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May the source be with you, but remember the KISS principle ;-)
Bigger doesn't imply better. Bigger often is a sign of obesity, of lost control, of overcomplexity, of cancerous cells
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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."
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
Symbol: VEIPX Expense ratio: 0.26% One-year return: 20.8% Three-year return: 10.1% Five-year return: 13.9% Value of $10,000 invested 10 years ago: $21,206
Top three stock holdings: Microsoft ( MSFT ), JPMorgan Chase ( JPM ), Philip Morris International ( PM ) Equity-Income is a member of the Kiplinger 25 , the list of our favorite no-load funds.
We think it's a solid choice for investors who want a conservatively managed large-company stock fund with an above-average yield. The fund recently yielded 2.7%, compared with 2% for the S&P 500. Wellington Management's Michael Reckmeyer manages two-thirds of the fund's assets, investing in large firms with above-average yields. He also looks for companies with good growth prospects and the financial muscle to raise their payouts steadily. Vanguard's quantitative group, using computers to pick stocks, runs the rest of the fund, homing in on large, high-quality firms with attractive yields.
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.
The Vanguard Energy Fund Investor Shares (MUTF: VGENX) consists mainly of large-cap growth and large-cap value stocks from the energy sector, with an emphasis on North America. Top holdings should come as no surprise, with the following as the most heavily weighted positions:
Exxon Mobil Corporation (NYSE: XOM)
Chevron Corporation (NYSE: CVX)
Royal Dutch Shell plc (ADR) (NYSE: RDS-A)
Schlumberger Limited. (NYSE: SLB)
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.
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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
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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 email@example.com
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Is The Finance Game Rigged Against Outsiders - Business Insider
Groupthink : Two Party System as Polyarchy : Corruption of Regulators : Bureaucracies : Understanding Micromanagers and Control Freaks : Toxic Managers : Harvard Mafia : Diplomatic Communication : Surviving a Bad Performance Review : Insufficient Retirement Funds as Immanent Problem of Neoliberal Regime : PseudoScience : Who Rules America : Neoliberalism : The Iron Law of Oligarchy : Libertarian Philosophy
War and Peace : Skeptical Finance : John Kenneth Galbraith :Talleyrand : Oscar Wilde : Otto Von Bismarck : Keynes : George Carlin : Skeptics : Propaganda : SE quotes : Language Design and Programming Quotes : Random IT-related quotes : Somerset Maugham : Marcus Aurelius : Kurt Vonnegut : Eric Hoffer : Winston Churchill : Napoleon Bonaparte : Ambrose Bierce : Bernard Shaw : Mark Twain Quotes
Vol 25, No.12 (December, 2013) Rational Fools vs. Efficient Crooks The efficient markets hypothesis : Political Skeptic Bulletin, 2013 : Unemployment Bulletin, 2010 : Vol 23, No.10 (October, 2011) An observation about corporate security departments : Slightly Skeptical Euromaydan Chronicles, June 2014 : Greenspan legacy bulletin, 2008 : Vol 25, No.10 (October, 2013) Cryptolocker Trojan (Win32/Crilock.A) : Vol 25, No.08 (August, 2013) Cloud providers as intelligence collection hubs : Financial Humor Bulletin, 2010 : Inequality Bulletin, 2009 : Financial Humor Bulletin, 2008 : Copyleft Problems Bulletin, 2004 : Financial Humor Bulletin, 2011 : Energy Bulletin, 2010 : Malware Protection Bulletin, 2010 : Vol 26, No.1 (January, 2013) Object-Oriented Cult : Political Skeptic Bulletin, 2011 : Vol 23, No.11 (November, 2011) Softpanorama classification of sysadmin horror stories : Vol 25, No.05 (May, 2013) Corporate bullshit as a communication method : Vol 25, No.06 (June, 2013) A Note on the Relationship of Brooks Law and Conway Law
Fifty glorious years (1950-2000): the triumph of the US computer engineering : Donald Knuth : TAoCP and its Influence of Computer Science : Richard Stallman : Linus Torvalds : Larry Wall : John K. Ousterhout : CTSS : Multix OS Unix History : Unix shell history : VI editor : History of pipes concept : Solaris : MS DOS : Programming Languages History : PL/1 : Simula 67 : C : History of GCC development : Scripting Languages : Perl history : OS History : Mail : DNS : SSH : CPU Instruction Sets : SPARC systems 1987-2006 : Norton Commander : Norton Utilities : Norton Ghost : Frontpage history : Malware Defense History : GNU Screen : OSS early history
The Peter Principle : Parkinson Law : 1984 : The Mythical Man-Month : How to Solve It by George Polya : The Art of Computer Programming : The Elements of Programming Style : The Unix Haters Handbook : The Jargon file : The True Believer : Programming Pearls : The Good Soldier Svejk : The Power Elite
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Manifest of the Softpanorama IT Slacker Society : Ten Commandments of the IT Slackers Society : Computer Humor Collection : BSD Logo Story : The Cuckoo's Egg : IT Slang : C++ Humor : ARE YOU A BBS ADDICT? : The Perl Purity Test : Object oriented programmers of all nations : Financial Humor : Financial Humor Bulletin, 2008 : Financial Humor Bulletin, 2010 : The Most Comprehensive Collection of Editor-related Humor : Programming Language Humor : Goldman Sachs related humor : Greenspan humor : C Humor : Scripting Humor : Real Programmers Humor : Web Humor : GPL-related Humor : OFM Humor : Politically Incorrect Humor : IDS Humor : "Linux Sucks" Humor : Russian Musical Humor : Best Russian Programmer Humor : Microsoft plans to buy Catholic Church : Richard Stallman Related Humor : Admin Humor : Perl-related Humor : Linus Torvalds Related humor : PseudoScience Related Humor : Networking Humor : Shell Humor : Financial Humor Bulletin, 2011 : Financial Humor Bulletin, 2012 : Financial Humor Bulletin, 2013 : Java Humor : Software Engineering Humor : Sun Solaris Related Humor : Education Humor : IBM Humor : Assembler-related Humor : VIM Humor : Computer Viruses Humor : Bright tomorrow is rescheduled to a day after tomorrow : Classic Computer Humor
The Last but not Least Technology is dominated by two types of people: those who understand what they do not manage and those who manage what they do not understand ~Archibald Putt. Ph.D
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Last modified: October, 13, 2018