF ( BLV , $91, 3.8%). The exchange-traded fund has a duration of 15, which means fund shares would fall 15% if interest rates moved up by one percentage point in a year's time. Still, the yield on this long-term bond offering is enticing, and the fund's expense ratio is just 0.07%. SEE ALSO: The 7 Best Bond Funds for Retirement Savers in 2019 //www.dianomi.com/smartads.epl?id=4908Dividend stocks have one advantage that bonds don't: They can, and often do, raise their payout. For example, Procter & Gamble ( PG , $106, 2.7%), a member of the Kiplinger Dividend 15 , the list of our favorite dividend-paying stocks, raised its dividend from $2.53 a share in 2014 to $2.84 in 2018, a 2.3% annualized increase. Preferred stocks, like bonds, pay a fixed dividend and typically offer higher yields than common stocks. Banks and other financial services firms are the typical issuers, and, like most high-dividend investments, they are sensitive to changes in interest rates. Yields for preferreds are in the 6% range, and a generous crop of new issues offers plenty of choices.
The risks: Dividend stocks are still stocks, and they will fall when the stock market does. Furthermore, Wall Street clobbers companies that cut their dividend. General Electric slashed its dividend to a penny per share on December 7, 2018, and the stock fell 4.7% that day. How to invest: Some slower-growing industries, such as utilities or telecommunications firms, tend to pay above-average dividends. Verizon Communications ( VZ , $58, 4.2%), a Kip 15 dividend stock, is the largest wireless carrier in the U.S. Its investment in Fios fiber-optic cable should pay off in coming years. SPDR Portfolio S&P 500 High Dividend ETF ( SPYD , $39, 4.3%) tracks the highest-yielding stocks in the S&P 500 index. The fund has 80 holdings and is sufficiently diversified to handle a clunker or two. Utility PPL Corp. ( PPL , $31, 5.3%) derives more than 50% of its earnings from the United Kingdom. Worries that the U.K.'s departure from the European Union will pressure PPL's earnings have weighed on the stock's price, boosting its yield. Nevertheless, PPL's U.S. operations provide strong support for the company's generous payout. Ma Bell is a Dividend Aristocrat , meaning that AT&T ( T , $32, 6.4%) has raised its dividend for at least 25 consecutive years (35 straight years, in AT&T's case). The company has plenty of free cash flow to keep raising its payout. SEE ALSO: 9 High-Yield Dividend Stocks That Deserve Your Attention //www.dianomi.com/smartads.epl?id=4908You can invest in two types of REITs: those that invest in property and those that invest in mortgages. Both types must pass on at least 90% of their revenue to investors, which is partly why they have such excellent yields. Typically, REITs that invest in income-producing real estate have lower yields than those that invest in mortgages. The average property REIT yields 4.1%, compared with the average mortgage REIT yield of 10.6%, according to the National Association of Real Estate Investment Trusts. Why the big difference? Property REITs rack up expenses when they buy and sell income properties or lease them out as landlords. Mortgage REITs either buy mortgages or originate them, using borrowed money or money raised through selling shares as their capital.
The risks: When the economy slows down, so does the real estate market, and most REITs will take a hit in a recession. Mortgage REITs are exceptionally sensitive to interest rate increases, which squeeze their profit margins, and to recessions, which increase the likelihood of loan defaults. REIT dividends are not qualified dividends for tax purposes and are taxed at your ordinary income tax rate. How to invest: Realty Income Corp. ( O , $69, 4.0%) invests in property and rents it to large, dependable corporations, such as Walgreens, 7-Eleven and Fed-Ex. It's a Kiplinger 15 dividend stalwart and pays dividends monthly. Fidelity Real Estate Income ( FRIFX , 4.0%) isn't a REIT, although it invests in them (among other things). The fund puts income first. It has 43% of its assets in bonds, most of them issued by REITs. The fund lost 0.6% in 2018, compared with a 6% loss for other real estate funds. Investors will forgive a lot in exchange for a high yield. In the case of iShares Mortgage Real Estate Capped ETF ( REM , $44, 8.2%), they're choosing to accept a high degree of concentration: The top four holdings account for 44% of the ETF's portfolio. Although concentration can increase risk, in this instance the fund's huge position in mortgage REITs has helped returns. Falling interest rates late in 2018 pushed up mortgage REITs, limiting the fund's losses to just 3% in 2018. Annaly Capital Management ( NLY , $10, 12%) is a REIT that borrows cheaply to buy government-guaranteed mortgage securities. Most of those holdings are rated AA+ or better. Annaly boosts its yield by investing in and originating commercial real estate loans and by making loans to private equity firms. Its 2018 purchase of MTGE Investment, a mortgage REIT that specializes in skilled nursing and senior living facilities, will help diversify the firm's portfolio. Annaly is the largest holding of iShares Mortgage Real Estate Capped ETF.
SEE ALSO: A Dozen Great REITs for Income AND DiversificationIf you think interest rates are low in the U.S., note that most developed foreign countries have even lower rates because their economies are growing slowly and inflation is low. The U.K.'s 10-year bond pays just 1.2%; Germany's 10-year bond yields 0.1%; Japan's yields –0.03%. There's no reason to accept those yields for a day, much less a decade. You can, by contrast, find decent yields in some emerging countries. Emerging-markets bonds typically yield roughly four to five percentage points more than comparable U.S. Treasury bonds, which would put yields on some 10-year EM debt at about 7%, says Pramol Dhawan, emerging-markets portfolio manager at bond fund giant Pimco.
The risks: You need a healthy tolerance for risk to invest in emerging-markets bonds. U.S. investors tend to be leery of them because they remember massive defaults and currency devaluations, such as those that occurred in Asia in the late 1990s. But in the wake of such debacles, many emerging countries have learned to manage their debt and their currencies better than in the past. But currency is still a key consideration. When the U.S. dollar rises in value, overseas gains translate into fewer greenbacks. When the dollar falls, however, you'll get a boost in your return. A higher dollar can also put pressure on foreign debt denominated in dollars -- because as the dollar rises, so do interest payments. How to invest: Dodge & Cox Global Bond ( DODLX , 4.5%) can invest anywhere, but lately it has favored U.S. bonds, which were recently 48% of the portfolio. The fund's major international holdings show that it isn't afraid to invest in dicey areas -- it has 11% of its assets in Mexican bonds and 7% in United Kingdom bonds. Fidelity New Markets Income ( FNMIX , 5.6%), a Kip 25 fund, has been run by John Carlson since 1995. That makes him one of the few emerging-markets debt managers who ran a portfolio during the currency-triggered meltdown in 1997-98. He prefers debt denominated in dollars, which accounts for 94% of the portfolio. But he can be adventurous: About 6.5% of the fund's assets are in Turkey, which is currently struggling with a 19% inflation rate and a 14.7% unemployment rate. IShares Emerging Markets High Yield Bond ETF ( EMHY , $46, 6.2%) tracks emerging-markets corporate and government bonds with above-average yields. The holdings are denominated in dollars, so there's less currency risk. But this is not a low-risk holding. It's more than twice as volatile as the U.S. bond market, although still only half as volatile as emerging-markets stocks. SEE ALSO: 39 European Dividend Aristocrats for International Income GrowthJunk bonds -- or high-yield bonds, in Wall Street parlance -- aren't trash to income investors. Such bonds, which are rated BB+ or below, yield, on average, about 4.7 percentage points more than the 10-year T-note, says John Lonski, managing director for Moody's Capital Markets Research Group. What makes a junk bond junky? Typical high-yield bond issuers are companies that have fallen on hard times, or newer companies with problematic balance sheets. In good times, these companies can often make their payments in full and on time and can even see their credit ratings improve. The risks: You're taking an above-average risk that your bond's issuer will default. The median annual default rate for junk bonds since 1984 is 3.8%, according to Lonksi. In a recession, you could take a big hit. In 2008, the average junk bond fund fell 26%, even with reinvested interest.
How to invest: RiverPark Strategic Income ( RSIVX , 4.8%) is a mix of cash and short-term high-yield and investment-grade bonds. Managers choose bonds with a very low duration, to cut interest rate risk, and a relatively low chance of default. Vanguard High-Yield Corporate ( VWEHX , 5.5%), a Kip 25 fund, charges just 0.23% in expenses and invests mainly in the just-below-investment-grade arena, in issues from companies such as Sprint and Univision Communications. SPDR Bloomberg Barclays High Yield Bond ETF ( JNK , $36, 5.8%) charges 0.40% in expenses and tracks the Barclays High Yield Very Liquid index -- meaning that it invests only in easily traded bonds. That's a comfort in a down market because when the junk market turns down, buyers tend to dry up. The fund may lag its peers in a hot market, however, as some of the highest-yielding issues can also be the least liquid. Investors who are bullish on the economy might consider Northern High Yield Fixed Income Fund ( NHFIX , 7.0%). The fund owns a significant slice of the junkier corner of the bond market, with about 23% of its holdings rated below B by Standard & Poor's. These bonds are especially vulnerable to economic downturns but compensate investors willing to take that risk with a generous yield.
SEE ALSO: 12 Dividend Stocks That May Be Income Traps //www.dianomi.com/smartads.epl?id=4908You might be surprised to learn how much income you can generate from moving hydrocarbons from one place to another. Most MLPs are spin-offs from energy firms and typically operate gas or oil pipelines. MLPs pay out most of their income to investors and don't pay corporate income taxes on that income. Those who buy individual MLPs will receive a K-1 tax form, which spells out the income, losses, deductions and credits that the business earned and your share of each. Most MLP ETFs and mutual funds don't have to issue a K-1; you'll get a 1099 form reporting the income you received from the fund.
The risks: In theory, energy MLPs should be somewhat immune to changes in oil prices; they collect fees on the amount they move, no matter what the price. In practice, when oil gets clobbered, so do MLPs -- as investors learned in 2015, when the price of West Texas intermediate crude fell from $53 a barrel to a low of $35 and MLPs slid an average 35%. Oil prices should be relatively stable this year, and high production levels should mean a good year for pipeline firms. How to invest: Magellan Midstream Partners ( MMP , $62, 6.5%) has a 9,700-mile pipeline system for refined products, such as gasoline, and 2,200 miles of oil pipelines. The MLP has a solid history of raising its payout (called a distribution) and expects a 5% annual increase in 2019. The giant of MLP ETFs, Alerian MLP ETF ( AMLP , $10, 7.2%), boasts $9 billion in assets and delivers a high yield with reasonable expenses of 0.85% a year. Structured as a C corporation, the fund must pay taxes on its income and gains. That can be a drag on yields compared with MLPs that operate under the traditional partnership structure. EQM Midstream Partners ( EQM , $46, 10.1%) is active in the Appalachian Basin and has about 950 miles of interstate pipelines. The firm paid $4.40 in distributions per unit last year and expects to boost that to $4.58 in 2019.
SEE ALSO: 7 High-Yield MLPs to Buy as Oil Prices ClimbClosed-end funds (CEFs) are the forebears of mutual funds and ETFs. A closed-end fund raises money through an initial stock offering and invests that money in stocks, bonds and other types of securities, says John Cole Scott, chief investment officer, Closed-End Fund Advisors. The fund's share price depends on investors' opinion of how its picks will fare. Typically, the fund's share price is less than the current, per-share value of its holdings -- meaning that the fund trades at a discount. In the best outcome, investors will drive the price up to or beyond the market value of the fund's holdings. In the worst case, the fund's discount will steepen.
The risks: Many closed-end income funds borrow to invest, which can amplify their yields but increase their price sensitivity to changes in interest rates. Most CEFs have higher expense ratios than mutual funds or ETFs, too.
How to invest: Ares Dynamic Credit Allocation Fund ( ARDC , $15, 8.5%) invests in a mix of senior bank loans and corporate bonds, almost all of which are rated below investment grade. Borrowed money as a percentage of assets -- an important indicator for closed-end funds known as the leverage ratio -- is 29.6%, which is a tad lower than the average of 33% for closed-end funds overall. The fund's discount to the value of its holdings has been narrowing of late but still stands at 12.1%, compared with 11.2%, on average, for the past three years.
Advent Claymore Convertible Securities and Income Fund ( AVK , $15, 9.4%), run by Guggenheim Investments, specializes in convertible bonds, which can be exchanged for common stock under some conditions. The fund also holds some high-yield bonds. Currently, it's goosing returns with 40% leverage, which means there's above-average risk if rates rise. For intrepid investors, the fund is a bargain, selling at a discount of 10.6%, about average for the past three years.
Clearbridge Energy Midstream Opportunity ( EMO , $9, 9.7%) invests in energy master limited partnerships. It sells at a 12.1% discount, compared with a 6.6% average discount for the past three years. Its leverage ratio is 33% -- about average for similar closed-end funds.SEE ALSO: The 10 Best Closed-End Funds (CEFs) for 2019
Mar 31, 2019 | medium.com
While the president celebrated the end of the Mueller inquiry this week, the risk of a recession is rising
Mar 31, 2019 | www.bloomberg.com
The global bond market's soaring performance has left investors queasy about the ride ahead.
The Bloomberg Barclays Global Aggregate index has earned 2.3 percent through March 28, its best quarter since mid-2017. But with yields sinking across major sovereign markets, investors now face a dilemma. Buying government bonds at these levels is perilous because economic data may improve, while taking more risk could leave investors nastily exposed to a global downturn.
Mar 26, 2019 | peakoilbarrel.com
Watcher 03/24/2019 at 10:25 amRe shale financing . . . Folks should go and read financial articles from Wednesday afternoon of this week.
The Fed basically took a sledgehammer to their dot charts. In the ongoing desire on their part to be transparent they have, until Wed., projected their expectations for increases to short-term rates over the next two years to be 4 increases this year and 4 next year.
As of Wednesday, that's all gone. The new dot chart says zero increases this year and at most 1 next year. The 10-year treasury immediately cratered its yield to 2.5something percent. Still falling. Overseas we see Germany tracking, and Japan, and more and more maturities on their yield curves return to negative. Not just real negative. Outright nominal negative.
This is something that Financial media does not talk about. Negative nominal interest rates from major country government bonds. How could they talk about it? It is utterly obvious that this specific reality demonstrates that the entirety of all analyses has no meaning. Their only defense is silence. Shale would prefer that it stay that way.
The Fed also announced an end to balance sheet normalization, which is euphemism for trying to get rid of all of those bonds and MBS that were purchased as part of QE. They are ending their purchases late this year. They dare not continue the move towards normal. I believe that leaves their balance sheet still holding in excess of 3 trillion. That's not normalization, sports fans. And it has been TEN YEARS.They havent been able to get to "normal" in ten years, and as of Wed, they will stop trying.
The Treasury notes are the underlying basis for what shale companies have to pay to borrow money. Thoughts by folks here that the monetary gravy train will shut off shale drilling need rethinking. Bernanke changed everything. Forever.
These Fed actions are indistinguishable from whimsy. Imagining that Powell is Peak Oil cognizant and is focused on shale is a tad extreme, but only a tad.
I recall a Bernanke quote during the crisis that made clear he knew what Peak would mean -- at any price.
Mar 25, 2019 | www.bloomberg.com
"Bond markets globally, along with dovish central banks, have been telling us a slowdown is on the way," said Jeffrey Halley, senior market analyst at Oanda Corp. in Singapore. "Some parts of the world will be better equipped than others to handle this. The U.S. can at least cut rates and apply monetary tools, while things could be worse for Europe and Japan, where they cannot."
Mar 22, 2019 | www.zerohedge.com
He said the stock market, for now, "likes the fact that they (the Fed) aren't going to give them any problems."
But things could change quickly and dramatically, he said, with his final comment, the most ominous:
"It feels eerily like '07," he said.
" The stock market is near its high and the economy is noticeably weaker - and yet everyone is saying 'Everything is Great! '"
And just in case you wondered how bad the underlying is - despite equity market's enthusiasm - Citi's Economic Data Change index as its worst level since 2009...
Mar 12, 2019 | www.zerohedge.com
Today at 4:15pm EDT, DoubleLine founder Jeff Gundlach is holding his latest live webcast open to investors and casual listeners, titled enticingly 'Highway to Hell', and which we assume will discuss either Brexit, the US-China trade deal, the long-term US debt picture or how this, latest asset bubble finally ends.
Readers can register and follow it live at this address , or clicking on the image below
As usual, we will grab and highlight the most interesting charts from Gundlach's presentation as they come in.
* * *
Gundlach, as usual, starts with one of his favorite charts, the one showing the global central bank balance sheet level juxtaposed to the global market, as the background for the Fed's "180 degree turn" in the stock market's recent rebound, which is understandable since the "S&P was and is in a bear market."
... ... ...If that wasn't bad enough, Gundlach also said that stocks will take out the December low during the course of 2019 and markets will roll over earlier than they did last year.
Shifting from the market to the economy, Gundlach shows that global economic momentum is getting worse across the globe... Gundlach then highlights the sudden collapse in global trade, which would suggest the world is in a global recession.
And yet at the same time, US economic data, at least in the labor market, has never been stronger as Gundlach shows:
Of course, another big red flag is the collapse in December retail sales, and despite the sharp rebound in the January print as we saw yesterday, Gundlach highlights the sharp drop in the 6 month average and highlights it as another potential recessionary risk factor.
Going back to one of his favorite topics, the relentless growth of US debt, Gundlach shows the following chart of debt by sector. Needless to say, it is troubling, and as Gundlach said.
And tied to that, the following new warning on the US interest expense: "The US interest expense is projected by the CBO to explode higher starting yesterday"
Gundlach then went on a rant against MMT, calling it a "crackpot" theory, which is based on a "completely fallacious argument", and adds that "People who have PhDs in economics actually are buying the complete nonsense of MMT which is used to justify a massive socialist program."
Gundlach also discusses the US trade deficit, which recently soared, saying that "the trade deficit is not shrinking but expanding," and the goods deficit is at "an all-time record", which according to Gundlach may hurt Trump's re-election chances.
Having predicted president Trump early, when everyone else was still mocking him, Gundlach admits that he is "not really sure what's going to happen,'' when it comes to the next election. "If you ran on promising a lesser trade deficit'' and elimination of national debt, and both have "exploded" higher, Gundlach thinks it's hard to say that you're winning.
And speaking of the next president, Gundlach suggests that if the economy falls into recession and Trump gets thrown out, we might get the chance to see how MMT, i.e. helicopter money, really works with the next, socialist, president.
Perhaps this is also why to Gundlach "the next big move for the dollar is lower."
Looking ahead, Gundlach also touches on the future of monetary policy, and once again highlights the discrepancy between the bond market, which expects half a rate cut, and the Fed's dot plot which expects three hikes in 2019-2020.
What happens? To Gundlach, "Fed expectations are likely to show capitulation to the Fed this time...the bond market is having none of the Fed's two dots that they revealed in December." He then adds that the Fed "will absolutely drop the 2019 dot," suggesting it may be dropped to 1/2 a hike.
Let it Go , 41 minutes ago linkthemarketear , 1 hour ago link
Optimism that a new trade deal will occur between America and China has driven stock markets higher even as data continues to emerge confirming economies across the world continue to slow. It seems much of the current market fervor is based on optimism and hope falls into the category of "irrational exuberance" a term that Allen Greenspan has in the past used to describe unbridled enthusiasm. More on the realities being ignored in the following article.
https://Unbridled Market Euphoria Rooted In Optimism And HopeGUS100CORRINA , 2 hours ago link
SPX versus US 10 year continues widening. https://themarketear.com/posts/cFmMM1H8UEcowdiddly , 2 hours ago link
I think with the increasing number of DOOM scenarios issued lately, I may need to go see a therapist.
THE SKY TRULY MAY INDEED BE FALLING!! PROBABLY NOT!!! FEAR promotion is truly running wild!ElTerco , 2 hours ago link
Hmm....Kinda strange call there Jeffy Jeff on those higher interest rates.
Especially considering just today where the 1yr yield is higher than...get this, the 2yr, the 3yr, the 5yr aaaaand the 7year bond. Kinda strange setup for rates exploding higher isn't it? Or if you like to think of it as a belly that sumbuck is getting one BIG pot gut.
NOT BUYING IT BUDDY.Bam_Man , 3 hours ago link
When the BBBs start toppling like dominoes, you'll understand better.
https://www.zerohedge.com/news/2018-11-22/64-trillion-question-how-many-bbb-bonds-are-about-be-downgradedKeter , 2 hours ago link
This guy just REFUSES to give up with his "higher interest rates" schtick.
He was DEAD WRONG with his call for 4.00%-4.50% on the 10-year UST last year.
He simply refuses to acknowledge that short-tern interest rates will be NEGATIVE in the US within the next 18 months.
Politicians are imbeciles and have no remedies. The US is the least ugly pig of the bunch. The EU needs major structural tax and regulatory reform; open borders with a pervasive social welfare state has proven a recipe for disaster. The US is in similar circumstances, but its tax and regulatory environment are at least rational. It requires massive entitlement and spending reforms with some minor tax hikes on the top end marginal income and capital gains brackets.
Mar 12, 2019 | www.zerohedge.com
Today at 4:15pm EDT, DoubleLine founder Jeff Gundlach is holding his latest live webcast open to investors and casual listeners, titled enticingly 'Highway to Hell', and which we assume will discuss either Brexit, the US-China trade deal, the long-term US debt picture or how this, latest asset bubble finally ends.
Readers can register and follow it live at this address , or clicking on the image below
As usual, we will grab and highlight the most interesting charts from Gundlach's presentation as they come in.
* * *
Gundlach, as usual, starts with one of his favorite charts, the one showing the global central bank balance sheet level juxtaposed to the global market, as the background for the Fed's "180 degree turn" in the stock market's recent rebound, which is understandable since the "S&P was and is in a bear market."
Mar 10, 2019 | finance.yahoo.com
"At this point in the cycle, a pickup in inflation will generally lead to corporate margin compression, which is potentially more supportive of maintaining a long duration stance," Bartolini, lead portfolio manager for U.S. core bond strategies, said after the jobs figures. He sees annual CPI remaining around this report's consensus of 1.6 percent -- the slowest since 2016 -- for a while.
Benchmark 10-year yields enter the week at 2.63 percent, close to the lowest level in two months. In the interest-rate options market, traders have been ramping up positions that target lower yields in five- and 10-year notes.
The Fed is pretty much DONE with rate hikes, as paying the INTEREST on, 22 Trillion in Debt will get,.. UGLIER and UGLIER ! Especially with, all the new,.. Tax and SPEND Demo'Rat Liberals, coming into, Congress ! "We the People", will be,.. TOAST !!
I'm HOLDING, my "Floating Rate" senior secured, Bond CEF's and my Utility and Tech, CEF's, too ! Drawing NICE Dividends,.. Monthly !
The World is NOT ending for, the USA,.. THANKS,.. to Trump !
Feb 05, 2019 | www.nasdaq.com
Famed investor Louis Navellier is our resident growth investing expert. Here's what he wrote to subscribers in his February issue of Growth Investor :
... ... ...
Beyond the larger macro issues Louis and Neil point out, U.S. oil prices are currently benefitting from the U.S. imposed sanctions on Petróleos de Venezuela SA that came last Monday. Petróleos is Venezuela's state-owned oil giant. On this news, Neil writes:
The one tailwind on the flip-side of Venezuela is for crude oil. U.S. sanctions mean Venezuelan crude will not be flowing to the U.S. This is good news for crude oil. U.S. West Texas Intermediate (WTI) is sitting nicely at $53.44. This is helpful for U.S. petroleum companies
One of Neil's suggested ways to play energy is XLE - the SPDR Energy Select Sector ETF. It's one of the largest and most liquid energy ETFs in the world. Back to Neil:
Meanwhile, our overall up, down and midstream synthetic holding in the Energy Select SPDR ETF (XLE) has the benefit of exposing us to the profitability of the midstream pipelines and the refiners as well as the producers. I continue to see value across this industry, which is capitalizing on the improvement in natural gas particularly in the liquified natural gas (LNG) market.
In the chart below, you can see XLE rallying off its December lows, trading sideways for the second half of January, then beginning to push higher over the last week (notice it breaking through its 50-day moving average last week - the blue line).
Neil likes XLE under $70.
Jan 17, 2019 | www.nasdaq.comNEW YORK, Jan 17 (Reuters) - U.S. fund investors charged into high-yield "junk" bonds during the latest week, pouring in $3.3 billion, the most cash flowing into that market since late 2016, Lipper said on Thursday, boosted by soothing words by Federal Reserve Chairman Jerome Powell.
Underscoring investors' appetite for some risk-taking, investors pulled $15 billion net cash from U.S.-based money market funds, according to the Refinitiv research service. For their part, U.S.-based equity mutual funds - which exclude exchange-traded funds - posted inflows of $4.8 billion, Lipper data showed.
Jan 20, 2019 | economistsview.typepad.com
anne , January 17, 2019 at 09:35 AMhttp://cepr.net/blogs/beat-the-press/does-william-cohan-s-nyt-tirade-against-low-interest-rates-make-any-sense
January 17, 2019
Does William Cohan's New York Times Tirade Against Low Interest Rates Make Any Sense?
By Dean Baker
It doesn't as far as I can tell. Cohan has been on a rant * for years about how high risk corporate bonds are going to default in large numbers and then ... something. It's not clear why most of us should care if some greedy investors get burned as a result of not properly evaluating the risk of corporate bonds. No, there is not a plausible story of a chain of defaults leading to a collapse of the financial system.
But even the basic proposition is largely incoherent. Cohan is upset that the Federal Reserve has maintained relatively low, by historical standards,interest rates through the recovery. He seems to want the Fed to raise interest rates. But then he tells readers:
"After the fifth straight quarterly rate increase, Mr. Trump, worried that the hikes might slow growth or even tip the economy into recession, complained that Mr. Powell would 'turn me into Hoover.' On January 3, the president of the Federal Reserve Bank of Dallas said the Fed should assess the economic outlook before raising short-term interest rates again, a signal that the Fed has hit pause on the rate hikes. Even Mr. Powell has signaled he may be turning more cautious."
It's not clear whether Cohan is disagreeing with the assessment of the impact of higher interest rates, not only by Donald Trump, but also the president of the Dallas Fed, Jerome Powell, and dozens of other economists.
Higher interest rates will slow growth and keep people from getting jobs. The people who would be excluded from jobs are disproportionately African American, Hispanic, and other disadvantaged groups in the labor market. Higher unemployment will also reduce the bargaining power of tens of millions of workers who are currently in a situation to secure real wage increases for the first time since the recession in 2001.
If Cohan had some story of how bad things would happen to the economy if the Fed doesn't raise rates then perhaps it would be worth the harm done by raising rates, but investors losing money on corporate bonds doesn't fit the bill.
Jan 13, 2019 | economistsview.typepad.com
im1dc , January 08, 2019 at 08:44 AMGoldman's Bond Desk just called for a slower and lower US GDP in 2019
"Goldman cuts 10-year Treasury yield target for 2019 to 3%"
By Sunny Oh...Jan 8, 2019...10:45 a.m. ET
"Goldman Sachs has rolled back its call for much higher rates in U.S. government bonds in the U.S., though it still expects a gradual climb from the current muted levels in the Treasury market.
In a Tuesday note, Goldman Sachs said they expect the 10-year yield TMUBMUSD10Y, +0.06% to hit 3% by year-end, a 50 basis point cut from their forecast of 3.5%. Since last week, the benchmark bond yield has steadily risen to 2.710% Tuesday, after hitting an 11-month low of 2.553% last Thursday, according to Tradeweb data.
Bond prices fall as yields climb."...
Jan 13, 2019 | finance.yahoo.com
Confidence in continued economic growth has been waning. A huge majority of chief financial officers around the world say a recession will happen by the end of 2020. Most voters think one will hit by the end of this year.
Now the Goldman Sachs economic research team says that the market shows a roughly 50% chance of a recession over the next year, according to Axios.
Goldman Sachs looked at two different measures: the yield curve slope and credit spreads. The former refers to a graph of government bond interest rates versus the years attaining maturity requires. In a growing economy, interest rates are higher the longer the investment because investors have confidence in the future. A frequent sign of a recession is the inversion of the slope, when investors are uncertain about the future, so are less willing to bet on it.
Credit spreads compare the interest paid by government bonds, which are considered the safest. Corporate bonds, which are riskier, of the same maturity have to offer higher interest rates. As a recession approaches, credit spreads tend to expand, as investors are more worried about companies defaulting on their debt.
However, despite the signs, Goldman Sachs assumes the indicators are wrong and that "recession risk remains fairly low, in the neighborhood of 15% over the next year." The bank has predicted that the S&P 500 will finish 2019 at 3,000, up from the current value just below 2,600.
Jan 12, 2019 | finance.yahoo.com
(Bloomberg) -- Jeffrey Gundlach said yet again that the U.S. economy is gorging on debt.
Echoing many of the themes from his annual "Just Markets" webcast on Tuesday, Gundlach took part in a round-table of 10 of Wall Street's smartest investors for Barron's. He highlighted the dangers especially posed by the U.S. corporate bond market.
Prolific sales of junk bonds and significant growth in investment grade corporate debt, coupled with the Federal Reserve weaning the market off quantitative easing, have resulted in what the DoubleLine Capital LP boss called "an ocean of debt."
The investment manager countered President Donald Trump's claim that he's presiding over the strongest economy ever. The growth is debt-based, he said.
Gundlach's forecast for real GDP expansion this year is just 0.5 percent. Citing numbers spinning out of the USDebtClock.org website, he pointed out that the U.S.'s unfunded liabilities are $122 trillion -- or six times GDP.
"I'm not looking for a terrible economy, but an artificially strong one, due to stimulus spending," Gundlach told the panel. "We have floated incremental debt when we should be doing the opposite if the economy is so strong."
Gundlach is coming off another year in which his Total Return Bond Fund outperformed its fixed-income peers. It returned 1.8 percent in 2018, the best performance among the 10 largest actively managed U.S. bond funds, according to data compiled by Bloomberg.
Gundlach expects further declines in the U.S. stock market, which recently have steadied after reeling for most of December since the Great Depression. Equities will be weak early in the year and strengthen later in 2019, effectively a reversal of what happened last year, he said.
"So now we are in a bear market, which isn't defined by me as stocks being down 20 percent. A bear market is determined by the way stocks are acting," he said.
Rupal Bhansali, chief investment officer of International & Global Equities at Ariel Investments, picked up on Gundlach's debt theme in the Barron's cover story. Citing General Electric's woes, she urged investors to focus more on balance-sheet risk rather than whether a company could beat or miss earnings. Companies with net cash are worth looking at, she said.
To contact the reporters on this story: James Ludden in New York at email@example.com;Hailey Waller in New York at firstname.lastname@example.org
To contact the editors responsible for this story: Matthew G. Miller at email@example.com, Ros Krasny
For more articles like this, please visit us at bloomberg.com
Dec 20, 2018 | www.project-syndicate.org
A decade after the subprime bubble burst, a new one seems to be taking its place in the market for corporate collateralized loan obligations. A world economy geared toward increasing the supply of ﬁnancial assets has hooked market participants and policymakers alike into a global game of Whac-A-Mole.
A recurrent topic in the financial press for much of 2018 has been the rising risks in the emerging market (EM) asset class. Emerging economies are, of course, a very diverse group. But the yields on their sovereign bonds have climbed markedly, as capital inflows to these markets have dwindled amid a general perception of deteriorating conditions . 1
Historically, there has been a tight positive relationship between high-yield US corporate debt instruments and high-yield EM sovereigns. In effect, high-yield US corporate debt is the emerging market that exists within the US economy (let's call it USEM debt). In the course of this year, however, their paths have diverged (see Figure 1). Notably, US corporate yields have failed to rise in tandem with their EM counterparts.
What's driving this divergence? Are financial markets overestimating the risks in EM fixed income (EM yields are "too high")? Or are they underestimating risks in lower-grade US corporates (USEM yields are too low)?
Taking together the current trends and cycles in global factors (US interest rates, the US dollar's strength, and world commodity prices) plus a variety of adverse country-specific economic and political developments that have recently plagued some of the larger EMs, I am inclined to the second interpretation.
In what is still a low-interest-rate environment globally, the perpetual search for yield has found a comparatively new and attractive source in the guise of collateralized loan obligations (CLOs) within the USEM world. According to the Securities Industry and Financial Markets Association, new issues of "conventional" high-yield corporate bonds peaked in 2017 and are off significantly this year (about 35% through November). New issuance activity has shifted to the CLO market, where the amounts outstanding have soared, hitting new peaks almost daily. The S&P/LSTA US Leveraged Loan 100 Index shows an increase of about 70% in early December from its 2012 lows (see Figure 2), with issuance hitting record highs in 2018. In the language of emerging markets, the USEM is attracting large capital inflows.
These CLOs share many similarities with the mortgage-backed securities that set the stage for the subprime crisis a decade ago. During that boom, banks bundled together loans and shed risk from their balance sheets. Over time, this fueled a surge in low-quality lending, as banks did not have to live with the consequences.
Likewise, for those procuring corporate borrowers and bundling corporate CLOs, volume is its own reward, even if this means lowering standards for borrowers' creditworthiness. The share of "Weakest Links" corporates rated B- or lower (with a negative outlook) in overall activity has risen markedly since 2013-2015. Furthermore, not only are the newer issues coming from a lower-quality borrower, the covenants on these instruments provisions designed to ensure compliance with their terms and thus minimize default risk have also become lax. Covenant-lite issues are on the rise and now account for about 80% of the outstanding volume.
As was the case during the heyday of mortgage-backed securities, there is great investor demand for this debt, reminiscent of the "capital inflow problem" or the " bonanza " phase of the capital flow cycle. A recurring pattern across time and place is that the seeds of financial crises are sown during good times (when bad loans are made). These are good times, as the US economy is at or near full employment.
The record shows that capital-inflow surges often end badly. Any number of factors can shift the cycle from boom to bust. In the case of corporates, the odds of default rise with mounting debt levels, erosion in the value of collateral (for example, oil prices in the case of the US shale industry), and falling equity prices. All three sources of default risk are now salient, and, lacking credible guarantees, the CLO market (like many others) is vulnerable to runs, because the main players are lightly regulated shadow banking institutions.
And then there are the old and well-known concerns about shadow banking in general, which stress both its growing importance and the opaqueness of its links with other parts of the financial sector. Of course, we also hear that a virtue of financing debt through capital markets rather than banks is that the shock of an abrupt re-pricing or write-off will not impair the credit channel to the real economy to the degree that it did in 2008-2009. Moreover, compared to mortgage-backed securities (and the housing market in general), the scale of household balance sheets' exposure to the corporate-debt market is a different order of magnitude.
A decade after the subprime bubble burst, a new one seems to be taking its place a phenomenon aptly characterized by Ricardo Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas as " Financial 'Whac-a-Mole .'" A world economy geared toward increasing the supply of ﬁnancial assets has hooked us into a global game of waiting for the next bubble to emerge somewhere.
Like the synchronous boom in residential housing prior to 2007 across several advanced markets, CLOs have also gained in popularity in Europe. Higher investor appetite for European CLOs has predictably led to a surge in issuance (up almost 40% in 2018). Japanese banks, desperately seeking higher yields, have swelled the ranks of buyers. The networks for financial contagion, should things turn ugly, are already in place. 1 Carmen M. Reinhart is Professor of the International Financial System at Harvard University's Kennedy School of Government. Douglas Leyendecker Dec 23, 2018 The most important questions isn't when or why this bubble will burst but how we got here in the first place. It all starts with BAD economic and social policies. Now we require more and more "money" to keep the wheels on. Bubble to bubble...this is where we are in the developed world today. When the reboot finally hits there won't be any cryptocurrency because there won't be any internet. This is what happens in a fiat currency system. Read More
- MARCO TEAMNEURS Dec 23, 2018 Certain deterministic outcome such as the one presented by Professor Carmen M. Reinhart fits with the Idols refereed by Francis Bacon in Novum Organum. We will be using financialization until it will be not relevant because something else had emerged or most of us de-merged. This time might be that we are on those moments where something relevant is moving under our feet.
What seems to be making the difference is strength of soft/hard power the CCP (Communist Chinese Party) has to leverage decisions over the world. What happened when in the Subprime Crises Russia called China to together attack capital markets of USA and China refused (according to Mr. Henry Paulson) might have not the same reply this time. Read less
Paul Daley Dec 23, 2018 Good article. But -- do I dare say it -- this time may be different. As Reinhart points out, CLOs do not have heavily engaged public institutions, as was the case with mortgage backed securities and sovereign debt. A collapse in CLO prices would fall largely on private shoulders. And, after their first experiments with QE, central banks should have a better grip on the risks and consequences of asset price support programs in encouraging and sustaining asset price bubbles, and be prepared this time to employ income support measures to sustain real economic activity, if necessary.nigel southway Dec 22, 2018 The best course of action is stop the easy movement of capital across borders that way it stops the phoney wealth transactions caused by a foolish focus on the global economy start more national centered wealth funds Jacob Alhadeff Dec 20, 2018 I had no idea any of this was going on. This was very informative, but I don't know yet exactly what to do with this information. I'm cynical about our ability to avoid such bubbles, but we can prepare for them. In terms of how low/middle income Americans can prepare what would anyone suggest? Also, I'm not looking for advice on investing decisions Read less
- nigel southway Dec 24, 2018 We need to come to terms with who owns capital. It's mostly the nation that created it. The capitalists should only rent it and the traders and globalists have zero rights to it hence the justification for stricter controls
Jan 03, 2019 | finance.yahoo.com
Berkshire, with the third-highest credit rating from both Moody's Investors Service and S&P Global Ratings, is expected to price the debt on Thursday with a spread of 150 to 155 basis points above benchmark Treasuries. The 30-year U.S. yield fell to 2.91 percent on Thursday, the lowest since January 2018.
The other interpretation is that the company chose to refinance with long-term fixed-rate debt because it sees the big drop in 30-year yields as unsustainable. After all, if a borrower expects interest rates to rise in the future, it would prefer to lock in a fixed rate now rather than face higher payments down the road.
Dec 05, 2018 | www.bradford-delong.com
Contra Tim Duy, The Lack of Federal Reserve Maneuvering Room Is Very Worrisome...
This , by the every sharp Tim Duy, strikes me as simply wrong: Contrary to what he says, the Fed has room to combat the next crisis only if the next crisis is not really a crisis, but only a small liquidity hiccup in the financial markets. Anything bigger, and the Federal Reserve will be helpless, and hapless.
Look at the track of the interest rate the Federal Reserve controls -- the short safe nominal interest rate:
In the past third of a century, by my count the Federal Reserve has decided six times that it needs to reduce interest rates in order to raise asset prices and try to lift contractionary pressure off of the economy -- that is, once every five and a half years. Call these: 1985, 1987, 1991, 1998, 2000, and 2007.
Continue reading "Contra Tim Duy, The Lack of Federal Reserve Maneuvering Room Is Very Worrisome..." "
Nov 19, 2018 | safehaven.com
Three things are certain: death, taxes, and that the already thin gap between human trader and algo is narrowing ever further.
AllianceBernstein's new virtual assistant can now suggest to fixed income portfolio managers what the best bonds may be to purchase using parameters such as pricing, liquidity and risk, according to Bloomberg . The machine has numerous advantages to humans: "she" can scan millions of data points and identify potential trades in seconds. Plus she never needs to take a cigarette or a bathroom break.
The new virtual assistant, dubbed Skynet 2.0 "Abbie 2.0", specializes in identifying bonds that human portfolio managers have missed. She can also help spot human errors and communicate with similar bots like herself at other firms to arrange trades, making humans redundant. This is the second iteration of AllianceBernstein's electronic assistant which debuted in January of this year, but could only build orders for bonds following precise input from humans.
Sourcing bonds that are easy to trade is done by Abbie 2.0 reaching out to another AB system called ALFA, which stands for Automated Liquidity Filtering and Analytics. The AFLA system gathers bids and asks from dealers and electronic trading venues to work out the best possible trades.
For now, humans are still required: Jeff Skoglund, chief operating officer of fixed income at AB told Bloomberg that "humans and machines will need to work closer than ever to find liquidity, trade faster and handle risks. Our hope is that we grow and use people in ways that are more efficient and better leverage their skills."
What he really means is that his hope is to fire as many expensive traders and PMs as possible to fatten the company's profit margins. Which is why the virtual assistant already helps support a majority, or more than 60 percent of AllianceBernstein's fixed income trades. The "upgrades" that are coming for the new assistant will help it include high-yielding investment grade bonds, before expanding to other more complex markets in the coming months. AB says that they will still rely on humans to make the final decisions on trades. For now. Related: IBM Launchs Global Payments System With New Stablecoin
While the original version of the assistant had to be told how much a portfolio manager wanted of a specific bond, the new version now mines data pools to be proactive, making sizing suggestions to portfolio managers. Among other things, the assistant looks at ratings of companies, capital structure and macro data such as social and geopolitical risks.
This is just another step in the industry becoming machine oriented in order to help cut costs, save time and avoid errors, especially in relatively illiquid bond markets. Liquidity could become even more of a factor if the economy slips into recession over the next couple of years.
Electronic trading in general is becoming more pronounced in fixed income as banks act more like exchanges instead of holding bonds on their balance sheet. All the while, regulations have encouraged the shifting of bond trading to exchanges. More than 80 percent of investors in high-grade bonds use electronic platforms, accounting for 20 percent of volume, according to Bloomberg.
Skoglund concluded, "We expect to be faster to market and capture opportunities we otherwise would not have caught by using this system. There's a liquidity problem right now that could become significantly more challenging in a risk-off environment."
Nov 15, 2018 | investornews.vanguard
link to comment sectionWe're introducing a new active bond fund that allows you to take advantage of Vanguard's extensive global investment management capabilities and expertise. Vanguard Global Credit Bond Fund ( Admiral™ Shares: VGCAX ; Investor Shares: VGCIX ) gives you unique access to the global credit market, which includes both U.S. and international investments. The fund will be managed by the Vanguard Fixed Income Group, which has more than 35 years of experience managing active bond portfolios.
Key potential benefits of the fund include:
Which bond fund is right for you?
- Lower volatility. The fund's global diversification reduces the impact of country-specific risks. This can help lower volatility relative to a U.S.-only credit fund.
- Higher returns. Rather than government-guaranteed bonds, the fund will hold mostly investment-grade credit bonds. These corporate and noncorporate obligations typically offer higher yields than their government-guaranteed counterparts. In addition, the fund has a global -- rather than a U.S.-only -- scope. This creates greater opportunity for value-added investments.
- Competitive value through active management. The fund will seek to deliver consistent outperformance with a goal of beating its benchmark, the Bloomberg Barclays Global Aggregate Credit Index (USD Hedged). It will do this at a lower cost than most competing funds, with expense ratios of 0.25% for Admiral Shares and 0.35% for Investor Shares. For comparison, the asset-weighted average expense ratio of its active peer funds in the world bond category is 0.65%.*
We've recently expanded our bond offerings to provide more options for diversification and income. While more choices can help you build a better portfolio, they can also make it tricky to decide which funds are right for you.
Here's a chart that shows, at a glance, the main differences between 3 similar bond funds:
Making the most of Vanguard's management resources
Global or U.S.-only Investment type Bond issuer types It might be right for you if you want: Vanguard Global Credit Bond Fund Global Actively managed mutual fund Investment-grade corporate and government-related entities An actively managed bond fund that provides global exposure to nongovernment bonds. Vanguard Total World Bond ETF Global Index ETF (exchange-traded fund) Broad investment-grade market coverage of Treasuries and government-related, securitized, and corporate debt An all-in-one, low-cost global bond ETF. Vanguard Intermediate-Term Investment-Grade Fund U.S. Actively managed mutual fund Investment-grade corporate and government-related entities An actively managed bond fund that focuses on U.S., nongovernment exposure.
Vanguard Global Credit Bond Fund will complement Vanguard's existing suite of 25 actively managed fixed income funds, not including Vanguard's actively managed money market funds.
Vanguard launched its first internally managed active fixed income fund in 1982 and the world's first bond index fund in 1986. Vanguard is one of the world's largest fixed income fund managers with approximately $1.3 trillion in assets under management.** Over $600 billion of those assets are in actively managed fixed income funds (including money markets).
The Vanguard Fixed Income Group has more than 175 global fixed income professionals, 90 of whom are part of the active taxable fixed income team, including over 30 global credit research analysts around the world.
Vanguard Global Credit Bond Fund is the first Vanguard fund of its kind. This globally diversified, actively managed bond product capitalizes on Vanguard's extensive global investment capabilities and global credit expertise.
*Source: Morningstar, Inc., as of September 30, 2018.
**Data as of September 30, 2018.
Oct 12, 2018 | www.zerohedge.com
Yields to maturity on 10-year U.S. Treasury notes are now at their highest level since April 2011. The current yield to maturity is 3.21%, a significant rise from 1.387% which the market touched on July 7, 2016 in the immediate aftermath of Brexit and a flight to quality in U.S. dollars and U.S. Treasury notes.
The Treasury market is volatile with lots of rallies and reversals, but the overall trend since 2016 has been higher yields and lower prices.
The consensus of opinion is that the bull market that began in 1981 is finally over and a new bear market with higher yields and losses for bondholders has begun. Everyone from bond guru Bill Gross to bond king Jeff Gundlach is warning that the bear has finally arrived.
It's true that bond yields have backed up sharply and prices have come down in recent months. Yet, we've seen this movie before. Yields went from 2.4% to 3.6% between October 2010 and February 2011 before falling to 1.5% in June 2012.
Yields also rose from 1.67% in April 2013 to 3.0% in December 2013 before falling again to 1.67% by January 2015. In short, numerous bond market routs have been followed by major bond market rallies in the past ten years.
To paraphrase Mark Twain, reports of the death of the bond market rally have been "greatly exaggerated." The bull market still has legs. The key is to spot the inflection points in each bear move and buy the bonds in time to reap huge gains in the next rally.
That's where the market is now, at an inflection point. Investors who ignore the bear market mantra and buy bonds at these levels stand to make enormous gains in the coming rally.
The opportunity is illustrated in the chart below. This chart shows relative long and short positions in ten major trading instruments based on futures trading data. The 10-year U.S. Treasury note is listed as "10Y US."
As is shown, this is the most extreme short position in markets today. It is even more short than gold and soybeans, which are heavily out of favor. It takes a brave investor to go long when the rest of the market is so heavily short.
Sep 07, 2016 | www.fool.com
If you have some cash you'd like to preserve, this could be a better option than a savings account.
Matthew Frankel ( TMFMathGuy )
The Vanguard Prime Money Market Fund (NASDAQMUTFUND: VMMXX) is one of Vanguard's lowest-risk investment options. Best for short-term savings, the fund offers competitive interest rates and a stable share price. However, for investors seeking any acceptable level of long-term investment performance, it's generally best to look at other options.What is the Vanguard Prime Money Market Fund?
The Vanguard Prime Money Market Fund is designed as an alternative to keeping money in cash, or in a savings account. The primary objective is to preserve investors' principal by maintaining a portfolio of short-term, high-quality assets. This includes CDs, short-term U.S. Treasury Bills, and other money market assets. 100% of the fund's investments are of top credit quality (in the top two possible credit categories), and the average maturity of the fund's assets is just 39 days.
Image source: Getty Images.
The fund maintains a share price of $1.00 at all times and makes income distributions on a monthly basis. Since the fund invests in short-term money market instruments, it tends to pay a relatively low yield, but it can fluctuate considerably depending on the interest rate environment.
As of this writing, the fund's distribution yield is 0.48%, but it has been as low as 0.01% in recent years. However, the fund's average return since its 1975 inception has been 5.18%. When interest rates normalize, the fund's yield should rise to a level closer to that historic average, and as you can see, there have been times in the past when the fund's yield was significantly higher than the average.
VMMXX Dividend Yield (TTM) data by YCharts .
The fund's current expense ratio is 0.16% and requires a minimum $3,000 initial deposit. For investors with extremely large stockpiles of cash ($5 million or more), the fund is also available in Admiral Shares, which have a lower 0.10% expense ratio. Investors have the ability to transfer money electronically to and from their bank account, so the fund is designed to be just as convenient as a savings account, but with a slightly higher yield.Advantages
There are a few advantages to investing in the fund. To name a few of the best ones:
However, investors should consider the following drawbacks:
- Stability: The fund maintains a $1.00 share price. In other words, the risk of losing your investment principal is virtually zero.
- Liquidity: The shares can be readily redeemed for $1.00.
- Low cost: The fund's expense ratio is just 0.16%.
- Income: The Vanguard Prime Money Market Fund pays a better yield than most savings accounts, checking accounts, and short-term CDs do. Although the fund's current annualized yield is only about 0.50%, it's far better than the sub-0.10% returns many savings accounts are offering.
- Monthly income: The fund distributes income to investors on a monthly basis. This could become a more attractive benefit once interest rates normalize, but it's still better than having to wait for a quarterly or annual payout.
Who should invest in the fund?
- Low yield: Compared with bonds and dividend stocks, money market assets don't pay very much. Investors who want income on a long-term basis can get significantly higher checks by investing in bonds, without taking on much more risk.
- Purchasing power decline: While the fund generates some income, it's important to point out that its returns are unlikely to keep up with inflation, especially in the near term. For example, if the inflation rate is 2% and the fund returns only 0.5%, your investment is actually losing 1.5% in purchasing power each year.
- No principal appreciation: The Prime Money Market Fund maintains a $1.00 share price, no more, no less. So, while you won't lose money, you don't have the potential to make any either.
I'd recommend the Vanguard Prime Money Market Fund as a short-term investment vehicle only. For example, if you have $10,000 that you know you'll need in two months to pay for your kid's college tuition, the fund is a good way to ensure that you won't lose any of it, and to generate a little bit of income at the same time. Or, if you have some emergency savings and don't want to risk losing any of it by investing, this could be a good option.
As far as a long-term investment, I suggest that virtually 100% of all investors' portfolios be in either stocks or bonds (or funds that invest in them). Stocks provide the growth younger investors need, and bonds can provide the income retirees need without excessive risk. If you're retired and feel more comfortable with some cash, this could be a good option for a small percentage of your portfolio, but that's about it.
... ... ...
Jul 11, 2018 | www.kiplinger.com
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Since August 2007, when Reckmeyer and the quants took over, Equity-Income has returned an annualized 8.5%, edging the S&P 500 by an average of 0.1 percentage point per year. That isn't impressive. But the fund has been about 5% less volatile than the market over that period, giving investors a smoother ride.
Jul 09, 2018 | www.nakedcapitalism.com
So this has become a popular recession indicator that has cropped up a lot in the discussions of various Fed governors since last year. Today, the two-year yield closed at 2.55% and the 10-year yield at 2.84%. The spread between them was just 29 basis points, the lowest since before the Financial Crisis.
The chart below shows the yield curves on December 14, 2016, when the Fed got serious about raising rates (black line); and today (red line). Note how the red line has "flattened" between the two-year and the 10-year markers, and how the spread has narrowed to just 29 basis points:
... ... ...So just in the nick of time, with the spread between the two-year and the 10-year yields approaching zero, the Fed begins the process of throwing out that indicator and replacing it with a new indicator it came up with that doesn't suffer from these distortions.
And I have to agree that the Fed's gyrations over the past 10 years have distorted the markets, have muddled the calculations, have surgically removed "fundamentals" as a consideration for the markets, and have brainwashed the markets into believing that the Fed will always bail them out at the smallest dip. And the yield curve, reflecting all those distortions to some extent, might have become worthless as an indicator of anything other than those distortions.
ambrit , July 7, 2018 at 5:22 amSkip Intro , July 8, 2018 at 1:32 am
Isn't the Fed theoretically independent? Why then should they take cognizance of what the President, or, for that matter, any politician wants? The Feds behaviour over the last decade has demonstrated institutional capture in its' purest form. Everything for the financial sector and nothing for the "Main Street" sector.
The Fed is carrying out a grand experiment. Do these 'Quaint Quant Quotients' have a measurable relationship to the 'Real World' or do they not? My criteria for how well this 'realignment' amongst the 'Financial Stars' works out is going to be the severity of the next "Recession."jrs , July 8, 2018 at 1:53 am
To be fair, Obama himself was provided by Citigroup.skippy , July 8, 2018 at 2:33 am
I guess a possibility is the Fed let's the economy get really bad (not that we haven't seen that recently even but it could be worse) in order to punish Trump. Yea but people are going to suffer and die in the next recession, they not only already do in recessions anyway, but there is literally no economic slack in most people's lives anymore. Yea this whole economic system is screwy as can be, but if they produce mass unemployment we need a guaranteed income at that point just to keep people from dying.Jim Haygood , July 7, 2018 at 9:08 am
Please jrs read about the broader ideological opinions of those that forwarded a UBI or GI, same mob wrt the Chicago plan.Jim Haygood , July 7, 2018 at 9:38 am
"(Don't Fear) the Yield Curve" is the title of the staff paper, riffing on "(Don't Fear) the Reaper" by Blue Oyster Cult which evidently still exerts a powerful sway on the Fed's balding eggheads 42 years on.
What distinguishes this model is its use of an interest rate dear to the hearts of economists but absent from bond market quotes: the forward rate . Or as the Blue Oyster Cult fanboys explain:
The current level of the forward rate 6 quarters ahead is inferred from the yields to maturity on Treasury notes maturing 6 quarters from now and 7 quarters from now. In particular, it is the rate that would have to be earned on a 3-month Treasury bill purchased six quarters from now that would equate the results from two investment strategies: simply investing in a Treasury note that matures 7 quarters from now versus investing in a Treasury note that matures 6 quarters from now and reinvesting proceeds in that 3-month Treasury bill.
Not a big deal to calculate -- so voracious is Big Gov's appetite for borrowing as we approach the promised land of "trillion dollar deficits forever" that 2-year T-notes are auctioned monthly, meaning there's always a handy pair of notes with maturities 18 and 21 months ahead whose yields can be used to derive the 6q7q forward rate for the long end of the spread.
The joke is likely to be on the Fed, though. As their chart shows, the 0-6q forward spread is volatile, and could well lurch down to meet the 2y10y spread any time. Moreover, despite the June 28th date on the staff paper, the chart is stale, showing a 0.5%-plus value for the 2y10y spread which last existed several months ago.
In other words, prepare to hoist the Fedsters on their own forward-rate petard.
And they ran to us
Then they started to fly
They looked backward and said goodbye
They had become like we are
-- (Don't Fear) the ReaperSynoia , July 7, 2018 at 1:31 pm
From the WSJ's Treasury page, the yield on a note due 12/31/2019 is 2.470%, while the 3/31/2020 note yields 2.511%. Yield on the current 3mo T-bill is 1.951%.
Doing a little exponential maff, we can derive a 6q7q forward rate of 2.76%, for a spread of 0.81% over the current 3mo T-bill. This compares to a 2y10y spread of only 0.28%.
So according to the Fed's shiny new moved goalpost, there's room for three more rate hikes, whereas the old goalpost would've allowed just one.
Carry on, ladsJim Haygood , July 7, 2018 at 2:14 pm
If the policy is not supported by the understanding of the evidence, change the understanding.
Seems very reasonable. For witchcraft.
See -- she floats = A Witch! Kill her.
See– she sinks = Not a witch. Dies.
Outcome -- as desired.
aka: Tell the Boss what he wants to hear.Chauncey Gardiner , July 7, 2018 at 3:04 pm
We're gonna hold the Boss responsible with our own data. Here are the traditional 2y10y and new 6q7q fwd yield curves for 2018:
First one to hit the x-axis is the crack of doom.
Note that the two curves almost coincided on Feb 9th, and could do again one day soon. :-)Jim Haygood , July 7, 2018 at 4:13 pm
It is well within the Fed's capabilities to sell Treasury and Agency bonds with maturities concentrated in the long end of the yield curve. Were the Fed to do that, particularly against a backdrop of deep corporate tax cuts and the resultant increased supply of Treasury debt, what is likely to happen to mortgage rates, real estate and collateral values?
I suspect the people complaining loudest about this emergent Fed policy are those who have benefited most from both longtime negative real interest rates and a positively sloping yield curve. Those were lucrative monetary policy features for them over the past nine years.bruce wilder , July 7, 2018 at 10:49 am
One more note in the Fed's chart, the new 6q7q fwd spread dips below zero during the Russia/LTCM crisis in 1998, whereas the 2y10y spread didn't.
So it's not quite as reliable. When both go negative, it's " game ovahhhhh "Blue Pilgrim , July 7, 2018 at 12:12 pm
I have long been annoyed by the way Fed staff / hobbyists blithely treat the yield curve as just another "indicator", as if they were forecasting the weather from changes in barometric pressure or temperature.
Seeking a forecasting crystal in a calculated "forward" rate, supposedly mirroring "expectations" of (a representative?) investors reflects a world view that imagines economic actors confidently act on expectations that they believe will be fulfilled. It is not taking uncertainty seriously.
The yield curve has worked not thru magic, but because it reflects a fundamental mechanism of sorts that drives credit and the transformation of maturities: that some key institutions borrow short and lend long, to coin a phrase, in the creation of credit that typically drives the expansion of business activity. Inverting the yield curve forces the contraction of credit by institutions that hedge a borrow short, lend long strategy with Treasuries.
It probably is not lost on those with a memory of past cycles that speculation about whether things will be different this time with regard to the yield curve qua indicator emerges regularly from Fed hobbyshops near the end of very long expansions. If memory serves the Cleveland Fed research shop circulated such speculation in the 2005-7 period.
Admittedly, I haven't had my coffee yet, but I think I may have reached a conclusion: a country whose economic system can't be understood in an hour is doomed to failure.
Feb 07, 2018 | www.nakedcapitalism.com
JTFaraday , , February 6, 2018 at 9:55 amJTFaraday , , February 6, 2018 at 10:30 am
Wage inflation,yes, but they're really worried about the rising cost of corporate debt if the Fed hikes even faster due to wage inflation. If the interest on Corp debt isn't better than that on safer US debt then the market for especially junk bonds will evaporate leading to bankruptcies.
Wolff Richter has written about this, and how they misused their QE magic money tree.
This is also why they needed Corp tax cut ASAP, to stave off the inevitable stock market rout, although they should know better.djrichard , , February 6, 2018 at 11:33 am
Here is one such article from just the other day:
"Here's how this is going to work out:-- The Fed will continue to raise its target range for the federal funds rate. -- The 10-year yield will follow.
-- As the Treasury yield curve, which is still relatively flat, steepens back to some sort of normal-ish slope, the 10-year yield will make up for lost time over the past year and will rise faster than the Fed's target range for the federal funds rate.
-- Corporate bonds will follow, but they have even more catching up to do, and so they will rise even faster than the 10-year yield, as yield spreads between the 10-year Treasury and corporate bonds widen back to some sort of normal-ish range.
In other words, corporate yields will rise further and faster than Treasury yields, just to catch up, thus pushing down prices with gusto.
Junk bonds are more volatile and will react more strongly. Junk-rated companies will find it more difficult to raise new money to service their existing debts and fund their money-losing operations, and there will be more defaults, which will push yields even higher as the risks of junk bonds suddenly become apparent for all to see. This will make it even tougher for companies to raise funds needed to service their existing debts and fund their operations.
This is not a secret. It's just how it works."
http://wolfstreet.com/2018/02/04/corporate-bond-market-in-worst-denial-since-2007djrichard , , February 6, 2018 at 11:46 am
I agree with the overall thesis of what's driving the market swoon at the moment. But I disagree when Wolf says the 10Y yield will follow the Fed Funds rate. E.g. see this graph: https://fred.stlouisfed.org/graph/?g=i9XE . If you stretch it back far enough, the 10Y yield and the Fed's fund rate are pretty independent of each other.
About the only relationship they have to each other is when they get inverted, that that precipitates a recession. E.g. see when the Fed Reserve did that in May 2000 and June 2006 in that same graph. That's when the punch bowl is gone, it just seems to take a while for that to work its way through the system.
I seem to recall that Wolf had a previous posting where he argued that the 10Y yield was going up because of other factors: the tax cuts, Fed Reserve unwinding its balance sheet, etc. So basically the same effect. Everyone is scared the bond vigilantes will finally have sway. To your point, corporate bonds will get more expensive to roll. And to your point, tax cuts will help them finance that. What it certainly means though is the good old days of stock buy backs would be over. Oh the humanity, lol.
One question I have is whether the corporations would actually retire the debt instead of roll it over; retiring the debt should be deflationary. But I suspect most corporations don't have enough cash flow to actually retire debt, even with the tax cuts. As usual, Banks to US: "all your cash flow are belong to us".
By the way, a counter thesis is that the bond vigilantes won't have sway and the 10Y yield will revert to the path it's been on since 1982. In which case, the market is saved, yay! But then it would still be on path to an inverted yield curve anyways, boo! I guess time will tell.
By the way, the 13 week treasury yield (which the Fed Funds rate tracks) is at 1.49%. Only 3 to 6 more basis points and the Fed Reserve will be due to increase their Fed Funds rate another 25 basis points.
Imagine the optics of that happening during this market swoon or soon after. Heads are going to implode, particularly Trump's. But to my point above, corporate debt is not exposed to that.
It separately still begs the question on whether the 13 week treasury actually anticipates the Fed Funds rate. Or if the Fed Reserve is actually forced to follow the 13 week treasury. One way to get more clarity would be if the Fed Reserve actually sat on increasing their rate, e.g. just to avoid spooking the markets more. It will be interesting to see how this plays out.
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Pioneer Natural Resources (NYSE: PXD)
The fund's expense ratio is 0.30 percent, which is low for an actively managed fund.
Exxon Mobil Corp. 10,814,410 $804,051,384 Chevron Corp. 5,324,603 $420,004,685 Pioneer Natural Resources Co. 3,177,564 $386,518,885 Royal Dutch Shell plc ADR 7,958,294 $377,143,553 Schlumberger Ltd. 4,669,124 $322,029,482 EOG Resources Inc. 4,208,887 $306,406,974 TOTAL SA ADR 5,369,377 $240,064,846 BP plc ADR 5,883,334 $179,794,687 Halliburton Co. 5,007,118 $177,001,621 Occidental Petroleum Corp. 2,643,548 $174,870,700 Phillips 66 2,116,175 $162,606,887 BG Group plc 10,650,741 $153,648,186 Anadarko Petroleum Corp. 2,504,899 $151,270,851 Energen Corp. 2,948,805 $147,027,417 Eni SPA ADR 4,353,566 $136,571,365 Marathon Petroleum Corp. 2,756,866 $127,725,602 Suncor Energy Inc. 4,613,719 $123,278,572 Baker Hughes Inc. 2,346,283 $122,100,567 EQT Corp. 1,869,866 $121,111,221 Southwestern Energy Co. 9,352,157 $118,678,872 Concho Resources Inc. 1,188,477 $116,827,289 Valero Energy Corp. 1,925,657 $115,731,986 ConocoPhillips 2,262,057 $108,488,254 Antero Resources Corp. 4,885,097 $103,368,653 Reliance Industries Ltd. 7,840,981 $103,182,488 Diamondback Energy Inc. 1,555,848 $100,507,781 Galp Energia SGPS SA 10,073,667 $99,405,558 Cabot Oil & Gas Corp. 4,514,397 $98,684,718 Canadian Natural Resources Ltd. 4,987,733 $97,011,407 Rosneft OAO GDR 25,783,629 $95,426,007 OGE Energy Corp. 3,273,667 $89,567,529 Cenovus Energy Inc. 5,575,030 $84,517,455 Inpex Corp. 9,138,300 $81,703,143 Noble Energy Inc. 2,450,979 $73,970,546 Hess Corp. (shale player) 1,467,239 $73,449,984 Newfield Exploration Co. 1,950,700 $64,178,030 Marathon Oil Corp. (bancrupcy Marathon Oil Corp (MRO.N) Key Developments Reuters.com) Slashed dividend to 5 cents per share from 32 cent. 4,116,698 $63,397,149 Lukoil PJSC ADR 1,857,962 $63,282,814 Spectra Energy Corp. 2,373,951 $62,363,693 Patterson-UTI Energy Inc. 4,652,763 $61,137,306 QEP Resources Inc. 4,733,880 $59,315,516 Range Resources Corp. 1,812,408 $58,214,545 Oil Search Ltd. 10,935,572 $55,524,639 Cheniere Energy Inc. 1,105,700 $53,405,310 TransCanada Corp. 1,637,899 $51,724,850 Petroleo Brasileiro SA ADR 11,803,739 $51,346,265 Kinder Morgan Inc./DE 1,833,802 $50,759,639 Vanguard Energy ETF 578,000 $48,991,280 PetroChina Co. Ltd. ADR 636,058 $44,333,243 Tenaris SA ADR 1,822,700 $43,945,297
Citigroup analysts led by Anindya Basu point out that spreads on the CDX HY, as the index is known, are currently pricing in an expected loss of 21.2 percent, which translates into something like 22 defaults over the next five years if one assumes zero recovery for investors. That is a pretty big number once you consider that a total of 41 CDX HY constituents have defaulted since the index really began trading in 2005, equating to about 3.72 defaults per year. A big chunk of those defaults (17) occurred in 2009 in the aftermath of the financial crisis.
What to make of it all? Actual recoveries during corporate default cycles tend to be higher than the worst-case scenario of zero percent. In fact, they average somewhere in the 26 percent range, which would imply 29 defaults over the next five years instead of 41.
So what? you might say. The CDX HY includes but one default cycle, and those types of analyses tend to underestimate the peril of tail risk scenarios (hello, subprime crisis). Citi has an answer for that, too. Using spreads from the cash bond market going back to 1991, they forecast the default rate over the next 12 months to be something more like 5 percent to 5.5 percent. (For comparison, the rating agency Moody's is currently forecasting a 3.77 percent default rate.)
,,,,The Vanguard Core Bond Fund, unveiled in a filing with regulators on Monday, is being billed as an actively managed alternative to index funds like the Total Bond Market fund (VBMFX, VBTLX, BND). Its launch, slated for the first three months of 2016, would coincide with a period of great uncertainty in the bond markets. The Fed could mull its next interest-rate hike as soon as March.
... ... ...
Daniel Wiener, editor of the Independent Adviser for Vanguard Investors newsletter and a close watcher of all things Vanguard, was quick to note that the fund could invest in bonds of "any quality." The new fund's fine print shows leeway for Vanguard's portfolio managers to plunk up to 5% of the portfolio in junk bonds. Some 30% of the fund could fall into "medium-quality" bonds.
Vanguard's existing offering in junk debt, the Vanguard High-Yield Corporate Fund (VWEHX, VWEAX), is managed by Wellington Management Company.
Says Wiener: "Vanguard has never offered lesser-quality bond funds run by its internal group. The junk portion of the Core Bond product will be a first."
peakoilbarrel.comJeffrey J. Brown, 12/13/2015 at 4:06 pmInteresting WSJ article (do a Google Search for the title, for access). Last week, the Journal noted that Chesapeake bonds that traded at 80’ on the dollar a few months ago were currently trading at 30’ to 40’ on the dollar. I suspect that there are some huge losses on the books of a lot of pension funds.
WSJ: The Liquidity Trap That's Spooking Bond Funds
The specter of a destabilizing run on debt is haunting markets
The debt world is haunted by a specter-of a destabilizing run on markets.
Last week, this took on more form even if there weren't concrete signs of panic. Only one mutual fund manager, Third Avenue Management, has said it would halt redemptions to forestall having to dispose of assets in a fire sale. The rest of the industry has been quick to say that while redemptions are elevated, particularly in high-yield bond funds, there doesn't seem to be a rush to for the exits.
Still, growing angst comes as the oil-price rout continues and the U.S. Federal Reserve appears ready to raise rates. This has investors worried-and starting to ask the fearful question: "Who's next?"
Goldman Sachs, for one, put out a note Friday warning Franklin Resources "is most at risk" given the large high-yield holdings of its funds, poor performance and large outflows. On Friday, its shares fell sharply. Meanwhile, there were unusually large declines Friday in the value of exchange-traded funds that track high-yield debt.
The idea of a "run" on mutual funds might sound strange. Typically, runs are associated with highly leveraged banks engaged in maturity transformation, funding long-term loans with short-term debt. Nearly all the programs designed to avoid destabilizing runs-from deposit insurance to the Fed's discount window to liquidity requirements-are built for banks. But unleveraged investors, including mutual funds, can also give rise to runs. That is because there is a liquidity mismatch in mutual funds that hold relatively illiquid assets funded by investors entitled to daily redemptions.
naked capitalismMikeNY December 12, 2015 at 6:41 amtimmy December 12, 2015 at 9:39 am
Yes, junk is usually the canary in the coal mine. The HY market melted in the Summer of 2008, months before equities noticed what was going on. The question really is how much contagion there will be: how many CDS have been written on the distressed names, who holds them, etc. My instinct tells me that there are considerably less CDS on junk than were written on MBS, due to the smaller market, the lower liquidity and (supposed) credit quality. But how much has that changed since 2008? I dunno.
One thing I do know: it's like the movie "Groundhog Day". The Fed always overstimulates, and there always follows a crash. Are there any bubbles left to blow, to 'reflate' assets next time?Jim Haygood December 12, 2015 at 1:39 pm
Your remark on written CDS is important. While it may be difficult to get liquidity on distressed names, it is less so on credit tiers above that or on indices. I'm sure there is some on junk, yes, but the real opportunity for spec CDS is (perhaps, was) on the BBB space which is the largest category in the investment grade market and is more liquid. While it may take awhile for distressed trading to creep up the credit ratings to the larger and more liquid names (specifically, since the definition of liquidity seems to be important on NC: the size of the specific issues' float, approximated with average daily volume), they will also have larger moves because potential fallen angels are repriced aggressively in an unstable market. The other thing about CDS is that they are most often delta-hedged which requires dealers to sell proxy's as the CDS go deeper into the money. The one restraining factor is that once a crisis is in motion, I think its going to be difficult for specs to get more CDS on their books. This strategy is purely directional (this is not an ETF NAV arb), essentially owning out of the money puts with minimal cost of carry.Mike Sparrow December 12, 2015 at 3:48 pm
'Their investing strategy putting high-risk investments into a mutual fund seems like exactly what not to do.'
It cuts two ways. Junk ETFs such as JNK and HYG have badly underperformed their benchmarks, owing to buying and selling in an illiquid market to replicate an index. Whereas actively managed junk mutual funds have the flexibility to deviate from index holdings in ways that can add a couple of hundred basis points a year.
That said, both junk ETFs and junk mutual funds are offering daily liquidity, while holding underlying securities that may trade once a week, or have no bids at all. As David Dayen observes, this sets up the risk of a bank run when investors get spooked.
Take a look at the "power dive" chart of TFCIX (Third Avenue Focused Credit Fund) - Aiieeeeee!
Now the question is contagion. Morningstar shows that 48% of TFCIX's portfolio was below B rating, and 41% had no bond rating. Most junk funds don't have THAT ugly a portfolio. But when the herd starts to stampede, fine distinctions can get lost in the dust cloud from the thundering hooves.
Over to you, J-Yel. Do you feel lucky, cherie? Well, do you?Keith December 12, 2015 at 7:27 am
There is no CDS. There just isn't less, there is none. The stock market has pretty much ignored it as well except that its move from 13000 to 18000 has temporarily stalled. I suspect by the spring, this will be old news.
I think we make errors here, not understanding this particular type of financial speculation is "anti-growth" in general. This would probably blow most of the minds on this board.Keith December 12, 2015 at 7:29 am
Many years ago when Alan Greenspan first proposed using monetary policy to control economies, the critics said this was far too broad a brush.
After the dot.com crash Alan Greenspan loosened monetary policy to get the economy going again. The broad brush effect stoked a housing boom.
When he tightened interest rates, to cool down the economy, the broad brush effect burst the housing bubble. The teaser rate mortgages unfortunately introduced enough of a delay so that cause and effect were too far apart to see the consequences of interest rate rises as they were occurring.
The end result 2008.
With this total failure of monetary policy to control an economy and a clear demonstration of the broad brush effect behind us, everyone decided to use the same idea after 2008.
Interest rates are at rock bottom around the globe, with trillions of QE pumped into the global economy.
The broad brush effect has blown bubbles everywhere.
"9 August 2007 BNP Paribas freeze three of their funds, indicating that they have no way of valuing the complex assets inside them known as collateralised debt obligations (CDOs), or packages of sub-prime loans. It is the first major bank to acknowledge the risk of exposure to sub-prime mortgage markets. Adam Applegarth (right), Northern Rock's chief executive, later says that it was "the day the world changed"
10th December 2015 "Moments ago, we learned courtesy of the head of Mutual Fund Research at Morningstar, Russ Kinnel, that the next leg of the junk bond crisis has officially arrived, after Third Avenue announced it has blocked investor redemptions from its high yield-heavy Focused Credit Fund, which according to the company has entered a "Plan of Liquidation" effective December 9."
When investor's can't get their money out of funds they panic.
Central Bank low interest rate policies encourage investors to look at risky environments to get a reasonable return
Pre-2007 Sub-prime based complex financial instruments
Now Junk bonds
The ball is rolling and the second hedge fund has closed its doors, investors money is trapped in a world of loss.
"Here Is "Gate" #2: $1.3 Billion Hedge Fund Founded By Ex-Bear Stearns Traders, Just Suspended Redemptions"
We know the world is downing in debt and Greece is the best example I can think of that shows the reluctance to admit the debt is unsustainable.
Housing booms and busts across the globe
Those bankers have saturated the world with their debt products.Skippy December 12, 2015 at 7:41 am
Links (which will probably require moderation)
Quality of instruments impaired by corruption has a more deleterious effect than quantities of could ever imagine
David December 12, 2015 at 10:33 amtegnost December 12, 2015 at 10:52 am
"Those bankers have saturated the world with their debt products."
I'm no apologist for Banksters but people bought this "stuff" as the Stuffies.
whether you call it greed or desperation in the face of zero yield at the end of the day the horizon was short since the last debacle.
getting 2 & 20 or whatever the comp arrangement was for those who are motivated by greed 2% of $2 Billion yields at least $40 million a year for 5 years or $200 million not bad for ten guys or less obviously not fiduciaries bouncing from Bear to Tudor to Third Ave with no change in the model yields predictable results
I put forth the proposition the "people" deserve their fate the tea leaves were all there to seeIan December 12, 2015 at 2:24 pm
Your apology is flawed because it assumes equal access to information among investors as well as assuming all investors have the same objective. Institutional investors have different goals than hedge funds for example. The people you refer to have been fleeced that's just ok with you. As to tea leaves the people have been steeped in recovery stories for years.Ian December 12, 2015 at 2:29 pm
Also fails to recognize the collateral damage caused towards the people that did not directly participate. It is very hard to say that they deserve their fate in this context, in that they were largely powerless to stop it to begin with, at a reasonable level.
I guess you qualified that with focusing solely on the people who bought it. Did not read fully.
Timmy December 12, 2015 at 8:34 amJim Haygood December 12, 2015 at 4:25 pm
Wait, so speculators are shorting big bond positions of distressed funds? No way, hope they aren't doing this to ETF's. Jeez, didn't see this coming. I guess having the positions of big ETF's published daily might assist the speculators.Timmy December 12, 2015 at 4:51 pm
Yesterday HYG closed at a 0.76% discount to NAV, while JNK closed at a 0.68% discount (values from Morningstar). These are wider discounts than ETF managers like to see.
The arbitrage mechanism of buying the discounted ETF shares, redeeming them for the underlying, and then selling the bonds at full value for an instant 0.76% gain is supposed to kick in now.
But sell to whom?tegnost December 12, 2015 at 9:15 am
The misperception is that the ETF junk trade is an arb right now. Its not, its directional. The discipline to bring NAV's in line with underlying value will only kick in at much wider levels because traders are still long (and putting on more of) the "widener" because they anticipate higher levels of vol going forward.
Actually have already been bracing myself as demand for labor fell off a cliff at the end of sept., and I'm guessing it's stories such as this that makes my customers tighten their belts....
nat scientist December 12, 2015 at 9:55 amcraazyboy December 12, 2015 at 4:26 pm
"Some say the world will end in fire
Some say in ice
From what I've tasted of desire
I hold with those who favor (fire) INFLATION
But if it had to (perish) REFINANCE twice,
I think I know enough of (hate) ZIRP RATES
To say that for destruction (ice) NO BID
Is also great
And would suffice."
Marty Whitman now gets Robert Frost.Christer Kamb December 12, 2015 at 1:44 pm
All those junk companies could just declare bankruptcy and start over. That's the way it's supposed to work. Just ask The Donald. Then it would be like that movie where Bruce Willis saved the earth from an asteroid strike. 'Course there was only one asteroid in that movie. Instead, we have World War Z with zombies all over the place!
But maybe JYell will buy all the junk bonds, burn them, and then the dollar will crash and we can all get jobs?MikeNY December 12, 2015 at 4:25 pm
"The HY market melted in the Summer of 2008, months before equities noticed what was going on."
Not really. HYG market were in a downtrend during summer of 2007, together with the stockmarket. Also in the 2008 summer both markets were in a severe meltdown. This time around the HYG΄s started their downtrend from summer 2014 with the 1:st leg down to dec same year. 2:nd leg is now running in which the stockmarket joined.
Your right, HYG΄s seems to be the canaries here! But, from august this year they seems to go in different directions. Or are they?
You're right, it was earlier than Summer 2008, now I think about it.
What I do remember (and I can't remember whether it was Spring of 2008 or earlier), was that HY spreads had gapped out at least a couple of hundred bps, and equities were still at or near all-time highs. I remember sitting in a meeting with a couple I-bankers, who chuckled ruefully "equities haven't a clue".
The received wisdom on the Street is that the bond market is smarter than the equity market. And, at last in my career, it was true, at least as far as downturns went.
December 3, 2015 | naked capitalismBy Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street
nvestors, lured into the $1.8-trillion US junk-bond minefield by the Fed's siren call to be fleeced by Wall Street and Corporate America, are now getting bloodied as these bonds are plunging.
Standard & Poor's "distress ratio" for bonds, which started rising a year ago, reached 20.1% by the end of November, up from 19.1% in October. It was its worst level since September 2009.
It engulfed 228 companies at the end of November, with $180 billion of distressed debt, up from 225 companies in October with $166 billion of distressed debt, S&P Capital IQ reported.
Bonds are "distressed" when prices have dropped so low that yields are 1,000 basis points (10 percentage points) above Treasury yields. The "distress ratio" is the number of non-defaulted distressed junk-bond issues divided by the total number of junk-bond issues. Once bonds take the next step and default, they're pulled out of the "distress ratio" and added to the "default rate."
During the Financial Crisis, the distress ratio fluctuated between 14.6% and, as the report put it, a "staggering" 70%. So this can still get a lot worse.
The distress ratio of leveraged loans, defined as the percentage of performing loans trading below 80 cents on the dollar, has jumped to 6.6% in November, up from 5.7% in October, the highest since the panic of the euro debt crisis in November 2011.
The distress ratio, according to S&P Capital IQ, "indicates the level of risk the market has priced into the bonds. A rising distress ratio reflects an increased need for capital and is typically a precursor to more defaults when accompanied by a severe, sustained market disruption."
And the default rate, which lags the distress ratio by about eight to nine months it was 1.4% in July, 2014 has been rising relentlessly. It hit 2.5% in September, 2.7% in October, and 2.8% on November 30.
This chart shows the deterioration in the S&P distress ratio for junk bonds (black line) and leveraged loans (brown line). Note the spike during the euro debt-crisis panic in late 2011:The oil-and-gas sector accounted for 37% of the total distressed debt and sported the second-highest sector distress ratio of 50.4%. That is, half of the oil-and-gas junk debt trades at distressed levels! The biggest names are Chesapeake Energy with $7.4 billion in distressed debt and Linn Energy LLC with nearly $6 billion.
Both show how credit ratings are slow to catch up with reality. S&P still rates Chesapeake B- and Linn B+. Only 24% of distressed issuers are in the rating category of CCC to C. The rest are B- or higher, waiting in line for the downgrade as the noose tightens on them.
The metals, mining, and steel sector has the second largest number of distressed issues and sports the highest sector distress ratio (72.4%), with nearly three-quarters of the sector's junk debt trading at distressed levels. Among the biggest names are Peabody Energy with $4.7 billion in distressed debt and US Steel with $2.2 billion.
These top two sectors account for 53% of the total distressed debt. And now there are "spillover effects" to the broader junk-rated spectrum, impacting more and more sectors. While some sectors have no distressed debt yet, others are not so lucky:
- Restaurants, 21 issuers, sector distress ratio of 21.4%;
- Media and entertainment companies, 36 issuers, distress ratio of 17%;
- High-tech companies, 22 issuers, distress ratio of 19%;
- Chemicals, packaging, and environmental services companies, 14 issuers, distress ratio of 16.1%;
- Consumer products companies, 16 issuers, distress ratio of 13.9%;
- Financial institutions, 14 issuers, distress ratio of 12.6%.
The biggest names: truck maker Navistar; off-road tire, wheel, and assembly maker Titan International; specialty chemical makers The Chemours Co. and Hexion along with Hexion US Finance Corp.; Avon Products; Verso Paper; Advanced Micro Devices; business communications equipment and services provider Avaya; BMC Software and its finance operation; LBO wunderkind iHeart Communications (Bain Capital) with a whopping $8.9 billion in distressed debt; Scientific Games; jewelry and accessory retailer Claire Stores; telecom services provider Windstream; or Texas mega-utility GenOn Energy (now part of NRG Energy).
How much have investors in distressed bonds been bleeding? S&P's Distressed High-Yield Corporate Bond Index has collapsed 40% from its peak in mid-2014:
In terms of investor bloodletting: 70% of all distressed bonds are either unsecured or subordinated, the report notes. In a default, bondholders' claims to the company's assets are behind the claims of more senior creditors, and thus any "recovery" during restructuring or bankruptcy is often minimal.
At the lowest end of the junk bond spectrum rated CCC or lower the bottom is now falling out. Yields are spiking, having more than doubled from 8% in June 2014 to 16.6% now, the highest since August 2009:
These companies, at these yields, have serious trouble raising new money to fund their cash-flow-negative operations and pay their existing creditors. Their chances of ending up in default are increasing as the yields move higher.
And more companies are getting downgraded into this club of debt sinners. In November, S&P Ratings Services upgraded only eight companies with total debt of $15.8 billion but downgraded 46 companies with total debt of $113.7 billion, for a terrible "downgrade ratio" of 5.8 to 1, compared to 1 to 1 in 2014.
This is what the end of the Great Credit Bubble looks like. It is unraveling at the bottom. The unraveling will spread from there, as it always does when the credit cycle ends. Investors who'd been desperately chasing yield, thinking the Fed had abolished all risks, dove into risky bonds with ludicrously low yields. Now they're getting bloodied even though the fed funds rate is still at zero!
Other high-risk credits, such as those backed by subprime mortgages, will follow. And the irony? Just in the nick of time, subprime is back but this time, it's even bigger. Read Subprime "Alt"-Mortgages from Nonbanks Run by former Countrywide Execs Backed by PE Firms Are BoomingBrianM, December 3, 2015 at 11:09 amIt is interesting that "distressed" in this article pretty much refers to pricing alone and says little about whether it actually represents a significant change in the ability of companies to repay/refinance their debts. The charts show a similar spike that happened in 2012 without any real consequence to default rates. Of course we are right to not trust the rating agencies as they are lagging indicators and there is a prima facie case for oil being a potential disaster area, but the article give no evidence as to why the markets are right this time. They've been wrong before.tegnost, December 3, 2015 at 1:07 pm
The definition of distress is also somewhat arbitrary 1000bps stinks of being a round number rather than any meaningful economic measure. 900bps sounds pretty distressed to me. Or, as a bull might put it, a bargain!
Question: What mechanism brought distress down after the euro crisis in late 2011, and is it possible that mechanism, whatever it was, will work again?susan the other. December 3, 2015 at 1:43 pm
It's kinda like the post above on German domestic banks looking for profit from any rotten source. We are on the cusp of a new economy; keeping alive the old consumer/manufacturing economy is a dead end. ...
07/29/2015 | zerohedge.com
"There is no doubt that the price of assets right now is a question mark... and ultimately when Central Banks stop manipulating markets where that price goes is up for grabs... and probably points down"
As Gross tweeted...
Gross: All global financial markets are a shell game now. Artificial prices, artificial manipulation. Where's the real pea (price)?
- Janus Capital (@JanusCapital) July 29, 2015
This clip carries a public wealth warning...
He is short, he is a loser, shell game or not.
Very rich loser.
And the markets are a .gov sanctioned and supported three card monti scamming folks all day, every day.
07/29/2015 | zerohedge.com
"There is no doubt that the price of assets right now is a question mark... and ultimately when Central Banks stop manipulating markets where that price goes is up for grabs... and probably points down"
As Gross tweeted...
Gross: All global financial markets are a shell game now. Artificial prices, artificial manipulation. Where's the real pea (price)?
- Janus Capital (@JanusCapital) July 29, 2015
This clip carries a public wealth warning...
He is short, he is a loser, shell game or not.
Very rich loser.
And the markets are a .gov sanctioned and supported three card monti scamming folks all day, every day.
Jul 22, 2015 | Safehaven.com
Setting aside the often-heard "certificates of confiscation" phrase, treasuries are a reasonable buy if one believes yields are going to stay steady or decline. They are to be avoided if the expectation is for yields to rise.
Part of the question is whether or not the Fed hikes, and by how much. But it's more complicated than the typical "yes-no when" analysis that we see in the media.
It's very conceivable for short-term rates to rise but long-term yields to decline if the market becomes convinced that Fed hikes will slow the economy. There's even a recent hint of that possibility looking at the action in treasuries since mid-July (the yield on 5-year treasuries has risen faster than yield on 10- and 30-year treasuries.
I am still not convinced the Fed is going to hike this year. Much will depend on retail sales, housing, and jobs.
A good retail sales report will send yields soaring, likely across the board.
Finally, even if economic data is weak, there is a chance yields rise if inflation picks up. Thus, one needs to keep inflation in mind, especially over longer time-frames.
That said, the recent decline in crude, commodities in general, does not lend much credence to the notion the CPI is going to take big leaps forward any time soon.
All things considered, the long end of the curve seems like a reasonable buy here provided one believes as I do, that economic data is unlikely to send the Fed on a huge hiking spree, and that if and when the Fed does react, yields on the long-end of the curve may not rise as everyone seems to expect.
Agreed ... any Fed rate hike will slow the economy, but they won't (can't) raise rates.
We have entered the black-hole of zero-interest, squarely caused by the incestuous relationship between the Fed and the Treasury whereby check-kiting and theft have become our central bankers' legal and institutional 'right.'
Through debt monetization, bond speculation has been made risk-free .. an anomaly in nature yet over 34 years in its bull cycle.
Risk-free bond speculation creates and maintains a falling interest rate structure which destroys the capital of virtually every market player. This is the greater danger .... which can only result in broad-based serial bankruptcies unless the parasitic system is abandoned for one that embraces sound money.
There is chaos in global markets. Bonds sold off sharply on Thursday morning for a second day in a row. They've reversed the decline, but stocks are still lower, after the chaos spilled over.
... ... ...
The International Monetary Fund slashed US growth forecasts, and urged the Federal Reserve to delay its first interest rate hike until 2016, in a statement that crossed as the stock market opened.
In a speech last month, Fed chair Janet Yellen said it would be appropriate to raise interest rates "at some point this year" if the economy continues to improve.
In a morning note before the open, Brean Capital's Peter Tchir wrote: "It is time to reduce US equity holdings for the near term and look for a 3% to 5% move lower. The Treasury weakness is NOT a 'risk on' trade it is a 'risk off' trade, where low yields are viewed as a risk asset and not a safe haven."
The sell off in global bonds started Wednesday, as European Central Bank president Mario Draghi gave a news conference in which he said markets should get used to episodes of higher volatility.
Draghi also emphasized that the ECB had no intention to soon end its 60 billion bond-buying program, called quantitative easing, before its planned end date of September 2016.
Bond yields, which move in the opposite direction to their prices, spiked across Europe on Wednesday, and on Thursday this move is continuing, with German bund yields and US Treasury yields hitting new 2015 highs and continuing to climb overnight.
According to Bloomberg, bonds wiped out all their gains for the year.
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The benchmark US 10-year treasury yield pushed higher to about 2.42% overnight, a level it hadn't touched since October. German bund yields rose to about 0.99%.
Sep 26, 2014 | zerohedge.com
The bull case is not the recovery or the economy as it exists, it is the promise of one and the plausibility for that promise. Under that paradigm, the market doesn't care whether orthodox economists are 'right', only that there is always next year. Other places in the world, however, are running out of "next year." The greatest risk in investing under these conditions is the Greater Fool problem. Anyone using mainstream economic projections and thus expecting a bull market will be that Fool. That was what transpired in 2008 as the entire industry moved toward overdrive to convince anyone even thinking about mitigation or risk adjustments that it was 'no big deal'. Remember: "The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so." - Federal Reserve Chairman Ben Bernanke, June 9, 2008.
Called the Rhode Island Retirement Security Act of 2011, her plan would later be hailed as the most comprehensive pension reform ever implemented. The rap was so convincing at first that the overwhelmed local burghers of her little petri-dish state didn't even know how to react. "She's Yale, Harvard, Oxford she worked on Wall Street," says Paul Doughty, the current president of the Providence firefighters union. "Nobody wanted to be the first to raise his hand and admit he didn't know what the fuck she was talking about."
Soon she was being talked about as a probable candidate for Rhode Island's 2014 gubernatorial race. By 2013, Raimondo had raised more than $2 million, a staggering sum for a still-undeclared candidate in a thimble-size state. Donors from Wall Street firms like Goldman Sachs, Bain Capital and JPMorgan Chase showered her with money, with more than $247,000 coming from New York contributors alone. A shadowy organization called EngageRI, a public-advocacy group of the 501(c)4 type whose donors were shielded from public scrutiny by the infamous Citizens United decision, spent $740,000 promoting Raimondo's ideas. Within Rhode Island, there began to be whispers that Raimondo had her sights on the presidency. Even former Obama right hand and Chicago mayor Rahm Emanuel pointed to Rhode Island as an example to be followed in curing pension woes.
What few people knew at the time was that Raimondo's "tool kit" wasn't just meant for local consumption. The dynamic young Rhodes scholar was allowing her state to be used as a test case for the rest of the country, at the behest of powerful out-of-state financiers with dreams of pushing pension reform down the throats of taxpayers and public workers from coast to coast. One of her key supporters was billionaire former Enron executive John Arnold a dickishly ubiquitous young right-wing kingmaker with clear designs on becoming the next generation's Koch brothers, and who for years had been funding a nationwide campaign to slash benefits for public workers.
Nor did anyone know that part of Raimondo's strategy for saving money involved handing more than $1 billion 14 percent of the state fund to hedge funds, including a trio of well-known New York-based funds: Dan Loeb's Third Point Capital was given $66 million, Ken Garschina's Mason Capital got $64 million and $70 million went to Paul Singer's Elliott Management. The funds now stood collectively to be paid tens of millions in fees every single year by the already overburdened taxpayers of her ostensibly flat-broke state. Felicitously, Loeb, Garschina and Singer serve on the board of the Manhattan Institute, a prominent conservative think tank with a history of supporting benefit-slashing reforms. The institute named Raimondo its 2011 "Urban Innovator" of the year.
The state's workers, in other words, were being forced to subsidize their own political disenfranchisement, coughing up at least $200 million to members of a group that had supported anti-labor laws. Later, when Edward Siedle, a former SEC lawyer, asked Raimondo in a column for Forbes.com how much the state was paying in fees to these hedge funds, she first claimed she didn't know. Raimondo later told the Providence Journal she was contractually obliged to defer to hedge funds on the release of "proprietary" information, which immediately prompted a letter in protest from a series of freaked-out interest groups. Under pressure, the state later released some fee information, but the information was originally kept hidden, even from the workers themselves. "When I asked, I was basically hammered," says Marcia Reback, a former sixth-grade schoolteacher and retired Providence Teachers Union president who serves as the lone union rep on Rhode Island's nine-member State Investment Commission. "I couldn't get any information about the actual costs."
... ... ...
Among the worst of these offenders are Massachusetts (made just 27 percent of its payments), New Jersey (33 percent, with the teachers' pension getting just 10 percent of required payments) and Illinois (68 percent). In Kentucky, the state pension fund, the Kentucky Employee Retirement System (KERS), has paid less than 50 percent of its ARCs over the past 10 years, and is now basically butt-broke the fund is 27 percent funded, which makes bankrupt Detroit, whose city pension is 77 percent full, look like the sultanate of Brunei by comparison.
Here's what this game comes down to. Politicians run for office, promising to deliver law and order, safe and clean streets, and good schools. Then they get elected, and instead of paying for the cops, garbagemen, teachers and firefighters they only just 10 minutes ago promised voters, they intercept taxpayer money allocated for those workers and blow it on other stuff. It's the governmental equivalent of stealing from your kids' college fund to buy lap dances. In Rhode Island, some cities have underfunded pensions for decades. In certain years zero required dollars were contributed to the municipal pension fund. "We'd be fine if they had made all of their contributions," says Stephen T. Day, retired president of the Providence firefighters union. "Instead, after they took all that money, they're saying we're broke. Are you fucking kidding me?"
There's an arcane but highly disturbing twist to the practice of not paying required contributions into pension funds: The states that engage in this activity may also be committing securities fraud. Why? Because if a city or state hasn't been making its required contributions, and this hasn't been made plain to the ratings agencies, then that same city or state is actually concealing what in effect are massive secret loans and is actually far more broke than it is representing to investors when it goes out into the world and borrows money by issuing bonds.
... ... ...
Even worse, placement agents are also often paid by the alternative investors. In California, the Apollo private-equity firm paid a former CalPERS board member named Alfred Villalobos a staggering $48 million for help in securing investments from state pensions, and Villalobos delivered, helping Apollo receive $3 billion of CalPERS money. Villalobos got indicted in that affair, but only because he'd lied to Apollo about disclosing his fees to CalPERS. Otherwise, despite the fact that this is in every way basically a crude kickback scheme, there's no law at all against a placement agent taking money from a finance firm. The Government Accountability Office has condemned the practice, but it goes on.
"It's a huge conflict of interest," says Siedle.
So when you invest your pension money in hedge funds, you might be paying a hundred times the cost or more, you might be underperforming the market, you may be supporting political movements against you, and you often have to pay what effectively is a bribe just for the privilege of hiring your crappy overpaid money manager in the first place. What's not to like about that? Who could complain?
Once upon a time, local corruption was easy. "It was votes for jobs," Doughty says with a sigh. A ward would turn out for a councilman, the councilman would come back with jobs from city-budget contracts that was the deal. What's going on with public pensions is a more confusing modern version of that local graft. With public budgets carefully scrutinized by everyone from the press to regulators, the black box of pension funds makes it the only public treasure left that's easy to steal. Politicians quietly borrow millions from these funds by not paying their ARCs, and it's that money, plus the savings from cuts made to worker benefits in the name of "emergency" pension reform, that pays for an apparently endless regime of corporate tax breaks and handouts.
Jun 21 2013 | Seeking Alpha
It is easier to predict WHERE they will go than WHEN they will go, and near impossible to predict both. We'll stick with WHERE in this letter, except to say we doubt rates will rise to "normal" levels very rapidly because central banks will probably take measures to moderate the rate of change.
It seems to me that the Fed in the back of its mind is expecting 10-year Treasury rates to go to the 4.0% to 5.0% range over the next year or two or maybe three. That would correspond to 30-year mortgages in the range of 5.75% to 6.75% compared to nearly 4% today. The estimated Treasury rate would also correspond to Baa corporate bonds at about 8%.
How do we estimate those rates? just using long-term averages.
The Fed is targeting 2% inflation. The long-term spread between 10-year Treasuries and CPI is about 2.5% (the "real rate"). That gives 4.5% as a probable target for the 10-year bond.
10-Year Treasury rate (blue), CPI (red) from 1963
August 21, 2013
... ... ....
But more to the point, very few individual investors actually own the 10-year Treasury bond itself. Instead, when they want fixed-income exposure, they buy a bond fund, which is likely to include a wide variety of coupons, credits, and maturities. There are quite a few stock-pickers out there, but there are precious few bond-pickers: bond investing is hard, boring, laborious work, and just about all individual investors outsource it to someone else.
So, how are bond funds doing, during this torrid time for the fixed-income world? The chart above shows how various popular bond funds have performed over the past 10 years; the main line shows the fortunes of the $110 billion Vanguard Total Bond Market fund, an index fund which gives a pretty good impression of how bond investors as a whole are doing. Its fortunes are more or less in line with those of the Fidelity Total Bond fund, the Fidelity Spartan US bond fund, and the Pimco Total Return fund.
... ... ...
Now it's true that over most of the period seen in the chart, rates were going down rather than up. But it's not strictly true that if rates are going up then the value of your bond-fund holdings is certain to go down. And even if you hold an index fund, I can tell you with 99% certainty that you have no idea how much it might fall in value with any given rise in rates. Individual investors neither can nor should be expected to do complex modified-duration calculations on their fixed-income portfolios, let alone be able to add a credit-forecast overlay to such a thing.
The fact is that rising rates are, in general, a sign of improving economic fortunes - and that they might well coincide with tightening credit spreads and greater economic activity, including new corporate borrowing. Yes, they might also mean a reduction in bond prices, but that kind of cost is easy to bear if it means a return to normality and growth in the rest of the economy, including possibly in stock portfolios.
... ... ...
Even if your rate forecast is exactly right, there's still a good chance that your decision to dump your bond funds might turn out to be a mistake.
August 14, 2013 | VanguardIn this interview, Brian Scott, a senior investment analyst in Vanguard's Investment Strategy Group, discusses concerns about the bond market and explains why Vanguard believes bonds can play a crucial diversification role in your portfolio, even in the event of a significant downturn.
We're getting a lot of questions about whether bonds are headed for a bear market. What is a bond bear market, and how is it different from a stock bear market?Listen to an audio recording of this interview "
It's an interesting question, because there is not a commonly accepted definition for a bear market in bonds. The answer for stocks is a rather simple one. There is a widely accepted, broadly used definition for a bear market in stocks, and that's a decline of at least 20% from peak to trough in stocks.
Now, if you tried to use that definition and apply it to bonds, we've never had a bear market in bonds. In fact, the worst 12-month return we've ever realized in the bond market was back in September of 1974, when bonds declined 13.9%. So we've never had a decline of the same magnitude as we've had in stocks, and I think that's one of the key differences between stocks and bonds.
Back to your original question then: What is a bear market in bonds? And, judging by investor behavior and reaction to losses in bonds, I think the answer is simply any period of time wherein you realize a negative return in bonds.
Is a bond bear market something we should be concerned about? If so, is there anything investors can do to prepare?
We've a great deal of sympathy for the anxiety that investors feel about the bond market right now. Typically, an investor that has an allocation to bonds-particularly those that have a large allocation to bonds-tend to be more risk-averse and become more unsettled when they see negative returns in any piece of their portfolio, let alone their total portfolio.
So we understand how unsettling this environment can be-and, in fact, we have actually realized a negative return in bonds. If you're looking at the 12-month return through the end of June 2013, bonds are now down about 0.7%-and when I say bonds, I'm referring to the Barclays U.S. Aggregate [Bond] Index. So, by that definition, and if you use the definition of a bear market I applied earlier, you could say-and some people have argued-that we are actually in a bear market in bonds.
And so it's unsettling; but, in times like these, what we encourage investors and their advisors to do is to look at the total return of their portfolio. And I think they'll feel much more comfortable when you take that perspective. As an example, an investor in Vanguard's Balanced Index Fund that has a mix of 60% U.S. stocks and 40% U.S. bonds realized a rate of return of 12% through June 30, 2013. So a total return perspective is especially valuable in times like this.
You recently co-wrote a research paper in which you note that in 2010, like today, investors also believed rising interest rates would cause bond losses, but that didn't happen. Does the experience of the last three years suggest anything about what investors should do now?
I think the last three years are very instructive and really impart a lot of lessons that investors can find very valuable in times like this. So for a little bit of historical perspective, back in about April/May of 2010, the yield on a 10-year Treasury note was about 3.3%. That was a level that was probably lower than almost all investors have ever seen in their investment lifetime. And you have to go back to August of 1957 to see yields as low as they were back in May of 2010.
And I think that perspective alone caused many people to assume that interest rates had to rise. And I think an important lesson from that environment and how the market actually reacted is that the current level of interest rates tells us absolutely nothing about their future direction. Just because yields are low doesn't mean that they can't go lower or that they must go higher. But at any point, in May of 2010, if you looked at what the market was pricing in and looking at forward yield curves, the market's expectation were that yields were going to rise, and the 10-year Treasury yield was going to rise to a level slightly over 4%.
In fact, what actually happened is that yields fell to just over 1.4%-again, I'm referring to the 10-year Treasury note. And if you had shortened the duration of your portfolio or moved your bond portfolio entirely into cash, you lost a tremendous amount of income.
I think another important lesson is that making knee-jerk reactions in your portfolio can be damaging over time and potentially even incur tax losses as well as higher transaction costs.
Do you have any thoughts about how to make the case that the smartest course of action is probably no action, assuming a portfolio is already well constructed?
That's a hard thing to do, because in the face of what you think is an impending loss in your portfolio, it's a very natural and even human reaction to feel like you have to do something. But we would argue, very strongly, that investors are best served by not changing their asset allocation unless some strategic element of their asset allocation has changed.
And, by that, I mean if your investment time horizon has changed, your investment objective has changed, if you really have an enduring change in your risk tolerance, then perhaps it's worth altering your strategic asset allocation. However, if those circumstances have not changed, you're probably best served by maintaining the strategic asset allocation that you set.
What are some indicators that your risk tolerance may be changing?
If you have extreme anxiety-let's face it, if you can't sleep at night, perhaps it's worth asking yourself whether your risk tolerance has changed. What we found-and we're not unique in this-is that investors tend to have a high level of risk tolerance when times are good and then when capital markets are delivering strong, positive returns. That changes sometimes over time. Now, we're not suggesting that you should frequently change your portfolio, but if you're really having a high level of anxiety over losses, perhaps it's worth becoming more conservative.
I think another way to react to the current environment is just to recognize the role that each asset class has in your portfolio. Stocks are designed to deliver strong capital gains-ideally, over the long term, above the rate of inflation so that you can grow your spending power over time. The role of bonds-at least the primary role of bonds, in our minds-is to act as a cushion or balance to stocks. Stocks tend to be much more volatile, much more prone to significant losses in bear markets in excess of 20%, and, when that happens, bonds tend to be an ideal cushion against equity market volatility.
It's very paradoxical. But perhaps, if you are feeling a higher level of anxiety because of the volatility in the fixed income markets in particular, the right answer for you might actually be a higher allocation to bonds. Because we actually think that because bonds are a good cushion to equity market volatility, over the long term, a higher allocation to bonds will reduce the total downside risk in your portfolio.Investing can provoke strong emotions. In the face of market turmoil, some investors find themselves making impulsive decisions or, conversely, becoming paralyzed, unable to implement an investment strategy or to rebalance a portfolio as needed.
Discipline and perspective are qualities that can help you remain committed to your long-term investment programs through periods of market uncertainty.
Learn more "
Well, that's certainly counterintuitive. Despite what you just said, your paper does ask the question of whether investors should consider moving away from bonds.
Yeah, that's the most common question we're getting right now. There's a lot of interest in other instruments that we're calling bond substitutes. Now, there's not necessarily anything wrong with them. So I think the term might impose kind of a negative connotation on some of these bond substitutes, but people are viewing other higher-yielding investments as a potential substitute for the high-quality bonds in your portfolio.
Some of those substitutes that I'm referring to are things like dividend-paying stocks, some high-yield bonds, floating-rate bonds, etc. And one of the things that we're really encouraging investors to recognize is that, while these instruments have higher yields than high-quality bonds like you get with the Barclays U.S. Aggregate [Bond] Index or certainly with Treasury bonds, they do have a very different risk profile, particularly when equities are declining. When equities are doing very poorly, many of these bond substitutes actually act a lot more like equities than bonds.
So it sounds like attempts to reach for income could end up depressing your overall returns. Is that right?
Over the long term, we think the answer is absolutely yes, and we've done some work around this, and we've modeled what we think will be forward-looking returns of portfolios over the long term for balanced investors. And what we found is the higher your allocation is to equities, the larger the downside risk in your portfolio is over time. And that's also true if you move away from high-quality bonds and Treasury bonds, in particular, and invest your bond allocation in some of these bond substitutes we've been talking about.
Older investors may be worried about generating income in a low interest rate environment. Do you have any advice?
This may be the hardest question you've asked of all, because we have a tremendous amount of sympathy for investors in this situation, those who are older-or, really, frankly, anyone who's really dependent on their portfolio to produce income for them, to meet their current spending needs, because you're absolutely right. The traditional answers to providing income-high-quality bonds-are not providing the level of income that investors have grown accustomed to. We've actually referred to these investors-and, really, maybe more appropriately call them savers-as a sacrificial lamb of current monetary policy. The very low interest rate environment we're faced with has really imposed a severe penalty on these savers.
And our answer is that if you choose to move away from the high-quality bonds into instruments that will generate more income in your portfolio, you'll likely get more income over time, but you'll also very likely experience a much higher level of volatility in that income stream. Of course, the only other alternative is to reduce your spending, which perhaps is even harder to do than to stomach lower levels of income for your portfolio. So there really is no easy answer.
Vanguard really emphasizes the idea of total return. Could you talk a little bit more about that and what that means in light of what's happening in the bond market?
I think it goes back to not looking at each piece of your portfolio and the returns that they're currently generating, but the return of your total portfolio overall. It's very rare that all assets in your portfolio are delivering very strong returns at any point in time. In fact, you don't want that if you're a balanced investor, because if you do have assets that are that highly correlated in good times, chances are they'll be very highly correlated in bad times as well, and you'll realize very sharp losses in declining equity markets. But ideally, if you have a balanced, diversified approach to investing, you'll realize healthy rates of total return over time.Vanguard research
Risk of loss: Should the prospect of rising rates push investors from high-quality bonds?
August 16, 2013 | FT.com
Taking short positions in US government bonds helped boost net assets in the first half of the year at RIT Capital, Jacob Rothschild's listed investment trust.
"Recognising that US authorities would face difficulties in suppressing bond yields in the face of an improving economy, we held short positions in government bonds during the period," said Lord Rothschild, chairman.
July 25, 2013 | FT.com
"Bond markets tend to benefit from ageing populations relative to equity markets," says Douglas Renwick, director at Fitch Ratings.
And the population in the industrialised world is ageing dramatically. While those over 65 accounted for 12 per cent of the population in 1982, this has risen to 16 per cent now and is projected to reach 25 per cent by 2042.
"We are at an inflection point," says Jonathan Willcocks, managing director at M&G Investments. "Two thirds of investable assets in the western world are now owned by those over 50."
There are a lot of assets to shift. Around 70 per cent of all world equities are owned by mutual funds and wealthy individuals, according to a white paper by the Network for Sustainable Financial Markets, all of whom can shift their allocation.
Lutz has one key "tell" for investors trying to gauge the potential impact of the inevitable mess created by our elected officials: Housing. The iShares US Home Construction ETF (ITB) is down more than 16% in three months and nearing official bear market territory. If housing isn't a black swan (it wouldn't be a shocking event), it's a canary in the coalmine. If housing fails the whole economy could die in mortal peril.
"As Alan Greenspan said years ago, 'it begins and ends with housing,'" Lutz concludes. "If we start losing control of rates all of the sudden what we're going to have is a collapse in the housing market, GDP is going to start falling apart, employment, and then the collateral damage of consumer spending because rates are going higher."
Buckle up, America. We could be in for yet another bumpy ride.
This is all sound and fury signifying NOTHING -- It is like baseball fans talking up their teams chances---at the beginning of the season. There are a lot of teams competing at the beginning. Then the field narrows until you get the playoffs, then the 'pennants' (league championships) and final, only one is left standing after the World Series. It is the same with stocks and bonds. Make sure that you put your money on the right ones.
First off, Gross manages a "Total return" fund. That means he Buy Bonds, or he can also buy the TBT. He can buy TBT options. He can write TBT options. It is going to be THE place to be, when the Fed starts unwinding 4 Trillion off their balance sheets.
Anyone who dismisses Bill Gross, ought have their heads examined.
Rates can't go up for a long time if you don't have Wage Inflation. US Wages are declining. The 10 Year might go above 3, but you will have the a huge recession again. Bonds are not moving until US Government has borrowed every dime on the planet.
Two things. Fight the Fed and you will lose. guaranteed and why listen to a guy that has so much bias. Wall Street was telling the investor to buy subprime tranche while shorting them on the other side. Common sense prevail. Don't listen to this guy
As soon as someone comes along with as good of a track record as Bill Gross, then I'll pay attention to their opinion, until then, I don't even care if Gross has a bad year or two.
The Fed has created this recovery based on printing money and it dare not stop. The national debt is so huge that any return to the average interest rates on the past would bring another great depression. The Fed has grasp the wolf by it's ears and dare not let go !
It isn't a matter of a bad year or two. Gross is a expert BOND FUND manager, who, like the retired Bill Miller of the now totally mediocre (and interestingly re-named) Legg Mason Value Trust, was in the right place at the right time. Gross had great, and unexpected success riding one of the longest bond cycles in recorded history. Bully for him!
But like all excesses, there is a reversion to the mean, which appears to be increasingly the case with bond yields. The point is, if you "stick" with a bond cycle that is going against you, and take away the artificially-manipulated interest rate environment which the planet's central banks have orchestrated in order to create breathing room for a nascent, and increasingly obvious credit recovery, you can be stuck for a long, long time (how about 30 years, with hiccups, in the opposite direction?) in a fund that is now resting on increasingly brittle laurels.
Throw in some additional leverage and positions in derivatives to make it appear that the reported investment returns are simply the result of just buying and selling and holding fixed-income investments, and you may have an explosive and implosive mix of unforeseen interest rate, credit quality, duration, geopolitical and currency risk in your portfolio.
General take away: don't assume that the Federal Reserve will not remove the punch bowl because conventional, popular media sycophants say it can't. Interestingly, while bond funds generally have done "ok" at preserving principal over the last 5 years (except for the last 6 months), if you had had the gumption and understanding of business trends and market psychology to move strongly into equities in the early spring of 2009, your returns in equities would exceed 130% from then. In the final analysis, Gross, like his counterparts and predecessors, can't publicly say "don't buy my fund - rates are going higher" - even he, I suspect, would be fired - or at least muzzled. Anyway it's not a war, it's a open-ended game.
In financial markets one person's loss is another's gain. Pimco's losses have created bullish market for individual bond holders. As Pimco has to sell to meet redemptions, I've been able to purchase high quality bonds at a steep discount. Keep it up Bill!
The bond market will be a bumpy ride for a couple of years before it settles out and becomes a attractive again. In the long run I would have a hard time betting against Bill Gross.
It was the Federal Reserve (who Gross despises) who lowered real interest rates to artificially low levels that made Gross look smart. As the artificially low interest rates drove bond prices higher he looked brilliant. My money is against Gross and in equities.
"There's an age-old cycle that happens, where you have periods of easy money, and certain sectors of our economy gorge on the easy credit, and then invariably, when rates start to rise and the economy slows, whoever has been gorging on that easy credit gets into trouble, the economy falters and markets go down," Hochberg says in the attached video.
Of particular concern to him are emerging markets, sovereign debt, municipal bonds and student loans, the latter of which is increasingly in the spotlight as recent college graduates face huge debt and weak jobs prospects.
I frame the debate as fantasy vs reality. The bull arguments are all based on fantasy, backed up by accounting that would land any private citizen in jail.
You can either be a bull living in la la land, or a bear living in reality. Reality isn't very fun, but it is REALITY.
Or are we really to believe that a company that loses millions on billions in revenue is a sound investment.
Try paying bills with that type of a system. Call your bank and tell them that you made $60k but you can't make your mortgage payment because you spent all your money. But instead of cash they can accept shares of yourself. Which are better than money because if your value goes up, the value of their shares will go up. Which will actually be worth more than your original mortgage payment.
The entire stock market system is bullshit. A system engineered to transfer wealth from people of worth to people of no worth.
Why do you buy stock?
- Does the company offer a dividend, no.
- Is the company buying back shares, no.
So why are the shares worth something?
Answer: Because you believe someone else will pay more for the shares sometime in the future.
But why are the shares worth more? If the company has no profit, how can the company be worth more money?
Myth: U.S. stocks will grow into their earnings expectations as the U.S. economies recover
Im hoping the same for my dick for years.
Stocks will go up until something TBTF (or nearly so) actually does (nearly) fail.
Until that event, the optimistic speculators will keep winning by buying stocks (or houses).
Calculated RiskRickkkPart-Time Work Made Up More Than 65 Percent Of New Jobs Created In July
While they won't say it I'd bet the Fed is also looking a combination of Federal revenue and revenue from income. One of the reasons for buying treasuries is to keep the cost of debt and deficits low. If those look to rise again on weak revenue the Fed will have little choice but to continue sopping up the excess.
using some kind of reasoned argument for justifying Fed monetary policy is humorous at best.
Actually I'm in awe of what Ben has pulled off.
Lit the fuse for the Arab Spring and all that has followed. Cheney's proud
Tommy Vu wrote on Sun, 8/4/2013 - 8:19 am (in reply to...)
Tommy Vu wrote:
Lit the fuse for the Arab Spring and all that has followed.
"What has happened in Tunisia, is happening right now in Egypt, but also riots in Morocco, Algeria and Pakistan, are related not only to high unemployment rates and to income and wealth inequality, but also to this very sharp rise in food and commodity prices," Roubini said.
Surging food prices added to North Africa turmoil - Jan. 28, 2011
Looks like the Fed has for now decided 10y 2.75, 30y 3.375 is as much as the economy can stand. Daily Treasury Yield Curve Rates
The mortgage markets seem to agree as spreads over the 10y are starting to close.
1 currency now -yogiobj
using some kind of reasoned argument for justifying Fed monetary policy is humorous at best.
but disgusting and immoral at worst.
Rob Dawg wrote:
Looks like the Fed has for now decided 10y 2.75, 30y 3.375 is as much as the economy can stand.
Daily Treasury Yield Curve Rates
The mortgage markets seem to agree as spreads over the 10y are starting to close.
I think the hoopla over yields rising, the crushing of bond owners by yields rising, and hyper-inflation is over for a little while.
Or would you rather have the economy crash again
although a free market is an ideal, something close to it is likely better than the alternative. That means taking the good with the bad. Whenever we place very powerful economic controls in the hands of a few they get abused, it is just human nature to favor ones own class or group. It is understandable that one wants their own assets to be protected on the downside but left to run on the upside, a very utopian view of life, and maybe just a bit reptilian in the sense of sheer greed.
So if we are to have a "crash" (caused in large part by the very forces you seem to credit with saving you) then I say let the chips fall where thy may. If a person so manages their own affairs to avoid leverage and speculation, preserving capital, then if they are in a position to "pick up the pieces" as you say, then I say more power to them. It seems the very essence of capitalism that the more sober parts stand ready to add balance on the downside when it does occur.
1 currency now -yogi:robj
the economy crash
You mean the stock markets, not the economy. You're a trader, remember?Tommy Vu
So if we are to have a "crash"(caused in large part by the very forces you seem to credit with saving you) then I say let the chips fall where thy may. If a person so manages their own affairs to avoid leverage and speculation, preserving capital, then if they are in a position to "pick up the pieces" as you say, then I say more power to them. It seems the very essence of capitalism that the more sober parts stand ready to add balance on the downside when it does occur.
I'm more concerned about the impact to the bottom 50%, given that we keep gnawing off the wheels of the "support" unicycle. Not ass-ets.
"Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be."
Managing the Federal Reserve's Balance Sheet - Federal Reserve Bank of New York
The equity market recovery on Twitpic
Rob Dawg wrote:
Where he got it: Obamacare Full Frontal: Of 953,000 Jobs Created In 2013, 77%, Or 731,000 Are Part-Time Submitted by Tyler Durden on 08/02/2013 09:04 -0400
Or here, since the original article ran August 2nd in the WSJ:Low Pay Clouds Job Growth - WSJ.com
Whose ranges or what ranges do you think he is disregarding? He actually said in the blog post:
Consult the table:
IMO, it is a misleading to say the forecast when reporting just central tendencies.
The current forecast is for GDP to increase between 2.3% and 2.6% from Q4 2012 to Q4 2013.
Range: 2.0 to 2.6
The current forecast is for the unemployment rate to decline to 7.2% to 7.3% in Q4 2013.
Range: 6.9 to 7.5
The current forecast is for prices to increase 0.8% to 1.2% from Q4 2012 to Q4 2013.
Range: 0.8 to 1.5
The current forecast is for core prices to increase 1.2% to 1.3% from Q4 2012 to Q4 2013.
Range: 1.1 to 1.5
The current forecast is for GDP to increase between 2.3% and 2.6% from Q4 2012 to Q4 2013.
Range: 2.0 to 2.6
Q3 '12 100.0 Q4 '12 100.1 (0.4% annual) Q1 '13 100.3 (1.1% annual) Q2 '13 100.8 (1.7% annual)
So to get to 2.0% lower bound annualized GDP for Q4 '12 to Q4 '13 Q3 '13 needs to grow at an annualized rate of 4.8%. Not going to happen.
IMO, it is a misleading to say the forecast when reporting just central tendencies.
In the projections, its indeed 2 columns , the central tendency side by side with the range. So what does Ben mean when he says forecast then ?
No doubt Hilsenrath will tell us when the time is right.. Until then:
'When I use a word,' Humpty Dumpty said, in rather a scornful tone, 'it means just what I choose it to mean - neither more nor less.'
'The question is,' said Alice, 'whether you can make words mean so many different things.'
'The question is,' said Humpty Dumpty, 'which is to be master - that's all.'
08/04/2013 | Zero Hedge
Quantitative easing is nothing but "competitive devaluation," Kyle Bass begins this brief but wide-ranging interview; and while no central bank can explicitly expose the 'beggar thy neighbor' policy, they are well aware (and 'banking on') the fact that secondary or tertiary effects will lead to devaluing their currency. The bottom line, Bass warns, is "when the globe is at 360% credit market debt-to-GDP, there is no real way out." Furthermore, the winds of austerity have already blown (simply put no nation engaged in austerity prospectively - for the nation's betterment - they were forced by the bond markets) and with central bankers now dominant - the Krugman-esque mentality of "let's just keep going," is very much in the driver's seat since politicians now see "no consequence for fiscal profligacy." The average investor, Bass adds, "is at the mercy of the central bank puppeteers," as the Fed's policies are forcing mom-and-pop to "put their money in the wrong place at the wrong time." There will be consequences for that... there is only one way this will end... "and investors should be really careful doing what the central bankers want them to do."
Rob Dawg wrote on Sun, 7/14/2013 - 7:39 pm (in reply to...)
Growth in spending on machinery and investment by the world's 2,000 biggest companies has begun to contract for the first time since the Lehman crisis, led by sharp falls in China and a near collapse in Latin America.
Everyone is hoarding cash in anticipation of picking up future assets for pennies on the dollar.
robj wrote on Sun, 7/14/2013 - 7:40 pm (in reply to...)
Growth in spending on machinery and investment by the world's 2,000 biggest companies has begun to contract for the first time since the Lehman crisis, led by sharp falls in China and a near collapse in Latin America.
The collapse in LA has been registered in the Fidelity fund over the last year. China and the US are the keys for the world economy, which is why I think the austerians are FOS.
This is still like the GD1 and Fortress America, in my view. We should be spending on infrastructure, but I'm speaking to the converted, mostly. I'm going to be pissed when we do necessary infrastructure spending at rates 2x higher than now.
Rob Dawg wrote on Sun, 7/14/2013 - 7:54 pm (in reply to...)
We should be spending on infrastructure, but I'm speaking to the converted, mostly. I'm going to be pissed when we do necessary infrastructure spending at rates 2x higher than now.
Sadly by the time we wise up delayed repairs will eat up far more than 2x and we we still be losing ground.
06/14/2013 | Zerohedge
Via Nomura's Bob Janjuah,
There can be no doubt that the global growth, earnings, incomes and fundamental story remains very subdued. But at the same time financial markets, hooked on central bank 'heroin', have created an enormous and in the long run untenable gap between themselves and the real economy's fundamentals. This gap is getting to dangerous levels, with positioning, sentiment, speculation, margin and leverage running at levels unseen since 2006/2007. 'Tapering' is going to happen. It will be gentle, it will be well telegraphed, and the key will be to avoid a major shock to the real economy. But the Fed is NOT going to taper because the economy is too strong or because we have sustained core (wage) inflation, or because we have full employment - none of these conditions will be seen for some years to come. Rather, we feel that the Fed is going to taper because it is getting very fearful that it is creating a number of significant and dangerous leverage driven speculative bubbles that could threaten the financial stability of the US. In central bank speak, the Fed has likely come to the point where it feels the costs now outweigh the benefits of more policy.
Referring back to my last note from 26th March (Bob's World: Post-Cyprus Tactical Update):
A At best I give myself 5 out of 10 in terms of the accuracy of my main tactical call detailed in the above note. The S&P rallied to 1597 in early April, and then sold off 63 points (4%) to 1534 in Q2 before recovering. I was looking for a 5% to 10% sell-off from 1575 to around 1450/1475.
B I score myself more highly for the 2nd key call I made back in March, which was that once we cleared a consecutive weekly close above 1575 in the S&P, we'd see new nominal all-time highs with the S&P trading in the high 1600s. I had thought we'd get there in Q3, but as it happens we have seen a (to date) Q2 high print of 1687 (22nd May). So maybe that deserves 7 out of 10? My sense that positioning and sentiment was set-up to get to extremes and chase/buy any dip seems to have played out pretty well.
C The 3rd and last main call I made was that based on (poor) fundamentals, (in my view) dangerously loose global central bank policy settings, increasing complacency towards risk and blind faith in central bank 'puts' amongst investors, and the sense that positioning and sentiment can and needs to be at (even more) absolute extremes as a pre-condition to any major market move it would not be until late 2013 or early 2014 before we see the onset of the next major (-25% to -50%) bear market. Time will reveal all on this call, but for now I continue to hold this view.
D To clarify further, I feel that the current dip that began with the S&P at 1687 in late-May, sparked by moves in rates and rates volatility in Japan and by the Fed 'taper' talk, is not the big one. Risk became way overbought from late 2012 and through the first 5 months of 2013, so a 5% to 10% correction (see A above) in, for example, the S&P (from 1687) should and will, I think, be considered normal and healthy and will be a dip that is also bought (into C above)
Of course things change all the time and I would have to be an (even bigger than usual) idiot to ignore all the Fed 'taper' and Japan talk.
Here is what I think matters:
1 There can be no doubt in my view that the global growth, earnings, incomes and fundamental story remains very subdued. But at the same time financial markets, hooked on central bank 'heroin', have created an enormous and in the long run untenable gap between themselves and the real economy's fundamentals. This gap is getting to dangerous levels, with positioning, sentiment, speculation, margin and leverage running at levels unseen since 2006/2007.
2 The Fed knows all this. The Fed also knows that it was held at least partially responsible for creating and blowing up the bubble that burst spectacularly upon us all in 2007/2008. But very importantly, the Fed now has explicit and pretty much full responsibility for regulation of the banking and financial sector.
3 As such, and as discussed by Jeremy Stein in February (remember, Mr. Stein is a Member of the Board of Governors of the Fed), the Fed now de facto has a new duel mandate based on (the trade-off between) what I'd call Nominal GDP (or macro-economic stability), and Financial Sector Stability (or what I'd simply label as system-wide 'leverage' levels).
4 This means first and foremost that while growth, inflation and unemployment all matter a great deal, the Fed cannot now either allow, or be perceived to allow, the creation of any kind of excessive leverage driven speculative (asset) bubbles which, if they collapse, go on to threaten the financial stability of the US. Imagine if this Fed were to allow a major asset bubble to blow up and then burst anytime soon (say within the next two or three years). This time round Congress and the people of the US would be able to place the entire blame on the Fed probably with some justification and, if the fallout approached anything like that seen in 2008, then it would mean, in my view, the end of the Fed as we currently know it.
5 Turkey's do not vote for Christmas, nor is Chairman Bernanke or any other member of the Fed willing, in my view, to take such a risk. Back in Greenspan's day he could always blame asset bubbles on someone else even though leverage either in and/or facilitated by the banking/finance sector is always at the heart of every asset bubble. But this get-out has now explicitly been removed from the list of options open to the Fed going forward.
6 So for me, 'tapering' is going to happen. It will be gentle, it will be well telegraphed, and the key will be to avoid a major shock to the real economy. But the Fed is NOT going to taper because the economy is too strong or because we have sustained core (wage) inflation, or because we have full employment - none of these conditions will be seen for some years to come. Rather, I feel that the Fed is going to taper because it is getting very fearful that it is creating a number of significant and dangerous leverage driven speculative bubbles that could threaten the financial stability of the US. In central bank speak, the Fed has likely come to the point where it feels the costs now outweigh the benefits of more policy.
7 - As part of this, the lack of sustainable growth in the US (much above the weak trend growth of 1% to 2% pa in real GDP which has been the case for some years now) is very telling. And, while I can't be 100% certain, at least some members of the Fed and other central bankers must be looking with concern at recent developments in Japan whereby the BoJ's independence has, for all practical purposes, been consigned to history, and which has a two decade head start with respect to QE. At least some members of the Fed may be worrying about the future of the Fed and the US if they persist with treating emergency and highly experimental policy settings as the new normal.
8 The Fed will hope that markets heed its message and that we gradually, through the normalization of yields (in the belly of the curve) and rates volatility (higher!), move aggressively over optimistic financial market asset valuations somewhat closer to what is justified by rational and sustainable real economic fundamental metrics. Rather than being based on some circular and self-serving 'risk premium' delusion, which is almost completely predicated on the bogus time-inconsistent assumption of a continuous and never to be removed Fed/central bank put on yields and rates volatility.
9 The sad likelihood is that markets which are suffering from an acute form of Stockholm Syndrome - will listen and react too little too late. This could give us the large 25% to 50% bear market I expect to see beginning in late 2013 or early 2014, rather than a more gradual correction. In part, this is because markets will not believe until it is too late that the Fed is actually taking away its goodies. Further, it's because positioning and sentiment among investors just always seems to go to extremes, way beyond most rational expectations, before they correct in spectacular style. Think Chuck Prince and his dancing shoes.
10 - Crucially I suspect that the Fed will be so conflicted/whip-sawed by, and suitably vague in its response to data that it ends up watering down its tapering message a little too often and a little too much, thus encouraging one or two more rounds of 'buying the dip'. This would reflect the new dual FED mandate and because we are living through an enormous and never seen before global policy 'experiment'. Furthermore, we are probably going to see Bernanke be replaced come January 2014. I don't actually think it matters who will replace him anyone different is a risk and a new uncertainty for the market. In the unlikely event that Bernanke signs up for another term, I don't think that the coming shifts and changes will be reversed, but I tend to feel that the transition phase would be a little less fraught with risk and volatility, as Chairman Bernanke has credibility and the confidence of the market.
11 So, going back to C & D above, we can certainly see a dip or two between now and the final top/the final turn. But it may take until 2014 (Q1?) before we get the true onset of a major -25% to -50% bear market in stocks. We also need to be cognizant of the Abe/BoJ developments. Along with the Fed, 'Japan' is one of the two major global risk reward drivers. The ECB response to (core) deflation and the German elections, and weakening Chinese & EM growth and the indebtedness of China & EM, will also matter a great deal.
As of today, my best guess is at least one major dip around Q2/Q3 (we may be in the middle of it now) as we seek more clarity around all of these drivers. My initial line in the sand for this dip is around S&P at 1530 and my major line is at S&P at 1450. A weekly close below 1450 S&P, in particular, would be extremely bearish. But I expect at least one more major buying of the dip come (late) Q3/Q4.I would not be surprised if we saw the S&P not just back up in the high 1600s, but perhaps even a 100 points higher (close to 1800!) before the next major bear market begins. It depends on who says what, and on the levels of extreme speculation and leverage. In other words, did we collectively learn our lesson from the events leading up to and including the global 07/08 crash? My 25+ years in financial markets lead me to believe, sadly, that the answer is almost certainly NO.
What I do know is that the longer we wait and the longer we put our faith in a set of time-inconsistent policies the greater the fallout will be from the forced unwind of the resulting speculative leverage extreme. This would come once the cost and availability of capital (i.e., rates volatility) 'normalizes'. It would follow current policies that seek to force a mis-allocation of capital by mis-pricing the cost and availability of capital. I am confident that view is a correct read of the current state of affairs . And I think the Fed is telling us that they know this too. Ignoring this seemingly transparent signal from the Fed by, for example, believing that the Fed will not have the courage to taper, or that the BoJ and/or ECB can replace or even out do the Fed over the next year or so - could prove to be extremely dangerous for investors.
We are (I think) in a new volatility paradigm now. Cash will increasingly become King over the next year, even if I do still expect another round or two of dips that get bought during this period. Not getting too sucked in and/or too long illiquidity and/or overly invested in high-beta risks should all be avoided. Nimble tactical trading of risk should be the rule. An increasing focus on de-risking core balance sheet/portfolio should, over the next 12/18 months, hopefully set one up to take advantage of what I think will be another savage bear market in global risk assets over most of 2014.
If cash is too safe, then safety should be sought in the strongest balance sheets, whether one is investing in bonds, in credit, in currencies and/or in stocks. And, as a rule of thumb, (and excluding real house prices in the US) those things that have 'gone up the most' over the past few years are likely to be the things that 'go down' the most so as well as equities, EM investors also need to be very careful.
Let's start with the oldest economics joke in the book: "assume there is a housing recovery."
Ok, let's assume that.
So, applying logic, wouldn't consumers be actively buying furniture for their brand new homes, instead of furniture sales not only declining for the past year but posting the first negative print since January 2011, and the Great Financial Crisis before that?... Because we are confused.
And here are some additional thoughts on the issue of the housing recovery via Doug Kass:
I expect last week's "rally" in applications will be short lived relative to history.
Here is why:
Home affordability is overstated today when compared to the last cycle.
The bubble from 2003-2007 was all about "leverage-in-finance", I.e.: popular, exotic loan products of each period, terms, allowable DTI, documentation type, start/qualifying interest rates etc. For example, from 2003 to '05 a 5/1 interest only loan allowed 50% DTI qualifying at interest only payments. From 2006 to '07 Pay Option ARMs allowed 55% DTI at a 1.25% start rate.
This made the "cost" of buying a house HALF of what it is today.
Then when the leverage-in-finance all went away during a short period of time from late-2007 to mid-2008 house prices quickly "reset" to what people could afford to pay on a fundamental basis...30-year fixed mortgages, fully documented, 45% DTI, at a 6% interest rate.
Because 70%+ of homebuyers use mortgage loans -- and the monthly payment trumps the "purchase price" of the house with respect to purchase ability and decisioning -- then it stands to reason that the monthly payment rate of popular loan types of each period relative to house prices would determine whether or not house prices are once again bubbly.
Bottom Line: the popular loan programs during the bubble years -- which allowed for rapid and large house price appreciation -- were not 30-year fixed loans like today. Rather, exotic interest only loans, negative amortizing Pay Option ARMs and high CLTV HELOCs. Thus, comparing the "affordability" of houses using today's 30-year rates and program guidelines vs 30-year rates and guidelines from 2003 to 2007 is apples to oranges.
Based on "cost of ownership" for the 70% who need a mortgage loan to buy, CA houses are more expensive today than from 2003 to 2007. This is why first-timer buyer volume has plunged to 4-year lows recently. And if not for the incremental buyer & price pusher -- the institutional "buy and rent or flip "investor" that routinely pays 10% to 20% over the purchase price / appraised value treating a house like a high-yield bond -- present house prices cannot be supported.
On this basis, back in 2006 a $555k house "cost" as much as a $325k house does today.
June 13 | Bloomberg Video
Michelle Meyer, senior U.S. economist at Bank of America, and Robert Sinche, global strategist at Pierpont Securities Holdings LLC, talk about the outlook for the U.S. economy, markets and Federal Reserve policy. They speak with Scarlet Fu, Tom Keene and Alix Steel on Bloomberg Television's "Surveillance."
June 13 | Bloomberg
Bank of Israel Governor Stanley Fischer discusses the U.S. economy, Federal Reserve and Bank of Japan monetary policy, and the shekel.
He talks with Francine Lacqua and Elliott Gotkine on Bloomberg Television's "The Pulse." (Source: Bloomberg)
June 12 | Bloomberg
MD Sass Associates Chairman and CEO Martin Sass discusses bonds with Adam Johnson on Bloomberg Television's "Lunch Money." (Source: Bloomberg)
June 12 | Bloomberg
Gary Shilling, president of A. Gary Shilling & Co. and a Bloomberg View columnist, talks about Federal Reserve policy, the U.S. economy and bond market. He talks with Tom Keene and Sara Eisen on Bloomberg Television's "Surveillance." (Shilling is a Bloomberg View columnist. The opinions expressed are his own. Source: Bloomberg)
Yield for 30 bond will remain low as economy remains weak. People were living in a dream work. They went for yield. They will be world. If people look at the reality they will see disconnect. Emerging market and junk might disappoint.
Charles Lewis Sizemore, CFA
Shilling is a true contrarian, June 10, 2011
Given the strong rebound in the equity markets since March 2009, "most investors believe that 2008 was simply a bad dream from which they've now awoken," starts Gary Shilling in his newly-released tome on deflation, The Age of Deleveraging. "But the optimists don't seem to realize that the good life and rapid growth that started in the early 1980s was fueled by massive financial leveraging and excessive debt, first in the global financial sector, starting in the 1970s, and later among U.S. consumers. That leverage propelled the dot-come stock bubble in the late 1990s and then the housing bubble."
Dr. Shilling has had a long and wildly successful career as an economic forecaster. Shilling was one of the few voices of reason that foresaw the busting of the Japanese bubble of the late 1980s, and he also correctly forecasted the bursting of the 1990s Internet bubble and the mid-2000s housing and financial sector bubble. I am delighted to find him on "our" side of the inflation/deflation debate.
It can be a bit lonely here in the deflation camp. Despite the fact that official CPI inflation has been tepid at best for the past three years and that retailers still have practically no pricing power, there is widespread belief that high or even hyper inflation is just around the corner due to the Federal Reserve's aggressive quantitative easing.
Essentially, the inflationist camp is making the mistake of believing that the pre-WWII Weimar German Republic is an accurate representation of our own conditions today. Why? Because it is example that is often cited in popular economics books and it is thus fresh on their minds. But a better understanding of history would tell you that 1990s Japan is a far better representation than 1920s Germany. Japan, like America, had a massive real estate and consumer spending bubble fueled by easy credit. Weimar Germany's inflationary spiral was a result of unplayable war reparations. Which would seem a closer parallel to you?
Similarly, the inflationists see confirmation that inflation is "everywhere" when they see prices for fuel and agricultural commodities rising--yet they ignore the fact that food prices have risen primarily due to supply-shock factors (i.e. exceptionally bad harvests in Russia and elsewhere due to extreme weather) and that energy prices are manipulated by both speculators and the OPEC cartel.
They simultaneously ignore the fact that retail prices of services and manufactured goods continue to fall, as do housing prices. Furthermore, the bursting of asset bubbles is virtually always followed by a long period of deflation. Gary Shilling understands this.
Shilling believes that as a result, we have a decade or more of continued deleveraging in front of us, and with it a period of lower than expected growth and deflation.
All About Deflation
On the federal deficit and its implications, Shilling writes,
"With the prospect of huge federal deficits for the next several years, why won't significant inflation follow? After all, excessive government spending is the root of inflation. Still, it's excessive only if the economy is already fully employed, as in wartime. And that's not the case now, nor is it likely in the slow economic growth years ahead. The continuing $1 trillion deficits result from a sluggish economy, which retards revenues and hypes government spending."
Ditto, Gary. Dr. Shilling, though not a demographic expert by any stretch, does understand what demographic trends imply. On the Boomers he writes,
"A saving spree in the next decade will also be encouraged by [Baby Boomer] saving. Those 79 million born between 1946 and 1964 haven't saved much, like most other Americans, and they accounted for about half the total U.S. consumer spending in the 1990s. But they need to save as they look retirement in the teeth... Postwar babies need to save not only to finance retirement but to repay debt.
The Fed's 2007 Survey of Consumer Finance found that 55 percent of households with members aged 55-64 had mortgages on their abodes and 45 percent carried credit card balances."
Yet while he sees the importance of demographics, he also misunderstands them. Shilling falls into the trap that so many others--Dr. Jeremy Siegel and Fed Chairman Ben Bernanke among them--fall into. There is this persistent belief that the retirement of the Boomers will cause a labor shortage that will lead to severe inflation. As Shilling writes,
"When [the Boomers] stop working, the supply of goods and services would fall. In retirement, they might spend less on themselves and on supporting their kids, and they might have lots of greenbacks... Nevertheless, there would not be enough goods and services to go around."
While this argument might make intuitive sense at first, it is fundamentally flawed. Outside of medical care and select few other industries, spending falls on virtually all other consumer items in retirement. Yes, the elderly still have to eat. But they buy little else that contributes meaningfully to inflation.
This is not purely an academic argument. Japan has been struggling with an aging and even declining population for years now. And Japan would love to have an inflation problem. Instead, deflation persists.
You see, supply is not the problem. In the post-industrial information and high-tech economy, supply takes care of itself. Is it expensive to hire a housekeeper? No problem, buy an iRobot Rhoomba to vacuum the carpet while you're at work. Is your tax accountant expensive? No problem, fire him and buy TurboTax.
In the modern economy, automation and technology can make a good deal of human labor obsolete. We bring in migrant labor to harvest crops because migrant labor is cheap. But if the price of migrant labor got high enough, rest assured that California farmers would use robots to pick strawberries. This is not idle conjecture; their counterparts in Japan already do.
Demand will determine if we have inflation or deflation, not supply.
In The Age of Deleveraging, Dr. Shilling has published a very good and very convincing body of work. A world economy dominated by deleveraging is a very different animal than a world economy dominated by an accumulation of debts.
As investors, you have to position your portfolios accordingly and -- I want to be firm on this point -- you have to adopt a tactical approach to investing. Take advantage of rallies when you see them, but be prepared to take profits. In a period of deleveraging, you win by not losing.
Interesting but not a slam dunk argument, December 21, 2010I have mixed feelings about this book. I suspect that you will either love it or hate it if you have strong predictions of deflation or inflation, respectively. For the rest of us who aren't sure and are reading around, this is a good read but isn't entirely convincing.
Let me just start by saying that Shilling points out in a number of places in the book that he is a top-down economist, predicting first the macroeconomic environment with interest rates, and then moving down to their effects on individual sectors. My trouble with this approach is that top-down theories are interesting to read about, as they lay out a framework for thinking about the economy and "what-if" scenarios... but they're known to be unreliable at predicting what will happen. This is probably why Shilling spends so much time at the beginning of the book tooting his own horn about his past predictions. Nonetheless, I hear that he has made a number of gravely inaccurate predictions as well - see for example his book on deflation from the late 90s, I believe. Anyway, past performance, even if perfect, is no guarantee of future results. (As an aside, the top-down, as opposed to the fundamental bottom-up, approach introduces many data points that can significantly skew the end result by compounding small errors along the way.
Consider that many good investors - people who actually intend to make money, as opposed to economists and academics -, like the Buffet clan, continually reiterate that no one can predict the markets, even with perfect economic information.)
Which brings me to my point: it seems to me that the case Shilling lays out isn't as strong as it may seem, even if there is a lot of supporting "evidence. ..." I feel much of this evidence is circumstantial; it's all good in isolation, but taken together it doesn't really give strong proof that the world is in a deflationary mode. Here's how he lays out the book. In general, he devotes much of the book to a history of the market and various economic environments. Now I admit it's a truly fascinating read for economic history buffs. He then launches into a very good conversation about P/E ratio compression.
He makes the common argument, which I entirely buy, that bear markets are often bear because P/Es continually compress more than earnings can grow, putting pressure on the market. Fair enough. He incorporates various comments about interest rate regimes, the earnings yield on bonds vs stocks over the last 30 yrs, and a broad conversation about what that means. He also talks about foreign countries and their economic policies, notably China and the Chinese growth myth. His conclusion, then, due to compressing P/Es and various macroeconomic factors, including low interest rates, is that deflation will rein supreme over the next 10 yrs. He then makes some investment recommendations.
All this data and analysis makes for very interesting reading, but the sum does not necessarily add up to deflation. Possibly, it adds up to a bunch of stagflation, maybe some low growth, and some p/e compression. But he somehow continually ends up with a number of 2-3% deflation per annum over 10 years that seems unjustifed by the large amount of "evidence." Along these lines, he is obsessed with the long bond and is predicting much further appreciation in bonds, stating for example that the 3.x% yield can still go down to 2.x%, for an almost 20% appreciation. However, just recently, and shortly after publication of the book, the yields on the long bond rose substantially after QE2, and there is great argument in the community about what this rise means. He ends the book by issuing some investment recommendations that seem very reasonable given his deflation hypothesis.
As someone who is on the fence and looking for more info with an open mind, this book did not convince me about the future of deflation - not even whether deflation exists now or not. I think I would have liked to have seen some more specific analysis of how QE is working (or not working) and why it's doing what it's doing compared to other inflationary or deflationary periods. But providing me with general scenarios of history and a jump to a conclusion of deflation is, while highly interesting from an academic perspective, not good enough for me to put money on, which is ultimately the point of the book.
All in all, this was an interesting read, a good history, and good theory; but an amalgam of lots of data does not necessarily end in a cogent, well-constructed argument, and it left me questioning his argument.
All this data and analysis makes for very interesting reading, but the sum does not necessarily add up to deflation. Possibly, it adds up to a bunch of stagflation, maybe some low growth, and some p/e compression. But he somehow continually ends up with a number of 2-3% deflation per annum over 10 years that seems unjustified by the large amount of "evidence." Along these lines, he is obsessed with the long bond and is predicting much further appreciation in bonds, stating for example that the 3.x% yield can still go down to 2.x%, for an almost 20% appreciation. However, just recently, and shortly after publication of the book, the yields on the long bond rose substantially after QE2, and there is great argument in the community about what this rise means. He ends the book by issuing some investment recommendations that seem very reasonable given his deflation hypothesis.
As someone who is on the fence and looking for more info with an open mind, this book did not convince me about the future of deflation - not even whether deflation exists now or not. I think I would have liked to have seen some more specific analysis of how QE is working (or not working) and why it's doing what it's doing compared to other inflationary or deflationary periods. But providing me with general scenarios of history and a jump to a conclusion of deflation is, while highly interesting from an academic perspective, not good enough for me to put money on, which is ultimately the point of the book.
All in all, this was an interesting read, a good history, and good theory; but an amalgam of lots of data does not necessarily end in a cogent, well-constructed argument, and it left me questioning his argument.
JackalSpecific long term recommendations for 2011 given, December 15, 2010
I am not familiar with Schilling but he manages money and writes a newsletter from a quick perusal of his website. However, the book states that he does not yet manage money (but he is already a bit old). The book is really in three parts:
- The first third of the books deals with recommendations the author made to his clients roughly from 1988 to 2008. Clearly the author is a bit full of himself here. That is allowed because he seems to have made some good calls. I suppose the author needs to establish his track record somehow. However, most people wouldn't find this section terribly interesting. At least the author has made a decent job editing the text, which presumably originates from his newsletter. However, the section might be interesting for life-long students that want to understand the author's thought process in more detail. For those a key problem is that he only discusses his successful predictions. Maybe he has loads of predictions that didn't pan out. So while there is value in history, this section is problematic.
- The second third deals with themes that currently preoccupies the author. We are not going to see anything like the bull market which lasted from 1982 to 2000. Instead we'll get deflation. This discussion is quite interesting. However, this is a contrarian viewpoint so I would really have liked more depth and crispness in the arguments. He should also address the contents of his 1998 book called "Deflation", because if he has called "deflation" for over a decade her will lose credibility.
- The final third deals with investment recommendations for the next decade. I'm not terribly impressed by this section. Some of these recommendations are a bit naive, like don't buy antiques because they're illiquid.... Other ideas are clearly more serious, like buy consumer staples stocks. The nagging question is that I don't know if the author still keeps his best ideas exclusive to his newsletter subscribers. I would have liked the author to raise this issue himself.
The language is not very technical at all. I think most people who end up reading my review can easily read the book. Personally I find the book very verbose. He is kind of writing to a not-so-knowledgeable wealthy person. If you have some basic economics courses under your belt, some of the book will feel quite tedious.
Judging the quality of non-fiction is different from judging a novel. I really don't like the verbose style of writing, so style is equivalent to two stars. However, it is really the insights and quality of recommendations that is the important. For problems listed above that is three or four stars. So in conclusion three stars (i.e. useful if you read many books, but certainly not your first choice on the topic).
Old wine in new bottle August 19, 2011
Gary Shilling has been predicting deflation for the better part of two DECADES now. In the 1990s he wrote books predicting that deflation was just round the corner. A dozen inflationary years later, he is still singing the same tune. As they say, even a stopped clock will be right twice a day. He lists out his great calls over the decades. How about listing the not-so-great calls also?
Gary is most likely wrong on his recommendation for investing in Treasurys and bonds, because with interest rates at historic lows, bond prices have nowhere to go but down in the next 10 years. And he is most likely wrong on the US dollar also. Except for short-lived bear-market rallies, the US Treasurys and US Dollar will remain on a long term down trend, as will US stocks until the end of this decade.
That being said, there is some great information in the book, and some great numbers. I do agree with his recommendation to invest in rental properties. Below I quote some of his statements from the "Rent versus Buy" section in Chapter 12.
Over time, houses have sold for about 15 times (annual) rental costs. But that was in the post-World War II years when owners of rental properties expected inflation to enhance their 6.7% return - before the cost of income tax-deductible maintenance and property taxes. When house price appreciation was not expected in the aftermath of the 1930s, the norm for (annual) rentals was 10% of the house's value. In the coming deflationary years, houses and apartments may sell for closer to 10 times (annual) rentals than the 15 times norm, much less than the 20 times in the housing boom days.
Gary's analysis has shown that even with tax deductibility of mortgage interest, renting a single-family house or apartment is cheaper than home ownership, absent price appreciation. One can only imagine how things will be if the mortgage interest deduction is removed (seriously being advocated by politicians in Washington DC).
Here are some of the investments he suggests to avoid in this decade: - Commodities. - Big ticket consumer purchases. - Banks and similar financial institutions. - Credit card and other consumer lenders. - Conventional home builders and suppliers. - Commercial real estate. - Developing country stocks and bonds. - Japan.
Here are some of the investments he suggests to buy in this decade: - Treasurys and other high-quality bonds. - US dollar. - North American energy. - Health care. - Rental apartments. - Income producing securities.
12 of 12 people found the following review helpful 5.0 out of 5 stars Thought-provoking look at where the economy is likely heading April 14, 2011 By SCJ Format:Hardcover|Amazon Verified PurchaseDr. Shilling quotes Mark Twain in Chapter 1: "History doesn't repeat itself, but it does rhyme." He explains that he believes human nature changes slowly, if at all, over time which leads him to be able to make great economic calls. (Some reviewers have been troubled by his description, "great calls." I viewed them as I would a hallway of accolades leading me to a conversation with a wise economic thinker). As Sir John Templeton noted, "The four most dangerous words in investing are, "this time it's different."
So while the majority believe that an increase in the money supply will lend itself to an inflationary challenge, Dr. Shilling believes that money velocity will continue to be muted and the supply of goods, not money, will dictate the direction of prices. He espoused this belief in two of his previous books in the nineties and believes that the global recession of 2007/2008 is the tipping point. To those who disagree, he presents a strong case.
His research indicates that, in general, war is a precursor for inflation because it saps up the excess productive capacity. When the nation(s) are at peace, deflation reigns. While acknowledging that the United States has been in a war of sorts, the War on Terror, he believes that it may wind down before reaching Cold War proportions. If that happens and no other wars rise up in its place, he is confident that capacity will dictate our economic path. Too much of a good thing with too few buyers putting them (the buyers) in command.
And these buyers are not buying like they once were. The savings rate in the US is climbing again for the first time since it began its steady decline in the early eighties. He believes that over the next decade we will again see the savings rate reach double digits here.... That implies a steady increase in the savings rate of about 1 percent per year (it had fallen to 1 percent from 12 percent before it began to reverse course). Incidentally, he notes that we have a long way to go to get back to the debt to after-tax income ratio we had in the early 1980s. We were at 122 percent in 2010 -- almost double where it was back then!
In addition to foretelling a significant rise in the savings rate, he also notes that credit will be much tighter in the years ahead. His logic for this is that the bankers of yesterday's excess will become the bankers of tomorrow's thoughtfulness. There will be no more "no-doc" (liar) loans. Only the best credit risks will be extended the courtesy of borrowing and they will graciously decline since they are reeling from setbacks in the values of their homes and the uncertainty surrounding their investment portfolios. We will become a nation of risk managers!
How important will this turnabout of the American buyer of first and last resort be for the rest of the world? Dr. Shilling points out that just a 1 percent decline in US consumer spending whacks nearly three times that much off of our imports, their exports. With US moms and pops a full one-sixth of global GDP, the rest of the world will feel the change in thinking and spending.
So with exports from around the globe adversely affected, will that open an opportunity for the US to ride the back of a weak dollar and become a stronger exporter? Not according to the good doctor. He actually sees a strong dollar (the best of a bad lot and still no other option for a global reserve currency) and a very limited link between the value of the buck and real imports/exports. On the other hand, his statistical evidence points to a very strong correlation between GDP and imports/exports.
For those that believe deflation is impossible in a fiat currency system, he points to Japan as an outstanding example. Their economic output has been among the top two or three for decades and yet they have experienced a domestic demand problem tied to the deleveraging that began there in 1989. So while we fret about the threat of rising prices, Dr. Shilling believes that we will start to see falling prices in the years ahead. Little by little, the reality of deflation will set in and people will start to expect to pay less in the future and not view today's purchase as a store of value. He points to the likes of Wal-Mart lowering the prices on thousands of items in April 2010 as a US example and Ireland, Spain, and Portugal price declines in 2009 as an international one.
So while the monetarists under the spell of Milton Friedman continue to wax poetically on the dangers of a pumped up money supply, Dr. Shilling continues to croon his tune of money in the vaults doesn't matter. Show me the M2 to reserves (was 70 to 1 in early 2007 but less than 1 to 1 for the $1 trillion in new reserves as of March 2010) and I'll show you a picture of a bunch of fat-cat bankers sitting around the table smoking their stogies and counting their Bennies (Franklins, that is). There's no business like show business as bankers have learned the hard way. Their exotic Italian and British cars have been replaced with Volvos and SUVs as they have gotten back to the business of banking. They now actually read the crash tests before they buy (or loan) now. The next wreck they get into may find Uncle Sam's body shop closed. That's a chance they would rather not take -- especially since Uncle Sam bought into the businesses and will now be lending a hand in deciding what cars little Johnnie and Susie should be driving on the dangerous highways and by-ways of an international economy teetering on the brink of failure.
So with the US consumer pulling back, the banks pulling back, and Uncle Sam pulling back, how are prices going to push ahead? Dr. Shilling concludes that they won't. After reading his book carefully you may not agree but I wouldn't bet on it. Read more Comment | Was this review helpful to you?Yes No 11 of 11 people found the following review helpful 4.0 out of 5 stars Has a really interesting chapter on the elements of deflation / inflation August 20, 2012 By Gwendally Format:PaperbackI heard Gary Shilling speak at a conference last month and his discussion of demographics was interesting and insightful so I sought out his most recent book: "The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation". This book was 500 pages long. Five hundred. I told B. I felt like I was taking a graduate level course in economic forecasting. I'm not even sure how to integrate this book into my body of knowledge, but here's my attempt.
The first 125 pages or so are on the subject of why we should listen to him. Each chapter is about triumphs in prognostication he had over the years, his "Seven Great Calls" when he predicted major economic changes. I found the history to be occasionally interesting and skimmed the chapters looking for what he considered the markers of change. The main thing he appears to do is to really dive down into the STORY that the economic indicators are telling. Look at the big picture: where are the demographics? What is the existing inventory level? What makes SENSE to happen next? I found his methods to be plausible and in line with the way I look at the world, too. Each of the many threads emerges into a tapestry if you stand back and look at the big picture. This is why I read so many threads and go for long walks to let it gel. I'm not Gary Shilling, but I don't have to be if I can listen to people who see the big picture.
The central premise of this book is that Gary Shilling sees slow growth ahead. Period. He stands with Mish Shedlock in the deflation camp (although he never mentioned Mish Shedlock.) Instead, he takes on more esteemed heroes of mine. He pooh poohs Peak Oil (we'll switch to natural gas, he says, and doesn't sound cornucopian when HE says it....) He dismisses Milton Friedman's definition of inflation "as always and everywhere a result of [excess money.]" What is money, asks Shilling? If you have a $10,000 credit line on a credit card - whether you use it or not - isn't that money? American Express cards have no limits on them... what does THAT mean to the money supply? Instead he talks about there being seven varieties of inflation/deflation:
1. Commodity 2. Wage-price 3. Financial asset 4. Tangible asset 5. Currency 6. Inflation by fiat 7. Goods and services.
I have to admit, I really liked having seven dimensions to this issue. It is far more satisfying that Friedman/Martenson/Austrian versions. It fits reality better. It's hard to hold them all in my head at once, and they often move in tandem, but they actually are NOT identical and our current world situation has allowed the effects of different parts to be teased out better. If I ever re-read this book it'll be for Chapter 8: "Chronic Worldwide Deflation". This is where he makes the case that he isn't just some cranky old man moaning about how things were better when he was young (and get off my lawn, kid!)
Chapter 9 talks a bit about what help we can expect from the Fed, IMF and Congress. It's a short chapter. (Synopsis: none.)
Chapter 10 is about the outlook for stocks. The short version there is that he expects very low earnings going forward. He pretty much stayed away from the question of whether to buy index funds or managed portfolios in a confusing way, by saying managed portfolios will do better, except most of the time they don't. He is not a fan of long-term buy and hold and hates asset reallocation strategies, too, thinking it's foolish to sell your winners to buy your losers. Far better to just buy winners low and sell them high. (D'oh, why didn't *I* think of that?) So, all in all, this chapter was pretty worthless to me. (Because every book that says, "first, start by buying a high quality stock cheap right before it goes up" is similarly worthless, although is certainly fine advice.)
Chapter 11 was his explanation of twelve investments to sell or avoid. This is worth elaborating on:
1. Big Ticket consumer purchases (because people will be more austere and expect prices to fall so they'll wait to buy.) 2. Consumer lenders (who are about to find out that "deleveraging" means that they don't get paid back) 3. Conventional home builders (demographics suck) 4. Collectibles (there's a distinct shortage of greater fools) 5. Banks (see #2) 6. Junk securities (did you notice how the lenders fared in #2 and #5) 7. Flailing companies (uh, when WERE those a good idea?) 8. Low tech equipment producers (becoming obsolete and fungible at the same time) 9. Commercial real estate (low growth = high vacancies) 10. Commodities (they're being played by speculators) 11. Chinese and other developing country stock and bonds and 12. Japanese securities.
Japanese securities were because Japan is a stagnant aging population with a serious debt problem whose heroes all die in kabuki plays (or something like that.) But the Chinese and other developing country stocks and bonds was because of currency risk and because the economy is still too dependent on exports to the First World. Until a country develops a sizable middle class that can purchase its own GDP the economy is too tied to ours, he claims, and so you just end up with the currency risk that will eat up any growth. He also thinks that China has been stimulating itself into creating too much capacity that they aren't yet using. In other words, he's expecting deflation there, too.
Instead, he suggests you buy:
- Treasuries and other high-quality bonds. (This guy loves him some long bonds. He had a unique voice on that subject and I should probably reread this section because I find myself really confused how the Long Bond could be a good investment in a 0% world. He appears to be expecting the interest rate to go still lower!)
- Income-producing securities (sort of the opposite to #7 above, I mean, duh.)
- Food and other consumer staples (because they won't be subject to people putting off buying them.)
- Small luxuries (fluffy toilet paper? Watches? Cosmetics?)
- The U.S. dollar (he made the case that no one else has anything better.)
- Investment advisers and financial planners (Wuhoo! He makes a case that we're worth our keep.)
- Factory-built housing and rental apartments (so, buy those REITS but make sure they aren't commercial, merely residential housing. Uh, good luck with that.)
- Health care. (Demographics, government unicorn funding, the thing people want above all else) 9. Productivity enhancers (because everyone wants to run their business without actual people)
- North American energy (because we're massive hogs who care not one whit about climate change and want our air conditioning RIGHT THIS MINUTE without having to negotiate with Iran for oil. Sounds like a solid bet to me.)
The pieces I find myself thinking about in new ways are 30 year treasury bonds (it comes as a surprise to me that someone LIKES those) and that emerging country growth won't be as solid a play as I was thinking. He also gave me some instruction on how to think about the Big Picture, and my brain may be ready for more on that subject after I rest up from reading this book. It was tough going at times, and he occasionally veered into stories about his days meeting with captains of industry or highly placed officials. I guess he's allowed. He's pretty proud of the job he did replumbing the house he bought in 1968 and still lives in. I found myself liking the man, much the way I like Jack Bogle and Bud Hebeler. Overall, recommended, but be prepared to skim some parts.
Gary Shilling is one of the bears December 12, 2010 By Y JIN Format:HardcoverGary Shilling called the 2008 bear market. Like most other bears he just kept calling it, in 2001, 2002, 2003, 2004, 2005, 2006, 2007, and 2008. Boom! They got it. All bears declared victory. But all bears missed the big run up. Now they all missed it again. Reading this book will not make anyone a penny.
Following the 3 and 10 year auctions in the last two days, today's 30 Year $13 billion reopening completed the trifecta of ugliness, pricing at a surprisingly wide 3.355%, or three whole basis points above the When Issued, which traded at 3.324% at 1pm - the biggest tail in a long time. It was also the highest yield for a 30 Year since March 2012.
The internals were not pretty either - the Bid To Cover coming at 2.47, well below the TTM average of 2.59 but hardly the massive BTC collapse that we saw in yesterday's 10 Year.
And just like yesterday, the Directs ran for the hills taking down just 8.5%, compared to 15.2% in the past year average, Indirects taking 40.2% and 51.3% or so left for the Dealers who will be happy to stock up on some more collateral.
In the process of reaching and stooping, prices on financial assets have soared and central banks have temporarily averted a debt deflation reminiscent of the Great Depression. Their near-zero-based interest rates and QEs that have lowered carry and risk premiums have stabilized real economies, but not returned them to old normal growth rates. History will likely record that these policies were necessary oxygen generators. But the misunderstood after effects of this chemotherapy may also one day find their way into economic annals or even accepted economic theory.
Central banks including today's superquant, Kuroda, leading the Bank of Japan seem to believe that higher and higher asset prices produced necessarily by more and more QE check writing will inevitably stimulate real economic growth via the spillover wealth effect into consumption and real investment. That theory requires challenge if only because it doesn't seem to be working very well.
...Granted, some investors may switch from fixed income assets to higher "yielding" stocks, or from domestic to global alternatives, but much of the investment universe is segmented by accounting, demographic or personal risk preferences and only marginal amounts of money appear to shift into what seem to most are slam dunk comparisons, such as Apple stock with a 3% dividend vs. Apple bonds at 1-2% yield levels.
Because of historical and demographic asset market segmentation, then, the Fed and other central banks operative model is highly inefficient. Blood is being transfused into the system, but it lacks necessary oxygen.
In addition, there are several other important coagulants that seem to block the financial system's arteries at zero-bound interest rates and unacceptably narrow "carry" spreads:
- Zero-bound yields deprive savers of their ability to generate income which in turn limits consumption and economic growth.
- Reduced carry via duration extension or spread actually destroys business models and real economic growth. If banks, insurance and investment management companies can no longer generate sufficient "carry" to support employment infrastructures, then personnel layoffs quickly follow. With banks, net interest margins (NIM) are lowered because of "carry" compression, and then nationwide retail branches previously serving as depository magnets are closed one by one. In the U.K. for instance, Britain's four biggest banks will have eliminated 189,000 jobs by the end of this year compared to peak staffing levels, reports Bloomberg News. Investment banking, insurance, indeed the entire financial industry is now similarly threatened, which is leading to layoffs and the obsolescence of real estate office structures as well which housed a surfeit of employees.
- Zombie corporations are allowed to survive. Reminiscent of the zero-bound carry-less Japanese economy over the past few decades, low interest rates, compressed risk spreads, historically low volatility and ultra-liquidity allow marginal corporations to keep on living. Schumpeter would be shocked at this perversion of capitalism, which is allowing profits to be more than "temporary" at zombie institutions. Real growth is stunted in the process.
- When ROIs or carry in the real economy are too low, corporations resort to financial engineering as opposed to R&D and productive investment. This idea is far too complicated for an Investment Outlook footnote it deserves expansion in future editions but in the meantime, look at it this way: Apple has hundreds of billions of cash that is not being invested in future production, but returned via dividends and stock buybacks. Apple is not unique as shown in Chart 1. Western corporations seem focused more on returning capital as opposed to investing it. Low ROIs fostered by central bank policies in financial markets seem to have increasingly negative influences on investment and real growth.
- Credit expansion in the private economy is restricted by an expanding Fed balance sheet and the limits on Treasury "repo." Again, too complicated for a sidebar Investment Outlook discussion, but the ability of private credit markets to deliver oxygen to the real economy is being hampered because most new Treasuries wind up in the dungeon of the Fed's balance sheet where they cannot be expanded, lent out and rehypothecated to foster private credit growth. I have previously suggested that the Fed (and other central banks) are where bad bonds go to die. Low yielding Treasuries fit that description and once there, they expire, being no longer available for credit expansion in the private economy.
Well, there is my still incomplete thesis which when summed up would be this: Low yields, low carry, future low expected returns have increasingly negative effects on the real economy. Granted, Chairman Bernanke has frequently admitted as much but cites the hopeful conclusion that once real growth has been restored to "old normal", then the financial markets can return to those historical levels of yields, carry, volatility and liquidity premiums that investors yearn for. Sacrifice now, he lectures investors, in order to prosper later.
Well it's been five years Mr. Chairman and the real economy has not once over a 12-month period of time grown faster than 2.5%. Perhaps, in addition to a fiscally confused Washington, it's your policies that may be now part of the problem rather than the solution. Perhaps the beating heart is pumping anemic, even destructively leukemic blood through the system. Perhaps zero-bound interest rates and quantitative easing programs are becoming as much of the problem as the solution. Perhaps when yields, carry and expected returns on financial and real assets become so low, then risk-taking investors turn inward and more conservative as opposed to outward and more risk seeking. Perhaps financial markets and real economic growth are more at risk than your calm demeanor would convey.
Wounded heart you cannot save you from yourself. More and more debt cannot cure a debt crisis unless it generates real growth. Your beating heart is now arrhythmic and pumping deoxygenated blood. Investors should look for a pacemaker to follow a less risky, lower returning, but more life sustaining path.
The Wounded Heart Speed Read
- Financial markets require "carry" to pump oxygen to the real economy.
- Carry is compressed yields, spreads and volatility are near or at historical lows.
- The Fed's QE plan assumes higher asset prices will revigorate growth.
- It doesn't seem to be working.
- Reduce risk/carry related assets.
Jun 13, 2013 | The Big Picture
Bloomberg reports today:
Traders at some of the world's biggest banks manipulated benchmark foreign-exchange rates used to set the value of trillions of dollars of investments, according to five dealers with knowledge of the practice.
Employees have been front-running client orders and rigging WM/Reuters rates by pushing through trades before and during the 60-second windows when the benchmarks are set, said the current and former traders, who requested anonymity because the practice is controversial. Dealers colluded with counterparts to boost chances of moving the rates, said two of the people, who worked in the industry for a total of more than 20 years.
The behavior occurred daily in the spot foreign-exchange market and has been going on for at least a decade, affecting the value of funds and derivatives, the two traders said.
The $4.7-trillion-a-day currency market, the biggest in the financial system, is one of the least regulated. The inherent conflict banks face between executing client orders and profiting from their own trades is exacerbated because most currency trading takes place away from exchanges.
While the rates aren't followed by most investors, even small movements can affect the value of what Morningstar Inc. (MORN) estimates is $3.6 trillion in funds including pension and savings accounts that track global indexes.
As market-makers, banks execute orders to buy and sell for clients as well as trade on their own accounts.
By concentrating orders in the moments before and during the 60-second window, traders can push the rate up or down, a process known as "banging the close," four dealers said.
Three said that when they received a large order they would adjust their own positions knowing that their client's trade could move the market. If they didn't do so, they said, they risked losing money for their banks.
One trader with more than a decade of experience said that if he received an order at 3:30 p.m. to sell 1 billion euros ($1.3 billion) in exchange for Swiss francs at the 4 p.m. fix, he would have two objectives: to sell his own euros at the highest price and also to move the rate lower so that at 4 p.m. he could buy the currency from his client at a lower price.
He would profit from the difference between the reference rate and the higher price at which he sold his own euros, he said. A move in the benchmark of 2 basis points, or 0.02 percent, would be worth 200,000 francs ($216,000), he said.
To maximize profit, dealers would buy or sell client orders in installments during the 60-second window to exert the most pressure possible on the published rate, three traders said. Because the benchmark is based on the median of transactions during the period, placing a number of smaller trades could have a greater impact than one big deal, one dealer said.
Traders would share details of orders with brokers and counterparts at banks through instant messages to align their strategies, two of them said. They also would seek to glean information about impending trades to improve their chances of getting the desired move in the benchmark, they said.
Interest Rates Are Manipulated
Unless you live under a rock, you know about the Libor scandal.
For those just now emerging from a coma, here's a recap:
- The big banks have conspired for years to rig interest rates upon which $800 trillion in assets are pegged
- Local governments got ripped off bigtime by the Libor manipulation
- Libor is still being manipulated
Derivatives Are Manipulated
The big banks have long manipulated derivatives a $1,200 Trillion Dollar market.
Indeed, many trillions of dollars of derivatives are being manipulated in the exact same same way that interest rates are fixed: through gamed self-reporting.
Commodities Are Manipulated
The big and and government agencies have been conspiring to manipulate commodities prices for decades.
Gold and Silver Are Manipulated
The Guardian and Telegraph report that gold and silver prices are "fixed" in the same way as interest rates and derivatives in daily conference calls by the powers-that-be.
Oil Prices Are Manipulated
Oil prices are manipulated as well.
Everything Can Be Manipulated through High-Frequency Trading
Traders with high-tech computers can manipulate stocks, bonds, options, currencies and commodities. And see this.
Manipulating Numerous Markets In Myriad Ways
The big banks and other giants manipulate numerous markets in myriad ways, for example:
- Shaving money off of virtually every pension transaction they handled over the course of decades, stealing collectively billions of dollars from pensions worldwide. Details here, here, here, here, here, here, here, here, here, here, here and here
- Charging "storage fees" to store gold bullion without even buying or storing any gold . And raiding allocated gold accounts
- Committing massive and pervasive fraud both when they initiated mortgage loans and when they foreclosed on them (and see this)
- Pledging the same mortgage multiple times to different buyers. See this, this, this, this and this. This would be like selling your car, and collecting money from 10 different buyers for the same car
- Cheating homeowners by gaming laws meant to protect people from unfair foreclosure
- Pushing investments which they knew were terrible, and then betting against the same investments to make money for themselves. See this, this, this, this and this
- Engaging in unlawful "frontrunning" to manipulate markets. See this, this, this, this, this and this
- Charging veterans unlawful mortgage fees
Category: Currency, Think Tank
June 13, 2013 at 2:07 am
The CFMA allows any derivative or future to be purchased in limitless quantity with absolutely no public disclosure, this entire blog topic completely true.
Bernie Sanders put a spotlight on it in 2010 by leaking CFTC records of oil futures from the Summer of 2008 that showed Morgan Stanley and Goldman Sachs were responsible for oil @ $145 despite lower demand & higher supply, which in turn constricted over-extended consumers and initiated the onslaught sub-prime defaults so they could benefit from short CDO counter positions ("Shitty deals")
The CFMA makes this possible for TBTF's with any metal, material, commodity, grain or energy valuation making them omnipotent over input costs for any sector.
Dodd-Frank was set to require position limits, but not anymore, the banking lobby is shredding it.June 13, 2013 at 2:27 am
Ratings agency Egan Jones downgraded the US and the US Treasury + SEC retaliated.
Whats weird about the whole thing is that Egan Jones doesn't charge investor-clients for sovereign ratings - no revenue, no profits, no change in business - because of the SEC's ban.
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1. Isn't their core business to rate companies ? And rating countries is then simply a teaser to attract customers. To attract attention ?
2. The simple fact, the Treasury (Geithner & co.) + SEC retaliated against Egan Jones speaks volumes. Seems the Treasury "doesn't like" bad publicity.
3. Remember the case of Eliot Spitzer ? The District Attorneys of the states wanted to take action against the fraudulous mortgages lending practices. But they were blocked by the Treasury (OCC). When Spitzer complained in an article in the Washington Post
the gov't unleashed the "attack poodles" to attack Spitzer. http://rense.com/general81/why.htm
Do you see a pattern emerging ?
It's 'news' only in as much as it's published in a public nwespaper with specifics. I think more of these crimes are getting made public because the people involved slowly realize that very little if anything will be done by enforcement agencies to prosecute them on a direct basis, so its less risky to leak info.
The realization is that we exist in a financial kleptocracy where the middle class muppets only serve to be a giant sponge to wring dry by the banks. It is made all the more shocking by how we, as a slow boiled frog society, continue to react with nothing but apathy at a conga line of malfeance, fraud, and F-Us by the bankers. This is followed on by a silent non-responsive F-U by our governement which refuses and abeits these crimes and protects their interest over ours.
I drive by a shiny HSBC branch on the way to work. I have often fantasized about spry painting 'drug pimps' in red spray paint on the side and chucking a molotov through the window. Of course the same government that criminally prosecuted exactly no one at this foreign bank for their habitual money laundering of drug money in the US, would certainly without a doubt prosectute me to fullest extent of the law possible and throw me in jail for that act of criminal protest.
Shares of Herbalife (HLF) are up 20% in early trading after it was revealed late yesterday that billionaire investor Carl Icahn filed a 13D disclosing that he'd taken a 13% stake in the company.
Those familiar with the story of Herbalife understand that Icahn's move was likely driven by his ongoing and very public spat with fellow billionaire, hedge fund manager Bill Ackman. Ackman has a large short position in Herbalife, leaving him vulnerable to a short squeeze. In an instant classic on-air argument last month on CNBC, Ichan suggested that HLF could become "the mother of all short squeezes."
The Icahn-Ackman brawl is the most public instance of what has become a recurring market theme: Hedge funds taking big positions then touting them on financial television. It makes for great theater but Lee Munson of Portfolio LLC and author of Rigged Money, says it's all part of a strange new world.
"Hedge funds back in the '80s and '90s used to be private, we used to be secretive. Nobody told anyone about their positions," Munson explains in the attached clip. "Nowadays you go on TV and you jack with the system."
Jacking with the system is trader-speak for causing wild swings in stock prices. He may think Icahn bought such a huge chunk of Herbalife just to artificially inflate the stock price, but Ackman's in no position to complain. Back in December it was Ackman himself who caused a sell-off in shares of HLF when he called the company a "pyramid scheme" on national television, causing the shares to drop more than 10% in a single day. This came after he disclosed a $1 billion short position on the stock.
Munson wants to know where the SEC is in all of this. They may not be profiting from their public jaw-boning (for his part Ackman says he hasn't booked any profits on HLF yet) but these titans are undeniably causing massive swings in share prices. The spats might make for good theater but individual investors are getting whipsawed at the whims of the super rich.
Enforcement officials may or may not decide to put a stop to these shenanigans, but waiting for it to happen is a sucker's game. Munson says the only way for individuals to really protect themselves from getting trampled is to get out of the way.
"If your stock is in the news because of two big dudes getting in the big grass and trying to fight, you should leave the stock," Munson concludes.
Related: Is Herbalife a Pyramid Scheme?
Related: Herbalife -Great Theater, Terrible Trade
The Center for Retirement Research at Boston College has just released a new study that shows that the best way for people to turn their 401(k) balances into a stream of income is to "buy" an annuity from Social Security. Many people don't recognize that Social Security is in the annuity business, but it is and it has the cheapest product in town.
As more people approach retirement with 401(k) plans as their only supplement to Social Security, they face the challenge of how best to use their accumulated 401(k) assets to support themselves once they stop working. They could invest in safe assets and try to live off the interest, but the value of the assets would erode as prices rise and interest income would fluctuate as nominal interest rates rise and fall. They could invest in a portfolio of stocks and bonds and draw out some percent each month, but to avoid outliving their assets that draw is now about 3 percent. They could take some of their money to an insurance company and buy an annuity, but commercial annuities tend to be expensive because they are designed for people with above-average life expectancy and involve considerable marketing costs.
[Related: What's a Realistic Retirement Age?]
A much better alternative is for the household to "buy" an annuity from Social Security. They can make this "purchase" by using their savings to pay current expenses and delaying claiming to get a higher monthly benefit at an older age. The savings used is the "price" and the increase in monthly benefits is the annuity it "buys."
For example, consider a retiree who could claim $12,000 a year at age 65 and $12,860 at age 66 $860 more. If he delays claiming for a year and uses $12,860 from savings to pay the bills that year, $12,860 is the price of the extra $860 annuity income. The annuity rate the additional annuity income as a percent of the purchase price would be 6.7 percent ($860/$12,860). Remember that Social Security benefits are indexed for inflation, so the retiree is buying a real annuity. Vanguard a wonderful company also sells real annuities but it pays much lower rates.
The reason that Social Security annuities are a better deal than those in the private market is that Social Security can offer a product that is actuarially fair they are based on the life expectancy of the average person (not those people whose parents lived into their 90s) and Social Security doesn't have to worry about marketing costs or profits. Moreover, in this period of very low rates, Social Security is an especially good deal because the increase in benefits is not based on current rates but rather is a basic feature of the system. So buying an annuity from Social Security, especially in today's low interest rate environment, is the best deal in town.
So read the study and tell your friends with some 401(k) assets to use them to delay claiming their Social Security benefit.
Alicia Munnell, the director of the Center for Retirement Research at Boston College, is a weekly contributor to "Encore.
Jan 21, 2013
Bank stocks continue to be depressed because legitimate financial fears still linger. With economists on average estimating growth in U.S. gross domestic product at 3.3% this year, the recovery remains anemic in comparison with past upturns.
Despite predictions that the real estate market will soon turn up, housing sales continue to languish. The Dodd-Frank financial reform bill "has spawned a number of new regulations that are already taking a big bite out of banks' noninterest revenues," writes Theresa Brophy in the Value Line Investment Survey. And there are continuing doubts about whether banks have enough capital to weather another downturn.
...That's the trouble with banks. For investors, a bank is a black box. Because you can't examine its loans -- in most cases, a bank's most critical assets -- you really have no idea how sound it is or how its profits will be affected by loans that go sour. Diversification offers some protection, but if another financial crisis comes along, the stocks of just about every bank will be affected. Even Morgan, the best of the big banks, fell more than 70% between its 2007 high and its 2009 low. PNC Financial Services Group (PNC), another bank with a strong reputation, dropped nearly 80%.
...Frankly, I am not enamored of either alternative. Banks today are the kinds of stocks Warren Buffett has in mind when he says that stock picking is a game in which you stand with the bat on your shoulder until you get a pitch you really like.
In 2012, investors' long-harbored suspicion that the stock market was a rigged game became something of a majority opinion.
This year, exasperation over the predominantly electronic mechanics of trading stocks, in which hyper-fast computer algorithms maneuver against one another for fractions of pennies collected over microseconds, boiled over. The level of disgust has gotten broad enough, in fact, that authorities might be prepared to rethink some of the basic rules and processes driving the system.
The opaque and complex structure for trading stocks electronically across dozens of exchanges and alternative networks has long been justified by industry leaders and regulators as the messy but logical result of investor-friendly reforms. Technology has enabled mind-melting speed, unfathomable communications capacity and brutal competition for order flow all of which have made trading cheaper and faster than ever.
Yet by squeezing out traditional market makers who once collected low-risk, protected profits by mediating among buyers and sellers, rules and technology have tilted the power toward "high-frequency traders." And in 2012, the fragility produced by so much layered complexity became too obvious, and produced too many market-jarring failures, to be considered merely the price of progress.
A List of Failures
In March of 2012, BATS Trading, an upstart exchange that sees a large percentage of its volume from HFT firms, botched its own initial public offering. First unable to process the initial trades, BATS ultimately canceled the IPO.
In May, the Facebook (FB) initial public offering was mishandled by Nasdaq, whose systems couldn't keep up with the flood of electric orders. Many small investors just mustering the will to wade back into the market to own a piece of FB were turned off by the fiasco.
Only months later, Knight Capital Group (KCG), a premier electronic stockbroker and market maker, nearly went under when a trading-software upgrade went rogue and spewed orders without human intention or limit. Knight is now being acquired by HFT powerhouse Getco.
A process that began in 2000, when regulators and exchanges moved to quote stocks in pennies -- making it easier for automated scalpers to "improve" a quote by one cent to legally front-run real orders while reducing the amount of stock behind each bid or offer -- has now agglomerated to a point that almost no one is satisfied. A recent publication of the staid New York Society of Security Analysts declared that "public confidence in the integrity of equity trading markets appears to be at a once-in-a-generation low." This is a trend measured in the nearly $300 billion retail investors have yanked from traditional equity mutual funds since 2009.
Do Robots Really Run the Market?
But do the hyper-fast, disembodied trading robots really run the market for their own profit?
There is some irony in the fact that the public is so embittered about what they believe to be a market rigged against them, when, for most, stock trading has never been easier or less costly. For a flat $8 commission, a stay-at-home investor can instantly execute a trade in almost any stock with little noticeable friction. If, at times, an opportunistic algorithm steps ahead of that order by, say, bidding a penny more and driving the price up a couple of cents, that charge is vastly less than the 25-cent spread Nasdaq market makers used to take on almost every trade. If anything, the small investor is better served by the current trading arrangements than are large institutional investors, whose need to execute large, sensitive orders is compromised by the software spies' efforts to step in front of their trading flows.
Indeed, even the dominance of high-frequency trading, once said to participate in a sizable majority of stock orders, has passed its peak, thanks to competition and lower market volatility reducing their opportunities.Still, somehow the opacity and bloodlessness of the automated quasi market-makers rankles more, especially when investors are less confident of unending stock market appreciation than they were in the late 1990s and early 2000s.
Perception Becomes Reality
The measure of disaffection with today's market structure by both professionals and individuals means that, even if the financial impact to the typical trader isn't onerous, the sour perception in itself diminishes market quality and vitality.
And sentiment isn't helped by the ongoing round-up of alleged insider-trading conspirators among employees of major investment firms, which has made headlines that prove the authorities are paying attention while also hinting to the little guy that investing profits are often ill-gotten.
The good news in all the frustration with our tangled trading system is a renewed focus on rationalizing it. At a Senate Banking Committee hearing on electronic trading in late December, a rough consensus among exchange officials showed a desire for Congress to lay out clearer order-handling rules. The recently announced merger of electronic derivatives exchange ICE with NYSE Euronext could provide further impetus for a fresh look at the trading landscape.
Several years ago, Jim Maguire -- a NYSE floor veteran and longtime specialist for Warren Buffett's Berkshire Hathaway Inc. (BRKA, BRKB) shares -- began promoting a small but potentially helpful reform: quoting stocks in minimum increments of nickels rather than pennies. The idea was to create greater incentive for middlemen to provide a deep and fair market for public orders. Dubbed "Mr. Nickel" by Barron's, Maguire was viewed as a charming little anachronism. Yet on Feb. 5, the SEC is holding a panel discussion to discuss "the impact of tick sizes on securities markets." There is also now a more open discussion over charging high-speed traders for the massive system capacity they use.
The now deeply ingrained sense that stock trading is a game rigged by privileged sharpies with their omnipotent machines will not dissipate soon or easily. But as we enter 2013, it appears at last that those able to take action to foster greater faith in the integrity of the markets are at least focused on the issue.
Asia Times Online
Commentary and weekly watch by Doug Noland
At least for today (perhaps because I'm a little under the weather), when it comes to the Federal Reserve I'm about all ranted out. So this isn't supposed to be a rant, but more an effort to tie together some loose analytical ends. Key facets of my macro credit theory analysis seem to be converging: the myth of deleveraging, "liquidationist" historical revisionism, rules versus discretion monetary management, and "Keynesian"/inflationist dogma.
The Ben Bernanke Fed last week increased its quantitative easing program to monthly purchases of US$85 billion starting in January. "Operation Twist" - the Fed's clever strategy of purchasing $667 billion of bonds while selling a like amount of T-bills - is due to expire at the end of the month. The Fed will now continue buying Treasury bonds ($45 billion/month). It just won't be selling any bills, while continuing with $40 billion mortgage-backed security (MBS) purchases each month. The end result will be an unprecedented non-crisis expansion of our central bank's balance sheet (monetization). It's Professor Bernanke's "government printing press" and "helicopter money" running at full tilt.
During his Wednesday press conference, chairman Bernanke downplayed the significance of the change from "twist" to outright balance sheet inflation. Wall Street analysts have generally downplayed this as well. Truth be told, no one has a clear view of the consequences of taking the Fed's balance sheet from about $3 trillion to perhaps $4 trillion over the coming year or so. It's worth noting that in previous periods of rapid balance sheet expansion, the Fed was essentially accommodating de-leveraging by players (hedge funds, banks, proprietary trading desks, real estate investment trusts, etc) caught on the wrong side of a market crisis.
Does the Fed's next trillion's worth of liquidity injections spur more speculation in bonds, stocks and global risk assets? Or, instead, will our central bank again provide liquidity for leveraged players looking to sell (many increased holdings with the intention of eventually offloading to the Fed)? It's impossible to know today the ramifications of the Fed's latest tack into uncharted policy territory. It will stoke some inflationary consequence no doubt, although the impact on myriad credit bubbles around the globe is anything but certain.
Clearer is that the Fed has again crossed an important line. There has been previous talk of Fed "exit strategies". I'll side with Richard Fisher, president of the Federal Reserve Bank of Dallas, who on Friday warned of "Hotel California" risk ("... Going back to the Eagles song which is, 'you can check out any time you want but you can never leave... '"). There has also been this notion that the US economy is progressing through a ("beautiful") deleveraging process.
Yet there should be little doubt that the Fed has now resorted to blatantly orchestrating a further leveraging of the US economy. It will now become only that much more difficult (think impossible) for the Federal Reserve to extricate itself from this inflationary process.
I've read quite sound contemporaneous analysis written during the "Roaring Twenties". There was keen appreciation at the time for the risks associated with rampant credit growth and speculative excesses throughout the markets and economy. The "old codgers" argued that a massive credit inflation that commenced during the Great War (World War I) was being precariously accommodated by loose Federal Reserve policies. Chairman Bernanke has throughout his career disparaged these "bubble poppers".
To this day the "liquidationists" are pilloried for their view that there was no viable alternative than to wring financial excess and economic maladjustment out of the system through wrenching adjustment periods. Through their empirical studies, quantitative models, and sophisticated theories, contemporary academics - led by Bernanke - have proven (without a doubt!) that the misguided "bubble poppers" and "liquidationists" were flat out wrong. Our central bankers are now determined to prove them (along with their contemporary critics) wrong in the real world. Yet there remains one rather insurmountable dilemma: The contemporaneous credit bubble antagonists were right.
The Dallas Fed's Fisher stated Friday that the rate-setting Federal Open Market Committee "is probably the most academically driven in history". Well, I'll say that a world of unconstrained market-based finance "regulated" by inventive and activist academics has proved one explosive monetary concoction. The Wall Street Journal's Jon Hilsenrath (with Brian Blackstone) had two insightful pieces this week, "MIT Forged Activist Views of Central Bank Role and Cinched Central Banker Ties", and "World Central Bankers United by Secret Basel Talks and MIT Connections".
Inflationary cycles always create powerful constituencies. After all, credit booms and the government printing press provide incredible wealth-accumulating opportunities for certain segments of the economy. Moreover, it is the nature of things that late in the cycle the pace of wealth redistribution accelerates as the monetary inflation turns more unwieldy. Throw in the reality that asset inflation (financial and real) has been a prevailing inflationary manifestation throughout this extraordinary credit boom, and you've guaranteed extraordinarily powerful constituencies.
By now, "activist" central banking doctrine - with pegged rates, aggressive market intervention/manipulation and blatant monetization - should already have been discredited. Instead, policy mistakes lead to only bigger policy mistakes, just as was anticipated generations ago in the central banking "Rules vs Discretion" debate.
Today, a small group of global central bank chiefs can meet in private and wield unprecedented power over global markets, economies and wealth distribution more generally. They are said to somehow be held accountable by politicians that have proven even less respectful of sound money and credit. In the US, Europe, the UK, Japan and elsewhere, central bankers have become intricately linked to fiscal management. As such, disciplined and independent central banking, a cornerstone to any hope for sound money and credit, has been relegated to the dustbin of history.
Considering the global monetary policy backdrop, it's not difficult to side with the view of an unfolding inflation issue. At the same time, the "liquidationist" perspective - that to attempt sustaining highly inflated market price and economic structures risks financial and economic catastrophe - has always resonated.
The markets' response to Wednesday's dramatic Fed announcement was notably underwhelming. This could be because it was already discounted. Perhaps "fiscal cliff" worries are restraining animal spirits. Then again, perhaps the more sophisticated market operators have been waiting for this opportunity to reduce their exposures. After all, the Fed moving to $85 billion monthly of quantitative easing five years into an aggressive fiscal and monetary reflationary cycle is pretty much an admission of defeat.
I've argued that, primarily due to unrelenting fiscal and monetary stimulus, the US economy has been avoiding a necessary deleveraging process. Some highly intelligent and sophisticated market operators have argued the opposite. They point to growth in incomes and gross domestic product, while total (non-financial and financial) system credit has contracted marginally. I can point specifically to total non-financial debt that closed out 2008 at $34.441 trillion and ended September 30, 2012, at a record $39.284 trillion. But the deleveraging debate will not be resolved with data.
The old "liquidationists" (and "Austrians") would have strong views about contemporary "deleveraging". They would shout "inflated price levels", "non-productive debt", "unsupportable debt loads", "excess consumption", "distorted spending patterns and associated malinvestment", "deep economic structural imbalances" and "intractable current account deficits!" They would argue that to truly "deleverage" one's economy would require a tough weaning from system credit profligacy.
Only by consuming less and producing more can our economy reduce its debt dependency and get back on a course toward financial and economic stability. The "bubble poppers" would profess that in order to commence a sustainable cycle of sound credit and productive investment first requires a cleansing ("liquidation") of unproductive ventures and unserviceable debts. It's painful and, regrettably, shortcuts only short-circuit the process. I'm convinced that they would hold today's so-called "deleveraging" - replete with massive deficits, central bank monetization and ongoing huge US trade deficits - in complete and utter disdain.
In a CNBC interview on Wednesday evening, the Wall Street Journal's Jon Hilsenrath called Bernanke a "gunslinger". Our Fed chairman is highly intelligent, thoughtful, polite, soft-spoken, seemingly earnest and a huge, huge gambler. And he's not about to fold a bad hand. Almost four years ago, I wrote that Fed reflationary measures were essentially "betting the ranch". This week they again doubled down.
With his perspective and theories, Bernanke has pushed the envelope his entire academic career. He is now surrounded by a group of likeminded "Keynesian" academics, and they together perpetuate groupthink in epic proportions. These issues will be debated for decades to come - and who knows how that will all play out.
But as a contemporary analyst and keen observer, there's no doubt these unchecked "academics" are operating with dangerously flawed theories and doctrine. It's not the way central banking was supposed to work. Ditto capitalism and democracies. Whatever happened to sound money and credit?
Prior to last week's 3.6% bounce in the market (S&P 500), it had been down -8.9% from the highs on 9/14/12 to the lows on 11/16/12.
The S&P, along with the other major indexes, and countless numbers of stocks rebounded sharply after falling below their 50-day and 200-day moving averages.
If you're bullish on the market, you likely see this as a sign that the selling is over.
If you're bearish on the market however, you probably see this as a short-covering rally before the market heads lower again.
Only time will tell which camp is right. And quite frankly, as it relates to individual stocks, it might turn out that both are correct.
For some stocks, the recent bounce is providing another opportunity to sell stocks at a higher price -- whether that's to establish new shorts or to finish up the end-of-year tax selling to ensure one can take advantage of what could be the last time capital gains taxes are this low for a while.
And for others, it was the correction they've been waiting for to get in on some of their favorite stocks.
Retracements and Moving Averages
In general, stocks that drop below their 50-day and 200-day moving averages are looked at as potentially bearish, while stocks that breakout above them are considered potentially bullish. Traders and investors will often key in on these levels as places to buy and sell stocks.
Another often used indicator for buying and selling are retracements. Common retracement levels, as defined by Fibonacci, come in at 38.2%, 50% and 61.8%. These levels are looked at strategically, like the moving averages, as places to either get long or short.
With this screen (2 screens actually) we're going to combine both of these indicators to find stocks that look like bearish retracements and others that look like bullish set ups.
For the bearish set up, I'm looking for stocks that have:
- retraced less than 61.8% of the drop that preceded it
- and that are trading just under their 200-day moving average
- with a Zacks Rank of greater than or equal to 3 (Hold, Sell, or Strong Sell)
For the bullish set up, I'm looking for stocks that have:
- retraced more than 61.8% of the drop that preceded it
- and that are trading above their 200-day moving average (and preferably their 50-day as well)
- with a Zacks Rank of less than or equal to 3 (Strong Buy, Buy, or Hold)
Of course, nobody should use just the retracement levels and moving averages as their only reason for getting long or short; the Zacks Rank aside.
But these are two popularly watched indicators, and they can help you identify key points as to when a stock is ready to turn around or keep on going in the same direction.
Simon Johnson:The Market Has Spoken, and It Is Rigged, by Simon Johnson, Commentary, NY Times: In the aftermath of the Barclays rate-fixing scandal, the most surprising reaction has been from people in the financial sector who fully understand the awfulness of what has happened. Rather than seeing this as an issue of law and order, some well-informed people have been drawn toward arguments that excuse or justify the behavior of the Barclays employees.
This is a big mistake.. The behavior at Barclays has all the hallmarks of fraud... Anyone who takes personal responsibility seriously should want all those involved to be held accountable to the full extent of the law in all jurisdictions. Anything that lets individuals escape consequences will further undermine the legitimacy that underpins all markets. ...
Nevertheless, five arguments put forward in the last 10 days ... attempt to provide some sort of cover for what happened at Barclays. None of these arguments have any merit.
First, it is argued that this kind of cheating around Libor has been going on for a long time. This may be true, but it is a sad and lame excuse... Second, it is also asserted that "everyone does it." This is not any kind of defense try it next time you are accused of fraud. ...
Third, Libor-rigging is defended as a "victimless crime." This is untrue. Traders at Barclays and other banks gained from this series of manipulations, so someone else lost. ...
Fourth, some contend that it is the regulators' responsibility and fault that there was cheating on Libor. It is certainly the case that there was regulatory capture at work... But who does the capturing in regulatory capture? Big banks work long and hard and lobby at many levels to push regulators toward paying less attention.
Fifth, the weakest argument is, "It was only a few basis points, here and there"... Either the Libor reporting process and, consequently, the pricing of derivatives has been corrupted by a criminal conspiracy, or it has not. There is no "just a little" in this context for the enormous global securities market. ...
How will this play in American politics? There is still time for politicians on the right and on the left of the political spectrum to get ahead of the issue. Digging in around specious arguments in favor of price-fixing cartels is not the way to go.
Power corrupts, and financial market power has completely corrupted financial markets. ...
There's also the argument that regulating the industry will harm economic growth, but look at the growth rates we currently have -- thanks in large part to an out of control financial sector -- to see the folly of that claim. Deregulation of the financial industry did not bring us the robust economy that we were promised, it brought disaster, fraud, and who knows what else, and more oversight is clearly needed.
Sep 29, 2011 | Yahoo! Finance
Just as I was considering another attempt at hastening my journey to wealth via some form of speculation on stocks, a wise old sage came along and told me not to.
"The game is rigged," says Jack Bogle, the octogenarian founder of The Vanguard Group. "It is too convoluted. It is too complex. You shouldn't be playing the game. You don't need to play the game."
With his paternal loyalty intact, the man who created the first index fund 35 years ago is unbending in his belief that speculators lose, and owning the broader market for the long haul is the best path to wealth appreciation. Not surprisingly, the enormous popularity and diversity of offerings within the fast growing universe of exchange traded funds or ETFs, has failed to convert him.
"The index investor doesn't need to be touched by any of the lunacy that is going on in the ETF market,"says Bogle. "The ETF industry, which has got to be the greatest marketing idea of this age, is not the greatest investment idea of this age, I can assure you."
It's not so much products with triple leverage that irk him about ETFs, it's more the velocity that they represent. Bogle abhors the notion of trading and timing, and the long odds that go with it. He insists no one is smart enough to do that for the long haul.
"If you own the stock market for a lifetime, you get those returns. Playing games in the stock market, over every day of that time, is playing the stock market. The stock market game is rigged, the business of investing is not rigged," says Bogle.
His reasoning is simple. The use of capital by companies to "develop new products, efficiencies, innovations, productivity, the improvement of consumer goods and services at lower and lower prices" is all very real and ultimately validated through earnings. It's a proven process that delivers long-term growth that mirrors the pace of economic growth, plus a pinch of dividends to round up the results.
The problem is that investors want more than 6 or 7 percent gains and they want it fast. Unfortunately it's been a wild ride over the past 11 years. We've made great highs and painful lows, until to finally landing at the same place we started from, a.k.a. "the lost decade."
It's the eternal rift that marks the difference between investing and trading. The intended outcomes are the same, but the paths to prosperity are wildly different.
Do you agree with Bogle? Are investors better off than traders? Let us know in the comment section below.
For the first time in a long while, things are looking up for the banks.
Morgan Stanley MS +0.17%and Capital One COF -2.81%just reported bigger than expected losses. But overall the results have beaten the gloomiest forecasts, and shares have rocketed from last month's desperate lows. Wells Fargo WFC -0.14%and JP Morgan Chase have doubled. Bank of America BAC -0.82%and Citigroup C -1.08%have trebled. Many banks are now talking of repaying the government's TARP money. And leaks suggest all the major banks may pass the government's "stress tests" in a couple of weeks.
Many are wondering if the crisis is now over. Are happy days here again? And is it too late to get on board?
I wish shareholders the best. And maybe this rally in banking stocks will keep going. I have no idea - I never try to foretell short-term moves in the market.
But I wouldn't touch banking stocks with a 10-foot pole. If I had any shares I'd be looking to sell.
Why? Here are 10 reasons.
1. These stocks are gambles. They are highly leveraged bets on an economic rebound. They will be most vulnerable if the recovery runs out of steam. And the market rally has already run well ahead of any upturn in economic news.
2. And you're betting blind. Your cards are all face down. At least with, say, a retailer you have a pretty good idea what the assets actually are and what they might fetch if they had to be sold quickly. With the banks: Good luck. Nobody really understands what they own - least of all the people in charge.
3. The "stress tests" that the government is running on banks may not be stressful enough. As others have already pointed out many forecasters already expect the economy to do worse than the tests' supposed "worst case scenario".
4. Recent earnings reports, while often not as bad as many had feared, should raise more eyebrows. Write-offs are certainly rising. And analysts at SG Securities say, for example, that up to one third of Wells Fargo's first -quarter profits may have come from an accounting change.
5. The stock market rarely comes out of a crash the way it went in. Financials and emerging markets owned the last boom, 2003-07. They're probably not the place to be in the next one.
6. Financials aren't even quite as depressed as they may seem. They just look that way because they got so high before. Right now they make up about 15% of the US stock market by market value. Sure, a few years ago they were nearly a quarter of the market. But 25 years ago they were only about 12%.
7. For the retail banks: It's hard to have much faith in - or respect for - their business model. Too many rely on nickel and diming customers - on everything from overdraft fees, credit card gotchas and low interest paid on deposits. Bankrate says average fees hit a new high last year. This leaves banks wide open to more regulation, better competition, or simple customer revulsion.
8. As for the Wall Street banks: They aren't run for the benefit of the stockholders anyway. They are run for the staff. The threat of a crackdown on pay is going to cause a stampede to new firms. These banks will happily issue new shares, diluting existing stockholders, just to pay off the TARP money so they can get back to handing out fat bonuses.
9. Why bother? Banking isn't the only industry on the stock market. And investors have lots of choices these days. There are plenty of good quality businesses in other industries whose stocks are looking reasonably valued. Why gamble with your savings?
10. Finally, and most importantly: Even if, by some magic, the economy, the stock market and the banks recovered back to 2006 levels I still wouldn't want to own banking stocks. The bankers would just find another way to blow all the money.
Write to Brett Arends at firstname.lastname@example.org
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Rigged Money Beating Wall Street at Its Own Game Lee Munson Amazon.com Kindle Store
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