December 13, 2015

Conspicuous By Its Absence

A weekend topic on this Brown Political Review editorial. “There are many things that can give financial markets jitters, but only a few do so with clockwork regularity. The United States Federal Reserve is such an entity. Shudders mainly occur when the Fed uses monetary policy to fulfill two often-contradictory tasks: minimize inflation and maximize employment. Historic mandate and conventional wisdom dictate that the Fed should keep to these tasks and these tasks alone. However, after the 2008 financial crisis turned much conventional wisdom into outright foolishness, policymakers have rightly ratcheted up their scrutiny of that mandate.”

“Thanks to the Dodd-Frank Act passed after the crisis, financial stability has been officially added to the Fed’s regulatory mandate. This is encouraging but insufficient; long leery of moving beyond the axis of low inflation and high employment, the Fed must consider financial stability a first priority of monetary policy, too. In practice, this means that the Fed must be willing to prick asset bubbles.”

“The advent of Dodd-Frank and its sweeping extension of the Fed’s mandate for supervising and regulating the financial system go some way toward fixing this. But it’s insufficient: If central banks, and the Fed in particular, are to properly ward off asset bubbles and ensure a respectable degree of financial stability, the Fed will need to direct monetary policy — not just regulation — toward this goal too.”

“Even the most nuanced regulations simply don’t exert the broad-based impact that interest rates and, by extension, monetary policy do. As Harvard Professor and previous member of the Federal Reserve Board of Governors Jeremy Stein put it, monetary policy ‘has one important advantage relative to supervision and regulation — namely that it gets in all the cracks.’ Financial institutions can evade regulations, but not the interest rate. If the Fed wants its actions to be all-encompassing, monetary policy is the best route for accomplishing that.”

“When monetary policy ignores financial stability, as it has done in the past, there are deep and long-lasting drawbacks. This is largely due to the fact that monetary policy influences financial stability whether it intends to or not. When interest rates are low, earning high rates of return through investment gets a lot harder. As such, asset managers who are obliged to maintain a rate of return and earn a slice of their clients’ profits often start looking at riskier investments that pay higher returns. This behavior is known as ‘reaching for yield.’”

“Critically, this reaching means that there are more risky assets floating around the economy, making financial crises themselves more likely to occur. In short, a low interest rate environment sows the seeds of its own demise. Governor of the Reserve Bank of India Raghuram Rajan epitomized this wisdom in a 2005 speech later made famous by the financial crisis: ‘An unanticipated and persistent low interest rate can be a source of significant distortions for the financial sector, and thence asset prices.’ Such a counter-culture claim was blockbuster stuff in the world of central bankers.”

“If it’s true that low interest rates can create the potential for excessive risk to build up in the financial system, it’s also true that they make loans much cheaper. But in addition, it means that general amounts of debt — particularly for private actors, like households and corporations — quickly accumulate. As long as there are no big economic shocks and business continues as usual, this is fine. But when there is an economic shock, such as the bursting of an asset bubble, large amounts of debt are extremely problematic.”

“Like any controversial proposal, putting the onus of financial stability on monetary policy is an imperfect solution. Bubbles are difficult to diagnose, and a misdiagnosis would be costly in terms of jobs and economic growth. Nonetheless, the destructiveness of bubbles and contagiousness of financial instability in this day and age make these counterarguments persuasive only to the extent that policymakers should tread carefully, rather than not tread at all.”

“Targeting asset bubbles with monetary policy isn’t as difficult as skeptics make it out to be. Asset bubbles that pose a serious threat to the national economy — such as the housing bubble or the dot-com burst — usually come with warning signs.”

“Ultimately, the argument for monetary policy’s stake in financial stability comes down to two things: the limits of regulation and supervision and the fact that monetary policy is a powerful tool that affects financial stability and asset bubbles anyway. Dodd-Frank codified a much greater role for the Federal Reserve in ensuring financial stability; the Fed is now tasked with identifying and overseeing institutions that are ’systemically risky,’ with a view to preventing another Lehman Brothers meltdown.”

“But its role in ensuring financial stability hasn’t gone deep enough yet. One of the first sections of the Federal Reserve Act lists the objectives for monetary policy: ‘maximum employment, stable prices, and moderate long-term interest rates.’ Still, conspicuous by its absence is any mention of asset bubbles or financial stability. In order to face these threats, frequently far from the thoughts of central bankers, the Fed must climb out of its own bubble and put that realization in writing.”

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Comment by Ben Jones
2015-12-12 09:58:58

‘Asset bubbles…usually come with warning signs.’

This piece mentions:

‘For example, while it may be hard to track the development of bubbles through asset prices alone, Stein has suggested that the Fed can monitor proxies, like the junk bond market, to get a sense of whether markets might be overvalued. “Overheating in the junk bond market might not be a major systemic concern in and of itself,” Stein said, “but it might indicate that similar overheating forces were at play in other parts of credit markets, out of our range of vision.”

A reader posted this link to a chart today:

Comment by Professor Bear
2015-12-12 11:56:33

What does it mean to the Fed if the junk bond market crashes? Yet another excuse to postpone liftoff, perhaps?

Comment by Ben Jones
2015-12-12 12:19:27

It means we re-discover the reality that central banks don’t control long term interest rates. If these bonds are falling, rates are rising. Most have focused on what the Federal Reserve hasn’t done, instead of what they have done.

“The risk is there could be a run on the bond funds, causing further downward price movement. A lot of investors don’t like Treasurys. They’ve been searching for yield and throwing caution to the wind.” Jeffrey Gundlach, CEO at DoubleLine Capital.’

‘He added that investors may think that what happened in 2013, when the Treasury market fell during the taper tantrum and junk bonds held up and delivered decent returns, is normal and repeatable. “They wouldn’t just go up like Treasury rates, they’d go up even more than Treasury rates, causing price losses that aren’t expected and means high yields could suddenly be hundreds of basis points higher in yields,” said Gundlach.’

‘Liz Ann Sonders, chief investment strategist at Charles Schwab, said in the same Wall Street Week segment that she’s never seen anything like the “desperate search for yield,” largely outside the equity market, among her clients right now.’

“I’m amazing at how often I find investors who don’t really even understand the basics of how yields and prices move in the opposite direction. I’m not so sure in that desperate hunt for yield they quite understand the risks they’re taking in order to get that,” said Sonders.’

Comment by Ben Jones
2015-12-12 12:26:33

‘The first red light on the dashboard appeared in July, when analysts at Bank of America Merrill Lynch pointed out the huge gap between high-yield spreads and equity volatility – a good proxy for the level of complacency among equity investors. On August 14 the gap reached its widest level since March 6, 2008 – less than a fortnight before the financial crisis kicked off in earnest. The equity market sell-off over the summer closed the chasm a bit but not completely. The question now: was this the quake or just a pre-tremor?’

‘The signs are not good. Yields on debt issued by US companies with a credit rating of BB or lower (and therefore not classed as investment grade) have continued to rise. Prices (which move in the opposite direction to yields) are down 2pc for the year (even when you factor in interest payments) and are on course for their first yearly loss since the financial crisis.’

‘High-yield investing used to be a niche activity. But that was before global interest rates hit record lows, forcing investors to forage further afield in search of yield. Many found it in junk bonds, which pay a higher rate of interest to compensate for the higher risk of default.’

‘Normally, central banks would be tightening when the economy was growing strongly. But the high-yield markets also tell us that these aren’t normal times.’

‘So far this year there have been 102 high-yield defaults around the world, according to Standard & Poor’s, up from 62 in the whole of 2014. Moody’s has 37pc more companies on its “distressed list” than it did this time last year. Rising corporate defaults are usually a pretty accurate harbinger of coming recessions.

‘The relatively high global equity prices point to expectations of strong economic growth; the historically very high bond prices point to expectations of weak economic growth. How does one reconcile these two wildly inconsistent worldviews? The short answer is quantitative easing, which has pumped up asset values far beyond what the fundamentals would justify. Any bad news that comes along – and there has been a fair bit of that in recent months – merely serves to highlight that growing disconnect.’

Somebody around here has been saying junk bonds were the thin ice. Oh yeah, that was me.

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Comment by Professor Bear
2015-12-12 19:07:13

Me too.

Comment by Professor Bear
2015-12-12 22:46:08

“Rising corporate defaults are usually a pretty accurate harbinger of coming recessions.”

Another reason for the Fed to postpone?

Comment by GuillotineRenovator
2015-12-12 22:28:58

‘Liz Ann Sonders, chief investment strategist at Charles Schwab, said in the same Wall Street Week segment that she’s never seen anything like the “desperate search for yield,” largely outside the equity market, among her clients right now.’

My IRA fell 4.5% this year. Wooohoooooo!!

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Comment by Professor Bear
2015-12-13 10:38:35

It’s been a rough year for anyone to earn positive returns — even the “experts.”

Comment by Professor Bear
2015-12-13 10:42:02

The Worst Hedge Funds of 2015
2015’s biggest losers in the hedge fund world.

Hedge funds are supposed to be the smartest investors in the world, right? They’re paid millions, if not billions, to find and invest in the deals that no one else sees. The only problem is that even these elites of the investing world don’t always get it right.

Tough year for hedgies

For the 12 months ending in October, which is the most recent data available as of this writing, hedge-fund strategies are up just 3.09% across the board compared to 3.04% for the S&P 500. For the investors widely considered the smartest on Wall Street, simply matching the S&P is an underwhelming result.

Hedge funds focusing on North America have a net return of even less, 2.73%, but they aren’t the worst of all. That honor goes to the funds specializing in the emerging markets, which have posted a negative 0.3% return over this same period.

Hedge fund performance has gotten worse as the year has gone on, tracing the tough summer that was seen more generally across all equity markets.

Comment by Professor Bear
2015-12-13 13:55:02

The contrast between Treasury and junk bond yields is getting quite interesting.

I’m wondering if big “risk-off” moves like the current one are a typical development as the U.S. economy slides towards a recession?

Treasury yields post largest single-day drop in 5 months
Published: Dec 11, 2015 4:02 p.m. ET
Benchmark 10-year Treasury yield at lowest level since late October
By Ellie Ismailidou
Markets reporter
Bloomberg News
Oil prices fell below $37 a barrel Friday, toward a seven-year low.

U.S. Treasury prices closed sharply higher Friday, pushing yields to their lowest level since late October, as the crude-oil rout worsened.

Worries about risky assets, including stocks and high-yield bonds, drew investors into the perceived safety of government bonds.

The yield on the 10-year benchmark Treasury yield lost 13.5 basis point over the week and 10 basis points on the day to 2.139%, its lowest level since Oct. 28, according to Tradeweb. Treasury yields fall when prices rise and vice versa.

On Friday, the benchmark yield posted its largest one-day drop since early July.

Meanwhile, the 2-year Treasury yield fell 5.2 basis points over the week and the same amount on the day to 0.895%, its lowest level since Nov. 19, while the yield on the 30-year Treasury bond, known colloquially as the long bond lost 12.9 basis points over the week and 9.5 basis points on the day to 2.880%.

Crude-oil futures traded on the New York Mercantile Exchange fell below $36 a barrel to a seven-year low, continuing a downturn that began last week when the Organization of the Petroleum Exporting Countries decided to maintain current production levels.

The unrelenting oil rout weighed on energy stocks Friday, pushing Wall Street toward its fourth downbeat session this week. As stock prices fell, demand for government bonds rose.

Meanwhile, China’s central bank signaled Friday morning its intention to change the way it manages the yuan’s value by loosening its peg to the U.S. dollar and instead letting it track the currencies of its broader trading partners.

The news “rekindled fears of global currency devaluation and its disinflationary impact on U.S. prices,” said Lisa Hornby, a fixed-income portfolio manager at Schroders. Those fears pushed Treasury yields lower despite the fact that the Fed is expected to raise interest rates next week.

Comment by Ben Jones
2015-12-12 11:04:26

‘Candidate Clinton is essentially whitewashing the financial catastrophe. She has produced a clumsy rewrite of what caused the 2008 collapse, one that conveniently leaves her husband out of the story. He was the president who legislated the predicate for Wall Street’s meltdown. Hillary Clinton’s redefinition of the reform problem deflects the blame from Wall Street’s most powerful institutions, like JPMorgan Chase and Goldman Sachs, and instead fingers less celebrated players that failed. In roundabout fashion, Hillary Clinton sounds like she is assuring old friends and donors in the financial sector that, if she becomes president, she will not come after them.’

‘The seminal event that sowed financial disaster was the repeal of the New Deal’s Glass-Steagall Act of 1933, which had separated banking into different realms: investment banks, which organize capital investors for risk-taking ventures; and deposit-holding banks, which serve people as borrowers and lenders. That law’s repeal, a great victory for Wall Street, was delivered by Bill Clinton in 1999, assisted by the Federal Reserve and the financial sector’s armies of lobbyists. The “universal banking model” was saluted as a modernizing reform that liberated traditional banks to participate directly and indirectly in long-prohibited and vastly more profitable risk-taking.’

‘The banks invented “guarantees” against loss and sold them to both companies and market players. The fast-expanding financial sector claimed a larger and larger share of the economy (and still does) at the expense of the real economy of producers and consumers. The interconnectedness across market sectors created the illusion of safety. When illusions failed, these connected guarantees became the dragnet that drove panic in every direction. Ultimately, the federal government had to rescue everyone, foreign and domestic, to stop the bleeding.’

‘Yet Hillary Clinton asserts in her Times op-ed that repeal of Glass-Steagall had nothing to do with it. She claims that Glass-Steagall would not have limited the reckless behavior of institutions like Lehman Brothers or insurance giant AIG, which were not traditional banks. Her argument amounts to facile evasion that ignores the interconnected exposures. The Federal Reserve spent $180 billion bailing out AIG so AIG could pay back Goldman Sachs and other banks. If the Fed hadn’t acted and had allowed AIG to fail, the banks would have gone down too.’

‘These sound like esoteric questions of bank regulation (and they are), but the consequences of pretending they do not matter are enormous. The federal government and Federal Reserve would remain on the hook for rescuing losers in a future crisis. The largest and most adventurous banks would remain free to experiment, inventing fictitious guarantees and selling them to eager suckers. If things go wrong, Uncle Sam cleans up the mess.’

‘Actually, the most compelling witnesses for Senator Warren’s argument are the two bankers who introduced this adventure in “universal banking” back in the 1990s. They used their political savvy and relentless muscle to seduce Bill Clinton and his so-called New Democrats. John Reed was CEO of Citicorp and led the charge. He has since apologized to the nation. Sandy Weill was chairman of the board and a brilliant financier who envisioned the possibilities of a single, all-purpose financial house, freed of government’s narrow-minded regulations. They won politically, but at staggering cost to the country.’

‘Weill confessed error back in 2012: “What we should probably do is go and split up investment banking from banking. Have banks do something that’s not going to risk the taxpayer dollars, that’s not going to be too big to fail.”

‘John Reed’s confession explained explicitly why their modernizing crusade failed for two fundamental business reasons. “One was the belief that combining all types of finance into one institution would drive costs down—and the larger institution the more efficient it would be,” Reed wrote in the Financial Times in November. Reed said, “We now know that there are very few cost efficiencies that come from the merger of functions—indeed, there may be none at all. It is possible that combining so much in a single bank makes services more expensive than if they were instead offered by smaller, specialised players.”

‘Reed concludes, “As I have reflected about the years since 1999, I think the lessons of Glass-Steagall and its repeal suggest that the universal banking model is inherently unstable and unworkable. No amount of restructuring, management change or regulation is ever likely to change that.”

‘This might sound hopelessly naive, but the Democratic Party might do better in politics if it told more of the truth more often: what they tried do and why it failed, and what they think they may have gotten wrong. People already know they haven’t gotten a straight story from politicians. They might be favorably impressed by a little more candor in the plain-spoken manner of John Reed.’

‘Of course it’s unfair to pick on the Dems. Republicans have been lying about their big stuff for so long and so relentlessly that their voters are now staging a wrathful rebellion. Who knows, maybe a little honest talk might lead to honest debate. Think about it. Do the people want to hear the truth about our national condition? Could they stand it?’

Comment by BetterRenter
2015-12-12 17:39:13

There’s no real market for the truth. In this age of highly available information, people have become info-stunned, more ignorant than ever. The next great banker screwup and subsequent bailout are likely already in motion. If there’s anything a criminal learns well, is that if he gets away with a crime, he’ll just do that crime again.

Comment by Neuromance
2015-12-12 19:14:00

The repeal of Glass Steagall did nothing to cause the financial crisis?

I suppose allowing financial companies to hold consumer deposits hostage to their casino operations’ outcomes, and thus being granted de facto TBTF status, and the reckless behavior which accelerated after the repeal, and the subsequent financial crisis when it was realized the emperor had no clothes, is all just a big coincidence.

Granted, the financial sector had been moving towards a ‘privatize the profits / socialize the losses’ model for a long time, since the Great Depression, incrementally. It was like molten metal being poured in a mold little by little. When the crisis arrived, it was like taking a hammer and breaking the mold and seeing what had been wrought. And what had been building for a long time is the system we have today. Glass Steagall’s repeal was the last bit of molten metal in the mold.

Comment by Professor Bear
2015-12-12 22:48:14

‘Yet Hillary Clinton asserts in her Times op-ed that repeal of Glass-Steagall had nothing to do with it. She claims that Glass-Steagall would not have limited the reckless behavior of institutions like Lehman Brothers or insurance giant AIG, which were not traditional banks. Her argument amounts to facile evasion that ignores the interconnected exposures. The Federal Reserve spent $180 billion bailing out AIG so AIG could pay back Goldman Sachs and other banks. If the Fed hadn’t acted and had allowed AIG to fail, the banks would have gone down too.’

Is it really fair to expect an attorney to understand economics? I recall AlbqDan making a mockery of himself here on countless occasions trying to hold forth on economics, a subject he clearly never took in college.

Comment by oxide
2015-12-13 06:33:14

The most interesting part of this article is that it appeared in The Nation, that most liberal of liberal rags. Are they trying to torpedo Clinton in favor of nearly-unelectable Sanders?

Who knows, maybe a little honest talk might lead to honest debate.

As long as it’s not Trump doing the talking, eh?

Comment by Mafia Blocks
2015-12-13 07:51:28

The Donald lives in your empty skull, rent free.

Comment by IPFreely
2015-12-12 11:20:02

That anyone still believes the feds true mandate is to minimize inflation and maximize employment is amazing to me. How does the fed have any credibility left at all? Analysis of fed policy and regulations like what was posted is just propaganda to keep the sheep believing in the scam. I’m surprised anyone even wants to debate this crap anymore. What is the point? What a racket.

Comment by Ben Jones
2015-12-12 11:35:25

‘What is the point?’

It’s ongoing.

Comment by Ben Jones
2015-12-12 11:48:12

‘The junk bond bubble has exploded. Yesterday a public mutual fund “specializing” in the lowest-rated segment of junk bond market announced that it was suspending redemptions and liquidating its assets. It’s debatable whether or not it will be able to sell the nuclear garbage in the fund unless the Fed prints up some money and buys it.’

‘Blackrock (BLK) is the poster boy for credit market mutual funds. Blackrock’s funds are riddled with illiquidity, derivatives and bad investments. The stock is down over 11% in the last 10 trading days. It plunged 6.5% today.’

‘Everyone is worried about what will happen if the Fed nudges the Fed funds rate up a microscopic amount next week. But the planetary-system sized bubble that has inflated would never have been possible without the Fed’s monetary policies.’

Comment by Neuromance
2015-12-12 19:00:50

The problem with Fed interventions is that they don’t actually create any new value; they simply re-allocate society’s resources to causes they see fit.

Printing money, buying bonds with public money to simply make companies solvent is just re-allocating public resources - the value that a society has - to areas they want.

And those areas are always failed ventures, thus rewarding those who failed or were bad actors. Thus rewarding those behaviors. Which is not good for the society.

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Comment by Professor Bear
2015-12-12 22:49:30

‘Blackrock’s funds are riddled with illiquidity, derivatives and bad investments. The stock is down over 11% in the last 10 trading days. It plunged 6.5% today.’

Is Blackrock too big to fail?

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Comment by Professor Bear
2015-12-12 11:59:55

“Thanks to the Dodd-Frank Act passed after the crisis, financial stability has been officially added to the Fed’s regulatory mandate. This is encouraging but insufficient; long leery of moving beyond the axis of low inflation and high employment, the Fed must consider financial stability a first priority of monetary policy, too. In practice, this means that the Fed must be willing to prick asset bubbles.”

I’ve been under the mistaken impression that the Fed’s self-defined role was to keep asset bubbles aloft, not to prick them.

Comment by Ben Jones
2015-12-12 12:35:09


‘When a Federal Reserve governor other than Chairman Ben Bernanke gives a speech, the temptation to take a nap is powerful, but Thursday’s warning from Jeremy Stein about a junk bond bubble matters more than many investors are likely to realize.’

‘Speaking in St. Louis Thursday, Stein voiced concern about “a fairly significant pattern of reaching-for-yield behavior emerging in corporate credit.”

‘Stein, as a member of the Federal Open Markets Committee, has a vote on whether the Fed should try and pop that bubble, which it has had an important hand in creating by building up an unprecedented $3 trillion bond portfolio.’

‘Investors are expecting the Fed to keep adding to that portfolio — potentially inflating the bubble — for another six months to a year. Any hint that the Fed may hit the brakes sooner than that could cause a sharp rise in bond yields, in anticipation that the central bank may eventually begin selling bonds. Too sharp a rise could bring lending to a halt and throw the economy back into a recession.’

‘Despite the worrisome patterns observed by Stein, he added that “it need not follow that this risk-taking has ominous systemic implications.”

‘Then again, what choice did he have? If he had said it clearly has ominous systemic implications, his speech would have gotten far more attention than he wanted. If the Fed sees a bubble forming, it wants to let the air out as slowly as possible. Thursday’s speech by Stein was an attempt to do just that.’

Comment by Ben Jones
2015-12-12 13:06:07

This is the entire speech, a good read:

‘Governor Jeremy C. Stein
At the “Restoring Household Financial Stability after the Great Recession: Why Household Balance Sheets Matter” research symposium sponsored by the Federal Reserve Bank of St. Louis, St. Louis, Missouri
February 7, 2013

Overheating in Credit Markets: Origins, Measurement, and Policy Responses

‘Conclusion: I hope you will take this last example in the spirit in which it was intended–not as a currently actionable policy proposal, but as an extended hypothetical meant to give some tangible substance to a broader theme. That broader theme is as follows: One of the most difficult jobs that central banks face is in dealing with episodes of credit market overheating that pose a potential threat to financial stability. As compared with inflation or unemployment, measurement is much harder, so even recognizing the extent of the problem in real time is a major challenge. Moreover, the supervisory and regulatory tools that we have, while helpful, are far from perfect.’

‘These observations suggest two principles. First, decisions will inevitably have to be made in an environment of significant uncertainty, and standards of evidence should be calibrated accordingly. Waiting for decisive proof of market overheating may amount to an implicit policy of inaction on this dimension. And, second, we ought to be open-minded in thinking about how to best use the full array of instruments at our disposal.’

Hey Janet:

‘Waiting for decisive proof of market overheating may amount to an implicit policy of inaction’

Comment by Neuromance
2015-12-12 19:04:06

In 2013, the Nobel went to Shiller, who studies bubbles, and Fama, who states bubbles cannot exist.

Granted, Fama’s conjecture is a bit tautological, in that his view, market pricing is always correct, and cannot be wrong for it is The Market, thus bubbles cannot exist.

Comment by Professor Bear
2015-12-12 19:09:31

Chicago school circular reasonung…

Comment by Ben Jones
2015-12-12 19:30:25

I don’t think he got the NP for saying bubbles don’t exist:

“Prize motivation: “for their empirical analysis of asset prices”

Field: financial economics

Trendspotting in Asset Markets

For many of us, the rise and fall of stock prices symbolizes economic development. In the 1960s, Eugene Fama demonstrated that stock price movements are impossible to predict in the short-term and that new information affects prices almost immediately, which means that the market is efficient. The impact of Fama’s, results has extended beyond the field of research. For example, Fama’s results influenced the development of index funds.”

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Comment by Professor Bear
2015-12-12 22:51:55

“I don’t think he got the NP for saying bubbles don’t exist:”

Not exactly. However, the efficient markets theory associated with his work has been used to rule out the theoretical possibility of bubble formation.

Comment by Ben Jones
2015-12-12 12:43:14

‘Here are five worrying signs in the junk-bond market:

‘A charge for the exits: After pouring money into junk-bond funds the past several years in a desperate hunt for yield, investors have started to run for the exits. The money is being put into cash—money-market funds saw $13.4 billion in inflows in the week, and have now attracted $48 billion in inflows in the last four weeks, for a total of $212 billion in the second half, easily dwarfing the $31 billion invested in equity funds.’

‘Spiking yields: Yields have continued to shoot higher this week, especially at the lower end of the credit spectrum. In the CCC category, which is five rating notches below investment grade, yields spiked to 17% this week, their highest level since 2009, according to BofA Merrill Lynch. Some subindexes are showing even higher yields.’

‘Returns are decisively negative: The BofA U.S. High Yield Master Index has been showing negative returns since September and is now firmly in the red, making it almost certain investors will lose money on the asset class this year for the first time since 2008. The index has a negative return of 3.6% for the year so far, and is down 6.5% in the past six months.’

‘Further down the credit spectrum, the picture is even gloomier. The CCC category is showing a negative return of 13% for the year and 15% for the past six months. By comparison, the S&P 500 SPX, -1.94% is down 1.7% on the year and down 4.5% in the last six months.’

‘Defaults and downgrades are on the rise: The number of global corporate defaults this year rose to 102 issuers in the latest week, its highest level since 2009, according to Standard & Poor’s. The oil and gas sector accounted for about 26% of the total, a trend expected to continue into 2016. Moody’s recently forecast a spike in defaults and downgrades in the new year, and said investors who have piled into high-yield bonds are now facing major losses.’

‘Liquidity has dried up: High-yield bonds and other risky securities have become harder to trade, as banks are committing less capital to market-making activities, and no longer hold inventories because of new regulations. Some analysts have been warning that investors could really be hurt if everyone tries to exit positions at the same time.’

“A portfolio manager who turns negative on a name and decides to liquidate a large position must be resigned to disrupting the market more violently than would have been the case before the Global Financial Crisis,” said Marty Fridson, chief investment officer at wealth manager Lehmann Livian Fridson Advisors LLC, in a recent report.’

Comment by Ben Jones
2015-12-12 12:51:16

Steven Pearlstein: Warning signs of a credit market that ……warning…/ef0497…The Washington Post
Apr 26, 2014 - So much money has been flowing into junk-bond funds that Black Rock, … The reason why credit is so cheap and easy is the Federal Reserve, …’

‘May 9, 2014′

‘Janet Yellen appeared before the Senate Budget Committee this week, where she agreed that the U.S. economy is on the mend but reaffirmed the central bank is prepared to act should it falter.’

‘None of which came as much of a surprise to analysts who are expecting the Fed to continue with the process of reducing its monthly bond buying programme known as quantitative easing, in which billions of dollars of bonds are purchased in an attempt to keep long-term interest rates low and stimulate growth.’

‘But in a departure from normal Fed rhetoric, Yellen specifically pointed to the growing issuance of leveraged loans and high-yield bonds, as well as a loosening of underwriting standards. For a Fed chair to mention specific asset classes is highly unusual and points to mounting concerns within the Fed about loosening credit markets.’

‘But despite her best efforts it appears Yellen’s remarks appear to have fallen on deaf ears. Just one day after her comments, the U.S. high-yield market printed more volume than in all of the previous week.’

“There is indeed a search for yield, but that’s been happening for a while,” one senior investment banker told IFR. “And other Fed speakers have mentioned the risks of this behaviour, so I am not sure what these latest remarks are supposed to indicate. They have never said we should stop doing deals.”

‘So bankers are willfully choosing to ignore Yellen’s comments, because there is a lot of money to be made trading in this type of debt. In fact several bankers told IFR that, amid the current red-hot demand in the market, banks are not in a position to make a moral judgment about structural risks.’

“If we don’t do those deals, someone else will and we would be missing out on important fee-earning mandates,” said one. “Structures are getting riskier with each day, but there is sufficient appetite for these trades to get done.”

‘The desperate search for yield has led private investors into some pretty dodgy neighborhoods. Junk bonds and catastrophe bonds have all seen massive inflows of capital in the last eighteen months or so.’

Comment by alphonso bedoya
2015-12-12 17:37:53

Quote: Junk bonds…[has] seen massive inflows of capital in the last eighteen months or so.

Massive inflows from whom? And what were the amounts?

I stopped looking for change when Volcker went back to WallStreet. He didn’t become a tomato farmer waiting for the afternoon mail to arrive.

Comment by alphonso bedoya
2015-12-12 17:39:11

[have] :)

Comment by Ben Jones
2015-12-13 07:07:06

‘Spain’s ‘lost’ generation struggles to find its place’

‘Cabilla started studying hairdressing when he was 15 but dropped out after just one term. He has only had a few odd jobs since then. “I wake up at around noon, I spend the afternoon with friends in a park, we talk, we smoke, until 10 or 11 pm,” he said.’

‘He then returns to the flat he shares with his father Ramon and his partner, as well as his 22-year-old brother and 13-year-old half-brother. He also spends hours watching TV or playing video games.’

‘During Spain’s decade-long building boom many young people dropped out of school to get well-paid work on building sites or in the services sector. But when the property bubble collapsed in 2008, sending the Spanish economy into a tailspin, these jobs dried up, leaving thousands of youth out of work and without education.’

At least his “carbon footprint” is small. Even the tattoos he’s acquired are relatively green.

Comment by In Colorado
2015-12-13 13:23:46

FWIW, Spain’s “conservative” party and its castor oil prescription of “austerity” hasn’t done much to turn things around in Iberia.

Comment by Ben Jones
2015-12-13 07:21:47

‘Don’t doubt the ingenuity of U.S. oil producers when it comes to dealing with an epic slump in prices. At a time when U.S. oil production as a whole has been falling, North Dakota’s has been increasing. Output from the second-largest oil-producing state rose by nearly 7,000 barrels a day in October, reaching nearly 1.17 million barrels, according to new data from the North Dakota Department of Mineral Resources.’

‘In North Dakota, where oil sells for less because of the state’s limited access to pipelines, the price was $34.37 a barrel in October, up from $31.17 in September. The local price as of last week, when Helms discussed the data with reporters, was $27 a barrel.’

Comment by goedeck
2015-12-13 08:23:07

Collapse Of U.S. Shale Oil Production Has Begun

“Total U.S. shale oil production in January 2016, is forecasted to be 4.67 mbd, down from the peak of 5.3 mbd in March 2015.  This is a decline of 630,000 barrels per day from the peak.”

Comment by Knifecatcher
2015-12-13 07:46:04

The Big Short…
Ben you called that movie in 2005. Wish you had gotten some credit.
Iam still in the belly of the beast here in NY. A lot has changed but I am riding the RE wave now. The shore is coming up fast as the Chinese are in full panic mode.

Comment by Mafia Blocks
2015-12-13 08:37:37

Have you observed any change of sentiment or reactions in Chinatown?

Comment by Ben Jones
2015-12-13 11:05:29

‘The Big Short…you called that movie in 2005′

As I’ve mentioned before, the writer got two interviews in one day on NPR. Have you ever heard that before? And why? IMO, he excoriated capitalism and greed, ignored the governments role, and when asked if anyone should be jailed said, “Oh no, that would stifle financial innovation!”

So it fits the PTB perfectly. Play up the role of the state without actually doing any harm to wall street.

This is from the Fama NY Post article:

‘Q: Back to Chicago economics. Is there still anything distinctive about Chicago, or have the rest of the world and Chicago largely converged, which is what Richard Posner thinks?’

“A: The rest of the world got converted to the notion that markets are pretty good at allocating resources. The more extreme of the left-leaning economists got blown away by the collapse of the Eastern bloc. Socialism had its sixty years, and it failed miserably. In that way, Chicago theory prospered. Milton Friedman and George Stigler were fighting that battle pretty much alone in the old days. Now it is pretty general. An experience like we’ve had rehabilitates the remnants of the old socialist gang. (Laughs) Unfortunately, they seem to be in control of the government, at this point.’

‘Q: I spoke to Becker. His view is that what remains distinctive about Chicago is its degree of skepticism toward the government.’

A: Right—that’s true even of Dick (Thaler). I think that is just rational behavior. (Laughs) It took people a long time to realize that government officials are self-interested individuals, and that government involvement in economic activity is especially pernicious because the government can’t fail. Revenues have to cover costs—the government is not subject to that constraint.’

‘Q: So you don’t accept the view, which Paul Krugman, Larry Summers, and others have put forward, that what has happened represents a rehabilitation of government action—that the government prevented a catastrophe?’

‘A: Krugman wants to be the czar of the world. There are no economists that he likes. (Laughs)’

‘Q:And Larry Summers?’

‘A: What other position could he take and still have a job? And he likes the job.’

This is why we see this movie and others won’t be made:

‘what has happened represents a rehabilitation of government action’

Comment by Professor Bear
2015-12-13 13:25:03

Posner, Friedman, Becker = Fresh-water economists

Krugman, Summers, Bernanke = Salt-water economists

The two species groups can’t coexist in the same kind of water.

Comment by Mafia Blocks
2015-12-13 08:48:00

Old news and this is just a symbolic event. All were advised in advance many months ago. Did you prepare?

“December 16, 2015—–When The End Of The Bubble Begins”

Comment by Professor Bear
2015-12-13 10:43:39

It’s not too late for the Fed to punt!

Comment by Mafia Blocks
2015-12-13 12:56:14

Massive excess supply of houses, cars, commodities, finished goods and…….. collapsing demand.

*Did you really believe wages would triple to meet massively inflated prices?

*Did you really think prices would remain static in the face of collapsing demand?

You’re not thinking.

“The End Of The Bubble Finance Era”

Comment by Senior Housing Analyst
2015-12-13 16:44:39

Arvada, CO Housing Craters; Prices Plummet 16% YoY

Comment by Mafia Blocks
2015-12-13 20:09:41

“The Ugly Truth Donald Trump Has Exposed”

“The fear in both the GOP and Democratic party is visible at the surface when it comes to Trump, and it’s not that he’s any of what they’ve accused him of. No, it’s really much simpler than that, and both Republican and Democrat parties, along with the mainstream media, are utterly terrified that you, the average American, is going to figure out what underlies all of these institutions in America.”

You DaddyState pukes keep on doing the rah-rah for your enslavement. Leave the rest of us out of it.

Comment by Professor Bear
2015-12-13 23:57:09

Are you set for another year of volatile, dismal stock market returns?

Comment by Professor Bear
2015-12-13 23:59:17

I’m sure this is good news to contrarians.

8:54 am ET
Dec 13, 2015
2016 Forecast for Stocks: More Gloom, More Volatility and Few Gains
By E.S. Browning

Stock prognosticators by nature are an optimistic bunch, but not now.

Their forecasts for 2016 are downright gloomy, with many warning clients to expect more volatility and limited gains.

“We think that we are likely headed for a choppy year of low returns, and suspect many others think the same,” said Adam Parker, Morgan Stanley’s chief U.S. stock strategist, in a report to clients. He is forecasting that the S&P 500 will rise to 2175 by the end of 2016, 8% above Friday’s close. A year ago, he thought the S&P 500 would already be at 2275 by the end of this year.

Savita Subramanian, chief U.S. stock strategist at Bank of America Merrill Lynch, calls her 2016 outlook “tepid.” She is predicting that the S&P 500 will rise to 2200, which is where, a year ago, she thought it would be this year.

The problem is that 2015 has been a washout. The S&P 500 is down 2% so far this year, finishing Friday at 2012.37. With stocks likely to face the same headwinds again next year, including weak corporate earnings, high stock prices and the expectation of rising interest rates, many strategists are recycling last year’s predictions, or, like Mr. Parker, actually reducing them.

Of 11 stock strategists who have made 2016 forecasts so far, six now say the S&P 500 will finish next year at or below the level they previously predicted for this year. Four see a lower finish for 2016 than they predicted for 2015, while two reissued the same prediction as a year ago, according to Birinyi Associates.

“This has essentially been a lost year for earnings,” explained Ms. Subramanian. Since expectations for corporate earnings are the main fuel for stock gains, and since earnings for S&P 500 companies overall are expected to be flat or even down this year, many strategists simply threw out 2015 and started over. The 11 strategists who have made predictions expect the S&P 500 to finish next year at an average 2206. A year ago, the average prediction was 2208 for this 2015.

The gloom isn’t limited to brokerage firms. Money managers, too, are warning clients to limit expectations.

Comment by Mafia Blocks
2015-12-14 10:53:32


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