Holding individual T-Notes or high quality bonds is never a bad idea. As long as they're held to maturity,
they can't "fall in value." You'll get 100% of your investment back.
But Holding T-Note mutual
funds is another matter entirely, since whenever you need that money it could be worth less
than what you paid in, much less. For example, the value of Vanguard TIPs fund fluctuates
30% or more. With yield around 3%. So unless you keep your investment to ten years you will lose
money (and even for ten years holding period you will lose a lot of money as inflation is not
compensated in this case).
Bond interest can be separated into two part.
compensation for inflation
"real
yield".
Actually there are bonds called TIPS which are structured exactly as described.
As of 2013 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.
But with the exception of TIPs and other Treasuries, typically 401K investor can't invest in individual bonds.
Moreover in 401K, which are designed to enrigh Wall Street, not an individual investor, you
typically has access to a very limited number of
bond funds (sometimes just one or two). All the rest in a typical 401K plan are stock funds.
The main advantage of bond funds is that they provide steady return despite (sometimes wild, like
in September-October 2008) fluctuations of bonds fund share values. But it is important to understand
that bond funds create what can be called "indefinite maturity bond with limited duration". So
they behave quite differently then individual bonds:
While duration of bonds in a bond fund if usually defined by prospectus, this artificial bond (which
is a package of bonds) never mature. So in raising rate environment you might not get your principal
back in the bond duration period. And principal fluctuations can be substantial. If duration of bonds in your bond is 10 years then
2% change of interest rate lead to 20% oscillations of the price of the bond fund.
Typical duration outside of treasuries typically is less then 10 years. It goes without saying that all bonds with duration over 10 years are essentially government
bonds. And that applies first of to mortgage backed bonds. That are very few idiots that can lend
their money for 30 years at 4% or less ;-)
There are several major lessons of this discussion for individual investor:
Bonds funds are more complex instrument that individual bonds and selling them is
possible only during rather short "window of opportunity" moments. Buffet saying
"my
favorite holding period is forever" is fully applicable to bond funds, if you can
afford such a strategy.
Generally one should avoid bond funds with duration over 10 years. Over periods
longer then 10 years inflation and other critical factors such as political stability of the
nation are completely unpredictable. You better be safe then sorry.
Corporate bonds are still risky, but corporate bonds funds that curry multiple high grade corporate
bonds probably are not much riskier than TIPS and Tresuries. They usually have shorter duration too, which is a definite
advantage.
Still bond fund provide usually provide more or less uniform average duration of the bonds and quality of the issuers.
Those two variable help to predicts possible fluctuations. And if you keep bond fund long enough
to exceed average maturity usually you you principal plus interest paid is at least equal the amount
you invested in most (but not all) cases. One important exception are junk bonds which behave more like
stocks.
According to Vanguard approximately 13% of participants in 401K plan had their entire accounts in
fixed-income securities. That 's probably the most reasonable part of 401K crowd. Most knowledgeable
part of this "bond oriented" crowd use stable value and TIPS for major ("safe") part of
401K portfolio.
A typical bond investor usually do not believe in investment advisor hype and take the investment
risk extremely seriously as they should. The game of 401K investing is first of all about preserving
capital, not so much about meaningful return.
Who cares about 10% annual returns of your portfolio in 2004-2007 if you lost 40-50% in 2008 and
in desperation sold part of your holdings close to lower point. That's a typical story of "stocks for
a long run" 401K investor, probably the most fleeced part of 401K crowd (although compulsive flippers
-- speculators who trade their assets too often might come close)
Most investors fail to understand the importance
of preserving capital. It might be the only achievable goal 401K investor can have. For
that you need to beat inflation. If you
could consistently beat inflation just by 1-2%, you would do far better than most.
If we assume inflation of 3% then 5% return is enough to get you far ahead of the regular
pack of "401K donors" in 10 years or so.
The most important advice here: do not play with your retirement money by increasing the risk.
"High risk tolerance" is just another, more politically correct, definition of greed
and it is usually punishable... If economics grows 3% a year or less, any return in excess
of that carry level of additional risk that might not justify the difference.
There is already enough risk in the system even without your allocation decisions (government
essentially offloaded all the responsibility on the shoulders of 401K investors; fiat currency risk
now is another one that needs to be considered seriously).
Any increase of risk such as buying stocks does not necessary increase return as investors
in S&P500 had found out in 2008 (as of May 2009 they lost approximately 50% in 10 years in
comparison with short term bond holders). In crisis all correlation are one, so divirsication fails
you when it is needed most. But taking additional risk will definitely enrich financial intermediaries
so they would fiercely advocate for it (look at Vanguard propaganda, and Vanguard is actually is
one of best and the most honest broker in this shady crowd).
The most important advice here: do not play with your retirement money by
increasing the risk.
"High risk tolerance" is just another, more politically correct, definition of greed
and it is usually punishable... If economics grows 3% a year or less, any return in excess
of that carry level of additional risk that might not justify the difference.
There are nominal returns lower which bonds became way too risky. For 10 years such return is around
4%. If return falls below then you generally should think about shortening the duration of
your bond portfolio.
The key idea here is to understand that a safer strategy might be to use type of allocations: stable
value or short term TIPS for part of your portfolio that you will need before reaching the age
of 70 (the time when people with substantial 401K holding should tap their SS benefits, as they are
maximum at this age) and the other
part which can be corporate bonds.
TIPS suffer from the fact that the inflation measurement are highly political and as such are crooked
but still return around 3% per year even in deflationary environment of 2008-2013. Inflation
is being measured and reported by the US government, which has an very strong incentive to underreport
inflation. That why Boskin Commission
changes in CPI, probably were the most intellectually dishonest analysis of Inflation as has ever been
penned. The goal of fraud perpetrated by Boskin Commission was to reduce Social Security payments
and avoid bankrupting the US Treasury -- not measure inflation accurately. Since then, the spread between
the core and headline data have only grown further apart (The
Big Picture)
Whenever I hear the phrase "excluding volatile food and energy" I just laugh. Can a pricing
group be considered volatile if it merely goes up each month in an orderly fashion -- for years
and years?
That's not volatility, thats a trend.
One way to actually measure how absurd the US core inflation measure is to look at what has happened
to the spread between headline CPI and Core CPI. If Core CPI is understating inflation, than the
spread should be widening. If it is accurate, the overall ratio between the two should be relatively
steady.
What does the data show? The spread has increased substantially since the US adopted an ultra
low rate/easy money policy under Greenspan (now
affiliated with bond giant PIMCO). Since the easy money policy of the 1990s, and the rate
slashing of the 2000s, it is no coincidence that the spread between the headline number and the
core has grown dramatically.
If you want to trace this widening spread back to its origins, it coincides with implementation
of Boskin Commission changes in
CPI. (About as intellectually dishonest analysis of Inflation as has ever been penned -- its goal
was to reduce Social Security payments and avoid bankrupting the US Treasury -- not measure inflation
accurately). Since then, the spread between the core and headline data have only grown further apart.
This simply reflects the government's BLS inflation data diverging from reality.
Core CPI flatlined over the past 8 years because that is how it was constructed -- to not
show inflation. However, the absurdity of the adjustments in inflation measures is revealed
in the widening spread between Core and Headline
As one of the key crooks in Bush administration (Greg Mankiw, chairman of George W. Bush's Council
of Economic Advisers from 2001-2003) openly stated "The debate about the CPI was really a political
debate about how, and by how much, to cut real entitlements."
So TIPS are screwed and should be used in moderation and can and should be traded. Still government
has the lowest default risk. And the only realistic alternative to TIPS is gold which is also manipulated
by massive scale and might cost you pretty penny if you buy it in a bubble. That does not mean
that you should not buy gold, jus that you need to understand that it also carry implicit mispricing
risk.
TIPS suffer from the fact that the CPI is being measured and reported by the US government,
which has an very strong incentive to underreport inflation by a significant margin.
Moreover, if you are a baby-boomer you already was ripped off royally by forced switching from defined
benefit plans to defined contribution plans. To a certain extend you already lost significant
part of nest egg: it was confiscated by Greenspan-Rubin-Gramm gang of "free market" for middle class,
socialism for rich. In blog entry
The Secret to Investment Longevity? Yyves Smith noted:
The Wall Street Journal's daily human interest story featured a
holiday season tale of the Fuggerei,
a Roman Catholic housing compound for the poor in Germany. The price of admission for those lucky
enough to get in is yearly rent of one Rhein guilder, which equals 88 euro cents or $1.23, plus
daily prayers for the founder, Jakob Fugger and his descendants.
How does such a marvel exist?
The settlement is funded by a charitable trust, and the rent remains unchanged since the trust was
established...in 1520.
Think about that. Can you think of another pool of capital that has lasted that long, let alone
a commercial enterprise? The Fugger family is still well off, but nowhere near as rich as in Jakob
Fugger's day.
The story does not give much detail about how the trust survived (a few nasty events like the
German hyperinflation and World War II intervened), and gives a few tidbits about the last 200 or
so years.
The core holding is forestry properties, which is both a renewable resource and inflation-hedged
(admittedly with some volatility) and also owns some local real estate. The article does not
indicate whether it holds securities.
Annual returns have been 0.5% to 2.0% over inflation
A fund manager who has quite a successful track record and manages money for families once told
me that most investors fail to understand the importance of preserving
capital and the value of keeping inflation.He said if
you could consistently beat inflation by 2 or 3 percent, you would do far better than most understand.
But too many investors chase greater returns, take on undue risk and in the long
haul wind up worse off than if they had set more modest and attainable objectives (and note that
this manager does seek and generally achieves higher returns because that is what customers want).
There is a second, behavioral issue with seeking higher returns and accepting the attendant risks.
Let's say you do have a good year, or perhaps even a run of good years. You come to perceive this
level of returns as sustainable, when it may be luck or an unusual set of investment conditions
that will not persist. But human nature being what it is, most people
would increase their expenditures in line with their new level of wealth, and are ill prepared for
a reversal of fortune, as the last year has shown.
Unless you are very well-to-do there is no such things as safe investing in stocks, especially this
absurd idea of "stocks for a long run" (Naive Siegelism).
In no way risks of stocks go away with the long run. That's a fallacy. While this is promoted in most
so called investor education materials, this is a typical hogwash promoted by financial industry.
If you buy stock you never should not be a static investor (as in "stocks for a long run"). You need
to become a trader (you time horizon can be much larger then regular trader but still you need to became
a trader). Again, repeat after me, the idea that investing in stock as safe investment for 401K portfolio
is a hogwash. You might be better off buying gold because it contradicts the fundamental of economics
and first of all the notion of risk premium. The notion of risk premium discredit any muttering by people
like Jeremy Siegel that you can avoid risk by taking longer time horizon. You can only diminish
it by selling stocks at higher then average valuations e.g. trading (if, and only if, such a period
occurs during the period you are holding them). So getting oversize returns from stock means successful
trading. That's it. That means that on any fixed target date there in no certainty as for what
your value of your stocks portfolio. And never will.
The current situation is a convincing proof that you should not rely on stocks in 'safe" part of
your 401K portfolio. Hedging of risk is more important then diversification for most 401K investors.
And the simplest way to decrease your risk is to invest larger part of your portfolio in safe assets.
The fundamental idea of risk reward is how much you should allocate to safe assets not those stupid
games with various stock funds allocation that are promoted in literature. You need to think about
the entity that guarantee you against default risk. Right now this is money market funds (government
will seldom allow them to go down, at least this was proved in 2008) and Treasuries. And anybody who
try to persuade you that this is not true is either a shill of some investment company (Siegel's of
the world, see
Naive Siegelism ) or complete idiots (rarely it can
be both ;-).
In retirement, if you have enough savings and can live simply on interest in tough times fluctuations
of bond prices don't matter. What matters is the risk of default. So here you can also use 100-your
age formula and diminish percentage of corporate bonds and increase percentage of TIPS with the age.
But you need to be careful what you wish for. During normal periods TIPS are competitive with corporate
bonds. When they are not competitive (for example in November 2008), the risk for corporate defaults
is very high and most of S&P500 companies bonds are essentially junk as it is unclear which company
will survive another year or two. Instead you might create in years close to retirement a stable value
(cash) portion of your principal enough for, say, one or two years as TIPS can fluctuate wildly
as we saw in 2008. This way you can avoid selling TIPS when their face value fall too low.
Another important augment in favor of TIPS is that according to Grantham model long term stock returns
are inflation plus 2%. That means that they are equal to average return of 10 year treasures with a
fraction of risk.
Please note that the price at which you buy matters. It is actually matter most. Medium and long
term bonds including TIPS bought with yields below 5% can be as risky as stocks and single point ("all-in")
purchases in such circumstances would better be avoided. In such cases money market funds or shot
term corporate bonds are preferable to bonds as yields are lower but the risk is completely different
as recent event had shown us quite well. In any case it is wise to buy bonds only on dips.
You can then cost average them during as long period as you wish buying some amount each two weeks a
month or even a quarter.
Medium and long term investment-grade company bonds and bond funds
bought with yields below 5% are too risky and "all-in" type of purchases in such circumstances
should better be avoided
Junk bonds is entirely different category as they behave more like stocks not like bonds. In small
dozes (let's say 5% - 10%) they can increase 10 years returns with only minimal increase of risk. But
question remains open whether one can use them in (100-your age, see Lifecycle strategies)
strategy as a substitution for stocks. It depends whether those companies die like fly on the frost;
2009 was lucky year for junk, but 2027 or whenever the next financial crisis strikes might be less so...
.
The problem with diversified bond fund like PIMCO Total return or Vanguard intermediate fund is that
they can drop dramatically in case of real crisis when bonds and stock sink synchronously while in normal
circumstances decline n stock usually lead to rally in bonds. That is a sad fact that many people, including
myself discovered in 2008. But for 10 years or longer holding periods they still might be OK and
provide slightly higher return then stable value. At the same time you need to understand that
bonds funds are very different from bonds and can be very risky during crisis period. For example LQD
dropped from $105 to $80 in 2008. With such drop you can recover the value on your investment approximately
in 5 years. So some caution is appropriate:
Never buy any bonds funds with average duration close to 10 years and return less then
2% above the inflation. It is preferable
to buy them as points when returns are closer to 6% to have some cushion against decline. Stay with
stable value during periods or short duration corporate bond funds. Stay in cash if your 401K
plan does not have such finds. The worst mistake 401K investor can do is to move his finds from stable
value into bonds funds when return in stable value dry out. This is a mistake equivalent to buying
stocks at the top.
Be vary of buying bond founds which charge big fees. For example
I would prefer Vanguard intermediate to Pimco Total return, if both are available. Pimco average
returns are not that different from Vanguard fund, but to earn the same return they need to take
more risk and if government would not bail out Funny-Freddie Total Return might has to be renamed
PIMCO Total Loss. It's nearly impossible to outperform bond fund (or EFT) with substantially lesser
fees without taking more risk and people use bonds funds to cut risk not to enhance it. In
comparison with stable value you can also pay for the errors of bond fund managers. So PIMCO guys
should be used with caution or just for trading. Waggoner
analysis had shown that the average bond fund with high fees can't beat T-bills over a decade
(some charged 1.77% a year in fees, vs. 1.40% for the average domestic stock fund which is a highway
robbery to say politely).
Try to shelter gains from taxes. That's given for 401K investors.
If you buy bonds outside 401K plan you can buy municipal bonds which are exempted from federal
tax. TIPs are also tax exempt which is not
a bad thing. It you paid taxes on capital gains and dividends on a fund that has 1% average
annual interest and 1% capital gains that disappeared because fund price dropped, your gains
could evaporate .
Rebalance only on high deviations (arbitrage), but do not trade bond funds
frequently even if your 401K plan does not penalize for it. The simplest rebalancing strategy
is to wait for the difference between value of simulated contributions to stable value and chosen
bond fund (from a given, realistic for you date) exceed one standard deviation up or two standard
deviations ( here difference is calculated as (a-b)/total_contrib
) where:
a -- total simulated value of stable value fund using cost
averaging from your starting date
b -- total simulated value of selected bond fund using
cost averaging from the same starting date
total_contrib -- total amount you contributed via cost
averaging from your starting date.
Keep some percentage of your holding in cash as it helps to protect you from the downside
risk. For those people who like me are overly concerned with the downside risk changing percentage
from offensive to defensive (for example from high yield/stable value ration of 40:60 to 20:80)
might be a better strategy. Of cause timing will be wrong and usually you will move funds
year or even two early, but still you can get some part of "good time" stocks returns. The
signal is widely available. For example in late 2007 almost everybody recommended boosting
their cash allocations and many investment advisors increase cash/stable value portion of the portfolio.
As Emil Lee wrote in his article
Protect Your
Portfolio! August 16, 2007
According to The New York Times, Baupost Group's Seth Klarman, regarded
as one of the world's savviest investment managers, last year allocated
a whopping 49.8% of the group's portfolio to cash, up from 45.8% a year earlier.
FPA Capital Fund, run by the legendary Robert Rodriguez, currently has a
40% allocation to cash and cash equivalents, and Fairholme Fund, my personal
favorite mutual fund, allocates about 20% to cash. If those heavy-hitters
like cash, it might be a good idea to give this patient approach a long, hard look.
Rotate your holdings based on perceived risk. There is nothing wrong to have 80% in cash
if the situation is scary.Usually noise about the recession is loud long before the recession
started and you have at least one year lead time for reallocation. After reading well-written and pretty
convincing paper about recession coming the next quarter or two you can start moving and usually
can proceed slowly in small chunks as bears are almost always
notoriously early (and in an interesting way, this fact confirms that is it very difficult
to time the market):
They started to call recession in 1998 but it despite the fact the many prerequisites
were in place it happened only in 2001. For those three years "blue chips" stock investment
and bonds
grow sufficiently to protect against the forthcoming slump. Most carnage happened to investors
who overloaded the portfolio with tech stocks at the last moment then to those who used cost
averaging.
Most bears started to call recession in 2005 and while all signs of the subprime mess
were in place their call did not materialize before February 2008. They were more
then two years early. The same thing with early calls happened with dot-com mess. If a
401K investor heeded those early warnings and moved to the sidelines in 1998 would have lost
the chance to make a chunk of money that more or less compensate for 20-30% of losses during
2001-2003 recession (if cost averaging was used all the time). Yes, there were a lot of troubles
in the economy, but for two years it did not happen and those who moved their 401K to cash in
2005 were for two years sitting on the sidelines of a pretty significant stock rally. Whether
this rally is justified is another question, but there is not much rationality in the stock
market anyway. You can think about merge and acquisition mania, about "Paulson effect"
as well as about huge bubble in financial stocks as the reason, but it does not help if
you were on sidelines.
As Keyes famously noted markets can stay irrational longer then
you can stay solvent. This quote probably is mostly about short traders but in some
way it is applicable to overly defensive 401K investors too.
Stable value fund is a necessary compliment of all-bond portfolio, as it can diminish the downside risk.
As is evident in September-October of 2008 this is not a bad thing. For those people who like
me are overly concerned with the downside risk changing percentage from offensive to defensive (for
example from high yield/stable value ration of 40:60 to 20:80) might be a better strategy. For
example in late 2007, a number of institutional investors are boosting their cash allocations and many
investment advisors increase cash/stable value portion of the portfolio. You can probably use the level
of noise in this direction as a reallocation signal. As Emil Lee wrote
in his article
Protect Your Portfolio! August 16, 2007
According to The New York Times, Baupost Group's Seth Klarman, regarded
as one of the world's savviest investment managers, last year allocated
a whopping 49.8% of the group's portfolio to cash, up from 45.8% a year earlier.
FPA Capital Fund, run by the legendary Robert Rodriguez, currently has a 40%
allocation to cash and cash equivalents, and Fairholme Fund, my personal favorite
mutual fund, allocates about 20% to cash. If those heavy-hitters like
cash, it might be a good idea to give this patient approach a long, hard look.
At any point of time you can find pretty convincing arguments that crash is just around the corner
(next month, next quarter, the next year) but the fact that they are convincing does not mean that this
is a right forecast. Seldom such convincing predictions happen in the promised timeframe. In a way it
might be safer to be perma-bull of Siegel variety as you might be more often right then wrong; but if
you are wrong 30% of investment can be wiped out in a year of two and it is unclear whether you have
enough discipline not to move you holdings into cash in the middle of the turmoil.
At the same time it is not that easy to dismiss this strategy:
According to the Lehman Aggregate Bond Index, from 1978 until 2005, the long-term average annualized
return for bonds was approximately 9%. This rate compares with the approximate 11% average market
return for stocks for this same period, according to Ibbotson Analyzer, a modeling tool used for
calculating returns. Those retuns probably will never materialize again but even assuming them
30% drop is eqail to at least three years of appreciation. In exchange for their relatively lower returns, fixed-income investments are
generally less volatile than stock market returns - which means that the value of stocks tends to
rise or fall more sharply than that of bonds. For example, from 1975 to 2005, stocks were generally
twice as volatile as fixed-income investments.
TIAA-CREF investing
in Bonds- Myths and Realities. Please note that returns are close (9% and 11%) while risk
for stocks is twice higher.
While it is denigrated by most fund managers (for obvious reason) 100% in bonds strategy can beat
S&P500 during certain 10 year periods (mostly periods ending in recessions). Therefore it
can't be denied that this strategy can beat an opposite strategy "100% stock + panic selling" that
so many people practiced in 2002 and then in 2008. And that means that Siegel should eat the corresponding
chapter of his book shredded in to borsch :-). And while in general this strategy has
lower returns that 50:50 or 100-your_age stock/bond mixes, it also it
might provide better returns then questionable, overly aggressive stock portfolio, or even ad-hoc
mixes of many stock funds with periodic "irrational" or blind rebalancing based on the current fashionable
trend.
Also the standard deviation of returns in this strategy is extremely low: assuming inflation
will remain in the same zone you can almost plan the future as you are almost guaranteed to get
a certain sum at the end of a certain period. If you are earning enough money not to play in stock
market, why should you waist your mental and nerve energy on this ? Worrying about 401K
is the game for poor smacks only ;-). In other words while this is not an optimal strategy
it provides a very simple low end baseline for any 401K investor who can use Excel. If you
cannot beat this strategy during any 3-5 year period you better change the way you are investing.
See also a book
Stock
Cycles: Why Stocks Won't Beat Money Markets over the Next Twenty Years.
If might be a very good starting strategy if stocks are tremendously overvalued at the
period when you start or increase 401K investing (for example this would be an excellent
strategy for starters in 1997-1999 and in 2006-2007; they just need to wait several years for a
stock drop to start accumulate the stock portion of the portfolio).
If stock prices are driven too high,
then getting 5% return on stocks becomes increasingly difficult and many move their investments
into too dangerous for 401K territory by increasing their level of risk (typically starting to "diversify"
portfolio into international stock funds if they are available. This is all
due to a simple fact that earnings
yields on stocks at 5-6% are very unlikely for stock close to the top like they were in, say 2000,
or for a change 2007.
In a way reasonable success of "Depression might start tomorrow"strategy
proves that Siegelism is wrong and that for certain starting dates and for reasonably long periods
(say ten years) that include several boom-bust cycles stable value funds with average return
above 4.5% might even be better then all stock portfolio. Example of such periods are some periods
during the last ten years ending in 2003-2006 ( that means that periods started in 1993-1996 and
this effect occurs despite two huge bull runs of the stock markets during this decade long periods;
this situation actually changed for ten year periods ending in the second half of 2006 till June
2007 when all stock portfolio (Vanguard Total Market Index) now again beats all bonds portfolio
(Vanguard bond index) for almost all 10 years periods.
Much depends on the interest rates.Bonds funds with
returns below 5% are very dangerous and during those periods a stable value fund (cash) might be
a much safer bet. Such funds can drop significantly in a short period as many
investors discover in 2007 with Pimco and other mid-term bond funds.
The Rule of 72 will tell you how long it takes for an investment to double in value, assuming
interest is paid annually and reinvested in the same account. To get your result, simply divide
the number 72 by the interest rate you expect to earn on your investment. For 4% this is almost
20 years.
Money market funds are not a bad choice if returns on bonds are below 5%. It's really stupid
to expose yourself to this risk for let's say 0.3% per year difference in returns.
Bonds funds with returns below 5% are very dangerous
and during those periods a stable value fund might be a much safer bet. Never invest
in bonds that have returns below 5%. Use cash instead.
Also with biweekly value averaging and assuming we started from zero, such a strategy looks
competitive to "All S&P500" strategy for older investors in "old bulls" markets in stocks as long
as stable value fund interest rate is approximately 4.5% or higher. During such periods combination
of stable value and Vanguard high-yield bond fund bonds (for example 80:20) might improve returns
in comparison with "pure" bond funds with the same of less risk (for example Pimco Total return).
My impression is that Vanguard high-yield bond fund generally has higher quality bonds then a typical
junk bond fund and thus is less prone to severe declines in bear markets.
There are some tricks that can be played while staying within the limits of this strategy to increase
returns. John Waggoner mentioned several of them in
his recent
column. Most of them are not applicable to 401K accounts but the are worth consideration for other
savings, if any:
Yields on money market mutual funds also fall when the Fed cuts rates.
The average money fund now yields 4.08%, down from 4.76% in August.
If you count on investment income for part of your living expenses, you'll
have to tighten your already-tight belt. A $100,000 CD at 3.54% will give you $295 a month in income,
which might be enough if you live in a cave atop Mount Crumpit. If you don't, you'll want to look
for investments that generate more income.
Normally, you can receive higher rates by investing in a longer-term CD.
But these aren't normal times. The average five-year CD yields 3.76%. On a $100,000 investment,
a 3.76% yield would earn you an additional $18 a month, or about enough for a can of Who-hash.
Also, you don't want to lock in a lousy 3.76% for the next five years. Rates
are more likely to rise than fall in the coming years, because of the very real threat of inflation.
Inflation, at 4.3% in November, will gobble up all your interest if prices continue to rise at their
current clip.
Look for banks that really want to borrow your
money. Countrywide Bank, for example, will pay you 5.5% on a six-month CD.
The trade-off: Many banks that offer high deposit yields have been in the
news lately, and the news hasn't been good. Countrywide, once a leading subprime lender, has been
plagued by lower lending volume and rising defaults.
These banks' troubles shouldn't haunt you if you stay within the federal
deposit insurance limits. (You're insured for up to $100,000 of your deposits.) The insurance is
quite generous: You also enjoy separate $250,000 insurance for your individual retirement accounts,
for example. For a complete rundown, go to
www.fdic.gov.
If you want higher yields, though, you'll have to take more risk - including
that your principal might fall. One suggestion: closed-end bond funds. Unlike most mutual funds,
closed-end funds issue a set number of shares that trade on the stock exchanges, just like stocks.
The twist: Many times, the market price of closed-end funds falls below the value of the fund's
holdings.
Thanks to the meltdown in the credit markets, many closed-end bond funds
have been clobbered. That's bad news for people who had bought the funds. But it's good news if
you're now looking for high yields at bargain prices. Thomas Herzfeld, a closed-end specialist,
says closed-end bond funds now offer some of the best buys he's seen in nearly 40 years.
Consider, for example, Putnam Premier Income Trust
(PPT). Wednesday,
the fund's shares sold for $6.14. But the fund held securities worth $7.11 a share. In other words,
you'd be buying the fund's shares for a 13.6% discount to their real value.
More important, the fund's yield is a generous 5.8%, according to the Closed-End
Fund Association (www.closed-endfunds.com). Other closed-end bond funds that Herzfeld likes are
in the chart.
All-in-all simple binary allocations like static 50-50 (or close to it in a range approximately 60:40
to 40:60 ) split between "safe" and "risky" bonds as well as
recursive application of of lifecycle strategy
(100 - your age and similar), but now to a bond portfolio.
Based on just simulations that I performed it looks like static 50:50 split between TIPS and corporate
junk bonds provides not bad returns and a reasonable level of risk in comparison with the 100% in stable value
portfolio. But again I a computer expert, not financial expert.
But there are really bad periods for this combination and junk funds in October 2008 look really
bad (or suicidal, if you wish) with drops approaching declines of S&P500. At the same time 50/50 portfolio
is extremely easy to rebalance. See
also Life cycle fund investors Doing
it wrong - Personal Finance - MSNBC.com.
All-in-all keeping all your money in money market fund or mixture of bond funds without any stock
component might be an overly defensive strategy. I suspect that there is a minimum amount of stocks
in portfolio below which the risk increases. Such a minimum might be in the range 10-30% depending on
your personality (abrupt moves due to discomfort usually damage return greatly in a long run) and
stocks can utility stocks that carry some dividend.
And with good selection of bond fund
and stock index the risk probably stays within bounds similar to all bond portfolio till probably 30-40%.
Then it rises but until probably 60% this rise is rather slow. That means that defensive
lifecycle strategies (and lifecycle funds, see below) might
be able to provide better returns then "cash only/bonds only" 401K portfolios with only minimally higher
risk.
Here is an apt quote that describes the main problem with bond funds in 401K portfolio, the fact
that your principal is at risk:
MANY INVESTORS, wary about buying bonds directly, often opt instead for bond funds, thinking,
perhaps, that there is safety in numbers. Big mistake. Bond funds can be even trickier than
bonds themselves because -- unlike the implication in their name -- they are not really fixed-income
investments. Even when a mutual fund's portfolio is composed entirely of bonds, the fund
itself has neither a fixed yield nor a contractual obligation to give
investors back their principal at some later maturity date -- the two key fixed characteristics
of individual bonds. [Bond vs. Bond
Funds (One Bond Strategy) SmartMoney.com]
Bond funds are not panacea in comparison with stock funds, even taking into account all machination
with stock prices. As we discussed TIPs are less volatile then most is should be a art of bond
portfolio. You might benefit from replacing some part of stock holding with junk bond fund as they behave
similarly (they are highly correlated) but have lesser volatility (interest also helps to diminish volatility
during severe downturns; for example 30% drop of junk bond price with 10% interest means approximately
20% drop in your investment value).
LIBOR, the London Interbank
Offered Rate, is the most active interest rate market in the world. It is determined by rates
that banks participating in the London money market offer each other for short-term deposits.
LIBOR is used in determining the price of many other financial derivatives, including interest
rate futures, swaps and Eurodollars. Due to London's importance as a global financial center,
LIBOR applies not only to the Pound Sterling, but also to major currencies such as the US Dollar,
Swiss Franc, Japanese Yen and Canadian Dollar.
http://www.bankrate.com/brm/ratewatch/other-indices.asp
But with junk funds like with stocks timing is everything: they are not suitable target for cost averaging.
As PIMCO Gross notes by simply researching historical annual high yield default rates (5%), multiplying
that by loss of principal in bankruptcy (60%), and coming up with an expected loss of 3% over the life
of future loans. So fair return for junk bonds is
LIBOR + 300 or more.
In other words as Gross stresses "for LIBOR+250 high yield lenders are giving away money!"
It is important to understand that in current circumstances stable value funds can be a blessing
as they are the only reliable hedge available to 401K investors. And if somebody is concerned
about returns it's relevant to remind that average returns for 401K investors are negative after inflation.
So you have nothing to lose and get peace of mind which is also very important. Money
market accounts (stable value funds in 401K terminology) are the most liquid and less dangerous of bond
funds and they should probably be integral part of any 401K portfolio, especially in cases where you
cannot buy a bond fund that has return above 5%.
Bond funds are much complex financial instrument than bonds themselves because -- unlike the
implication in their name -- they are not really fixed-income investments.Bond
funds do not guarantee the return on your principal after certain number of years and for intermediate
term and long term bond funds in fact can endanger your principal even if you hold them for a number
of years less then maturity. Also returns can fluctuate year to year.
One of the reason is that bonds in bond fund portfolio constantly rotate. If you try to withdraw
money from the bond fund during the period of Fed tightening you can lose part of your principal. That's
why intermediate with return below 3.5% and long term bond funds with returns below 5% (including inflation-protected securities
funds -- TIPS) are very risky to hold and are not safe financial instruments at all.
Inflation rate plus 2% rule for 10 year bonds
If we assume that stable value fund has zero effective return and compensates just for inflation,
to sacrifices stability of the principal for just 1% of extra return for 10 year bonds is risky. You
need at least 2% premium.
For the same reason buying bond indexes with low interest rate are much more
questionable idea then buying stock indexes. Long term high quality bond funds seldom worth either the
added risk or the added cost. Treasury Direct might be a simpler and better way to manage your high
quality bond port of the portfolio during the retirement as government bonds are tax free.
Investment fees associated with managing bond funds investments (mutual funds fees) are assessed
as a percentage of assets invested, but for bond funds this is a completely inaccurate method.
Bond fund can be considered partnership between you and bond fund advisors were you provide all the
capital and they provide management. That means that results should be calculated as a percentage of
return after inflation. For example Pimco with its eloquent manager Bill Gross are taking approximately
0.5% in fees and has after fees return of approximately 4.5%. That means that they
are taking 11% of net returns for the management of funds without even considering inflation.
If we are taking about returns after inflation and assuming inflation to
be around 3% a year, they are taking 0.5/1.5=33% of return on your capital and at the
same time spending a lot of your money trying to persuade you that this an extremely good deal.
That's why long term bonds funds that has returns below 5% (or Libor rate if you need to be more exact) are
generally a bad deal and you should consider using shorter duration funds instead. I think it is prudent
to avoid buying long term bonds funds with below 5% returns in 401K portfolio. Please note that bonds funds fees
are not specifically identified on statements, but can be found in fund prospects and on Yahoo finance.
See A Look At 401(k)
Plan Fees for Employees for details.
Bonds are especially vulnerable during "credit crunch" when even A and AA bonds can be affected (even
AAA were affected during Great Depression). Cutting interest rates during such a crisis (a typical government
reaction) increases inflation that has the effect of transferring wealth from creditors to debtors.
That means transferring wealth away from bond investors.
From other point of view interest rates are just to consider them to be the price of money. And low interest rates
suggest devalued money and high monetary supply growth. That is yet another way to explain why bond
funds with returns below 5% are risky to hold. In such cases stable value funds are blessing.Gold might be blessing too.
And the last but not least: while bond funds fees usually are stated as the percentage of
assets they in reality should be stated as the percentage of interest earned. That helps to see more
realistic picture about who is the prime beneficiary of the money you put in the fund and how big the
second largest beneficiary share is. See above calculation for PIMCO Total Return fund.
20210413 : U.S. Treasury yields slip despite surge in inflation to 2½-year high by very small number of companies. Treasury yields slipped Tuesday after bond investors shrugged off an increase in U.S. consumer prices in March that sent yearly inflation measures to the highest level in two and a half years. Treasury yields slipped Tuesday after bond investors shrugged off an increase in U.S. consumer prices in March that sent yearly inflation measures to the highest level in two and a half years. ( economistsview.typepad.com )
Inflation also might be coming via the devaluation of the dollar.
Notable quotes:
"... These articles are great at d ..."
"... There are no safe options. TIPS are indexed to the CPI. The CPI is "adjusted" by weighting, substitution, and hedonics to preserve the mirage of low inflation. We are being forced to either speculate in the market or watch our savings get swallowed by inflation. ..."
These articles are great at describing the problem, but not so great at suggesting what investors ought to do to
protect themselves.
TIPS are sometimes suggested, but if the govt is manipulating the reporting of inflation then TIPS
aren't going to be much help. Gold and blue chip stocks... "diversify"? how about some articles that will explore strategies.
There are no safe options. TIPS are indexed to the CPI. The CPI is "adjusted" by weighting, substitution, and hedonics to
preserve the mirage of low inflation. We are being forced to either speculate in the market or watch our savings get swallowed
by inflation.
Strong economic rebound and lingering pandemic disruptions fuel inflation forecasts
above 2% through 2023, survey finds. The U.S. inflation rate reached a 13-year high recently,
triggering a debate about whether the country is entering an inflationary period similar to the
1970s. WSJ's Jon Hilsenrath looks at what consumers can expect next.
Americans should brace themselves for several years of higher inflation than they've seen in
decades, according to economists who expect the robust post-pandemic economic recovery to fuel
brisk price increases for a while.
Economists surveyed this month by The Wall Street Journal raised their forecasts of how high
inflation would go and for how long, compared with their previous expectations in April.
The respondents on average now expect a widely followed measure of inflation, which excludes
volatile food and energy components, to be up 3.2% in the fourth quarter of 2021 from a year
before. They forecast the annual rise to recede to slightly less than 2.3% a year in 2022 and
2023.
That would mean an average annual increase of 2.58% from 2021 through 2023, putting
inflation at levels last seen in 1993.
"We're in a transitional phase right now," said Joel Naroff, chief economist at Naroff
Economics LLC. "We are transitioning to a higher period of inflation and interest rates than
we've had over the last 20 years."
Inflation likely rose sharply again in May. Economists polled by Dow Jones and The Wall
Street Journal predict the consumer price index rose 0.5% last month. The report comes out on
Thursday. If so, that would push the yearly rate close to 5% from 4.2% in April.
Consumer prices have only risen that fast twice in the past 30 years, most recently in 2008
when the cost of a barrel of oil topped $150.
... ... ...
The central bank has stuck to its prediction that inflation will drop back toward 2% by next
year. But many are beginning to wonder.
"The writing is on the wall: The Fed's temporary-inflation mantra is sounding more dated by
the week," said senior economist Sal Guatieri of BMO Capital Markets.
The Fed, in sync with the fiction writers at the Bureau of Labor Statistics (BLS), reports
consumer inflation as honestly as Al Capone reported taxable income.
Vardaman 3 hours ago
"A basket of things no one actually buys, with prices we just pull out of our
asses..."
Glock 1 hour ago
Yep, the BLS uses the CPI-W to literally avoid raising SS payments. The real rate of
inflation for seniors is close to 10% as the things they spend most of their money on like
medical care, medicine, food and utilities have gone through the roof
While the government claims they are entitled to 1.5% or less COLA's out of which comes a
bigger deduction every year for Medicare. Scam artists.
Strong economic rebound and lingering pandemic disruptions fuel inflation forecasts
above 2% through 2023, survey finds. The U.S. inflation rate reached a 13-year high recently,
triggering a debate about whether the country is entering an inflationary period similar to the
1970s. WSJ's Jon Hilsenrath looks at what consumers can expect next.
Americans should brace themselves for several years of higher inflation than they've seen in
decades, according to economists who expect the robust post-pandemic economic recovery to fuel
brisk price increases for a while.
Economists surveyed this month by The Wall Street Journal raised their forecasts of how high
inflation would go and for how long, compared with their previous expectations in April.
The respondents on average now expect a widely followed measure of inflation, which excludes
volatile food and energy components, to be up 3.2% in the fourth quarter of 2021 from a year
before. They forecast the annual rise to recede to slightly less than 2.3% a year in 2022 and
2023.
That would mean an average annual increase of 2.58% from 2021 through 2023, putting
inflation at levels last seen in 1993.
"We're in a transitional phase right now," said Joel Naroff, chief economist at Naroff
Economics LLC. "We are transitioning to a higher period of inflation and interest rates than
we've had over the last 20 years."
There's nothing more beautiful to a professional investor than a negative correlation between stocks and bonds. When stocks have
a bad month, bonds have a good month, and vice versa. Since their zigs and zags offset each other, the value of the combined portfolio
is less volatile. The customers are pleased. And that's how it's been for most of the last two decades.
But for almost a year now, Bloomberg market reporters have been detecting anxiety from the pros that the era of negative correlation
may be over or ending, replaced by an era of positive correlation in which stock and bond prices move together, amplifying volatility
instead of dampening it. "Bonds Have Never Been So Useless as a Hedge to Stocks Since 1999," read the headline on one article this
May.
Yet hope springs eternal. The headline on a July 7 article was, "Bonds Are Hinting They'll Hedge Stocks Again as Growth Bets Ease."
In the big picture and over long periods, it's obvious and necessary that stock and bond returns are positively correlated. After
all, they're competing investments. Each generates a stream of income: dividends for (most) stocks, coupon payments for bonds. If
stocks get very expensive, investors will shift money into bonds as a cheaper alternative until that rebalancing makes bonds more
or less equally expensive. Likewise, when one of the two asset classes gets cheap it will tend to drag down the other.
When the pros talk about negative correlation they're referring to shorter periods""say, a month or two--over which stocks and
bonds can indeed move in different directions. Lately two giant money managers have produced explanations for why stocks and bonds
move apart or together. They're worth understanding even if your assets under management are in the thousands rather than billions
or trillions.
Bridgewater Associates, the world's biggest hedge fund, based in Westport, Conn., says that how stocks and bonds play with
each other has to do with economic conditions and policy. "There will naturally be times when they're negatively correlated and naturally
be times when they're positively correlated, and those come from the underlying environment itself," senior portfolio strategist,
Jeff Gardner says in an edited transcript of a recent in-house interview.
According to Gardner, inflation was the most important factor in the markets for decades""both when it rose in the 1960s and 1970s
and when it fell in the 1980s and 1990s. Inflation affects stocks and bonds similarly, although it's worse for bonds with their fixed
payments than for stocks. That's why correlation was positive during that long period.
For the past 20 years or so, inflation has been so low and steady that it's been a non-factor in the markets. So investors have
paid more attention to economic growth prospects. Strong growth is great for stocks but doesn't do anything for bonds. That, says
Gardner, is the main reason that stocks and bonds have moved in different directions.
PGIM Inc., the main asset management business of insurer Prudential Financial Inc., has $1.5 trillion under management. In a report
issued in May, it puts numbers on the disappointment the pros feel when stocks and bonds start to move in sync. Let's say a portfolio
is 60% stocks and 40% bonds and has a stock-bond correlation of -0.3, which is about average for the last 20 years. Volatility is
around 7%. Now let's say the correlation goes to zero" not positive yet, but not negative anymore, either. To keep volatility from
rising, the portfolio manager would have to reduce the allocation to stocks to around 52%, which would lower the portfolio's returns.
If the stock-bond correlation reached a positive 0.3, then keeping volatility from rising would require reducing the stock allocation
to only 40%, hitting returns even harder.
PGIM's list of factors that affect correlations is longer than Bridgewater's but consistent with it. The report by vice president
Junying Shen and managing director Noah Weisberger says correlations between stocks and bonds tend to be negative when there's sustainable
fiscal policy, independent and rules-based monetary policy, and shifts up or down in the demand side of the economy (consumption).
The correlation is likely to be positive, they say, when there's unsustainable fiscal policy, discretionary monetary policy, monetary-fiscal
policy coordination, and shifts in the supply side of the economy (output).
One last thought: It's a good idea to spread your money between stocks and bonds even if they don't hedge each other. The capital
asset pricing model developed by William Sharpe in the 1960s says everyone should have the same portfolio, consisting of every asset
available, and adjust their risk by how much they borrow. True, not everyone agrees. John Rekenthaler, a vice president for research
at Morningstar Inc., wrote a fun article in 2017 about the different strategies of Sharpe and fellow Nobel laureate Harry Markowitz.
Images removed. See the original for the full version...
Notable quotes:
"... To shed light on this question, let's look at where both asset classes stand relative to their long-term trendlines. It's important to take a long-term perspective because commentators seem overly eager to detect bubbles everywhere they look these days. They (and we) need to be reminded that not every bull market is a bubble, and not every bear market represents the bursting of a bubble. ..."
Which U.S. asset class is more likely in a bubble right now" stocks or housing? More than 80% of traders polled in a
Charles Schwab survey say both.
To shed light on this question, let's look at where both asset classes stand relative to their long-term trendlines. It's important
to take a long-term perspective because commentators seem overly eager to detect bubbles everywhere they look these days. They (and
we) need to be reminded that not every bull market is a bubble, and not every bear market represents the bursting of a bubble.
Why are we so eager to detect bubbles? Will Goetzmann, a finance professor at Yale University, told me that he suspects it traces
to the moral overtone that investors have when they declare something to be forming a bubble. When they do, he said, they're implying
that those who lose big in that bear market will be getting what they deserve.
This column leaves moral judgments out of the equation. I instead am focusing on the most comprehensive data set of U.S. equity
and housing returns that I know. This database, which extends back to the late 1800s, was compiled by Ã'scar Jordà of the Federal
Reserve Bank of San Francisco, Katharina Knoll of Deutsche Bundesbank in Frankfurt, Dmitry Kuvshinov and Moritz Schularick, both
of the University of Bonn, and Alan M. Taylor of the University of California Davis.
This database is unique in several ways. One big advantage
is that it includes data for both stocks and housing; other databases extend further back in the case of the stock market but don't
include housing. The database also takes rent into account when calculating housing's return. Some prior historical analyses of housing's
return have focused only on price appreciation, which significantly underreports housing's performance.
The chart below plots the returns since 1890 of U.S. stocks and housing. Notice that equities and housing have each produced
largely similar returns over the past 130 years . As recently as the late 1940s, housing was ahead of equities for cumulative
performance since 1890. As recently as the late 1970s the two data series were nearly neck-and-neck. Notice further that housing's
performance has been less volatile than the stock market's, especially since World War II.
For each asset class I calculated an exponential trendline that most closely fit the 130 years' worth of data. The bad news is
that both stocks and housing currently are above their respective trendlines, so if you insist that both assets are in bubbles now
you in fact could find some statistical support.
Of the two, the stock market is further ahead of its long-term trendline than is housing. So if you'd have to pick which of the
two is more likely to decline significantly, you should choose stocks.
Bonds are vulnerable
I've not said anything about bonds, but they are even further ahead of their trendline than either stocks or housing. So from
this long-term perspective they are even more vulnerable than stocks to a big decline.
The continued decline in Treasury yields has prompted many short-sighted arm-chair analysts
to declare that the Fed was right about inflationary pressures being "transitory". Of course,
as Treasury
Secretary Janet Yellen herself admitted, a little inflation is necessary for the economy to
function long term - because without "controlled inflation," how else will policymakers inflate
away the enormous debts of the US and other governments.
As policymakers prepare to explain to the investing public why inflation is a "good thing",
a report published this week by left-leaning NPR highlighted a phenomenon that is manifesting
in grocery stores and other retailers across the US: economists including Pippa Malmgren call
it "shrinkflation". It happens when companies reduce the size or quantity of their products
while charging the same price, or even more money.
As
NPR points out, the preponderance of "shrinkflation" creates a problem for academics and
purveyors of classical economic theory. "If consumers were the rational creatures depicted in
classic economic theory, they would notice shrinkflation. They would keep their eyes on the
price per Cocoa Puff and not fall for gimmicks in how companies package those Cocoa Puffs."
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However, research by behavioral economists has found that consumers are "much more gullible
than classic theory predicts. They are more sensitive to changes in price than to changes in
quantity." It's one of many well-documented ways that human reasoning differs from strict
rationality (for a more comprehensive review of the limitations of human reasoning in the
loosely defined world of behavioral economics, read Daniel Kahneman's "Thinking Fast and
Slow").
Just a few months ago, we described shrinkflation as "the
oldest trick in the retailer's book" with an explanation of how Costco was masking a 14%
price hike by instead reducing the sheet count in its rolls of paper towels and toilet
paper.
NPR's report started with the story of Edgar Dworsky, who monitors grocery store shelves for
signs of "shrinkflation".
A couple of weeks ago, Edgar Dworsky walked into a Stop & Shop grocery store in
Somerville, Mass., like a detective entering a murder scene.
He stepped into the cereal aisle, where he hoped to find the smoking gun. He scanned the
shelves. Oh no, he thought. He was too late. The store had already replaced old General Mills
cereal boxes -- such as Cheerios and Cocoa Puffs -- with newer ones. It was as though the
suspect's fingerprints had been wiped clean.
Then Dworsky headed toward the back of the store. Sure enough, old boxes of Cocoa Puffs
and Apple Cinnamon Cheerios were stacked at the end of one of the aisles. He grabbed an old
box of Cocoa Puffs and put it side by side with the new one. Aha! The tip he had received was
right on the money. General Mills had downsized the contents of its "family size" boxes from
19.3 ounces to 18.1 ounces.
Dworsky went to the checkout aisle, and both boxes -- gasp! -- were the same price. It was
an open-and-shut case: General Mills is yet another perpetrator of "shrinkflation."
It's also being used for paper products, candy bars and other packaged goods.
Back in the day, Dworsky says, he remembers buying bigger candy bars and bigger rolls of
toilet paper. The original Charmin roll of toilet paper, he says, had 650 sheets. Now you
have to pay extra for "Mega Rolls" and "Super Mega Rolls" -- and even those have many fewer
sheets than the original. To add insult to injury, Charmin recently shrank the size of their
toilet sheets. Talk about a crappy deal.
Shrinkflation, or downsizing, is probably as old as mass consumerism. Over the years,
Dworsky has documented the downsizing of everything from Doritos to baby shampoo to ranch
dressing. "The downsizing tends to happen when manufacturers face some type of pricing
pressure," he says. For example, if the price of gasoline or grain goes up.
The whole thing brings to mind a scene from the 2000s comedy classic "Zoolander".
Many people seem to have forgotten after their nearly four-decade run that bonds have a
very ugly side that can yield great pain. Today's lower yields may be part of a greater
conundrum created by the reality of too much freshly printed money floating around and
people needing someplace to stash it. The article below delves into why interest rates may
unexpectedly rise. https://Bonds
As An Investment Have A Very Ugly Side.html
besnook10 4 hours ago
the equity market is reflecting the rush to dollar assets as a function of economic
uncertainty especially dedollarization while the low rates also reflect the lower demand
for dollars because of dedollarization.
George Bayou 5 hours ago
Treasury rates are set by the fed and have absolutely nothing to do with reality
anymore. The rates are set so that the government can sustain a higher debt ceiling,
nothing more. Corporate bonds can be made artificially low because they don't have to
compete against treasuries.
buzzsaw99 4 hours ago
i would argue that the s&p 500 is set by the fed and has absolutely nothing to do
with reality anymore. i would further add that if the fed didn't meddle treasury rates
would be even lower and the corporate spread would be huge.
bshirley1968 PREMIUM 4 hours ago
I would argue you are both right. The meddle when they have to. As long as the sheep run
with their narrative, the "markets" usually go the way they want them to. But they will
step in when there is a divergence.
George Bayou 4 hours ago remove link
I agree that the s&p is inflated due to fed injection and currency devaluation. I
disagree about treasury rates, if the fed stopped buying treasuries then the market would
not take up the slack unless the rates went higher.
The fed can't do this not only because the government couldn't afford paying higher
rates, but the housing industry that they've inflated would get crushed as well.
"How many impossible things can you believe before breakfast?"
US 10-year bonds and US equity are in full rally mode. They show contradictory expectations
for a stalled recovery and future strong growth! How can that be? Because the market is about
what participants collectively think – and how markets think has been utterly changed by
12 years of monetary experimentation, repression, and distortion. We've got to change the way
we think about markets.
That the reflation trade is fading fast? Falling bond yields = rising bond prices, and are a
sign the market anticipates a slowdown and declining inflationary threat.
Yet, we still expect to see further equity upside? Falling dividend yields = rising equity
prices, and are a sign the market anticipates strong growth and rising corporate profits.
In bonds there is truth. Bonds are about credit risk – getting repaid principal and
interest. But not the US treasury market – which is why it is called the risk-free rate.
The risk of holding a Treasury bond actually boils down to inflation risk. Whatever mad-eyed
Libertarian preppers hiding in mountain lairs say, the US Government defaulting on debt is a 50
Sigma possibility – it aint going to happen.
But inflation will eat away the value of the bond today in terms of its purchasing power
relative to its future purchasing power at maturity. The greater inflation, the less the bond
is worth, and its price today should reflect that. Inflation could occur through rising prices,
and declining confidence in currency which creates inflation as its FX value tumbles.
If you assume zero inflation – as the market clearly does when the 10-year risk free
rate is 1.34% – then there is no downside risk holding Treasuries. You will happily
collect $1.34 for each $100 invested semi-annually and the price of a beer or a McDonalds in
10-years time will be exactly the same as it is today. (Which it won't.)
Bonds have rallied strongly in recent weeks – clearly telling us the expectations of a
strong global recovery have stalled. There is little upside to holding bonds. Just certainty.
If the global economy does staggering well you won't get $2 back on your $100 investment. The
only way you get more at maturity is if we see deflation – when the price of a beer is
less in 10 years time than it is today.
Yet, we all know the world is a very uncertain place – its been illustrated by supply
chain shifts and breaks, and rising trade hassle and protectionism. Inflation is not only
likely – but nailed on. And that means any pension fund buying bonds today to pay your
pension tomorrow – is going to fail unless they find other ways to generate returns.
It's the same problem if they buy equity. Long term, bonds outperform, but today we believe
stocks are the only place to generate Alpha. If you want upside, then buy stocks. If the global
economy rallies and grows, then profits rise and companies become more valuable yada, yada The
downside? If the global economy stalls, companies make less money, the price falls or they
collapse completely and you get nothing back.
How can the two markets be telling us such a contradictory story?
Distortion is a terrible thing. It affects minds and they way we think about markets.
And this is what I suddenly realised yesterday talking to my chums yesterday. We all noted
the same thing – those of us of a certain age are watching younger, more nimble financial
minds take over our business. That's normal. They have different perspectives and different
reads on what's happening and No One Working In Global Finance Today Under the Age of 32 has
ever known markets that were undistorted by QE!
Think about it a second – central bank policies holding interest rates artificially
low and them standing ever-ready to support global markets from the consequences of induced
bubble conditions – have been the dominant theme of market for 12 years now. A whole
generation of very clever bankers and investment managers are maturing into senior positions
across the global financial industry having known nothing else.
It amazes me in our own internal discussions how the divide between we few surviving old
fogey's who remember free market currency crashes, bond market collapses and equity tumbles,
and the younger financiers who can just accept the distortions caused by central banks to avoid
these events, as a factor to include in their market expectations..
That's probably why anyone over 40 is such a bear and convinced the market is unsustainable,
while the younger generation is far more accepting of distortion as a permanent market
reality..
Remember when it comes to generating investment returns, it's not what you think, but what
the market thinks that matters. It is just a voting machine
(And, by the way, the only way funds are going to make proper returns in these markets is
probably to shift out of distorted financial assets (bonds and equity) and start buying real
world assets linked to reality that's a story for tomorrow!)
In the past year the combined QE of the EU plus the Fed went from $8.3 Tr to $17.4 Tr.
That is massive economic stimulus and rate suppression. It is estimated by the Fed that
for each $ 1Tr of QE in the US, there is a 50 BP reduction from what would have been
market interest rates. So, $4 trillion of QE by the Fed equals 200 BP of rate reduction.
If inflation is running at 3%, and then there is 2% QE reduction, then real Fed Funds
rates are around 500 BP negative. QE is completely distorting the bond market. That is
driving a lot of the stock market growth
NoDebt 5 hours ago
Well, for sure, one thing UST rates are NOT is a proxy for inflation. Haven't been in a
long time.
They are a proxy for where the Fed wants the rates to be. Nothing more. And that is
mostly driven by the need to finance profligate federal government deficits. What the
market won't buy at a given rate, the Fed will buy. But make no mistake, the rate will be
what they want it to be. Simple as that.
buzzsaw99 5 hours ago
That the reflation trade is fading fast? Falling bond yields = rising bond prices, and
are a sign the market anticipates a slowdown and declining inflationary threat...
ah, ********. there is no market.
Herdee 3 hours ago (Edited)
The numbers are 3.5% for the U.S. and 2.5% for Japan. Hit those numbers on interest
rates and it's game over. Neither one of them at that point according to their tax revenues
could even make a payment on the interest, let alone make a principle payment.
Adino 2 hours ago
Yeah, I'd love for someone to explain to me how $30 trillion + debt and over $130
trillion in unfunded liabilities gets paid off without hyperinflation.
Especially when the frn itself is the primary source of the debt.
bshirley1968 PREMIUM 4 hours ago
Sure, whatever Blain.
It's just time to throw bond traders a bone. Two weeks from now stawks will be once
again pushing new records and we'll be talking about "rising interest" rates.
The narrative changes.......consistently.
How long ago were we hearing about the significance of 1.75% on the ten year......as
stawks rallied to all time highs day after day? Now we are supposed to be scared because
rates are falling......and telling us there is "risk" out there.
The ******** is thick.......and it's all ********.
Hal n back 4 hours ago
meanwhile, this week a 10.7 ounce bag of M&M's went up 11%.
90% hamburger meat is $4 a pound on sale.
eggs, which do fluctuate, are 1.49 a dozen for large (they were 88 cents not too long
ago)
cereals are up in price or down in content.
A bagel is now a buck without the smear.
Too bad there is not an official true inflation rate. even when the govt does it by
region, its not correct.
Actually too bad government is not held accountable. On a fair and even basis.
ChromeRobot 5 hours ago
Yeah there is no possible way that the "Japanofication" of US bonds and economy can
occur. Our CB is much smarter than theirs. Lol, lol, lol.... The 10yr has appreciated 10%
in a month! Who cares about the yield. Negative yields on German bunds. This guy kills
me!
Heroic Couplet 5 hours ago
The libertarian magazine Reason yesterday had an interesting article about the 10 year
Treasury and how student loan interest rates are tied to it. Now, if the 10 year goes down,
are we going to see the 3% student loan interest rate and the 6% student loan interest rate
go down? OF COURSE NOT.
gcjohns1971 1 hour ago
The US Defaulted in 1790 "Continentals" 1824 "He killed the Bank", the Civil War
"Greenbacks", arguably the Panic of 1907, 1933 "Gold Confiscation", 1971 "Temporary
suspension of Convertibility...Like the Pound Sterling in 1914!..
Kreditanstalt 3 hours ago
"...the price of a beer or a McDonalds in 10-years time will be exactly the same as it
is today. (Which it won't.)"
But the type who buy US government bonds don't care about the price of burgers. They
only plan to flip the thing back to the next Greater Fool...or THE FED
"... This is not the first time Summers has predicted that the firehose of fiscal and monetary stimulus will unleash soaring inflation. While career economists at the White House and Fed - who have peasants doing their purchases for them - urge Americans to ignore the current hyperinflation episode, saying that the recent inflation surge will soon pass, Summers has been unique among his fellow Democrats in predicting that massive monetary and fiscal stimulus alongside the reopening of the economy would spark considerable price pressures. ..."
"... Asked how financial markets may behave in the rest of 2021, Summers said "there will probably be more turbulence" as traders react to faster inflation by pushing up bond yields. "We've got a lot of processing ahead of us in markets," he said. ..."
It may not be quite hyperinflation - loosely defined as pricing rising at a double-digit
clip or higher - but if former Treasury Secretary and erstwhile democrat Larry Summers is
right, it will be halfway there in about six months.
One day after Bank of America warned that the coming "hyperinflation" will last at least 2
and as much as 4 years - whether or not one defines that as transitory depends on whether one
has a Federal Reserve charge card to fund all purchases in the next 4 years - Larry Summers,
who is this close from being excommunicated from the Democrat party, predicted inflation will
be running "pretty close" to 5% at the end of this year and that bond yields will rise as a
result over the rest of 2021.
Considering that consumer prices already jumped 5% in May from the previous year, his
forecast is not much of a shock.
Speaking on Bloomberg TV, Summers said that "my guess is that at the end of the year
inflation will, for this year, come out pretty close to 5%," adding that "it would surprise me
if we had 5% inflation with no effect on inflation expectations." If he is right, the recent
reversal in one-year inflation expectations which dipped from 4.6% to 4.2% according to the
latest UMich consumer sentiment survey, is about to surge to new secular highs.
This is not the first time Summers has predicted that the firehose of fiscal and monetary
stimulus will unleash soaring inflation. While career economists at the White House and Fed -
who have peasants doing their purchases for them - urge Americans to ignore the current
hyperinflation episode, saying that the recent inflation surge will soon pass, Summers has been
unique among his fellow Democrats in predicting that massive monetary and fiscal stimulus
alongside the reopening of the economy would spark considerable price pressures.
Asked how financial markets may behave in the rest of 2021, Summers said "there will
probably be more turbulence" as traders react to faster inflation by pushing up bond yields.
"We've got a lot of processing ahead of us in markets," he said.
Ironically, Summers - who now teaches at Harvard University whose president he was not too
long ago when he hung out with his buddy Jeffrey Epstein...
Plus Size Model 5 hours ago (Edited)
Exactly!! Not only that, it's not just the FED that is contributing to inflation. We can
also blame the SEC and the DOJ. I've never seen a Zero Hedge article blaming stock price
appreciation or buybacks for causing inflation or increasing the money supply. The DOJ
never enforces antitrust laws. The FBI never investigates money laundering from overseas
that creates artificial real estate appreciation that inflates the money supply when people
take out HELOC. There are other oversight bodies that, in a sane world, would not allow
foreign investment in real estate. Bitcoin and others are a new tool that is being used to
manipulate the money supply. It's comical how coins always go down when the little guys are
holding the bag and go up when Coinbase executives want to cash out.
Another thing, this artificial chip shortage, punitive tariffs, and new tax laws are
also adding to price increases.
Totally_Disillusioned 1 hour ago
Speculative investments have NEVER been included in the forumulation of CPI that
determines inflation rate.
Revolution_starts_now 6 hours ago
Larry Summers is a tool.
gregga777 5 hours ago (Edited) remove link
Banksters in 2010's: We've got to revise how we calculate inflation again to conceal it
from the Rubes.
Banksters in 2020: Ho Lee Fuk! Gun the QE engine! Pedal to the metal! Monetize all of
the Federal government's debt! Keep those stonks zooming upwards!
Banksters in 2021: Ho Lee Fuk! The Rubes have caught onto our game! Gun the QE engine!
Keep that pedal to the metal! Maybe the Rubes won't notice housing prices going up 20% per
year?
Summer 2021: Ho Lee Fuk! They are noticing Inflation! We'd better revise how we
calculate inflation again to conceal it from the Rubes.
Paul Tudor Jones said economic orthodoxy has been turned upside down with the Federal
Reserve focused on unemployment even as inflation and financial stability are growing
concerns.
Inflation risk isn't transitory, the hedge fund manager said in an interview on CNBC.
If the Fed says the U.S. economy is on the right path, "then I would go all in on the
inflation trade, buy commodities, crypto and gold," he said. "If they course correct, you will
get a taper tantrum and a sell off in fixed income and a correction in stocks.
BofA expects U.S. inflation to remain elevated for two to four years, against a rising
perception of it being transitory, and said that only a financial market crash would prevent
central banks from tightening policy in the next six months.
It was "fascinating so many deem inflation as transitory when stimulus, economic growth,
asset/commodity/housing inflations (are) deemed permanent", the investment bank's top
strategist Michael Hartnett said in a note on Friday.
Thyagaraju Adinarayan
Fri, June 25, 2021, 5:24 AM
By Thyagaraju Adinarayan
LONDON (Reuters) - BofA expects U.S. inflation to remain elevated for two to four years,
against a rising perception of it being transitory, and said that only a financial market crash
would prevent central banks from tightening policy in the next six months.
It was "fascinating so many deem inflation as transitory when stimulus, economic growth,
asset/commodity/housing inflations (are) deemed permanent", the investment bank's top
strategist Michael Hartnett said in a note on Friday.
Hartnett thinks inflation will remain in the 2%-4% range over the next 2-4 years. U.S.
inflation has averaged 3% in the past 100 years, 2% in the 2010s, and 1% in 2020, but it has
been annualising at 8% so far in 2021, Bofa said in the note.
Global stocks were holding near record highs hours ahead of the reading of May core personal
consumption expenditures index, an inflation gauge tracked closely by the Fed. The gauge is
estimated to rise 3.4% year-on-year.
... In the week to Wednesday, investors pumped $7 billion into equities and $9.9 billion
into bond funds, while pulling $53.5 billion from cash funds, BofA calculated, using EPFR
data.
A significant global bond market correction is likely in the next three months as central
bankers eye the exit door from pandemic emergency policy, according to a Reuters poll of
strategists who also forecast modestly higher yields in a year.
Financial markets were caught off guard by the Federal Reserve's surprisingly hawkish tone
at its meeting last week, sparking a sell-off in equities and a safe-haven rush into
Treasuries.
While Fed Chair Jerome Powell played down rising price pressures on Tuesday, just a day
later two Fed officials said the recent bout of higher inflation could last longer than
anticipated.
The MOVE index - a bond market volatility gauge - hit a two-month high on Monday,
underscoring those mixed signals and uncertainty about the near-term.
In the June 17-24 poll, over 60% of fixed-income strategists, or 25 of 41, who answered an
additional question said a significant sell-off in global bond markets was likely over the next
three months.
... The U.S. 10-year Treasury yield was forecast to rise about 50 basis points to 2.0% by
June 2022, from around 1.5% on Thursday.
... When asked how high would U.S. 10-year Treasury yields rise to over the next three
months, the median of 30 analysts was 1.75%, with forecasts ranging between 1.5% and 2.0%.
... "Inflation is not all transitory. It is going to be a mix of sustainable and
transitory," said Guneet Dhingra, head of U.S. interest rates strategy at Morgan Stanley.
In the face of prolonged low interest rates, all investors face three basic choices, says
Mr. Skjervem, the consultant who formerly managed roughly $100 billion as chief investment
officer of the Oregon State Treasury.
You can raise your existing holdings of traditional risky assets like stocks, even though no
one thinks they're cheap.
You can add a bunch of new and exotic bets and hope they don't blow up on you.
Or you can grit your teeth and stay the course, through a period of what may be lackluster
returns, until interest rates finally normalize.
"People are looking for the silver bullet, the magic wand, the get-out-of-jail-free card,"
says Mr. Skjervem. "There isn't one."
Jason Zweig always offers a breath of fresh air in the world of investment advice.
I like the cautionary tale he offers in re Fund "Trustees". Likely that many serve as
decoys on the pond. Ignore that blind, look how comfortable the plastic ducks appear.
Stuart Young
There will be no solution to the yield problem until Powell and the Federal Reserve Bank stop
having a fire sale on money and return interest rates to their normal levels. It certain that
there is much resistance to do this from the administration due to the trillions of dollars
they are borrowing and yes, these borrowed dollars are coming from the same Federal Reserve
Bank that controls the interest rates for the nation.
John Zarwan
Two quick comments. 1, a pension system is different than an individual, as the pension
system has a legal obligation to meet the payouts of its members. If my retirement nest egg
doesn't provide, too bad for me, but my heirs aren't required to make up the shortfall. 2, it
would have been nice if the article focused more on the purported subject rather than the
shortcomings of a possibly corrupt pension plan.
BRIAN HILL
For those who say just have an S&P 500 index fund, the index had no return from 2000 to
2012 and other long periods like 1966 to 1982. And if you were withdrawing income during this
period the sequence of return risk would be a disaster. You need multiple asset classes - not
just large cap US stocks.
Richard Fishman
How easy it is for these pension trustees to make themselves popular with participants by
raising earning assumptions and payouts when they have their big daddy the U.S. Pension
Benefit Guarantee Corp. ready to raid the taxpayers pockets again and again. As usual,
intelligent, conservative, fiscal management is a joke. What else is new?
Khyshang Lew
I do agree. It is time to lower expected rate of return.
Frank Walker
I wouldn't want to pour any water on all the great returns of the past 10 years but they came
after a major crash in 2008. A Federal Reserve that dropped the interest rate to 1.5% on a 10
year bond. They have created a Stock, Bond, and Real Estate market bubble. How would your
averages work out with a 50% correction?
Ralph Tibiletti
"People are looking for the silver bullet, the magic wand, the get-out-of-jail-free card,"
says Mr. Skjervem. "There isn't one."
All of these problems are caused by a dysfunctional federal government controlled by
politicians from both parties whose only concern is getting elected and reelected. They
accomplish their goal by redistributing wealth in the form of many different entitlement
programs and by catering to the legislative needs of special interest groups.
Voting is not the solution because we only replace the existing set with a different set
that will perform in the same way. We need a Solomon like individual who can solve the
problem.
Y.C. Sung
Private equity is great for money managers; there's no transparency in the value of the
investment. Unlike public market managers who have a scorecard on them every day, private
equity managers have wide latitude in valuing their investments. They can avoid being fired
for a long time.
Rachel Glyn
Not sure why it's different than a SPAC.
Ralph Tibiletti
"The challenge we all face as investors is that the collapse in interest rates makes
achieving historical rates of return very difficult,"
As we all know this problem has been caused by the Fed's zero interest rate and
money printing polices in support of the profligate spending and borrowing by both parties in
the federal government.
Why is the Fed so interested in the interest rate that savers may receive but has no
interest in the interest rate that lenders may charge like credit card companies? It does
seem a bit unfair when lenders can borrow at near zero percent interest rates and then loan
the money out at 16 percent plus. This smacks of inequality with which both the Fed and the
federal government seem so terribly concerned.
James Winkle
The only magic bullet for a lot of people is to spend less.
Inflation for common people level means devaluation of the dollar. It can happen for reasons
completely detached from money supply issues. For example shortage of commodities (especially
oil) or diminishing of the world reserve currency status of the dollar (refusal of some countries
to hold their currency reserves in dollars and switch to other currencies in mutual trade).
Increase of military expenses (Pentagon budget is over trillion dollars now) also does not help
(guns instead of butter policy)
The reason that rates are discounting the current "economic growth" story is that artificial
stimulus does not create sustainable organic economic activity.
"This is because bubble activities cannot stand on their own feet; they require support
from increases in money supply that divert to them real savings from wealth generators. Also,
note again that a major cause behind the possible decline in the pool of real savings is
unprecedented increases in money supply and massive government spending. While the pool of
real savings is still growing, the massive money supply increase is likely to be followed by
an upward trend in the growth rate of the prices of goods and services. This could start
early next year. Once the pool of real savings starts to decline, however -- because of
massive monetary pumping and reckless fiscal policies -- various bubble activities are will
plunge. This, in turn, is likely to result in a large decline in economic activity and in the
money supply." – Mises Institute
As stimulus fades from the system, that decline in money supply is only one of several
reasons that "deflation" will resurface.
Monetary & Fiscal Policy Is Deflationary
The Federal Reserve and the Government have failed to grasp that monetary and fiscal policy
is "deflationary" when "debt" is required to fund it.
How do we know this? Monetary velocity tells the story.
What is "monetary velocity?"
"The velocity of money is important for measuring the rate at which money in circulation
is used for purchasing goods and services. Velocity is useful in gauging the health and
vitality of the economy. High money velocity is usually associated with a healthy, expanding
economy. Low money velocity is usually associated with recessions and contractions. " –
Investopedia
With each monetary policy intervention, the velocity of money has slowed along with the
breadth and strength of economic activity.
While in theory, "printing money" should lead to increased economic activity and inflation,
such has not been the case.
A better way to look at this is through the " veil of money" theory.
If money is a commodity, more of it should lead to less purchasing power, resulting in
inflation. However, this theory began to fail as Governments attempted to adjust interest rates
rather than maintain a gold standard.
Crossing The Rubicon
As shown, beginning in 2000, the "money supply" as a percentage of GDP has exploded higher.
The "surge" in economic activity is due to "reopening" from an artificial "shutdown."
Therefore, the growth is only returning to the long-term downtrend. As shown by the attendant
trendlines, increasing the money supply has not led to either more sustainable economic growth
rates or inflation. It has been quite the opposite.
However, it isn't just the expansion of the Fed's balance sheet that undermines the strength
of the economy. For instance, it is also the ongoing suppression of interest rates to try and
stimulate economic activity. In 2000, the Fed "crossed the Rubicon," whereby lowering interest
rates did not stimulate economic activity. Therefore, the continued increase in the "debt
burden" detracted from it.
Similarly, we can illustrate the last point by comparing monetary velocity to the
deficit.
As a result, monetary velocity increases when the deficit reverses to a surplus. Such allows
revenues to move into productive investments rather than debt service.
The problem for the Fed is the misunderstanding of the derivation of organic economic
inflation
6-More Reasons Deflation Is A Bigger Threat
Previously,
Mish Shedlock discussed Dr. Lacy Hunt's views on inflation, or rather why deflation remains
a more significant threat.
Inflation is a lagging indicator. Low inflation occurred after each of the past four
recessions. The average lag was almost fifteen quarters from the end of each. (See Table
Below)
Productivity rebounds in recoveries and vigorously so in the aftermath of deep
recessions . The pattern in productivity is quite apparent after the deep recessions ending
in 1949, 1958, and 1982 (Table 2 Below). Productivity rebounded by an average of 4.8% in
the year after each of these recessions. Unit labor costs remained unchanged as the rise in
productivity held them down.
Restoration of supply chains will be disinflationary . Low-cost producers in Asia and
elsewhere could not deliver as much product into the United States and other relatively
higher-cost countries. Such allowed U.S. producers to gain market share. As immunizations
increase, supply chains will gradually get restored, removing that benefit.
Accelerated technological advancement will lower costs . Another restraint on inflation
is that the pandemic significantly accelerated the implementation of technology. The sharp
shift will serve as a restraint on inflation. Much of the technology substitutes machines
for people.
Eye-popping economic growth numbers vastly overstate the presumed significance of their
result . Many businesses failed in the recession of 2020, much more so than usual.
Furthermore, survivors and new firms will take over that market share, which gets reflected
in GDP. However, the costs of the failures won't be.
The two main structural impediments to traditional U.S. and global economic growth are
massive debt overhang and deteriorating demographics, both having worsened as a consequence
of 2020.
To summarize, the long-term risk to current outlooks remains the "3-Ds:"
Deflationary Trends
Demographics; and,
Debt
Conclusion
With this in mind, the debt problem remains a massive risk. If rates rise, the negative
impact on an indebted economy quickly depresses activity. More importantly, the decline in
monetary velocity shows deflation is a persistent threat.
"It is hard to overstate the degree to which psychology drives an economy's shift to
deflation. When the prevailing economic mood in a nation changes from optimism to pessimism,
participants change. Creditors, debtors, investors, producers, and consumers all change their
primary orientation from expansion to conservation.
Creditors become more conservative, and slow their lending.
Potential debtors become more conservative, and borrow less or not at all.
Investors become more conservative, they commit less money to debt investments.
Producers become more conservative and reduce expansion plans.
Consumers become more conservative, and save more and spend less.
These behaviors reduce the velocity of money, which puts downward pressure on prices.
Money velocity has already been slowing for years, a classic warning sign that deflation is
impending. Now, thanks to the virus-related lockdowns, money velocity has begun to collapse.
As widespread pessimism takes hold, expect it to fall even further."
There are no real options for the Federal Reserve unless they are willing to allow the
system to reset painfully.
Unfortunately, we now have a decade of experience of watching monetary experiments only
succeed in creating a massive "wealth gap."
Most telling is the current economists' inability to realize the problem is trying to "cure
a debt problem with more debt."
In conclusion, the Keynesian view that "more money in people's pockets" will drive up
consumer spending, with a boost to GDP being the result, has been wrong. It hasn't happened in
40 years.
Unfortunately, deflation remains the most significant threat as permanent growth doesn't
come from an artificial stimulus.
bikepath999 2 hours ago
Title is 100% wrong! It's artificial growth (money printing) that is the inflation!
Organic growth thru increased production can actually lead to deflation!
OldNewB 2 hours ago
Exactly. Inflation can be the reduction in the rate of deflation due to productivity
increases.
bikepath999 2 hours ago
Transitory is just the new little catch phrase to have you chasing after your own tail
rather than skinning alive a central banker or politician
dead hobo 2 hours ago (Edited)
Transitory was Janet Yellen's favorite word for years. It was her catch phrase like
Bernanke's was 'The benefits outweigh the costs'. Total blather in both cases.
In both cases, it was muppet-speak for 'p*ss off'. But it sounded oh so intelligent and
the media lapped it up.
About the above article ... Economics, as commonly applied by sales folk, teachers,
experts, and pundits is theology, not science. One credibility trick is to quote an expert
who quoted another expert. Like above. How can you argue against this depth?
Misesmissesme 2 hours ago (Edited)
They are somewhat correct on the technical definition of inflation. However,
hyper-inflation does not care about any of that. It only needs a government willing to
print and a populace that has lost faith in the currency. We know the gov and the Fed are
game. It's just a matter of time until the masses lose faith in the dollar.
OldNewB 2 hours ago (Edited) remove link
Devaluing the fiat by printing to infinity has nothing to do with growth.
Printing IS inflation. Where it shows up is another matter.
Whether it results in higher prices is a function of behavior between buyers and sellers
of assets, products and services.
-- ALIEN -- 2 hours ago (Edited) remove link
International Energy Agency said GLOBAL PEAK OIL PRODUCTION for all liquids happened in
2018.
NO economic growth is possible without growing the energy supply, so 2% predicted growth
is BS,
unless other countries contract by 2+%.
Quia Possum 2 hours ago
We're beyond the point of pulling the rip cord.
Some ZH writer had an excellent analogy to a hot air balloon on fire. Up to a height X,
you can jump off safely. Up to a height Y you can jump off and survive with some broken
bones, but you're going to have to muster some courage to do that. But once you pass that
height you're dead whether you jump or stay in the balloon all the way.
The price of energy is growing. and that means inflation is accelerating, but it will
probably take the form of stagflation...
Stagflation is characterized by slow
economic growth and relatively high unemployment -- or economic stagnation -- which is at the same time
accompanied by rising prices (i.e. inflation). Stagflation can also be alternatively defined as a
period of inflation combined with a decline in gross domestic product (GDP). See also Stagflation - Wikipedia
Stagflation led to the emergence of the Misery index . This index, which is
the simple sum of the inflation rate and unemployment rate, served as a tool to show just how
badly people were feeling when stagflation hit the economy.
Under neoclassic economic doctrine stagflation was long believed to be impossible. This
pseudoscience demonstrated in the Phillips Curve portrayed
macroeconomic policy as a trade-off between unemployment and inflation.
Excellent analysis. I would add one point as a result of your conclusion. Older
populations with declining birth rates and slower population, depress household, business and
public investment. The contracting effect on investment is highly deflationary and overwhelms
the impact of inflation due to the smaller labor force. This condition is plainly evident in
Japan and Europe. Moreover, this pattern will be increasingly apparent in the US .
The Transitory Boat
The transitory boat is a small one. Powell and Yellen have to say that no matter what they
believe.
Rosenberg, Hunt, and I are in the small boat.
And if you want another reason to be in that boat with us, then think about what happens
when asset bubbles burst. It won't be inflationary, that's for sure.
Meanwhile, "I just say buy the gold," Rosenberg said. "Gold has 1/5 of the volatility that
bitcoin has."
Let us preface our inflation note with one of our favorite quotes:
"World War II was transitory"
– GMM
Inflation has eroded my purchasing power in my transitory life. Bring back the $.35 Big Mac,
which was only about 20% of the minimum wage. Now? About 40-50%... Enough to spark a
revolution?
Inflation doesn't really matters, what only matters is the one big question: "How much bonds
does the one market member with unlimited funds buy?".
And the time the FED was able to rise more than .25% is in the rear mirror – when they
hike now, inflation or not, all these zombie companies and zombie banks will fail and no lawyer
in the world will be able to clean up the chaos after all these insolvency filings.
They have to talk the way out of this inflation. They have to talk until it stops, or
longer. They can't hike. They can perhaps hike again when most of the debt is inflated away
– a period with 10+% inflation and 1% bond interrest.
And yes, they can buy litterally any bond dumped onto the market – shown this in March
last year when they stopped the corona crash in an action of one week.
I think most non-investment-banks are zombies at the moment, and more than 20% of all
companies. They all will fail in less than 1 year when we would have realistic interrest rates.
On the dirty end, this would mean 10%+ for all this junk out there – even mighty EXXON
will be downgraded to B fast.
In old times the FED rates would be more than 5% now with these inflation numbers. Nobody
can pay this these days.
And now in the USA – look for how much social justice and social security laws you'll
get. The FED has to provide cover for all of them.
We in Europe will do this, too. New green deal, new CO2 taxes, better social security
– the ECB already has said they will swallow everything dumped on the market.
So, oil 100$ the next years – but some kind of strange dollars buying less then they
used to.
Eulen , your 2cents = 1 Dollar . Everything you say is correct . Weird is the only word for
what is happening in the financial world . I was in my first year of college when Paul Volcker
hiked interest rates into double digits so I have a benchmark to measure against . This is not
going to end well . Take care .
REPLY
All factors that Stokman sites does not exclude bond rate remaining withing this yea max-min
band for the rest of the year. You never know how long Fed will continue to buy bonds to suppress
the yield.
The last "dead chicken bounce" of 10 year bond caught many people unprepared and
surprised.
The Fed's destructive money-pumping has many victims, but chief among these is the Wall
Street financial narrative itself.
It emits not a whiff about the patent absurdity of the Fed's monthly purchase of $120
billion of treasury and GSE debt under current circumstances; and treats with complete respect
and seriousness the juvenile word game known as "thinking about thinking about tapering" by
which the clowns in the Eccles Building fearfully attempt to placate the liquidity-intoxicated
speculators on Wall Street.
So it's not surprising that today's 5.0% CPI reading was made inoperative within minutes
after the BLS release by a chorus of financial pundits gumming about "base effects" and
ridiculing outliers like soaring used car prices (up 29.7% YoY), which, of course, Bloomberg
reporters never see the inside of anyway.
Then again, that's why we look at the two-year stacked CAGRs, which smooth the ups and downs
of the worst lockdown months last spring; and also why we use the 16% trimmed mean CPI, which
eliminates the highest 8% and lowest 8% of items in the overall CPI each month (both sets of
deleted outliers are different each month).
In the present instance, therefore, off-setting the used car prices in the highest 8% of
items during May is the -5.0% YoY drop in health insurance costs (if you believe that BLS
whopper) and the -5.3% drop in sporting event prices, which, of course, have been largely zero
since last April.
In any event, the 16% trimmed mean CPI for May was up by 4.7% annualized versus the April
number and was higher by 2.62% on YoY basis.
Still, the more salient point is that on a two-year stacked basis the plain old CPI -- used
car prices and all -- leaves not a scintilla of doubt: Consumer inflation is accelerating and
rapidly.
During the last eight months the growth rate for the two year stack has risen from 1.48% to
2.55% per annum. And we don't recall a word in May 2019 about that year's reading being
particularly deflationary. It was actually up 1.83% from May 2018.
Per Annum CPI Increase, Two-Year Stack:
October 2020: 1.48%;
November 2020: 1.59%;
December 2020: 1.78%;
January 2021: 1.92%;
February 2021: 1.99%;
March 2021: 2.07%;
April 2021: 2.23%;
May 2021: 2.55%.
Still, according to the Fed apologists there's nothing troubling about the above because the
Fed is now only trying to hit its 2.00% inflation target "averaged over time".
Let's see. Here are the CPI growth rates going back to May 2014. It turns out you have to
average back seven years before you have a shortfall from the 2.00% target!
CPI Increase per Annum To May 2021 From:
May 2018, 3-Yr, average: 2.31%;
May 2017, 4-Yr. average: 2.42%;
May 2016, 5-Yr. average: 2.31%;
May 2015, 6-Yr. Average:2.10%;
May 2014, 7-Yr. Average: 1.81%
You get the scam. These mendacious fools will just keep averaging back in time until the get
a number that's a tad under 2.00%, smack their lips loudly and then pronounce the current
inflation to be "transitory".
And they will also toss out any inflation index that undercuts their MOAAR inflation mantra
-- like all of the data reported above!
So we will say it again : The CPI is a highly imperfect general price measure owing to its
one-sided treatment of quality (hedonic) improvements, wherein some reported prices are
adjusted downward for improved product features like airbags and more powerful PCs, put few
prices are adjusted upward for the junkie toys, towels, kitchenware, appliances and furniture
that comes out of China.
But with the 8% highest and 8% lowest prices dropped out monthly to filter out the short-run
noise, the 16% trimmed mean version of the CPI at least purports to be a fixed basket price
index, not a variable weight deflator like the Fed's beloved PCE deflator.
In short, the 16% trimmed mean CPI puts paid to the "transitory" scam. Come hell or high
water, this serviceable inflation measure has been rising at 2.00% per annum since the year
2000, and even more than that during the 1990s.
Thus, during the 112 months since the Fed formally adopted inflation targeting in January
2012, it has risen by 2.03% per annum and by 2.15% per annum since January 2000.
Equally significantly, there have been only a handful of times during the 256 monthly
readings since January 2000 when the year-over-year measure dropped materially below 2.00%.
YoY Change, 16% Trimmed Mean CPI, 2000-2021
For want of doubt, here is the Fed's preferred short-ruler -- -the core PCE (personal
consumption expenditure deflator less food and energy). And the Fed's case for its insane
money-pumping essentially boils down to the dueling information covered by the red bars above
and the purple bars below.
As it happens, the one-year change in the core PCE deflator is 3.1% and the stacked two-year
gain is 1.99% per annum. That latter is apparently not close enough to 2.00% for government
work, meaning that the Fed needs to get more years into its average.
Even then, you have to be trained in the medieval theology of counting angels on the head of
a pin to ascertain the purported earth-shaking "shortfall" from target. Compared to April 2021,
here are the multi-year CAGRs on an April-to-April basis:
2019-2021: 1.99%;
2018-2021: 1.89%;
2017-2021: 1.92%;
2016-2012: 1.86%:
2015-2021:1.82%
That's right. For the five year-pairs shown above, the average CAGR for the core PCE
deflator was 1.90%. It seems that "lowflation" amounts to that which you need a magnifying
glass to ascertain -- 10 basis points of shortfall.
Of course, our monetary bean counters are not done "averaging", either. If you go back to
January 2012 when the Fed officially adopted inflation targeting, the core PCE deflator is up
by 1.69% per annum, and since January 2000 it has risen by 1.75% per annum.
So there you have it. For want of 25-31 basis points of annual inflation -- -averaging back
to the beginning of the current century -- you have a camarilla of central bankers giving deer
in the headlights an altogether new meaning. That is to say, they are apparently not even
thinking about thinking about tapering their massive bond-buying fraud owing to the barely
detectable differences between purple and red bars of these dueling charts.
As we said a few days back, would that they had applied the 25th Amendment to the Federal
Reserve Board.
These sick puppies are in urgent need of palliative care.
YoY Change In Core PCE Deflator, 2000-2021
They are also in need of a dose of realism, and on that score there are three figures in the
May CPI report which tell you all you need to know. To wit, compared to May 2020, durable goods
prices were up by 10.3%, nondurables were higher by 7.4% and services less energy gained
2.9%.
In fact, in the recent history of these three figures lays a stinging refutation of the
entire "lowflation" scam promulgated by the Fed money printers and their acolytes and shills on
Wall Street and in Washington, too.
On this matter, the Donald was right, even if by accident or for the wrong reasons. What we
are referring to, of course, is the "Shina" factor.
Beijing's form of state-controlled printing press capitalism has systematically drivendown
the cost of manufactured goods and especially durables by, in effect, draining the rice paddies
of China's great interior and herding its latent industrial work force into spanking new
factories which paid wages less than meager. And CapEx costs were rock bottom, too, owing to
$50 trillion of central bank-fueled domestic debt and the greatest cheap capital-driven
malinvestment spree in human history.
The result was an intense, multi-decade long deflation of manufactured goods as the high
labor costs embodied in US and European manufacturers were steadily squeezed out of global
prices levels as production shifted to China and its East Asian supply chain.
That impact is patently obvious in the composition of the CPI among the three components
which were flashing warning lights in today's inflation report.
Composition of CPI By Major Components, 2000-2021
In the first place, the core of domestic inflation lies in the 58.8% weight of the CPI
consisting of mainly domestically supplied services. The 2.9% YoY gain reported for May for CPI
services less energy was essentially par for the course.
That is, during the last 21 years (since January 2000) this component (black line) has risen
by 2.71% per annum, and since January 2012 it has gained a similar 2.63% per annum.
Needless to say, if there is any part of the inflation rate that the Fed can most powerfully
impact, it is domestically supplied services like health care, education, housing,
entertainment, travel and foods services. So where's the "lowflation" in that part of the CPI
basket?
Alas, we don't have lowflation in services at all, but a stubborn 2.6%-3.0% upward price
drift in domestic service components which account for nearly three-fifths of the household
budget.
By contrast, the durable goods component (brown line) accounts for 11.1% of the CPI, and
it's been an anchor to the windward for more than two decades. As of May 2021, prices were
still 8% below their January 2000 level.
The truth is, the alleged lowflation on the top line CPI has been heavily attributable to
the deflationary durable goods sector, but, alas, that era is apparently over. The Chinese rice
paddies have been drained on a one-time basis and its labor force is now actually shrinking,
while the Donald's ill-timed tariff barriers have forced production to move to higher cost
venues, albeit not necessary the USA of A.
Either way, the anchor to the windward is largely gone , meaning that rising durable goods
prices going forward will no-longer weigh as heavily on the CPI.
It should be further noted that during the past two-decades nondurable prices have also
held-down the CPI top line -- again in large part owing to the "Shina" factor and downward
pressures from cheap apparel, footwear, home furnishings and the like.
During the past 21 years, the nondurables component (yellow line) of the CPI rose by 1.99%
per annum, which is as close as you please to the target, but was also on anchor on the overall
CPI top-line ( purple line) which increased by 2.19% per annum.
Alas, during the period since January 2012, nondurables rose by just 0.63% per annum owing
to flat-lining energy and commodity prices, thereby pulling the overall CPI down to 1.80% per
annum, where it too fell awry of the Fed's sacred 2.00% target.
But here's the thing. A smattering of surging nondurable goods prices in the May 2021 report
are a stark reminder that the times they are a changin'.
On a YoY basis, these components suggest that "lowflation" in durables may have passed its
sell-by date and that the 7.4% YoY gain in nondurables overall may be lifting, not suppressing,
the CPI top-line going forward.
YoY Change In Major Nondurables Components:
Energy commodities: +54.5%;
Apparel: +5.6%;
Home furnishings and supplies: +3.7%;
Footwear: +7.1%;
Food away from home: +4.0%
Household furnishings and operations: +4.6%.
In sum, the chart above captures the one-time history of the Fed's phony "lowflation"
narrative -- an aberrant condition that is now fading fast. Sooner or latter they will run out
of excuses and back inflation reports to average down. And that, in turn, means tapering of the
Fed's great bond-buying fraud -- the lynch pin of the greatest bond and stock bubble in
recorded history.
Do we think that will trigger the greatest financial asset value collapse in modern
times?
Why, yes, we do! play_arrow
wareco 4 hours ago remove link
Seriously? David Stockman? This guy has been perpetually wrong for the last 4 years, at
least. In June, 2017, he was calling for the S&P to fall to 1600. Never happened. In
October 2019, he loudly proclaimed that everyone should get out of the "casino". S&P up
40% since then. He has as much credibility as that self-promoter, Harry Dent, who has been
calling for gold to drop to $700 since 2012.
Sound of the Suburbs 8 hours ago (Edited) remove link
Stage one – The markets are rising.
Look at all that wealth we are creating.
Stage two – It's a bubble.
That wealth is going to disappear.
Stage three – Oh cor blimey! I remember now, this is what happened last time
At the end of the 1920s, the US was a ponzi scheme of inflated asset prices.
The use of neoclassical economics, and the belief in free markets, made them think that
inflated asset prices represented real wealth.
1929 – Wakey, wakey time
The use of neoclassical economics, and the belief in free markets, made them think that
inflated asset prices represented real wealth, but it didn't.
It didn't then, and it doesn't now.
Putting a new wrapper around old economics did fool global elites.
You'd have to get up pretty early in the morning to catch me out.
E5 9 hours ago
Not going to happen.
No one is buying.
No one is raising salaries.
Inflation is a stalled plane.
Everyone is waiting.
Self fulfilling prophecy. Mainstreet is waiting on their inheritance from dead Boomers.
The only thing that will save America. Money being spent and Cuban Missile Crisis not
happening under Boomers.
"... The dynamics show how much the municipal-bond market has been swept up in the global push into higher yield assets as central banks worldwide hold interest rates low to stoke the economic recovery. ..."
"... That's fueled a surge in debt sales by corporations and governments battered by virus lockdowns. And for the state and local government debt market, it has revived the years-long rally in junk bonds that was only temporarily derailed by the coronavirus lockdowns. ..."
"... So far this year, government agencies across the U.S. have sold more than $6.5 billion of bonds that can only be marketed to institutional investors able to bear the risk, driving such issuance toward the biggest year on record, according to data compiled by Bloomberg. ..."
With the economy rebounding swiftly from the pandemic, interest rates on high-yield state
and local government securities have tumbled to the lowest in over two decades. Cash is pouring
into mutual funds focused on the junk-rated debt so quickly that money managers are fighting to
get in on new deals. And prices have rallied, driving high-yield bonds to their biggest run of
outperformance since 2014.
The demand is so strong that a California agency sold 35-year bonds for the development of a
senior-living community at a yield of 4.43%, about two-and-a-half percentage points less than
bankers initially anticipated. The price went on to surge 8% in secondary trading.
"We couldn't think of a better time to come to market," said Sarkis Garabedian, an
investment banker at Ziegler, the underwriter on the bonds. He said the firm hadn't seen such
interest in a transaction for a new senior living campus since they started tracking the
metrics in the 1980s. "We really hit the sweet spot here."
Recent bond sales have raised money for an ethanol production facility in North Dakota, a
bevy of charter schools, and a youth-sports complex in Arizona. American Samoa, a junk-rated
territory, is tapping the market for the first time since 2018. And the owner of a plant that
recycles rice waste into fiberboard may sell more debt even though it has already been driven
to default.
The dynamics show how much the municipal-bond market has been swept up in the global push
into higher yield assets as central banks worldwide hold interest rates low to stoke the
economic recovery.
That's fueled a surge in debt sales by corporations and governments battered by virus
lockdowns. And for the state and local government debt market, it has revived the years-long
rally in junk bonds that was only temporarily derailed by the coronavirus lockdowns.
So far this year, government agencies across the U.S. have sold more than $6.5 billion of
bonds that can only be marketed to institutional investors able to bear the risk, driving such
issuance toward the biggest year on record, according to data compiled by Bloomberg.
May CPI is expected at 8:30 a.m. ET Thursday. It is unclear to me why the 10-year Treasury yield fell below the key 1.5% Wednesday.
Was it short-covering? if so what triggered it? If predictions are true it might jump up on Jun 10, 2021 because you can't have Headline
CPI 4.7% and the 10-year Treasury yield 1.5%. That's the theatre of absurd.
Rent, owners' equivalent rent and medical care services collectively are 50% of the core CPI basket.
Notable quotes:
"... Headline CPI is expected to jump 4.7% year-over-year, the highest rate since sky high energy prices spiked inflation readings in the fall of 2008. ..."
"... "I am worried about rent and owners' equivalent rent because it should go up. It had decelerated," she said. Shelter is more than 30% of CPI , and rent costs have bottomed in some cities, Swonk added. "The issue is it could have longer legs and keep overall inflation measures buoyed more than people expect." ..."
...The consensus forecast for the core consumer price index, which excludes food and energy, is 3.5% on a year-over-year basis,
according to Dow Jones. That's the fastest annual pace in 28 years.
Economists expect both core and headline CPI rose by 0.5% in May. Headline CPI is expected to jump 4.7% year-over-year, the highest
rate since sky high energy prices spiked inflation readings in the fall of 2008.
... ... ...
"I am worried about rent and owners' equivalent rent because it should go up. It had decelerated," she said. Shelter is more
than 30% of CPI , and rent costs have bottomed in some cities, Swonk added. "The issue is it could have longer legs and keep
overall inflation measures buoyed more than people expect."
Analysts said other factors are driving lower yields, including a weaker dollar, which has
lifted demand for Treasurys from foreign investors. Foreign investors tend to hold more
Treasurys when the dollar declines and reduces the costs of protecting against swings in
currencies.
That is a counterintuitive response , because rising inflation erodes the value of
Treasuries' payouts. And the data did indicate stronger inflation: Excluding volatile food and
energy costs, prices rose 0.7% in May. That was the second-highest monthly increase in consumer
prices since the early 1980s, behind April's 0.8% rise. Compared with last year, when the
global economy was mired in a pandemic-driven slowdown, headline consumer prices rose at
a 5% pace . (Excluding food and energy, they rose 3.8%.)
The market's moves could be muted because investors are betting that central bankers are
going to stick with their view that most of the strength in consumer prices will pass after a
potentially bumpy reopening period and keep policy easy.
That doesn't mean Treasuries have much room to rally more from here.
The Fed's meeting next week may be the first test. If central-bank officials talk about
starting to remove accommodation earlier than expected, that could send yields higher. In fact,
strategists from TD Securities decided to take a bearish view on the 10-year note on Thursday,
after yields fell below 1.5% earlier this week. They argued that continued economic momentum
and stronger inflation could lead central-bank officials to take a more upbeat tone on the
economy than investors expect at their meeting on June 15 and 16.
Wood, who became the face of the outsized rally in technology stocks such as Zoom Video
Communications Inc and electric vehicle maker Tesla Inc during the coronavirus pandemic last
year, said that falling lumber and copper prices signal that the market is "beginning to see
signs that the risks are overblown" from inflation.
...Wood, whose ARK Innovation ETF was the top-performing actively managed U.S. equity fund
tracked by Morningstar last year, has seen her performance stagnate along with the slowdown in
growth stocks. Her flagship fund is down nearly 28% from its early February high.
A short-term period of slightly higher inflation wouldn't be memorable, but an extended run
of inflation above 3% can be problematic. Social Security Is Your Best Inflation Hedge; you need
to maximize it.
Social Security checks represent about a third of income for all retirees.
Among elderly recipients, those checks represent half of their retirement income for married
couples and 70% for singles.
A primary residence, if you own a house and it is fully paid off, also gave some minimal
inflation protection.
Another factor is that once people actually get into retirement, ,
their spending generally decreases so much that they're spending less overall, even accounting
for inflation.
While seniors can't directly affect the inflation rate,
there are ways to minimize the shadow it casts over their retirement.
Reducing housing costs, for instance, is a step in the right direction. Trading in a larger
home for a smaller one, even if the mortgage is paid off, reduces the monthly outflow for
property taxes, utilities, homeowners insurance, and maintenance.
Another smart move is adding investments to your portfolio that are likely to increase in
value as inflation rises.
Yes, inflation is rising, and retirees must now consider repositioning not just their
short-term safe-haven investments (we'll talk more about that in part two) but their entire
portfolio as well (which we'll focus on here). Well that, conveniently enough, is the subject
(and title) of a paper soon to be published in the Journal of Portfolio Management that was
co-authored by Campbell Harvey, a professor at Duke University, and several of his colleagues
affiliated with Man Group. What more, Harvey and his co-authors found that no individual equity
sector, including the energy sector, offers significant protection against high and rising
inflation.
... here's what Harvey and his co-authors discovered after researching eight periods of
inflation dating back to 1925: Neither equities nor bonds performed well in real terms during
the inflationary periods studied. Real being the nominal rate of return minus the rate of
inflation.
... ... ...
TIPS
"Treasury Inflation-Protected Securities (TIPS) are robust when inflation rises, giving them
the benefit of generating similar real returns in inflationary and noninflationary regimes,
both of which are positive," the authors wrote.
In fact, TIPS had a 2% annualized real return during the most recent five periods of
inflation.
But what looks promising in a research paper might not work in reality given the current
yield on TIPS (0.872% as of June 2, 2021). The low yield means that TIPS are a "really super
expensive" inflation hedge going forward, said Harvey.
"It means that you're going to get a negative return in noninflationary periods," he said.
"So yes, they provide the protection, but they're an expensive way to get that protection."
Commodities
"Traded commodities" have historically performed best during high and rising inflation. In
fact, traded commodities have a "perfect track record" of generating positive real returns
during the eight U.S. periods studied, averaging an annualized 14% real return.
Now investors might not be able to trade commodities in the same manner as institutional
investors using futures, but they can invest in ETFs that invest in a broad basket of
commodities, said Harvey.
Other assets
Residential real estate on average holds its value during inflationary times, though not
nearly as well as commodities. Collectibles such as art (7%), wine (5%) and stamps (9%) have
strong real returns during inflationary periods, as well.
And while some suggest adding bitcoin to a diversified portfolio as an inflation protection
asset, caution is warranted given that bitcoin is untested with only eight years of quality
data -- over a period that lacks a single inflationary period, the authors wrote. "It's not
just untested," said Harvey. "It's too volatile."
Gold is also too volatile as a reliable hedge against inflation. Harvey noted, for instance,
that the performance of gold since 1975 is largely driven by a single year, 1979, when gold
dramatically appreciated in value. "And that makes the average look really good," he said.
Harvey also said his number one dynamic strategy for inflationary times is changing the
sector exposures in your portfolio. With this strategy, you would allocate a greater portion of
your assets to sectors that have historically performed well during inflationary periods, such
as medical equipment, and less if anything at all to sectors that have performed poorly during
inflationary periods, such as consumer durables and retail. "You can naturally rebalance your
portfolio to be a little more defensive," he said. "And that can be done by any investor."
Harvey and his co-authors also found active equity factors generally hold their own during
inflation surges with "quality stocks" having a small positive real return and "value stocks"
having a small negative return.
Dynamic strategies are "active" strategies that involve monthly rebalancing of portfolios,
according to Harvey. In contrast, passive strategies require minimal or no rebalancing; for
example, holding an S&P 500 index fund.
Active equity factor investing uses frequent rebalancing to take bets that deviate from the
investment weights implied by a passive market portfolio. These bets seek to produce returns
over and above the passive market portfolio, said Harvey.
In Harvey's study, quality is defined as a combination of profitability, growth and safety
and value is defined with traditional metrics such as the book-to-price ratio.
Is now the time to reposition your portfolio?
According to Harvey, inflation surging from 2% to more than 5% is bad for stocks and bonds.
We're not there yet; the current rate of inflation is 4.2%. But we are getting close to the
"red zone" and now would be a good time to "rethink the posturing of your portfolio," Harvey
said. "So even if it doesn't occur, it doesn't matter. If the risk is high enough, you take
some actions, you're basically buying some insurance."
And being proactive is the key. "So, at least right now, it's better to have the discussion
now than when it's too late; when we're already in the surge and the asset prices have already
dropped," said Harvey.
Remember too that what you hedge is "unexpected" inflation, Harvey said. "What you really
are concerned with is unexpected inflation or a surprise in inflation. We call it an economic
shock."
But not a transitory shock. That won't have any effect on asset prices. "You need to
consider long-term inflation," he said.
And that place to look for that is in the break-even inflation (BEI) rate reflected in
TIPS and nominal Treasurys. The BEI is the weighted average of inflation expectations over the
life of the bond. And changes in the BEI have the advantage of reflecting changes in long-term
or permanent inflation expectations. Presently the BEI is 2.44%. "Anything that is a long-term
measure of inflation is going to have the maximum reflection in the asset prices," he said.
As for the current inflationary environment, Harvey said it's a mix of transitory and not-so
transitory elements. Lumber prices are up but likely not permanently. The rising prices of
other goods and services, however, may not be transitory. "It's obviously difficult to dissect
this," he said. "But it's really important for people that are running a portfolio draw that
distinction."
US government bonds rallied on Friday following a weaker-than-expected reading on American
job growth for the month of May. But a key report on consumer price inflation will provide a
fresh test for investors. Consumer prices rose at its fastest pace in more a decade in the 12
months to April, but analysts project that it has picked up even more since then, raising fears
that the economy is overheating. Economists surveyed by Bloomberg expect the year on year
inflation rate to have jumped to 4.7 per cent in May in figures to be released by the
Department of Labor on Thursday, compared with 4.2 per cent in April.
It looks like this surge is suitable, especially in energy... That spells troubles for
the US economy which is based on cheap energy.
Higher prices for commodities are flowing through to more companies and consumers, making it
harder for central bankers to ignore them
...The world hasn't seen such across-the-board commodity-price increases since the beginning
of the global financial crisis, and before that, the 1970s. Lumber, iron ore and
copper have hit records . Corn, soybeans and wheat have jumped to their
highest levels in eight years . Oil recently reached
a two-year high .
At current metal prices, Rio Tinto PLC, BHP Group Ltd. , Anglo American PLC and Glencore PLC could this year generate a
combined $140 billion in earnings before interest, taxes, depreciation and amortization,
according to Royal Bank of Canada. That compares with $44 billion in 2015, when metals prices
were at or near lows.
However, in Russia, a commodity exporter, surging commodity prices also are driving up
inflation. While Russia's international reserves hit $600.9 billion in May, the highest ever,
its central bank increased its benchmark interest rate by 0.5 percentage point to 5% in April.
It said it would consider further increases, citing "pro-inflationary risks generated by price
movements in global commodity markets."
"We think that the inflation pressure in Russia is not transitory, not temporary,"
Russia's central-bank governor Elvira Nabiullina told CNBC in a recent interview.
...Nicolas Peter, chief financial officer of BMW AG , said in May that it expects
an impact of 500 million euros, equivalent to about $608 million, from prices for raw
materials. Increased steel prices have added about $515 to the cost of an average U.S. light
vehicle, according to Calum MacRae, an auto analyst at GlobalData.
Like most central banks, the US Federal Reserve has been forced to ask why more than a
decade of ultra-loose monetary policy has had such lacklustre economic results.
The Fed's data are misleading because they assume the US is the middle-class nation it has
ceased to be.
Until it uses data that reflect the nation as it is, the Fed will no more get America back
to shared prosperity than someone using a map of New Amsterdam will find the pond in Central
Park.
"If we ended up with a slightly higher interest-rate environment it would actually be a plus
for society's point of view and the Fed's point of view," she told Bloomberg.
"We've been fighting inflation that's too low and interest rates that are too low now for a
decade," she said. "We want them to go back to" a normal environment, "and if this helps a
little bit to alleviate things then that's not a bad thing -- that's a good thing."
The annual rate of inflation in the eurozone rose in May to hit the European Central Bank's
target for the first time since late 2018, as energy prices surged in response to a
strengthening recovery in the global economy.
"The consumer-price index rose at a remarkable 4.2%," says your editorial, "Powell
Gets His Inflation Wish" (May 13). Remarkable, yes, but our current inflation problem is
far worse than that 4.2%, which is bad enough. The real issue is what is happening in 2021. We
need to realize that for the first four months of this year, the seasonally-adjusted
consumer-price index is rising at an annual rate of 6.2%. Without the seasonal adjustments, it
is rising at 7.8%. Meanwhile, house prices are inflating at 12%.
We are paying the inevitable price for the Federal Reserve's monetization of government debt
and mortgages. As for whether this is "transitory," we may paraphrase J.M. Keynes: In the long
run, everything is transitory. But now it is high time for the Fed to begin reducing its debt
purchases, and to stop buying mortgages.
Skill shortages, wage pressures and "hawseholes flash with cash" is is a pretty questionable
consideration (mostly neoliberal mythology). It is typical for WSJ not to touch controversial topics
connected with the deterioration of global neoliberal empire centered in Washington and rampant money printing by Fed, which
increases the level of debt to Japanese's level. They also are buying bonds to keep rate under check which is kind of
counterfeiting money.
So we should expect US stock market to emulate Japanese's stock market. Under
neoliberalism there can be no wage pressures as war of labor was won by financial oligarchy which
institutes neo-feudal regime of wage slavery. One of the key methods is import of foreign workers
to undermine wages in the USA. And neoliberalism is a trap, creating "Welcome to the hotel California" situation.
Automation and robotization puts further pressure on workers in the USA, especially low skill jobs (in some restaurants
waiters are replaced by robots). In many large grocery shots, Wall Mart, etc automatic cashiers machines now are common.
That increase theft but saving on casheer job partially compensate for that. In back office cash and check counting is also
automated using machines.
The key issue here might be the status of dollar as world reserve currency... That allows the USA to
export inflation. If dollar dominance will be shaken inflation chickens will come to roost.
Inflation is here already, and in the long run there is a lot of upward
pressure on prices. But between now and then lies a big question for investors and the
economy: Is the Federal Reserve right to think that the price rises we're seeing now are
temporary and will abate by next year?
Some at the Fed are already having vague doubts, starting to talk about when to
discuss removing some of their extraordinary stimulus even as they continue to push the idea
that inflation is likely to fall back of its own accord.
... ... ..
Inflation expectations can become self-fulfilling, and are watched closely by the Fed.
One-year consumer inflation expectations reached 4.6% in May, according to the University of
Michigan survey, the highest since the China commodity boom of 2011.
Jeffrey P
It is important to not underestimate market sentiment and expectations in such matters
because sometimes in economics, the expectation can be strong enough to become a
self-fulfilling prediction even when other indicators recede or normally wouldn't be a
driver.
Jeffrey Whyatt
I wonder how COLAs in wages, pensions, social security, etc. will impact inflation when these
kick in. Think most occur automatically on a given contractual date. Might add fuel to the
fire.
BRANDON JAMES
Just look at the prices for all the things they exclude from the CPI and other indices of
inflation.
stephen rollins
How do you tell when the Treasury Sec. and Fed Chair are lying about inflation? When you open
your eyes in the morning and the Sun rises in the East.
RICHARD TANKSLEY
It seems wise not to overlook the upcoming problems that we might have with China which which
have the potential to create even more inflation. Lots of tensions are still around and
frankly we should seriously dent US imports from there over the Wuhan virus.
BRUCE MONTGOMERY
Economists are good at dissecting the past, but terrible at forecasting the future.
ROBERT BAILEY
They predicted 12 out of the last 3 recessions
stephen rollins
Yes, and non economists do even worse. Look at the Japanese stock market. About 37K in
1990, cratered, and still only at 28 today. Thats over 30 years, folks.
RODNEY EVERSON
Definition of a "Positive Carry Trade": Borrowing money at an interest rate and investing it
at a higher rate to earn the difference.
Banks do this with deposits, for example, borrowing money from savers and investing it in
higher-yielding loans.
Bond traders typically do it by purchasing longer maturities at, say, three percent and
financing them in the repo market at a rate now close to zero.
The main risk to such a trade is that the higher-yielding investment loses value while
holding it. The bank loan goes bad, or the long bond falls in value while holding it.
Today the Federal Reserve is running the largest positive carry trade in history,
borrowing trillions of dollars from the banking system and paying them 1/10 of one percent on
the loans while using the money to buy trillions of bonds and mortgages for its
portfolio.
If they raise short rates today, the banks will want more than 1/10 of a percent while,
simultaneously, bond prices will crater. Anyone see a conflict here?
RODNEY EVERSON
There seems to be universal agreement that inflation is underway today. The disagreement is
three-part: 1) It will be transitory and we will return to low levels; 2) It will not be
transitory and we are facing steadily rising prices for the foreseeable future; 3) Not only
will it not be transitory, but it will begin to escalate rapidly with the Fed proving unable
or even unwilling to control it, resulting in a hyperinflation.
The bond market is clearly betting on scenario #1, as is the Fed.
And yet the government is spending like the proverbial drunken sailor and the Fed has now
abandoned the banking system's fractional reserve mechanism that Volcker employed to bring
the 1970's inflation back under control. The result, to my mind, is that the U.S.
Government's finances now closely approximate those of Venezuela and Zimbabwe in the recent
past while the Fed has relinquished the tools that would ordinarily be used to yield a
different result than those countries experienced.
C Cook
Economics and politics.
The story describes reality well. Economics is just fuzzy theory now, neither I nor 99% of
America can sort it out. MMT... Print money forever and it doesn't matter?
Politics is clear. History has shown that new administrations lose the House at the first
mid-term. If that happens next year, the entire woke/green/leftist agenda goes down in
flames. Pelosi is back to being a pedestrian member of the House.
To avoid history, DNC will attempt to spend our grandchildren's future to buy every vote
available. Free everything, all the time. No need to work, study, or even get out of bed
before noon. Infrastructure is code for pay off Unions to get workers to vote, shake down
companies who want construction contracts to donate to DNC.
Equity market is watching. Bond market is watching. Likely, they realize that the only
reality is the massive damage to the US which will result from the DNC wanting to keep Nancy
happy.
James Cornelio
Unexplored in this article is the issue of what CAN the Fed do if there is unacceptable
inflationary pressures. To think that it could reduce its $100+ billion monthly purchases in
debt let alone raise interest rates by any serious amount is to forget that we are a nation
awash in debt and that any move by the Fed to do either would result in a 'taper tantrum' the
likes of which will cause all previous tantrums to look like nothing more than naughty
child's play.
William Mackey
The poster child for inflation has to be in the retail housing market. Fixer Uppers that went
begging for a buyer two years ago are the subject of bidding wars today. Biden is pouring
trillions into an emergency that is not there.
DANIEL PETROSINI
The Fed is now just another political entity. They are justifying the ridiculous
increase in money supply with the 'temporary' argument. It is critical to note, they have
always been late. This will not end well.
jennifer raineri
So right. And everyone is just whistling through the graveyard.
Ivaylo Ivanov
One possibility is that households spend some of their savings but continue to save more
than before in case of future trouble, while higher prices make people think twice about
splashing out.
When people see prices rising across the board they spend and hoard, they don't
save, especially when savings accounts interest rates are 0%.
CHING CHANG TSAI
In my opinion, anyone with common sense knows that inflation is here. Everything is more
expensive than before with a significant difference that draws buyer's attention. Even my
home value appreciates about 20% more than the value in 2020, estimated by the local
government. Thanks to my senior age that helped me to limit the raise to 10%. I protested in
vain due to local taxing authority had hard data on hand to dispute my protest.
I accept the reality except that FED said this inflation is "transitory." I can hardly
wait till next year to see my home value will depreciate back to my 2020 property value. I
hope FED will not "lie" on this subject.
David Weisz
I accept the reality except that FED said this inflation is "transitory."
The Fed description is accurate... it's just whether the transition is to
lower inflation or to runaway inflation.
Mr. Dale, that's not entirely accurate. Obviously, the value of the cash deteriorates as
inflation progresses, but once inflation is underway interest rates, particularly short-term
rates, typically escalate. Often in the past, the short rate has gone well above the
inflation rate and people holding money market funds do quite well, ending up earning more
than the inflation rate and able to take advantage of depressed prices in bonds and even
stocks later on.
But if we get a hyperinflation, (and to be fair you did specify "runaway inflation") which
isn't out of the question given the Fed's actions, short term rates won't likely reach the
level required to make cash a good alternative. At that point, real assets, possibly some
stocks, or holding cash denominated in another currency become the only reasonable protection
from your savings losing significant value. Cryptocurrencies could also pan out, although
there's a huge risk that they do not, and that's despite what inflation does.
C Cook
You cannot eat gold and crypto is a house of cards. Short term, only cash holds up, and even
then inflation eats it away slowly.
Longer term, I believe only place to hide is the mega-cap global franchise stocks. They
can dodge government policies and can move assets to where they live better.
jennifer raineri
How can inflation progress if everything crashes? I believe the horrible mess we've gotten
into is going to produce horrific results. The financial crisis was the result of
deregulation. What's next will be global and will be due to the sheer stupidity of the
reaction to Covid. Throw politics in there too.
I accept the reality except that FED said this inflation is "transitory."
The Fed description is accurate... it's just whether the transition is to
lower inflation or to runaway inflation.
Jim McCreary
The biggest single factor that will drive long-term inflation is the absence of downward
price pressure from new Chinese market entrants. Cutthroat pricing from China is the ONLY
reason the West has been able to get away with Money-Printing Gone Wild for the past 20 years
without triggering runaway inflation.
There are no new Chinese entrants because the Chinese are now all in in the world economy.
The existing Chinese competitors are seeing their costs go UP, not down, because they have
fully employed the Chinese population, and have to pay up in order to get and keep
workers.
So, without any more downward price pressure from China, this latest round of
Money-Printing Gone Wild is showing up as price inflation, and will continue to do so.
Batten down the hatches! Stagflation and then runaway inflation are coming!
Calm has descended across one of the most influential markets for all investors: government
bonds. Investors fearing a rolling interest rate shock unfolding in 2021 with the potential for
puncturing high-flying equities, housing and highly indebted economies have been breathing
easier of late.
Courtesy of central banks' sustained presence in bond markets, this year's rise in market
borrowing costs has not triggered a bigger shock, At least for now.
The read question is when this will happen. So far this year the yield of 10 year bond fluctuate in a rather narrow band. It
does not steadily increases...
Some tried to downplay concern by pointing out that the gains resulted from the "base effect" of comparing current prices with
the artificially depressed "Covid lockdown" prices of March and April of last year. But that ignores the more alarming trend of near-term
price acceleration.
According to the Bureau of Labor Statistics, in every month this year, the month-over-month change in prices has been greater
than the change in the previous month.
In April prices jumped .8% from March, versus an expected gain of just .2%. Clearly, if this trend continues, or even fails to
dramatically reverse, we could be looking at inflation well north of 5 or 6 percent for the calendar year. That would create a big
problem.
Despite Federal Reserve officials' recent assurances that the inflation problem is "transitory," many investors are concluding
that the central bank will have to deal with this problem by tightening monetary policy far sooner than had been expected. This would
make sense if the Fed cared about restraining inflation or, more importantly, had the power to do anything to stop it. In truth,
we are sailing into these waters with little ability to alter speed or course, and we will be wholly at the mercy of the waves we
have spent a generation creating.
The Commerce Department on Friday reported that
consumer spending rose 0.5% in April from a month earlier, which, coming after March's government stimulus-check-fueled surge,
was impressive. The gain was driven by a 1.1% increase in spending on services""an indication of how, with
Covid-19 cases dropping
and
vaccination rates rising , consumers are shifting their behavior. Spending on goods actually declined, with the weakness concentrated
in spending on nondurable goods such as groceries and cleaning products.
But a closer look at April's overall gain indicates it was mainly driven by price increases. By the Commerce Department's measure,
which is the Federal Reserve's preferred gauge of inflation, consumer prices rose 0.6% in April from March, putting them 3.6% above
their year-earlier level. As a result, real, or inflation-adjusted spending declined. Core prices, which exclude the often volatile
food and energy categories to better capture inflation's underlying trend, were up 0.7% from March, and 3.1% on the year. The Fed's
inflation goal is 2%, though it has said it
will tolerate higher readings than that for some time.
Some tried to downplay concern by pointing out that the gains resulted from the "base
effect" of comparing current prices with the artificially depressed "Covid lockdown" prices of
March and April of last year. But that ignores the more alarming trend of near-term price
acceleration.
According to the Bureau of Labor Statistics, in every month this year, the month-over-month
change in prices has been greater than the change in the previous month.
In April prices jumped .8% from March, versus an expected gain of just .2%. Clearly, if this
trend continues, or even fails to dramatically reverse, we could be looking at inflation well
north of 5 or 6 percent for the calendar year. That would create a big problem.
Despite Federal Reserve officials' recent assurances that the inflation problem is
"transitory," many investors are concluding that the central bank will have to deal with this
problem by tightening monetary policy far sooner than had been expected. This would make sense
if the Fed cared about restraining inflation or, more importantly, had the power to do anything
to stop it. In truth, we are sailing into these waters with little ability to alter speed or
course, and we will be wholly at the mercy of the waves we have spent a generation
creating.
According to BofA's latest Flows Show, this week's EPFR data revealed a broad defensive retrenchment, culminating with the largest
inflow to cash since Apr'20 & largest inflow to gold in 16 weeks ($2.6bn); and while broad inflows to equities continue ($512bn YTD)
& largest inflow to Europe since Feb'18 ($2.8bn); we just experienced the largest 3-week outflow from tech since Mar'19 ($1.5bn)
as well as the largest outflow from banks since Jun'20 ($0.6bn).
Refinitiv confirms this,
reporting this morning that "global money market funds saw huge inflows" amounting to no less than $53.2 billion, the highest
in four weeks, in the week ended May 26 amid caution that quickening inflation could alter the direction of U.S. monetary policy
and shake up asset markets.
Despite the massive flows into the safety of money market, Refinitiv also finds that global equity funds attracted solid inflows
of $8.84 billion, a 46% increase over the previous week, as stocks rallied somewhat after U.S. Federal Reserve officials reaffirmed
a dovish monetary policy stance: U.S. equity funds received $2.87 billion, while European equity funds and Asian equity funds obtained
$2.47 billion and $1 billion, respectively.
Where the EPFR and Refinitiv data diverge is when it comes to tech. Contrary to the EPFR observation, Refinitiv reports that tech
funds attracted inflows worth $546 million after three straight weeks of outflows, while financial sector funds faced their first
outflow in 16 weeks, hit by a decline in bond yields.
y_arrow
Pausebreak 6 hours ago
"Refinitiv's analysis of 23,865 emerging-market funds showed equity funds had net outflows worth $463 million, while bond
funds had inflows worth $420 million after outflows in the previous week."
Mary Beth
11 months ago Vanguard eliminated the 30% limitation on investments in non-investment grade
bonds today . Any indication of how far they will go to increase returns?
Prices for the building blocks of the economy have surged over the past year. Oil, copper, corn and gasoline futures all cost
about twice what they did a year ago, when much of the world was locked down to fight the spread of the deadly coronavirus. Lumber
has more than tripled.
Not sure its adding anything which hasn't been said already but to look at the same thing in a different way:
2, or if you look at it 'sideways' 3, main interwoven factors drive inflation:
Access to money to spend - That can be wage/earnings increases or access to cheap debt. That ups demand & prices follow.
Devaluation of the currency - Pushes up raw material imports & prices follow.
What curbs inflation?:
High taxation
High interest rates
High unemployment
And if anyone can point to any Western Democracy currently willing to implement any one, never mind all three, of those
controls a lot of folk will probably be pretty surprised.
Michael Matus
Commodities prices are not the problem. They are high now because of a short-term surge in demand and supply chain issues. All
should be worked out by this time next year.
The long-term structural problem could be wages. If inflation shows up in wages through wage increases through a multitude
of industries then there will be a problem,....... a major one.
Having all these people on the Dole from the government didn't help things Joe!
But like all Presidents that came after HW Bush all you care about is getting re-elected. Doling out is a great way even if
its at the cost of the country.
The FED as been intervening in the markets for so long that they have no tools left for the next crisis.
The FED painted themselves into a corner and the Stimulus that was not needed left them no Escape.
Michael Brown
"Having all these people on the Dole from the government didn't help things Joe!"
What about raising the minimum wage, and Joe commanding that all workers for federal contractors be paid $15 per hour or more?
You think that could be inflationary?
Michael Matus
I would have to agree with yoiu Michael. I should have mentioned that, thank you for reminding me. However, the main problem with
all the sources trhat I have out on the street and their are mnay. Is WAGE growth. As far as a national mimum wage there is none.
Altough there probably will be now. Most states pay as high or higher than what the Federal Government was proposing.
90% of government contractors make at least $15.00 an hour anyway. The VAST majority of the problem is enhanced unemployment
insurance. The 3 month averge of wage groth ending in March was 3.4%. If it hits > 4.0% that will be bad.
Michael Brown
Excellent points, Michael. The list of government actions instigating inflation would be long indeed.
Michael Matus
Unfortunately, Michael, I would have to Wholeheartedly agree with you, Have a Good Weekend!
JOSEPH MICHAEL
Serious, severe inflationary problems are here, they are just starting, and they are going to get much worse.
Brian Kearns
eh.
best to give corporations a large tax cut
so the can buy back stock
Bill Hestir
I will interested to see if new car prices, lumber prices, new home prices, gasoline prices, and food prices will ever go back
down to pre-pandemic levels.
If not, with all the new anti-business taxes and reluctance of out-of-work laborers to go back to work, how will businesses
not be forced to raise their wages and increase the price of their products even higher than they are today?
At what point, therefore, will the Fed end their "inflation is transitory" farce and raise interest rates?
Deirdre Hood
Food prices, regardless of when inflation ends, will not go down/return to 'normal'.
Supply lines are squeezed (NO ONE can hire reliable transport drivers), low supply of workers, plus factor in a bad
year for wheat, and it turns into the perfect storm for commercial bakers.
Judy Neuwirth
Inflation is just getting started. Cho Bi-Den's hyper-regulated economy is only three months old and already it's 1976 all over
again!
Jim Chapman
Now Judy, it's just "transitory" inflation as per Yellen, Powell and Buyden. You really must stick with the narrative, and remember,
Adam Smith's scurrilous "Invisible Hand" is a ultra-right wing conservative myth. So we are not supposed to believe our lying
eyes.
The price of the benchmark 10-year Treasury inflation-protected security logged its biggest
one-day decline in a month. Shares of real-estate investment trusts slid the most since
January. Commodities were generally flat but dropped the following day.
The three asset classes have vacillated since, but their initial moves showed the unexpected
ways that markets can behave when inflation is rising, especially when many are already
expensive by historical measures.
This week, investors will gain greater insight into the inflation picture when the Commerce
Department updates the Federal Reserve's preferred inflation gauge, the
personal-consumption-expenditures price index. They will also track earnings from the likes of
Dollar General Corp. ,
Costco Wholesale
Corp. and Salesforce.com Inc.
The stakes are high for investors. Inflation dents the value of traditional government and
corporate bonds because it reduces the purchasing power of their fixed interest payments. But
it can also hurt stocks, analysts say, by pushing up interest rates and increasing input costs
for companies.
From early 1973 through last December, stocks have delivered positive inflation-adjusted
returns in 90% of rolling 12-month periods that occurred when inflation""as measured by the
consumer-price index""was below 3% and rising, according to research by Sean Markowicz, a
strategist at Schroders, the U.K. asset-management firm. But that fell to only 48% of the
periods when inflation was above 3% and rising.
A recent report from the Labor Department showed that the
consumer-price index jumped 4.2% in April from a year earlier, up from 2.6% in March. Even
excluding volatile food and energy prices, it was up 3% from a year earlier, blowing past
analysts' expectations for a 2.3% gain.
Analysts say that there are plenty of reasons why inflation won't be able to maintain that
pace for long. The latest year-over-year numbers were inflated by comparisons to deeply
depressed prices from the early days of the pandemic. They were also supported by supply
bottlenecks that many view as fixable and robust consumer demand that could dissipate once
households have spent government stimulus checks.
... ... ...
By comparison, the S&P GSCI Commodity Total Return Index delivered positive
inflation-adjusted returns in 83% of the high and rising inflation periods. "Commodities are a
source of input costs for companies and they're also a key component of the inflation index,
which by definition you're trying to hedge," said Mr. Markowicz.
At the same time, commodities are among the most volatile of all asset classes and can be
influenced by an array of idiosyncratic factors.
Charles Goodhart, the economist from the Bank of England, has just written an important book
arguing that worldwide demographic changes are going to result in a couple of decades of high
inflation. See Charles Goodhart, The Great Democratic Reversal: Ageing Societies, Waning
Inequality, and an Inflation Revival. Maybe the Journal could find someone to review it.
Maybe Ms. Yellen should read it.
(Douglas Levene)
Bruce Fegley
This article is naive, if not ridiculous, for several reasons. I name a few.
1st - the stock market is the best hedge against inflation over a long time period -
years, not daily, weekly, or quarterly. Especially with dividend reinvesting and with an
automatic buying plan like the DRIP plans offered by many companies at no or very low
cost.
2nd - Individuals can buy US government I-series savings bonds at NO COST directly from
the US Treasury, and while they do not completely hedge against inflation, they offer good
interest rates that beat bank interest and are completely insured.
3rd - Toyota and perhaps other car companies offer notes with higher interest than banks
but not FDIC insured. About 1.5% now.
One does not have to blow money away on bitcoin or hold gold, which is taxed as a
collectible and has assay fees on the front and back ends of any buy/sell transaction unless
one is buying coins which have a markup to begin with.
Theo Walker
Started buying I-bonds this month. The rates are great! Easily the best safe investment right
now.
Bryson Marsh
... why would you buy TIPS? The spread is a farce after all.
PHILIP NICHOLAS
Inflation is always sticky . In other words all the prices do not go down . Wages that are
increased , usually stay . Companies sense a new level they can pass on to consumers . And
the Government damage to energy prices will influence prices .
Bryson Marsh
Memory costs, data plans, and televisions are all examples that clearly demonstrate secular
price declines despite periodic increases.
Charles D
"Inflation Forces Investors to Scramble for Solutions"
Hundreds of millions of Americans are going to suffer as the Federal Government
inflates the national debt away over the next 10 to 15 years. Investors will figure it out,
but the little guy will get crushed once again. Oh well, we get the government we deserve.
They are all substantially down, one year from now; except Copper and financials which are
flat.
What does that say about the economy & inflation in one year?
Paul Smith
I am under the impression that the Social Security COLA is based on a September to September
comparison of the CPI-U. That is to say, for example, September 2020 CPI-U vs. September 2021
CPI-U. Is this not correct?
We have had inflation over over the past decade or so. As measured by the CPI-U, it has
hovered around 2 percent. Not a big deal to the Fed's economists. Cumulatively, however, it
adds up.
I have been retired for 16 years. Inflation has eroded the purchasing power of my fixed
pension by 25.5. Mercifully, I have other resources to make up the loss, but for people on a
fixed pension, so-called mild inflation can wreck it over time.
James Webb
Paul, one of the lower estimates for 2022:
"The Kiplinger Letter is forecasting that the annual cost-of-living adjustment for Social
Security benefits for 2022 will be 4.5%, the biggest jump since 2008, when benefits rose
5.8%. That would also be higher than the 3% adjustment The Kiplinger Letter predicted earlier
this year."
From SocialSecurity dot gov:
"To determine the COLA, the average CPI-W for the third calendar quarter of the most
recent year a COLA was determined is compared to the average CPI-W for the third calendar
quarter of the current year. The resulting percentage increase, if any, represents the
percentage that will be used to increase Social Security benefits beginning for December of
the current year. "
So the predicted 4.5-4.7% increase for 2022 will take effect December 31 this year.
Of course the calculation is not completed yet....
James Robertson
The Fed's inflation calculations have become increasingly "fuzzy" since the Boskin Commission
in 1995. The CPI ignores housing, food, and energy. Healthcare gets weighted at 3 percent,
though it accounts for 18 percent of expenditures. "Hedonic quality adjustment" is another
knob the Fed turns to "control" inflation. Inflation calculated by comparing the price of a
basket of goods this year to a basket of goods last year runs quite a bit higher than the
CPI; even higher if you include food, shelter, and energy in that basket.
James Webb
What's in the CPI?
-Food and Beverages (breakfast cereal, milk, coffee, chicken, wine, full service meals,
snacks)
-Housing (rent of primary residence, owners' equivalent rent, fuel oil, bedroom
furniture)
-Clothes (men's shirts and sweaters, women's dresses, jewelry)
-Transportation (new vehicles, airline fares, gasoline, motor vehicle insurance)
-Medical Care (prescription drugs and medical supplies, physicians' services, eyeglasses and
eye care, hospital services)
-Recreation (televisions, toys, pets and pet products, sports equipment, admissions)
-Education and Communication (college tuition, postage, telephone services, computer software
and accessories)
-Other Goods and Services (tobacco and smoking products, haircuts and other personal
services, funeral expenses)
Tim Adams
The core CPI which the Fed uses excludes food and energy. The Consumer price index which is
used for things like social security adjustments does not. These very similar but different
uses of the same acronym just adds to the confusion.
"... there's a growing sense that the forces behind the recovery will eventually feed through to higher prices if left unchecked. One harbinger could be the rally in commodities, with a key index of raw materials this month jumping to a five-year high. ..."
"... "If the stimulus continues, at some point it will become inflationary," said Sanjiv Bhatia, the chief investment officer at Pembroke Emerging Markets in London. "At some point, we believe it will become a problem." ..."
The prospect of tighter monetary conditions in emerging markets still hasn't changed the
overall calculus for many investors, with behemoths including Pacific Investment Management Co.
and BlackRock Inc. focusing on the growth story instead. Developing-nation inflation remains
near a record low, with the economic rebound making assets look "increasingly interesting,"
according to Dan Ivascyn, Pimco's group chief investment officer in Newport Beach,
California.
Yet there's a growing sense that the forces behind the recovery will eventually feed
through to higher prices if left unchecked. One harbinger could be the rally in commodities,
with a key index of raw materials this month jumping to a five-year high.
"If the stimulus continues, at some point it will become inflationary," said Sanjiv
Bhatia, the chief investment officer at Pembroke Emerging Markets in London. "At some point, we
believe it will become a problem."
For now, assurances from the Federal Reserve that inflation in the U.S. is unlikely to get
out of control have supported the bulls. The Fed appears in no rush to raise interest rates, a
move that would siphon capital out of emerging economies currently enjoying the windfall from
U.S. stimulus.
That major central banks currently view inflation as transitory should boost
developing-nation currencies as a whole, according to Henrik Gullberg, a London-based macro
strategist at Coex Partners Ltd.
MSCI Inc.'s emerging-market currency index has climbed to a record high, while the benchmark
equity gauge just posted its biggest two-day rally in almost two weeks amid a rally in energy
and technology shares. On Friday, risk assets got further support when U.S. job growth data
significantly undershot forecasts.
"On the one hand, the valuations of growth stocks look meaningfully less demanding after
recent underperformance coupled with earnings upgrades," said Kate Moore, the head of thematic
strategy at BlackRock in New York. "On the other, rising inflationary pressures from the broad
economic restart and low inventories should be supportive of cyclicals and commodity
producers."
"... Mark Carbana, U.S. rates strategist at Bank of America, still expects U.S. rates to rise further especially if there is a strong reading for the Fed's preferred measure of inflation, personal consumption expenditures, due out next Friday. ..."
"... He expects Treasury yields to rise in the second half of the year ..."
In the U.S., inflation readings have been strong and the minutes of the last Fed meeting
released Wednesday showed there had been
some discussion about slowing bond purchases -- also known as taper talk.
... Mark Carbana, U.S. rates strategist at Bank of America, still expects U.S. rates to
rise further especially if there is a strong reading for the Fed's preferred measure of
inflation, personal consumption expenditures, due out next Friday. "Uncertainty around
inflation is the highest it has been in decades," he said, particularly around whether recent
high readings are temporary or due to changes in the underlying economy. He expects
Treasury yields to rise in the second half of the year , pushed higher by rises in yields
on inflation-protected Treasurys as the Fed starts to talk more seriously about tapering its
bond purchases.
As the credit strategist continues, "while it is easy to blame transitory factors, these
were surely all known about before the last several data prints and could have been factored
into forecasts. That they weren't suggests that the transitory forces are more powerful than
economists imagined or that there is more widespread inflation than they previously believed.
"
To be sure, all such "˜surprise' indices always mean revert so the inflation one will
as well. However as Reid concludes, "the fact that we're seeing an overwhelming positive beat
on US inflation surprises in recent times must surely reduce the confidence to some degree of
those expecting it to be transitory. "
Inflation fears already roiled the market this week with the Nasdaq falling nearly 2%, but
one hedge fund founder is sounding the alarm over a potential 20% collapse that could be
sparked by the Federal Reserve signaling an end to accommodative pandemic-era monetary policy
later this year.
Satori Fund founder Dan Niles recently told Yahoo Finance that this week's
hotter-than-anticipated inflation data coupled with other central banks around the world
already coming off their easy money policies will likely corner the Fed into tapering its
accommodative policies sooner than expected.
"If you've got food prices, energy prices, shelter prices moving up as rapidly as they are,
the Fed's not going to have any choice," he said, predicting that the Fed could signal the
beginning of a move to wind down its monthly $120 billion a month pace of asset purchases by
this summer. "They can say what they want, but this reminds me to some degree of them saying
back in 2007 that the subprime crisis was well contained. Obviously it wasn't."
Can it be wage driven inflation, when there is mass unemployment of the scale that we
observer. That's a stupid idea. Commodites driven inflation is possible as oil if probably past
its peak, but for now production continued at plato level and cars are getting slightly more
economical, espcially passenger car, where hybrids reached 40 miles er gallon.
Notable quotes:
"... The prospect of a rebound to 2% yields on the world's benchmark bond is alive and well. ..."
The prospect of a rebound to 2% yields on the world's benchmark bond is alive and
well.
Treasury-market bears found a deeper message within Friday's weak employment report that's
emboldened a view that inflationary pressures are on the rise, and could boost rates to levels
not seen since 2019. For Mark Holman at TwentyFour Asset Management, the sub-par April labor
reading indicated companies will need to lift wages to entice people back into the labor force;
he's expecting a break of 2% on the 10-year this year.
That level has come to symbolize a return to pre-pandemic normalcy in both markets and the
economy. The wild ride in markets on Friday suggests Holman likely has company in his views.
Ten-year yields initially plunged to a more than two-month low of 1.46%, then reversed to end
the day at 1.58%. Meanwhile, a key market proxy of inflation expectations surged to a level
last seen in 2013.
I agree that Fed might lose the control: much depends on the continuation of the status of
the dollar as the main reserve currency. If this position continue to weaken all beta are
off.
What would happen to the financial system if the Fed stopped printing massive amounts of
money for stimulus and debt service? Williams explains,
" You could see financial implosion by preventing liquidity being put into the system. The
system needs liquidity (freshly created dollars) to function. Without that liquidity, you
would see more of an economic implosion than you have already seen. In fact, I will contend
that the headline pandemic numbers have actually been a lot worse than they have been
reporting. It also means we are not recovering quite as quickly. The Fed needs to keep the
banking system afloat. They want to keep the economy afloat. All that requires a tremendous
influx of liquidity in these difficult times."
So, is the choice inflation or implosion? Williams says, "That's the choice, and I think we
are going to have a combination of both of them. .."
" I think we are eventually headed into a hyperinflationary economic collapse. It's not
that we haven't been in an economic collapse already, we are coming back some now. . . . The
Fed has been creating money at a pace that has never been seen before. You are basically up
75% (in money creation) year over year. This is unprecedented. Normally, it might be up 1% or
2% year over year. The exploding money supply will lead to inflation. I am not saying we are
going to get to 75% inflation -- yet, but you are getting up to the 4% or 5% range, and you
are soon going to be seeing 10% range year over year. . . . The Fed has lost control of
inflation. "
And remember, when the Fed has to admit the official inflation rate is 10%, John Williams
says, "When they have to admit the inflation rate is 10%, my number is going to be up to around
15% or higher. My number rides on top of their number."
Right now, the Shadowstat.com inflation rate is above 11%. That's if it were calculated the
way it was before 1980 when the government started using accounting gimmicks to make inflation
look less than it really is. The Shadowstats.com number cuts out all the accounting gimmicks
and is the true inflation rate that most Americans are seeing right now, not the "official"
4.25% recently reported.
Williams says the best way to fight the inflation that is already here is to buy tangible
assets. Williams says,
"Canned food is a tangible asset, and you can use it for barter if you have to. . . .
Physical gold and silver is the best way to protect your buying power over time."
Gold may be a bit expensive for most, but silver is still relatively cheap. Williams says,
"Everything is going to go up in price."
When will the worst inflation be hitting America? Williams predicts,
"I am looking down the road, and in early 2022, I am looking for something close to a
hyperinflationary circumstance and effectively a collapsed economy."
Join Greg Hunter of USAWatchdog.com as he goes One-on-One with John Williams, founder of
ShadowStats.com.
2 play_arrow 1
Nikki Alexis 7 minutes ago
John Williams warning about hyperinflation is like Peter Schitt telling me stocks are
going to crash. It's coming, it's coming! Boy crying wolf.
Cautiously Pessimistic 59 minutes ago
Accounting Gimmicks. Election Gimmicks. Gender Gimmicks. Science Gimmicks. Rule of Law
Gimmicks.
America has become one big fun house of gimmicks.
Time for a RESET.
NoDebt 54 minutes ago remove link
Yeah, the Reset Gimmick. Where they fundamentally transform themselves into a permanent
position of power. Never mind that they'll kill millions to achieve it.
Samual Vimes 47 minutes ago (Edited)
What about gutting primary dealers by buying T bills directly ?
Who Bought the $4.7 Trillion of Treasury Securities Added Since March 2020 to the
Incredibly Spiking US National Debt?by Wolf Richter • May 17, 2021 •
119 CommentsThe Fed did. Nearly everyone did. Even China nibbled again. Here's who
holds that monstrous $28.1 trillion US National Debt.By Wolf Richter for WOLF STREET .
The US national debt has been decades in the making, was then further fired up when the tax
cuts took effect in 2018 during the Good Times. But starting in March 2020, it became the
Incredibly Spiking US National Debt. Since that moment 15 months ago, it spiked by $4.7
trillion, to $28.14 trillion, amounting to 128% of GDP in current dollars:
But who bought this $4.7 trillion in new
debt?
We can piece this together through the first quarter in terms of the categories of holders:
Foreign buyers as per the Treasury International Capital data,
released this afternoon by the Treasury Department; the purchases by the Fed as per its weekly
balance sheet; the purchases by the US banks as per the Federal Reserve Board of Governors bank
balance-sheet data; and the purchases by US government entities, such as US government pension
funds, as per the Treasury Department's data on Treasury securities.
Foreign creditors of
the US.
Japan , the largest foreign creditor of the US, dumped $18 billion of US Treasuries in
March, reducing its stash to $1.24 trillion. Since March 2020, its holdings dropped by $32
billion.
China had been gradually reducing its holdings over the past few years, but then late last
year started adding to them again. In March, its holdings ticked down for the first time in
months, by $4 billion, bringing its holdings to $1.1 trillion. Since March 2020, it added $9
billion:
But Japan's and China's importance as creditors to the US has been diminishing because the
US debt has ballooned. In March, their combined share (green line) fell to 8.3%, the lowest in
many years:
All foreign holders combined dumped $70 billion in Treasury securities in March, bringing
their holdings to $7.028 trillion (blue line, left scale). But this was still up by $79 billion
from March 2020.
These foreign holders include foreign central banks, foreign government entities, and
foreign private-sector entities such as companies, banks, bond funds, and individuals. Despite
the increase of their holdings since March 2020, their share of the Incredibly Spiking US
National Debt fell to 25.0%, the lowest since 2007 (red line, right scale):
After Japan & China, the 10 biggest foreign holders include tax havens where US
corporations have mailbox entities where some of their Treasury holdings are registered. But
Germany and Mexico, with which the US has massive trade deficits, are in 17th and 24th place.
The percentages indicate the change from March 2020. Note the percentage increase of India's
holdings:
US government funds hit record, but share of total debt drops further.
US government pension funds for federal civilian employees, pension funds for the US
military, the US
Social Security Trust Fund , and other federal government funds bought on net $5 billion of
Treasury securities in Q1 and $98 billion since March 2020, bringing their holdings to a record
of $6.11 trillion (blue line, left scale).
But that increase was outrun by the Incredibly Spiking US National Debt, and their share of
total US debt dropped to 21.8%, the lowest since dirt was young, and down from a share of 45%
in 2008 (red line, right scale):
Federal Reserve goes hog-wild: monetization of
the US debt.
The Fed bought on net $243 billion of Treasury securities in Q1 and $2.44 trillion since it
began the bailouts of the financial markets in March 2020. Over this period through March 31,
it has more than doubled its holdings of Treasuries to $4.94 trillion (blue line, left scale).
It now holds a record of 17.6% of the Incredibly Spiking US National Debt (red line, right
scale):
US Banks pile them up.
US commercial banks bought on net $28 billion in Treasury securities in Q1 and $267 billion
since March 2020, bringing the total to a record $1.24 trillion, according to Federal Reserve
data on bank balance sheets. They now hold 4.4% of the Incredibly Spiking US National
Debt:
Other US entities & individuals
So far, we covered the net purchases by all foreign-registered holders, by the Fed, by US
government funds, and by US banks. What's unaccounted for: US individuals and institutions
other than the Fed, the banks, and the government. These include bond funds, private-sector,
state, and municipal pension funds, insurers, US corporations, hedge funds (they use Treasuries
in complex leveraged trades), private equity firms that need to park billions in "dry powder,"
etc.
These US entities hold the remainder of Incredibly Spiking US National Debt. Their holdings
surged by $149 billion in Q4 and by $2.35 trillion since March 2020, to a record $8.76 trillion
(blue line, left scale). This raised their share of the total debt to 31.2% (red line, right
scale), making these US individuals and institutions combined the largest holder of that
monstrous mountain of debt:
The Incredibly Spiking US National Debt and who
holds it, all in one monstrous pile:
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get
why – but want to support the site? You can donate. I appreciate it immensely. Click on
the beer and iced-tea mug to find out how:
Inflation fears already roiled the market this week with the Nasdaq falling nearly 2%, but
one hedge fund founder is sounding the alarm over a potential 20% collapse that could be
sparked by the Federal Reserve signaling an end to accommodative pandemic-era monetary policy
later this year.
Satori Fund founder Dan Niles recently told Yahoo Finance that this week's
hotter-than-anticipated inflation data coupled with other central banks around the world
already coming off their easy money policies will likely corner the Fed into tapering its
accommodative policies sooner than expected.
"If you've got food prices, energy prices, shelter prices moving up as rapidly as they are,
the Fed's not going to have any choice," he said, predicting that the Fed could signal the
beginning of a move to wind down its monthly $120 billion a month pace of asset purchases by
this summer. "They can say what they want, but this reminds me to some degree of them saying
back in 2007 that the subprime crisis was well contained. Obviously it wasn't."
For their part,
Fed officials have remained adamant that a rise in inflation is to be expected as a
transitory reality of the economy reopening from the pandemic lockdown. The latest print
from the Bureau of Labor Statistics out this week , however, may have spooked investors
when it showed consumer prices for the month of April rose at their fastest annual pace since
2008. That inflation metric, which is different than the Fed's
preferred Personal Consumption Expenditures (PCE) index , jumped to a 4.2% rise over the
last 12 months. The Fed has already signaled it would be comfortable staying accommodative even
if inflation in the recovery shoots past 2% as measured by its preferred metric.
In the US, this translates to a growth environment where GDP will be 3pp above its
pre-COVID-19 path by end-2022 and underlying core PCE inflation (adjusted for base effects)
rises above 2%Y from March 2022. The Fed, which is now aiming for inflation averaging 2%Y and
maximum employment, should remain accommodative. Our chief US economist Ellen Zentner expects
the Fed to signal its intention to taper asset purchases at the September FOMC meeting, to
announce it in March 2022 and to start tapering from April 2022 . On our forecasts, rate hikes
begin in 3Q23, after inflation remains at or above 2%Y for some time and the labour market
reaches maximum employment.
What are the risks to this story? Most obvious is the emergence of new COVID-19 variants
that resist vaccines. However, I have argued that the biggest threat to this cycle is an
overshoot in US core PCE inflation beyond the Fed's implicit 2.5%Y threshold – a serious
concern, in my view, which could emerge from mid-2022 onwards .
Portal 4 hours ago
LMFAO!!!
You sent manufacturing and industry to China.
There is no "red hot recovery.". Just a long descent into fascism and communist
poverty.
Newpuritan 4 hours ago
The "red hot recovery." they are hoping for is replacing all efficient energy production
with inefficient "green" energy. The costs will be astronomical but are hoped to offset the
Boomer generation retirement period.
Iskiab 2 hours ago (Edited)
Yea, all these forecasting models are garbage. They're all based on a faulty assumption
that trends continue so the growth we see now will continue, plus things will revert back to
the trend line. Junk in, junk out.
A more realistic assessment would be there was a bump from reopening, but costs have
increased. It will be impossible to get back to the old growth trend line, and expect the low
growth of the last 20 years to continue from hereon out. The stimulus will help a bit but not
much, most of the stimulus was misallocated.
JH2020 3 hours ago (Edited)
It's the sycophants of the Wall Street/government confidence game, dropping words that,
hopefully, lead to buying securities, not selling, though, perversely, any negative truths
result in the assumption there will be a new flood of free money, from the Fed, driving
margin debt even more vertical, such that one needs a second page for the chart, or a more
drastic log scale. (In this economy so red hot interests rates need to be kept near zero, for
the remainder of the century, and near daily reassurance the Fed will accommodate anything
and everything, whatsoever, anytime a sector gets some heartburn, or a red candlestick gets
too large.)
Red hot = FOMO bait.
The "red not" verbiage is comical, reminds me of Hollywood sycophants, that write reviews
of some pretend person, some degenerate nobody, "In an unparalleled display of performing
brilliance, in this worthy sequel to A Couple Hours of Brains Splattered All Over the Wall,
and which only proves his sheer genius, the way he flared his nostrils, while driving in the
chase scene, that went two times around the entire city perimeter, in the ongoing
lanes...".
ebworthen 4 hours ago
"Red hot global recovery"? ROFLMAO!
That isn't recovery, it is money printing, inflation, and rabid speculation.
hugin-o-munin 4 hours ago (Edited)
Who do these people think they can fool?
This was about the dumbest article by a bank in a long while. Pushing a contrarian lie too
hard reveals it quicker than keeping quiet. Someone should remind Morgan Stanley of this age
old truth. Real inflation is destroying the USD right now. Ignoring it and pretending
otherwise will only accelerate the fall into hyper inflation.
J J Pettigrew 3 hours ago
A little inflation is good for you.
What's a little? 2.5%? For ten years....a flat chart of 2.5% each year... .looks like
nothing happened....just 28% off the value of the dollar...thats all.
Sound of the Suburbs 2 hours ago
How does anything really work?
I don't know, I use neoclassical economics.
Everyone tries to kill growth by making the same mistakes as Japan.
Japan led the way and everyone followed.
At 25.30 mins you can see the super imposed private debt-to-GDP ratios.
Why did they think private debt wouldn't be a problem after 2008?
Probably the same reason they didn't notice it building up before 2008.
The economics of globalisation has always had an Achilles' heel.
The 1920s roared with debt based consumption and speculation until it all tipped over into
the debt deflation of the Great Depression. No one realised the problems that were building
up in the economy as they used an economics that doesn't look at debt, neoclassical
economics.
Not considering private debt is the Achilles' heel of neoclassical economics.
That explains it.
"We cannot solve our problems with the same thinking we used when we created them." Albert
Einstein.
Who do you think you are?
This is what we are going to do, whether you like it or not.
He must be one of those populists.
Einstein was right of course, but you know what neoliberals are like.
Anyone that doesn't go along with their ideas must be a populist.
Sound of the Suburbs 2 hours ago (Edited) remove link
Not considering private debt is the Achilles' heel of neoclassical economics.
Weak analysis. The fundamental factor is the price for energy, not some trivia like used cars
and trucks. Teh second dot com bubble will deflate but it is unclear when and whether this is a
crash or gradual deplation of worthless junk stocks which enjoyed "profitless" IPOs.
With rising energy prices it is more difficult to keep interpreting high CPI numbers as
temporary. But like in the past the USA will fight the rise in energy prices tools and nail. With
the full power of their global neoliberal empire.
... prices for used cars and trucks jumped 10 per cent in April alone, accounting for a
large slice of the gains in the overall index.
"It looks like Wall Street is climbing the wall of worry," said Gregory Perdon, co-chief
investment officer at private bank Arbuthnot Latham. "The bears are constantly looking for
signs that the world is going to end. They come up with all the potential excuses. The reality
is that the only question that matters is whether the reopening is going OK or not.
... Notably, while 10-year US yields did rise on Wednesday after the inflation data release,
they did not hit new highs.
Inflation is back. The U.S. consumer-price index
surged to a 13-year high of 4.2% in April, official data showed Wednesday. The eurozone's
figure is a weaker 1.6%, but still a two-year high. The global bond market isn't panicking yet.
The pandemic led many distressed companies to slash prices in 2020. Investors always knew that,
as the economy reopened, some year-over-year increases would be huge.
The prices of most products
haven't changed much . CPI gyrations are mostly down to a few items particularly affected
by lockdowns and travel restrictions, such as airfares and restaurant prices, as well as
commodities. Excluding food and energy, U.S. inflation in April was just 3%.
... Over the past few decades, for example, CPI figures
have mostly been the results of a concatenation of "temporary" trends in different sectors
-- the costs of education and healthcare rose nonstop, while the prices of many goods
continuously fell. It was different in the 1970s, when an idiosyncratic squeeze in the supply
of oil fueled an inflationary spiral that pushed all costs up.
...As Peter Schiff put it, CPI is a lie . Grant used the
evolution of the toothbrush into its electric form as an example. How do you measure the clear
quality improvements in the toothbrush? The government uses hedonics to measure these changes,
but as Grant pointed out, this is "inexact and not really a science."
Grant believes that the economy can only tolerate 2.5% real rates. If that is breached, he
thinks the Fed will have to resort to yield-curve control. If it does actually try to shrink
its balance sheet and sell bonds, it will drive bond yields even higher. Fed bond-buying is the
only thing propping up the bond market right now.
In fact, the Fed is propping up the entire economy. There is a sense that the Fed will
always step in and save the markets. As a result, we have bubbles everywhere, from the stock
market, to real estate, to cryptocurrency.
"These are strange and oppressive markers of financial markets that have lost moorings of
valuation," Grant said.
I think the astounding complacency toward, or indifference of, the evident excesses in our
monetary and fiscal affairs I think the lack of concern about those things is perhaps the
most striking inflationary augur I know of."
Meanwhile, the Fed continues to create money. M1 annual growth is 350%; M2 is growing at
approximately 28%.
"Never before have we had monetary peacetime growth this fast," Grant said.
"Tell me who cares."
Grant said central bankers like Powell are guilty of hubris. They suffer from the delusion
that they can actually control everything. Grant called the Fed "un-self-aware."
Despite Jay Powell's credentials, he knows nothing about the past and believes he knows
everything about the future."
Grant talked about gold ,
saying it is an investment in "monetary disorder."
To me, gold isn't a hedge against monetary disorder. It's an investment in monetary
disorder, which is what we have. We have floating-rate currencies. We have manipulated
exchange rates. We have manipulated interest rates. When the cycle turns, people will want
gold and silver, and they will want something tangible ."
Consumers are picking up on the rise of inflation, and the Fed, which has been trying to
heat up inflation, is pleased. The Fed watches "inflation expectations" carefully. The minutes
from the March FOMC meeting mention "inflation expectations" 12 times.
The New York Fed's Survey of Consumer
Expectations for April, released today, showed that median inflation expectations for one
year from now rose to 3.4%, matching the prior highs in 2013 (the surveys began in June
2013).
But wait the median earnings growth expectations 12 months from now was only 2.1%, and
remains near the low end of the spectrum, a sign that consumers are grappling with consumer
price inflation outrunning earnings growth. The whoppers were in the major specific
categories.
History repeats and the repetition is coming with some minor variations.
Notable quotes:
"... "Corporate bond rates have been rising steadily since May. Yellen is not doing what Greenspan did in 2004." ..."
"... There isn't much of a difference between signaling tighter money to a market that is skeptical of Fed forecasts and actually tightening. ..."
"... While at 5.0 percent, the unemployment rate is not extraordinarily high, most other measures of the labor market are near recession levels. The percentage of the workforce that is involuntarily working part-time is near the highs reached following the 2001 recession. The average and median duration of unemployment spells are also near recession highs. And the percentage of workers who feel confident enough to quit their jobs without another job lined up remains near the low points reached in 2002. ..."
"... While wage growth has edged up somewhat in recent months by some measures, it is still well below a rate that is consistent with the Fed's inflation target. Hourly wages have risen at a 2.7 percent rate over the last year. If there is just 1.5 percent productivity growth, this would be consistent with a rate of inflation of 1.2 percent. ..."
"... One positive point in today's action is the Fed's commitment in its statement to allow future rate hikes to be guided by the data, rather than locking in a path towards "normalization" as was effectively done in 2004. ..."
Washington, D.C.- Dean Baker, economist and a co-director of the Center for Economic and Policy Research (CEPR) issued the
following statement in response to the Federal Reserve's decision regarding interest rates:
"The Fed's decision to raise interest rates today is an unfortunate move in the wrong direction. In setting interest rate policy
the Fed must decide whether the economy is at risk of having too few or too many jobs, with the latter being determined by the
extent to which its current rate of job creation may lead to inflation. It is difficult to see how the evidence would lead the
Fed to conclude that the greater risk at the moment is too many jobs.
"While at 5.0 percent, the unemployment rate is not extraordinarily high, most other measures of the labor market are near
recession levels. The percentage of the workforce that is involuntarily working part-time is near the highs reached following
the 2001 recession. The average and median duration of unemployment spells are also near recession highs. And the percentage of
workers who feel confident enough to quit their jobs without another job lined up remains near the low points reached in 2002.
"If we look at employment rates rather than unemployment, the percentage of prime-age workers (ages 25-54) with jobs is still
down by almost three full percentage points from the pre-recession peak and by more than four full percentage points from the
peak hit in 2000. This does not look like a strong labor market.
"On the other side, there is virtually no basis for concerns about the risk of inflation in the current data. The most recent
data show that the core personal consumption expenditure deflator targeted by the Fed increased at just a 1.2 percent annual rate
over the last three months, down slightly from the 1.3 percent rate over the last year. This means that the Fed should be concerned
about being below its inflation target, not above it.
"While wage growth has edged up somewhat in recent months by some measures, it is still well below a rate that is consistent
with the Fed's inflation target. Hourly wages have risen at a 2.7 percent rate over the last year. If there is just 1.5 percent
productivity growth, this would be consistent with a rate of inflation of 1.2 percent.
"Furthermore, it is important to recognize that workers took a large hit to their wages in the downturn, with a shift of more
than four percentage points of national income from wages to profits. In principle, workers can restore their share of national
income (the equivalent of an 8 percent wage gain), but the Fed would have to be prepared to allow wage growth to substantially
outpace prices for a period of time. If the Fed acts to prevent workers from getting this bargaining power, it will effectively
lock in place this upward redistribution. Needless to say, workers at the middle and bottom of the wage distribution can expect
to see the biggest hit in this scenario.
"One positive point in today's action is the Fed's commitment in its statement to allow future rate hikes to be guided
by the data, rather than locking in a path towards "normalization" as was effectively done in 2004. If it is the case that
the economy is not strong enough to justify rate hikes, then the hike today may be the last one for some period of time. It will
be important for the Fed to carefully assess the data as it makes its decision on interest rates at future meetings.
"Recent economic data suggest that today's move was a mistake. Hopefully the Fed will not compound this mistake with more unwarranted
rate hikes in the future."
RC AKA Darryl, Ron said in reply to Peter K....
I like Dean Baker. Unlike the Fed, Dean Baker is a class warrior on the side of the wage class. He makes the point about the
path to normalization being critical that I have been discussing for quite a while. Let's hope this Fed knows better than Greenspan/Bernanke
in 2004-2006. THANKS!
likbez said in reply to RC AKA Darryl, Ron...
Very true !
pgl said in reply to RC AKA Darryl, Ron...
"Longer-term bond rates barely moved, showing that there was very little news." This interest rate rose from 4.45% to 5.46%
already. So the damage was already done:
"... This interest rate rose from 4.45% to 5.46% already..."
Exactly! Corporate bond rates have been rising steadily since May. Yellen is not doing what Greenspan did in 2004. Yellen's
Fed waited until the bond rate lifted off on its own (and maybe with some help from policy communications) before they raised
the FFR.
So far, there is no sign of their making a fatal error. They are not fighting class warfare for wage class either, but they
seem intent on not screwing the pooch in the way that Greenspan and Bernanke did. No double dip thank you and hold the nuts.
"... "It's just unbelievable that central banks are actively encouraging this." ..."
"... Good point. Many times we look at charts and say WTF but once you normalize to inflation, maybe this is not as bad as originally it appeared ..."
"... reminds me of an abusive husband telling his beaten wife, "See what you made me do!" ..."
"... Hussman says the right way to do that is to look at margin debt to GDP ration, which is a record. GDP is doubling rate is about every 20 years now at nominal 3.5% ..."
"... That description applies to most Wall Streeters and banksters, whose titanic egos are amazing given the fact that most are parasites that contribute less than a woodlouse to society. Still, I dread the coming US debt collapse discussed in this website, which I would term a debt explosion as all of the bubbles start to pop and so many debtors and former creditors (like lessors, banks, etc.) become publicly known to be legally insolvent. ..."
"... I have invested carefully but we will all lose much or most of our savings. ..."
"... It is very irritating to think of the trillions that the banksters' deceptively named, "Federal" Reserve has been transferring to its ultra-rich owners for decades. They will probably even avoid most taxation again. ..."
Exactly. It is way more scary than even Wolf's charts suggest because there are so many
layers of leverage stacked on top of each other.
People taking out margin debt on stock portfolios that they bought by re-mortgaging their
bubbled houses to buy stocks with record corporate debt, collaterised (if at all) with bubble
assets, at record valuations driven itself by leverage etc etc
It's just unbelievable that central banks are actively encouraging this.
The amount of margin debt is not a WTF amount if you use the prices-double each 11 year
rule of thumb.
This 11 year period is strikingly accurate if you take the price of the New York Times
since 1900 (I have a booklet with frontpages of each year and discovered this when looking at
the selling prices). Having said that, the current 800B is the same as the previous inflation corrected peaks
of 2009 and around 1999.
So yes, Wolf is 100% correct with the prediction on what is coming. It is just not a WTF
amount but a history-repeats-itself moment
"normalize to inflationary, maybe not as bad as originally it appeared"
I know what you mean, but then the (major) problem is that the inflation itself shouldn't be viewed as "normal". Kinda reminds me of a gvt program defending doubled budget over 8 yrs because of
"inflation" when in point of fact it is likely that G printing/policy has *created* the
inflation in the first place (to help fund the program now pointing at inflation).
Also, reminds me of an abusive husband telling his beaten wife, "See what you made me
do!"
Hussman says the right way to do that is to look at margin debt to GDP ration, which is a record. GDP is doubling rate is about
every 20 years now at nominal 3.5%
That description applies to most Wall Streeters and banksters, whose titanic egos are
amazing given the fact that most are parasites that contribute less than a woodlouse to
society. Still, I dread the coming US debt collapse discussed in this website, which I would
term a debt explosion as all of the bubbles start to pop and so many debtors and former
creditors (like lessors, banks, etc.) become publicly known to be legally insolvent.
It is unfortunate that it may happen at the worst possible time, when we face an adversary
worse and more powerful than the Soviet Union or Nazi Germany ever was. I have invested
carefully but we will all lose much or most of our savings.
It is very irritating to think of
the trillions that the banksters' deceptively named, "Federal" Reserve has been transferring
to its ultra-rich owners for decades. They will probably even avoid most taxation again.
I do not like to even think how many Americans will wind up. Remember the saying "There
but for the grace of god, go I." Many of us will be saying that a lot in the coming years if
we are very fortunate.
"... The CPI is calculated by analyzing the price of a "basket of goods." The makeup of that basket has a big impact on the final CPI number. According to WolfStreet , 10.9% of the CPI is based on durable goods (computers, automobiles, appliances, etc.). Nondurable goods (primarily food and energy) make up 26.6% of CPI. Services account for the remaining 62.5% of the basket. This includes rent, healthcare, cellphone service etc.) ..."
"... The things the government includes and excludes from the basket can make a profound difference in that final CPI number. Back in 1998, the government significantly revised the CPI metrics. Even the Bureau of Labor Statistics (BLS) admitted the changes were "sweeping." ..."
"... In 1998, the BLS followed the recommendations of the Boskin Commission. It was appointed by the Senate in 1995. Initially called the "Advisory Commission to Study the Consumer Price Index," its job was to study possible bias in the computation of the CPI. Unsurprisingly, it determined that the index overstated inflation " by about 1.1% per year in 1996 and about 1.3% prior to 1996. The 1998 changes to CPI were meant to address this "issue." ..."
"... As Peter pointed out, there is a lot of geometric weighting, substitution and hedonics built into the calculation. The government can basically create an index that outputs whatever it wants. ..."
"... Peter said there is a bit of irony in government officials and central bankers constantly complaining about "not enough inflation." ..."
"... They're the ones that are cooking the books to pretend that inflation is lower than it really is. Because what they're really trying to do is get the go-ahead to produce more inflation, which is printing money." ..."
"... And there are other things that hide inflation. For instance, shrinking packaging so there is less product sold at the same price, or substituting lower quality ingredients, or requiring consumers to assemble items themselves. ..."
"... They find different ways to lower the quality and not increase the price, and I'm sure that the government is not picking up on any of that. If the quality improves, yeah, yeah, they calculate that. But they probably ignore all the circumstances where the quality is diminished." ..."
"... The bottom line is we can't trust CPI to tell us the truth about inflation. ..."
And we're seeing rising prices all over the place, from the grocery store to the gas station. Even
the government numbers flash
warning signs . But as Peter Schiff explains in this clip from an interview with Jay Martin, it's probably even worse than we
realize because the government cooks the numbers when it calculates CPI.
The monthly rises in CPI
through the first quarter show an upward trend. The CPI in January was up 0.3%. It was up 0.4% in February. And now it's up 0.6%
in March. That totals a 1.013% increase in Q1 alone. The question is does this really reflect the truth about inflation? Peter doesn't
think it does.
The government always makes changes to their methods of measuring things, whether it's GDP, or inflation, or unemployment.
And they always tweak the numbers to produce a better result as a report card. "
Imagine if students in a school had the ability to change the metrics by which they were graded or the methodology the teacher
used to calculate their grades.
Would it surprise anybody that all of a sudden they started getting more As and Bs and fewer Cs and Ds? The government always
wants to make the good stuff better, like economic growth, and the bad stuff better, like unemployment or inflation. So, they
want to find ways to make those numbers little and the good numbers big."
The CPI is calculated by analyzing
the price of a "basket of goods." The makeup of that basket has a big impact on the final CPI number. According to WolfStreet , 10.9%
of the CPI is based on durable goods (computers, automobiles, appliances, etc.). Nondurable goods (primarily food and energy) make
up 26.6% of CPI. Services account for the remaining 62.5% of the basket. This includes rent, healthcare, cellphone service etc.)
The things the government includes and excludes from the basket can make a profound difference in that final CPI number. Back in 1998, the government significantly revised the CPI metrics. Even
the Bureau of Labor Statistics
(BLS) admitted the changes were "sweeping."
According to the BLS, periodic changes to the CPI calculation are necessary because "consumers change their preferences or new
products and services emerge. During these occasions, the Bureau reexamines the CPI item structure, which is the classification scheme
of the CPI market basket. The item structure is a central feature of the CPI program and many CPI processes depend on it."
In 1998, the BLS followed the recommendations of the Boskin Commission. It was appointed by the Senate in 1995. Initially called
the "Advisory Commission to Study the Consumer Price Index," its job was to study possible bias in the computation of the CPI. Unsurprisingly,
it determined that the index overstated inflation " by about 1.1% per year in 1996 and about 1.3% prior to 1996. The 1998 changes
to CPI were meant to address this "issue."
As Peter pointed out, there is a lot of geometric weighting, substitution and hedonics built into the calculation. The government
can basically create an index that outputs whatever it wants.
I think this period of "˜Oh wow! We have low inflation!' It's not a coincidence that it followed this major revision into how
we calculate it."
Peter said there is a bit of irony in government officials and central bankers constantly complaining about "not enough inflation."
They're the ones that are cooking the books to pretend that inflation is lower than it really is. Because what they're really
trying to do is get the go-ahead to produce more inflation, which is printing money."
Peter said the CPI will never reveal the true extent of rising prices.
And there are other things that hide inflation. For instance, shrinking packaging so there is less product sold at the same price,
or substituting lower quality ingredients, or requiring consumers to assemble items themselves.
They find different ways to lower the quality and not increase the price, and I'm sure that the government is not picking up
on any of that. If the quality improves, yeah, yeah, they calculate that. But they probably ignore all the circumstances where
the quality is diminished."
The bottom line is we can't trust CPI to tell us the truth about inflation.
"... "In a highly inflationary environment, we like the auto parts space with its unique ability to pass-through higher costs to customers given the non-discretionary nature of the category," says Goldman Sachs analyst Kate McShane. "For instance, in 2019, telegraphed prices increases to offset cost pressures arising from tariffs provided an incremental benefit to same-store sales growth and most auto parts retailers cited between 150-300 basis points of tariff-related inflation." ..."
The investment thesis is pretty straightforward. With mobility across the country picking up (see chart below) as people get vaccinated,
cars will likely need more maintenance. That leaves auto parts retailers such as O'Reilly (
ORLY ), Genuine Parts Company (
GPC ), AutoZone (
AZO ) and Advance Auto Parts (
AAP ) in the enviable position of being able
to pass inflation in everything from tires to car wax on to consumers and then post strong profits.
"In a highly inflationary environment, we like the auto parts space with its unique ability to pass-through higher costs to
customers given the non-discretionary nature of the category," says Goldman Sachs analyst Kate McShane. "For instance, in 2019, telegraphed
prices increases to offset cost pressures arising from tariffs provided an incremental benefit to same-store sales growth and most
auto parts retailers cited between 150-300 basis points of tariff-related inflation."
McShane rounds out her bullish thesis on auto parts retailers by noting the main sector plays sport price-to-earnings multiples
below historical averages. Of the four aforementioned auto parts retailers, AutoZone has the lowest forward price-to-earnings multiple
of 18.7 times, according to Yahoo Finance
Plus data .
Mobility is back on the move higher as people get vaccinated for COVID-19.
As for which name McShane is most bullish on, that award goes to Advance Auto Parts in the wake of a recent analyst day. McShane
made the rare Wall Street move of upgrading her rating on Advance Auto Parts to Buy from Sell.
"Our double tier upgrade " from Sell to Buy " is predicated upon
(1) Advance Auto Parts improving profit and loss dynamics with 2-4% same-store sales per annum and 230-450 basis points of margin
expansion by 2023;
(2) cyclical recovery in do-it-for-me, where Advance Auto Parts has greater exposure vs peers;
(3) a finally improving do-it-yourself story as its new private label and loyalty program appears to be resonating with customers;
(4) improved capital allocation to shareholders;
(5) the ability of the auto parts space to pass-through inflation; and
(6) valuation that looks appealing vs history, especially in light of improving macro and company specific dynamics,"
Signs of inflation are picking up, with a mounting number of consumer-facing companies
warning in recent days that supply shortages and logistical logjams may force them to raise
prices.
Tight inventories of materials as varied as semiconductors, steel, lumber and cotton are
showing up in survey data, with manufacturers in Europe and the U.S. this week flagging record
backlogs and higher input prices as they scramble to replenish stockpiles and keep up with
accelerating consumer demand.
As commodities become increasingly expensive, whether faster inflation proves transitory --
or not -- is the biggest question for policy makers and markets. Rising prices and the
potential for a response from central banks topped the list of concerns for money managers
surveyed by Bank of America Corp.
Many economists and central bankers, from the Federal Reserve on down, maintain that price
gains are temporary and will be curbed by forces such as virus worries and unemployment.
Investors remain skeptical, with businesses including Nestle SA and Colgate-Palmolive Co.
already announcing they’ll need to raise prices.
U.S. Treasury Secretary Janet Yellen, a former Fed chair, entered the debate on Tuesday when
she ruffled markets with the observation that rates will likely rise as government spending
ramps up. She later clarified she was neither predicting nor recommending an increase.
The Bloomberg Commodity Spot Index, which tracks 23 raw materials, has risen to its highest
level in almost a decade. That has pushed a gauge of global manufacturing output prices to its
highest point since 2009, and U.S. producer prices to levels not seen since 2008, according to
data from JPMorgan Chase & Co. and IHS Markit. JPMorgan analysts also estimate non-food and
energy import prices in the biggest economies rose almost 4% in the first quarter, the most in
three years.
“Risk clearly leans to the upside in the current
environment,†said John Mothersole, pricing and purchasing research director at IHS
Markit. “The surge in commodity prices over the past year now guarantees
higher goods-price inflation this summer.â€
Money managers who’ve spent the bulk of their careers profiting from
deflationary trends need to quickly switch gears or risk an “inflation
shock†to their portfolios, warns JPMorgan Chase & Co. chief global markets
strategist Marko Kolanovic.
“Many of today’s investment managers have never
experienced a rise in yields, commodities, value stocks, or inflation in any meaningful
way,†Kolanovic wrote in a report Wednesday. “A significant
shift of allocations towards growth, ESG and low volatility styles over the past decade, all of
which have negative correlation to inflation, left most portfolios vulnerable.â€
After staging a powerful rally since November amid vaccine rollouts and government stimulus,
bets tied to inflation -- rising Treasury yields, cyclical stocks and small-caps, to name a few
-- have taken pause in recent weeks. While that has sparked debate over how long the trend will
persist, Kolanovic urged clients to adjust to the new regime amid the reopening of the global
economy.
“Given the still high unemployment, and a decade of inflation undershoot,
central banks will likely tolerate higher inflation and see it as temporary,†he
wrote. “The question that matters the most is if asset managers will make a
significant change in allocations to express an increased probability of a more persistent
inflation.â€
The way Kolanovic sees it, as data continue to point to higher prices of goods and services,
investors will be forced to shift from low-volatility plays to value stocks, while increasing
allocations to direct inflation hedges such as commodities. That trend is likely to persist in
the second half of the year, he wrote.
Based on JPMorgan’s data, professional investors have yet to fully
embrace the reflation trade. Take equities, for instance. Both computer-driven traders and
hedge funds now hold stocks at levels below historical averages.
“Portfolio managers likely will not take chances and will reposition
portfolios,†Kolanovic wrote. “The interplay of low market
liquidity, systematic and macro/fundamental flows, the sheer size of financial assets that need
to be rotated or hedges for inflation put on, may cause outsized impact on inflationary and
reflationary themes over the next year.â€
And if it doesn't last after the stimmies are gone, dealers will sit on massively
overpriced collateral, which could get messy. By Wolf Richter for WOLF STREET .
This has been going on for months: Used-vehicle prices spiking from jaw-dropper to
jaw-dropper, and just when I thought prices couldn't possibly spike further, they do.
Prices of used vehicles that were sold at auctions around the US in April spiked by 8.3%
from March, by 20% year-to-date, by 54% from April 2020, and by 40% from April 2019, according
to the Used Vehicle Value Index released today by Manheim, the largest auto auction operator in
the US and a unit of Cox Automotive. All heck has broken loose in the used vehicle market:
The price spike has now completely blown by the prior record spike over the 13-month period
through September 2009, which included the cash-for-clunkers program that removed a whole
generation of serviceable older vehicles from the market.
Curiously, the St. Louis Fed says used car prices have been pretty much flat for the last
25 years. While the last year of data shows a notable jump in prices, it's apparently been
bludgeoned a little with some old fashioned hedonic quality adjustments.
I'll help you out since I've been covering this for years. So here is the correct link
that explains it all, new vehicle CPI and used vehicle CPI (which is what you cited), plus
"hedonic quality adjustments."
I can see how the supply for these auctions will be tight for some time given that
business travel and the resulting car rental usage is way down. In addition, I would expect a
lot of corporate car purchasing is down considerably as many sales reps have worked remotely
which stalled corporate car purchasing schedules.
Messrs. Levy and Bordo allude to the sharp drop in the velocity of M2 after the 2007-09
crisis. The actual decline is startling. In the first quarter of 2007 M2 velocity was 1.99, by
the first quarter of 2020 it had fallen almost continually to 1.38. In other words, the money
stock went from turning over twice a year to under 1.4 times a year. This is the primary reason
for the very low inflation over the period.
Because of the Covid lockdowns, M2 fell even further to 1.13 by the fourth quarter of 2020.
As the authors point out, conditions are much different today than in 2007-20 because of
boosted bank reserves, households with substantial savings ready to spend and commercial banks
in good shape and eager to lend. Unless an economy-wide lockdown occurs, these are very good
reasons to believe the velocity of money will increase significantly, just as the 27% surge in
M2 since the outbreak of the pandemic works its way through the economy.
This is a prescription for major inflation, perhaps 4%-5% in the next two years. When people
say "no way," I remind them that in the early 1980s hardly anyone believed that interest rates
would ever return to 1950s levels. While many individuals prefer to trend forecast, never
underestimate how inflation (and interest rates) can swing back and forth in ways that
amaze.
Em. Prof. Stephen Happel
Arizona State University
Tempe, Ariz.
Messrs. Levy and Bordo might have made an equally compelling case about the Fed being in
total denial about the more troubling risk: that its policies have been contributing to a
global asset-price and credit-market bubble.
By maintaining ultralow interest rates and by continuing to expand its balance by $120
billion a month, even when the economy could soon be overheating and U.S. equity valuations are
close to their all-time highs, the Fed risks further inflating the asset-price bubble. By so
doing, it is heightening the chances of a hard economic landing when the Fed is eventually
forced to slam on the monetary-policy brakes to meet its inflation objective.
Desmond Lachman
American Enterprise Institute
Washington
Why did the money supply hardly budge in 2008, whereas now it's steadily increasing? The
answer is that during the financial crisis the Fed conducted a radical experiment: It paid
banks not to lend. By design, quantitative easing shored up banks' balance sheets while
interest on excess reserves prevented the newly created money from circulating.
In March 2020, the Fed slashed interest on excess reserves from 1.60% to 0.10%. The benefits
of sitting on funds is much smaller, which is why lending has increased.
Messrs. Levy and Bordo emphasize structural factors in the U.S. economy, such as housing and
trade. These matter, but not nearly so much as policy. Inflationary pressures will continue if
the Fed's asset purchases increase the broader money supply. But this depends on whether the
Fed raises interest on excess reserves to prepandemic levels.
For better or worse, interest on excess reserves is now a crucial policy tool. We can't
understand inflation without it.
SUBSCRIBER 3 hours ago Yellen and the Fed are currently repeating one of the most disturbing
episodes of U.S. economic history. It happened during the 1940s following the conclusion of
WWII.
The Fed is riding a tiger by the tail and will likely have great difficulty extricating
itself from a torrid monetary experiment that is reaching its limits. The U.S. M4 money supply
rose an alarming 24% in March alone from a year earlier whereas M1 rose 37%. Notwithstanding
these shocking numbers the Fed continues to buy $120bn of bonds each month and the total amount
of money in circulation is exploding at an unprecedented 40% rate.
Professor William Barnett of the Center for Financial Stability in New York explained that
today's financial collusion between the Fed and the Treasury is much like the 1940s when the
Fed served as a fiscal agent for Democratic administrations. The chaotic aftermath? By mid-1947
the rate of inflation exceeded 17% per year - destroying low income households.
(Cont.)
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Yellen and the Fed are currently repeating one of the most disturbing episodes of U.S.
economic history. It happened during the 1940s following the conclusion of WWII.
The Fed is riding a tiger by the tail and will likely have great difficulty extricating
itself from a torrid monetary experiment that is reaching its limits. The U.S. M4 money
supply rose an alarming 24% in March alone from a year earlier whereas M1 rose 37%.
Notwithstanding these shocking numbers the Fed continues to buy $120bn of bonds each month
and the total amount of money in circulation is exploding at an unprecedented 40% rate.
Professor William Barnett of the Center for Financial Stability in New York explained that
today's financial collusion between the Fed and the Treasury is much like the 1940s when the
Fed served as a fiscal agent for Democratic administrations. The chaotic aftermath? By
mid-1947 the rate of inflation exceeded 17% per year - destroying low income households.
Yellen and the Fed are currently repeating one of the most disturbing episodes of U.S.
economic history. It happened during the 1940s following the conclusion of WWII.
The Fed is riding a tiger by the tail and will likely have great difficulty extricating
itself from a torrid monetary experiment that is reaching its limits. The U.S. M4 money
supply rose an alarming 24% in March alone from a year earlier whereas M1 rose 37%.
Notwithstanding these shocking numbers the Fed continues to buy $120bn of bonds each month
and the total amount of money in circulation is exploding at an unprecedented 40% rate.
Professor William Barnett of the Center for Financial Stability in New York explained
that today's financial collusion between the Fed and the Treasury is much like the 1940s
when the Fed served as a fiscal agent for Democratic administrations. The chaotic
aftermath? By mid-1947 the rate of inflation exceeded 17% per year - destroying low income
households.
Yellen and the Fed are currently repeating one of the most disturbing episodes of U.S.
economic history. It happened during the 1940s following the conclusion of WWII.
The Fed is riding a tiger by the tail and will likely have great difficulty
extricating itself from a torrid monetary experiment that is reaching its limits. The
U.S. M4 money supply rose an alarming 24% in March alone from a year earlier whereas M1
rose 37%. Notwithstanding these shocking numbers the Fed continues to buy $120bn of
bonds each month and the total amount of money in circulation is exploding at an
unprecedented 40% rate.
Professor William Barnett of the Center for Financial Stability in New York
explained that today's financial collusion between the Fed and the Treasury is much
like the 1940s when the Fed served as a fiscal agent for Democratic administrations.
The chaotic aftermath? By mid-1947 the rate of inflation exceeded 17% per year -
destroying low income households.
Yellen and the Fed are currently repeating one of the most disturbing episodes of
U.S. economic history. It happened during the 1940s following the conclusion of
WWII.
The Fed is riding a tiger by the tail and will likely have great difficulty
extricating itself from a torrid monetary experiment that is reaching its limits.
The U.S. M4 money supply rose an alarming 24% in March alone from a year earlier
whereas M1 rose 37%. Notwithstanding these shocking numbers the Fed continues to
buy $120bn of bonds each month and the total amount of money in circulation is
exploding at an unprecedented 40% rate.
Professor William Barnett of the Center for Financial Stability in New York
explained that today's financial collusion between the Fed and the Treasury is
much like the 1940s when the Fed served as a fiscal agent for Democratic
administrations. The chaotic aftermath? By mid-1947 the rate of inflation
exceeded 17% per year - destroying low income households.
President Biden and Secretary Yellen said this week there is no significant
inflation.
On May 7 of last year, the metric standard of lumber, 1,000 board feet was $360 .
Today it's $1,702 a record high. It broke $1,000 first time ever a month ago on
April 7.
That's a 70% increase in lumber in just the last 30 days.
Copper was $2.33 on May 7 of last year. Today, $4.76 a record high.
Steel Rebar was $3,768 on May 7 of last year. Today: $5,483 , record high. President Biden and Secretary Yellen said this week there is no significant inflation
.
Tell that to a builder, his subcontractors, and the buyer of a newly built home this
summer.
Food prices for Corn, Wheat, Soybeans, Rice, Milk, Coffee, Cocoa are up double digits in just
the last two months.
Vice President Harris ignored a question about inflation with her regular everyday cackle
laughing as she walked away.
We are in month four of this administration that prioritizes its war on the wind and the
weather.
Figures are from Yahoo Finance
President Biden and Secretary Yellen said this week there is no significant
inflation.
On May 7 of last year, the metric standard of lumber, 1,000 board feet was $360 .
Today it's $1,702 a record high. It broke $1,000 first time ever a month ago
on April 7.
That's a 70% increase in lumber in just the last 30 days.
Copper was $2.33 on May 7 of last year. Today, $4.76 a record high.
Steel Rebar was $3,768 on May 7 of last year. Today: $5,483 , record
high. President Biden and Secretary Yellen said this week there is no significant
inflation .
Tell that to a builder, his subcontractors, and the buyer of a newly built home this
summer.
Food prices for Corn, Wheat, Soybeans, Rice, Milk, Coffee, Cocoa are up double digits in
just the last two months.
Vice President Harris ignored a question about inflation with her regular everyday cackle
laughing as she walked away.
We are in month four of this administration that prioritizes its war on the wind and the
weather.
Figures are from Yahoo Finance
The 10-year US Treasury yield fell to only 0.48% in March 2020, when deflationary fears were
mounting. The S&P 500 index had fallen by 32% in just five weeks as China's covid crisis
was followed by the prospect of other jurisdictions going into pandemic lockdowns. Commodity
prices were collapsing. The Fed then did what it always does in these conditions. It cut
interest rates to the minimum possible (zero this time) and it flooded markets with money
($120bn in QE every month) along with some other market fixes to cap corporate bond yields from
rising to reflect lending risks.
Fuelling it all is the expansion of base money by central banks. The St Louis Fed's FRED
chart below showing the Fed's monetary base illustrates the point and is a proxy for the global
picture, because the dollar is the reserve currency and the pricing medium for all
commodities.
From the beginning of March 2020, which was the month the Fed announced virtually unlimited
monetary expansion, base money has grown by 69%. It is this rapid growth in central bank money
which is undoubtedly behind rising commodity prices, or put more accurately, is why the
purchasing power of the dollar in international markets is falling.
When the outlook for the purchasing power of a fiat currency falls, all holders expect
compensation in the form of higher interest rates. Partly, it is due to time preference -- the
fact that an owner of the currency has parted with the use of it for a period of time. And
partly it is due to the expectation that when returned, the currency will buy less than it does
today. Official forecasts of the CPI state that the dollar's purchasing power will probably
sink to 97.5 cents on the dollar, then the yield on the ten-year UST should be at least 2.56%
(2.5%/0.97), otherwise new buyers face immediate losses. The official expectation that the rise
in the rate of price inflation will be temporary is immaterial to an investment decision today,
because the yield can be expected to evolve over time in the light of events.
This is before adding something to the yield for time preference (admittedly minimal in a
freely traded bond), plus something for currency risk relative to an investor's base currency
and plus something for creditor risk. Stripped of these other considerations, on the basis of
expected inflation alone a current yield of 1.61 appears to be far too low, and a yield target
of at minimum of 2.5% appears more appropriate.
ay_arrow
FinsterF 14 hours ago
Will increase??? Inflation is already much higher than 2% or whatever the latest
government figures imply. Price inflation first shows up in real time data like stock and
commodity prices. It only later shows up in broad consumer prices. Not to mention that year
over year data already average six months late.
And this on top of tricks like homeowners equivalent rent and hedonic adjustments. So
official inflation stats both systematically understate and lag actual inflation.
HorseBuggy 19 hours ago
As long as you print money you could keep this market going higher and higher regardless
of any reality.
philipat 14 hours ago
As much as I enjoy reading Alasdair's work, he's wrong about Bond Yields because there IS
NO RECOVERY. The latest BLS jobs report started to indicate that despite all the "stimulus"
the underlying economy is very weak, and that isn't due to the excuse of Covid. From the
data, the global economy started turning down in 4Q2108. This became more obvious in 3Q2019
with the REPO crisis. All before Covid.
The Bond markets almost always get it right and, as of now, Bond yields are falling as
also are Eurodollar Futures, suggesting that for once Powell is right, any inflation is
indeed transitory.
The good news for Alasdair is that for the last 3 years, Gold has been a precise mirror
image of Bond REAL yields so as Real Yields now fall further negative again, Gold should
respond to the upside - as already being seen.
Sound of the Suburbs 13 hours ago
Why is neoclassical economics so dangerous to the financial system?
We never did learn as much as we should have done from 1929.
Neoclassical economics produces ponzi schemes of inflated prices.
When they collapse it feeds back into the financial system.
Neoclassical economics still has its 1920's problems.
What's wrong with neoclassical economics?
It makes you think you are creating wealth by inflating asset prices
Bank credit flows into inflating asset prices, debt rises faster than GDP and you
eventually get a financial crisis.
No one notices the private debt building up in the economy as neoclassical economics
doesn't consider debt.
What is the fundamental flaw in the free market theory of neoclassical economics?
The University of Chicago worked that out in the 1930s after last time.
Banks can inflate asset prices with the money they create from bank loans.
Henry Simons and Irving Fisher supported the Chicago Plan to take away the bankers ability
to create money.
"Simons envisioned banks that would have a choice of two types of holdings: long-term
bonds and cash. Simultaneously, they would hold increased reserves, up to 100%. Simons saw
this as beneficial in that its ultimate consequences would be the prevention of
"bank-financed inflation of securities and real estate" through the leveraged creation of
secondary forms of money."
Existing financial assets, e.g. real estate, stocks and other financial assets, are traded
and bank credit is used to fund the transfers. This inflates the price.
You end up with a ponzi scheme of inflated asset prices that will collapse and feed back
into the financial system.
At the end of the 1920s, the US was a ponzi scheme of inflated asset prices.
The use of neoclassical economics and the belief in free markets, made them think that
inflated asset prices represented real wealth.
1929 – Wakey, wakey time
Why did it cause the US financial system to collapse in 1929?
Bankers get to create money out of nothing, through bank loans, and get to charge interest
on it.
Bankers do need to ensure the vast majority of that money gets paid back, and this is
where they get into serious trouble.
Banking requires prudent lending.
If someone can't repay a loan, they need to repossess that asset and sell it to recoup
that money. If they use bank loans to inflate asset prices they get into a world of trouble
when those asset prices collapse.
As the real estate and stock market collapsed the banks became insolvent as their assets
didn't cover their liabilities.
They could no longer repossess and sell those assets to cover the outstanding loans and
they do need to get most of the money they lend out back again to balance their books.
The banks become insolvent and collapsed, along with the US economy.
When banks have been lending to inflate asset prices the financial system is in a
precarious state and can easily collapse.
What was the ponzi scheme of inflated asset prices that collapsed in Japan in 1991?
Japanese real estate.
They avoided a Great Depression by saving the banks.
They killed growth for the next 30 years by leaving the debt in place.
What was the ponzi scheme of inflated asset prices that collapsed in 2008?
"It's nearly $14 trillion pyramid of super leveraged toxic assets was built on the back of
$1.4 trillion of US sub-prime loans, and dispersed throughout the world" All the Presidents
Bankers, Nomi Prins.
They avoided a Great Depression by saving the banks.
They left Western economies struggling by leaving the debt in place, just like Japan.
It's not as bad as Japan as we didn't let asset prices crash in the West, but it is this
problem has made our economies so sluggish since 2008.
The last lamb to the slaughter, India
They had created a ponzi scheme of inflated asset prices in real estate, but it
collapsed.
"This Time is Different" by Reinhart and Rogoff has a graph showing the same thing (Figure
13.1 - The proportion of countries with banking crises, 1900-2008).
Neoclassical economics came back and so did the financial crises.
The neoliberals removed the regulations that created financial stability in the Keynesian
era and put independent central banks in charge of financial stability.
Why does it go so wrong?
Richard Vague had noticed real estate lending balloon from 5 trillion to 10 trillion from
2001 – 2007 and knew there was going to be a financial crisis.
Richard Vague has looked at the data for financial crises going back 200 years and found
the cause was nearly always runaway bank lending.
We put central bankers in charge of financial stability, but they use an economics that
ignores the main cause of financial crises, private debt.
Most of the problems are coming from private debt.
The technocrats use an economics that ignores private debt.
The poor old technocrats don't really stand a chance.
In 2008 the Queen visited the revered economists of the LSE and said "If these things were
so large, how come everyone missed it?"
It's that neoclassical economics they use Ma'am, it doesn't consider private debt.
Goldman Sachs Group Inc. and bond titan Pacific Investment Management Co. have a simple
message for Treasuries traders fretting over inflation: Relax.
The firms estimate that bond traders who are pricing in annual inflation approaching 3% over
the next handful of years are overstating the pressures bubbling up as the U.S. economy
rebounds from the pandemic.
...the overshoot could be as large as 0.2-to-0.3 percentage point. That gap makes a
difference with key market proxies of inflation expectations for the coming few years surging
this week to the highest in more than a decade. The 10-year measure, perhaps the most closely
followed, eclipsed 2.5% Friday for the first time since 2013, even after unexpectedly weak U.S.
jobs data.
There's at least one market metric that backs up the view that the pressures, which have
been building for months, aren't about to get out of hand and may even prove temporary. A swaps
instrument that reflects the annual inflation rate for the second half of the next decade has
been relatively stable in recent months.
...The Federal Reserve has been hammering home that it sees any spike in price pressures as
likely short-lived, and that it's willing to let inflation run above target for a period as the
economy revives.
... ... ...
... Inflation worries have been mounting against a backdrop of soaring commodities prices --
copper, for example, set a record high Friday. It's all happening as lawmakers in Washington
debate another massive fiscal-stimulus package.
...
Korapaty calls the outlook for inflation "benign." His view is that the market is overly
optimistic with its inflation assumptions, with the greatest mismatch to be found on the three-
and five-year horizon. At roughly 2.75% and 2.7%, respectively, those rates are around 20 to 30
basis points higher than they should be, in his estimate.
... ... ...
...Treasury Secretary Janet Yellen stirred markets by saying interest rates will likely rise
as government spending swells and the economy achieves faster growth. She walked back the
remarks hours later.
... "Because we think front-end rates are pricing in a more aggressive Fed path than we
believe, we do like shorter-dated nominal bonds, and think there's value there," she said.
Yves here. Mark Blyth is such a treat. How can you not be a fan of the man who coined "The
Hamptons are not a defensible position"? Even though he's not always right, he's so incisive
and has such a strong point of view that his occasional questionable notions serve as fodder
for thought. And I suspect he'll be proven correct on his topic today, the inflation bugaboo.
Yves here. Mark Blyth is such a treat. How can you not be a fan of the man who coined "The
Hamptons are not a defensible position"? Even though he's not always right, he's so incisive
and has such a strong point of view that his occasional questionable notions serve as fodder
for thought. And I suspect he'll be proven correct on his topic today, the inflation bugaboo.
Even though he's not always right, he's so incisive and has such a strong point of view that
his occasional questionable notions serve as fodder for thought. And I suspect he'll be proven
correct on his topic today, the inflation bugaboo. Even though he's not always right, he's so
incisive and has such a strong point of view that his occasional questionable notions serve as
fodder for thought. And I suspect he'll be proven correct on his topic today, the inflation
bugaboo. By Paul Jay.
... ... ...
Paul Jay
And is the idea that inflation is about to come roaring back one of the stupid
ideas that you're talking about? And is the idea that inflation is about to come roaring back
one of the stupid ideas that you're talking about?
Mark Blyth
I hope that it is, but I'm going to go with Larry on this one. He says it's
about one third chance that it's going to do this. I'd probably give it about one in ten, so
it's not impossible.
So, let's unpack why we're going to see this. Can you generate inflation? Yeah. I mean, dead
easy. Imagine your Turkey. Why not be a kind of Turkish pseudo dictator?
Why not fire the head of your central bank in an economy that's basically dependent on other
people valuing your assets and giving you money through capital flows? And then why don't you
fire the central bank head and put in charge your brother-in-law? I think it was his
brother-in-law. And then insist that low interest rates cure inflation. And then watch as the
value of your currency, the lira collapses, which means all the stuff you import is massively
expensive, which means that people will pay more, and the general level of all prices will go
up, which is an inflation. So, can you generate an inflation in the modern world? Sure, yeah.
Easy. Just be an idiot, right? Now, does this apply to the United States? No. That's where it
gets entirely different. So, a couple of things to think about (first). So, you mentioned that
huge number of 20 trillion dollars. Well, that's more or less about two thirds of what we threw
into the global economy after the global financial crisis, and inflation singularly failed to
show up. All those people in 2010 screaming about inflation and China dumping bonds and all
that. Totally wrong. Completely wrong. No central bank that's got a brass nameplate worth a
damn has managed to hit its inflation target of two percent in over a decade. All that would
imply that there is a huge amount of what we call "˜slack' in the economy. (Also) think
about the fact that we've had, since the 1990s, across the OECD, by any measure, full
employment. That is to say, most people who want a job can actually find one, and at the same
time, despite that, there has been almost no price pressure coming from wages, pushing on into
prices, to push up inflation. So rather than the so-called vertical Phillips curve, which most
of modern macro is based upon, whereby there's a kind of speed bump for the economy, and if the
government spends money, it can't push this curve out, all it can do is push it up in terms of
prices. What we seem to actually have is one whereby you can have a constant level of
inflation, which is very low, and any amount of unemployment you want from 2 percent to 12
percent, depending on where you look and in which time-period.
All of which suggests that at least for big developed, open, globalized economies, where
you've destroyed trade unions, busted up national product cartels, globally integrated your
markets, and added 600 million people to the global labor supply, you just can't generate
inflation very easily. Now, we're running, depending on how much actually passes, a two to five
trillion-dollar experiment on which theory of inflation is right. This one, or is it this one?
That's basically what we're doing just now. Larry's given it one in three that it's his one.
I'd give it one in ten his one's right. Now, if I may just go on just for a seconds longer.
This is where the politics of this gets interesting. Most people don't understand what
inflation is. You get all this stuff talked by economists and central bankers about inflation
and expectations and all that, but you go out and survey people and they have no idea what the
damn thing is. Think about the fact that most people talk about house price inflation.
There is no such thing as house price inflation. Inflation is a general rise in the level of
all prices. A sustained rise in the level of prices. The fact that house prices in Toronto have
gone up is because Canada stopped building public housing in the 1980s and turned it into an
asset class and let the 10 percent top earners buy it all and swap it with each other. That is
singularly not an inflation. So, what's going to happen coming out of Covid is there will be a
big pickup in spending, a pickup in employment. I think it's (going to be) less than people
expect because the people with the money are not going to go out and spend it because they have
all they want already. There are only so many Sub-Zero fridges you can buy. Meanwhile, the
bottom 60 percent of the income distribution are too busy paying back debt from the past year
to go on a spending spree, but there definitely will be a pickup. Now, does that mean that
there's going to be what we used to call bottlenecks? Yeah, because basically firms run down
inventory because they're in the middle of a bloody recession. Does it mean that there are
going to be supply chain problems? Yes, we see this with computer chips. So, what's going to
happen is that computer chips are going to go up in price.
So, lots of individual things are going to go up in price, and what's going to happen is
people are going to go "there's the inflation, there's that terrible inflation," and it's not.
It's just basically short-term factors that will dissipate after 18 months. That is my bet. For
Larry to be right what would have to be true?
That we would have to have the institutions, agreements, labor markets and product markets
of the 1970s. We don't.
... ... ...
So, I just don't actually see what the generator of inflation would be. We are not Turkey
dependent on capital imports for our survival with a currency that's falling off a cliff. That
is entirely different. That import mechanism, which is the way that most countries these days
get a bit of inflation. That simply doesn't apply in the U.S. So, with my money on it, if I had
to bet, it's one in 10 Larry's right, rather one in 3.
Paul Jay
The other point he raises, and we talked a little bit about this in a previous
interview, but let's revisit it, is that the size of the American debt, even if it isn't
inflationary at some point, creates some kind of crisis of confidence in the dollar being the
reserve currency of the world, and so this big infrastructure spending is a problem because of
that. That's part of, I believe, one of his arguments. The other point he raises, and we talked
a little bit about this in a previous interview, but let's revisit it, is that the size of the
American debt, even if it isn't inflationary at some point, creates some kind of crisis of
confidence in the dollar being the reserve currency of the world, and so this big
infrastructure spending is a problem because of that. That's part of, I believe, one of his
arguments.
Mark Blyth
The way political economists look at the financial plumbing, I think, is
different to the way that macro economists do. We see it rather differently. The first thing
is, what's your alternative to the dollar unless you're basically going to go all-in on gold or
bitcoin? And good luck with those. If we go into a crushing recession and our bond market
collapses, don't think that Europe's going to be a safe haven given that they've got half the
US growth rate. And we could talk about what Europe's got going on post-pandemic because it's
not that good. So what's your alternative (to the Dollar)? Buy yen? No, not really. You're
going to buy Chinese assets? Well, good luck, and given the way that their country is being run
at the moment, if you ever want to take your capital out. I'm not sure that's going to work for
you, even if you could. So you're kind of stuck with it. Mechanically there's another problem.
All of the countries that make surpluses in the world make surpluses because we run deficits.
One has to balance the other. So, when you're a Chinese firm selling to the United States,
which is probably an American firm in China with Chinese subcontractors selling to the United
States, what happens is they get paid in dollars. When they receive those dollars in China,
they don't let them into the domestic banking system. They sterilize them and they turn them
into the local currency, which is why China has all these (dollar) reserves. That's their
national savings. Would you like to burn your reserves in a giant pile? Well, one way to do
that would be to dump American debt, which would be equivalent to burning your national
savings. If you're a firm, what do you do? Well, you basically have to use dollars for your
invoicing. You have to use dollars for your purchasing, and you keep accumulating dollars,
which you hand back to your central bank, which then hands you the domestic currency. The
central bank then has a problem because it's got a liability " (foreign) cash rather than an
asset. So, what's the easiest asset to buy? Buy another 10-year Treasury bill, rinse and
repeat, rinse and repeat. So, if we were to actually have that type of crisis of confidence,
the people who would actually suffer would be the Germans and the Chinese, because their
export-driven models only makes sense in terms of the deficits that we run. Think of it as kind
of monetarily assured destruction because the plumbing works this way. I just don't see how you
can have that crisis of confidence because you've got nowhere else to take your confidence.
Paul Jay
If I understand it correctly, the majority of American government debt is held
by Americans, so it's actually really the wealth is still inside the United States. I saw a
number, this was done three or four years ago, maybe, but I think it was Brookings Institute,
that assets after liabilities in private hands in the United States is something like 98
trillion dollars. So I don't get where this crisis of confidence is going to come any time
soon. If I understand it correctly, the majority of American government debt is held by
Americans, so it's actually really the wealth is still inside the United States. I saw a
number, this was done three or four years ago, maybe, but I think it was Brookings Institute,
that assets after liabilities in private hands in the United States is something like 98
trillion dollars. So I don't get where this crisis of confidence is going to come any time
soon.
Mark Blyth
Basically, if your economy grows faster (than the rest of the world because
you are) the technological leader, your stock markets grows faster than the others. If you're
an international investor, you want access to that. (That ends) only if there were actual real
deep economic problems (for the US), like, for example, China invents fusion energy and gives
it free to the world. That would definitely screw up Texas. But short of that, it's hard to see
exactly what would be these game-changers that would result in this. And of course, this is
where the Bitcoin people come in. It's all about crypto, and nobody has any faith in the
dollar, and all this sort of stuff. Well, I don't see why we have faith in something (like that
instead . I think it was just last week. There wasn't much reporting on this, I don't know if
you caught this, but there were some twenty-nine-year-old dude ran a crypto exchange. I can't
remember where it was. Maybe somewhere like Turkey. But basically he had two billion in crypto
and he just walked off with the cash. You don't walk off with the Fed, but you could walk off
with a crypto exchange. So until those problems are basically sorted out, the notion that we
can all jump into a digital currency, which at the end of the day, to buy anything, you need to
turn back into a physical currency because you don't buy your coffee with crypto, we're back to
that (old) problem. How do you get out of the dollar? That structural feature is incredibly
important.
Paul Jay
So there's some critique of the Biden infrastructure plan and some of the
other stimulus, coming from the left, because, one, the left more or less agrees with what you
said about inflation, and the critique is that it's actually not big enough, and let me add to
that. I'm kind of a little bit surprised, maybe not anymore, but Wall Street on the whole, not
Larry Summers and a few others, but most of them actually seem quite in support of the Biden
plan. You don't hear a lot of screaming about inflation from Wall Street. Maybe from the
Republicans, but not from listening to Bloomberg Radio. So there's some critique of the Biden
infrastructure plan and some of the other stimulus, coming from the left, because, one, the
left more or less agrees with what you said about inflation, and the critique is that it's
actually not big enough, and let me add to that. I'm kind of a little bit surprised, maybe not
anymore, but Wall Street on the whole, not Larry Summers and a few others, but most of them
actually seem quite in support of the Biden plan. You don't hear a lot of screaming about
inflation from Wall Street. Maybe from the Republicans, but not from listening to Bloomberg
Radio.
Mark Blyth
You don't even hear a lot of screaming about corporate taxes, which is
fascinating, right? You'd think they'd be up in arms about this? I actually spoke to a business
audience recently about this, and I kind of did an informal survey and I said, "why are you
guys not up in arms about this?" And someone that was on the call said, "well, you know, the
Warren Buffet line about you find out who's swimming naked when the tide goes out? What if a
lot of firms that we think are great firms are just really good at tax optimization? What if
those profits are really just contingent on that? That would be really nice to know this
because then we could stop investing in them and invest in better stuff that actually does
things." You don't even hear a lot of screaming about corporate taxes, which is fascinating,
right? You'd think they'd be up in arms about this? I actually spoke to a business audience
recently about this, and I kind of did an informal survey and I said, "why are you guys not up
in arms about this?" And someone that was on the call said, "well, you know, the Warren Buffet
line about you find out who's swimming naked when the tide goes out? What if a lot of firms
that we think are great firms are just really good at tax optimization? What if those profits
are really just contingent on that? That would be really nice to know this because then we
could stop investing in them and invest in better stuff that actually does things."
Paul Jay
And pick up the pieces of what's left of them for a penny if they have to go
down. And pick up the pieces of what's left of them for a penny if they have to go down.
Mark Blyth
Absolutely. Just one thought that we'll circle back, to the left does not
think it's big enough, etc. Well, yes, of course they wouldn't, and this is one of those things
whereby you kind of have to check yourself. I give the inflation problem a one in ten. But what
I'm really dispassionately trying to do is to look at this as just a problem. My political
preferences lie on the side of "˜the state should do more.' They lie on the side of
"˜I think we should have higher real wages.' They lay on the side that says that
"˜populism is something that can be fixed if the bottom 60 percent actually had some kind
of growth.' So, therefore, I like programs that do that. Psychologically, I am predisposed
therefore to discount inflation. I'm totally discounting that because that's my priors and I'm
really deeply trying to check this. In this debate, it's always worth bearing in mind, no one's
doing that. The Republicans and the right are absolutely going to be hell bent on inflation,
not because they necessarily really believe in (inevitable) inflation, (but) because it's a
useful way to stop things happening. And then for the left to turn around and say, well, it
isn't big enough, (is because you might as well play double or quits because, you know, you've
got Biden and that's the best that's going to get. So there's a way in which when we really are
trying to figure out these things, we kind of have to check our partisan preferences because
they basically multiply the errors in our thinking, I think.
Paul Jay
Now, earlier you said that one of the main factors why inflation is
structurally low now, I don't know if you said exactly those words. Now, earlier you said that
one of the main factors why inflation is structurally low now, I don't know if you said exactly
those words.
Mark Blyth
I would say that yes. I would say that yes.
Paul Jay
Is the weakness of the unions, the weakness of workers in virtually all
countries, but particularly in the U.S., because it matters so much. That organizing of workers
is just, they're so unable to raise their wages over decades of essentially wages that barely
keep up with inflation and don't grow in any way, certainly not in any relationship to the way
productivity has grown. So we as progressives, well, we want workers to get better organized.
We want stronger unions. We want higher wages, but we want it without inflation. Is the
weakness of the unions, the weakness of workers in virtually all countries, but particularly in
the U.S., because it matters so much. That organizing of workers is just, they're so unable to
raise their wages over decades of essentially wages that barely keep up with inflation and
don't grow in any way, certainly not in any relationship to the way productivity has grown. So
we as progressives, well, we want workers to get better organized. We want stronger unions. We
want higher wages, but we want it without inflation.
Mark Blyth
And it's a question of how much room you have to do that. I mean,
essentially, if you quintuple the money supply, eventually prices will have to rise"¦but
that depends upon the velocity of money which has actually been collapsing. So maybe you'd have
to do it 10 times. There's interesting research out of London, which I saw a couple of weeks
ago, that basically says you really can't correlate inflation with increases in the money
supply. It's just not true. It's not the money that's doing it. It's the expectations. That
then begs the question, well, who's actually paying attention if we all don't really understand
what inflation is? So I tend to think of this as basically a kind of a physical process. It's
very easy to understand if your currency goes down by 50 percent and you're heavily dependent
on imports. You're import (prices) go up. All the prices in the shops are going to go up.
That's a mechanism that I can clearly identify that will generate rising prices. If you have
big unions, if you have kind of cartel-like vertically integrated firms that control the
national market, if you have COLA contracts. If you have labor able to do what we used to call
leapfrogging wage claims against other unions, if this is all institutionally and legally
protected, I can see how that generates inflation, that is a mechanism I can point to. That
doesn't exist just now. Let's unpack this for a minute. The sort of fundamental theoretical
assumption on this is based is some kind of "˜marginal productivity theory of wages.' In
a perfectly free market with free exchange, in which we don't live, what would happen is you
would hire me up to the point that my marginal product is basically paying off for you, and
once it produces zero profits, that's kind of where my wages end. I'm paid up to the point that
my marginal product is useful to the firm. This is not really a useful way of thinking about it
because if you're the employer and I'm the worker, and I walk up to you and say, hey, my
marginal productivity is seven, so how about you pay me seven bucks? You just say, shut up or
I'll fire you and get someone else. Now, the way that we used to deal with this was a kind of
"˜higher than your outside option,' on wages. The way we used to think about this was
"why would you pay somebody ten bucks at McDonald's?" Because then you might actually get them
to and flip the burgers because they're outside option is probably seven bucks, and if you pay
them seven bucks, they just won't show up. So we used to have to pay workers a bit more. So
that was, in a sense, (workers) claiming (a bit of the surplus) from productivity. But now what
we've done, Suresh Naidu the economist was talking about this the other day, is we have all
these technologies for surveilling workers (instead of paying them more). So now what we can do
is take that difference between seven and ten and just pocket it because we can actually pay
workers at your outside option, because I monitor everything you do, and if you don't do
exactly what I say I'll fire you, and get somebody else for seven bucks. So all the mechanisms
for the sharing of sharing productivity, unions, technology, now lies in the hands of
employers. It's all going against labor. So (as a result) we have this fiction that somehow
when the economy grows, our productivity goes up, and workers share in that. Again, what's the
mechanism? Once you take out unions and once you weaponize the ability of employers to extract
surplus through mechanisms like technology, franchising, all the rest of it, then it just tilts
the playing field so much that we just don't see any increase in wages. (Now) let's bring this
back to inflation. Unless you see systematic (and sustained) increases in the real wage that
increases costs for firms to the point that they need to push on prices, I just don't see the
mechanism for generating inflation. It just isn't there. And we've underpaid the bottom 60
percent of the U.S. labor market so long it would take a hell of a lot of wage inflation to get
there, with or without unions.
Paul Jay
Yeah, what's that number, that if the minimum wage was adjusted for inflation
and it was what the minimum wage was, what, 30 years ago, the minimum wage would be somewhere
between 25 and 30 bucks, and that wasn't causing raging inflation. Yeah, what's that number,
that if the minimum wage was adjusted for inflation and it was what the minimum wage was, what,
30 years ago, the minimum wage would be somewhere between 25 and 30 bucks, and that wasn't
causing raging inflation.
Mark Blyth
And there is that RAND study from November 2020 that was adeninely entitled, "˜Trends
in Income 1979 to 2020,' and they calculated, and I think this is the number, but even if I'm
off, the order of magnitude is there, that transfers, because of tax and regulatory changes,
from the 90th percentile of the distribution to the 10 percentile, totalled something in the
order of $34 trillion. That's how much was vacuumed up and practically nothing trickled down.
So when you consider that as a mechanism of extraction, why are worrying about inflation
(from wages)? The best story on inflation is actually Charles Goodhart's book that came out
last year. We got a long period of low inflation because of global supply chains, and because
of demographic trends. It's a combination of global supply chains, Chinese labor, and
demographics all coming together to basically push down labor costs, and that's why you get
this long period of deflation, which leads to rising profits and zero inflation. A perfectly
reasonable way of explaining it. And his point is that, well, that's coming to an end. The
demographics are shifting, or shrinking. We're going back to more closed economies. You're
going to create this inflation problem again. OK, what's the timeline on that? About 20
years? A few years ago, we were told we had 12 years to fix the climate problem or we're in
deep shit. If we have to face the climate problem versus single to double-digit inflation,
I'm left wondering what is the real problem here? And there is that RAND study from November
2020 that was adeninely entitled, "˜Trends in Income 1979 to 2020,' and they
calculated, and I think this is the number, but even if I'm off, the order of magnitude is
there, that transfers, because of tax and regulatory changes, from the 90th percentile of the
distribution to the 10 percentile, totalled something in the order of $34 trillion. That's
how much was vacuumed up and practically nothing trickled down. So when you consider that as
a mechanism of extraction, why are worrying about inflation (from wages)? The best story on
inflation is actually Charles Goodhart's book that came out last year. We got a long period
of low inflation because of global supply chains, and because of demographic trends. It's a
combination of global supply chains, Chinese labor, and demographics all coming together to
basically push down labor costs, and that's why you get this long period of deflation, which
leads to rising profits and zero inflation. A perfectly reasonable way of explaining it. And
his point is that, well, that's coming to an end. The demographics are shifting, or
shrinking. We're going back to more closed economies. You're going to create this inflation
problem again. OK, what's the timeline on that? About 20 years? A few years ago, we were told
we had 12 years to fix the climate problem or we're in deep shit. If we have to face the
climate problem versus single to double-digit inflation, I'm left wondering what is the real
problem here? The best story on inflation is actually Charles Goodhart's book that came out
last year. We got a long period of low inflation because of global supply chains, and because
of demographic trends. It's a combination of global supply chains, Chinese labor, and
demographics all coming together to basically push down labor costs, and that's why you get
this long period of deflation, which leads to rising profits and zero inflation. A perfectly
reasonable way of explaining it. And his point is that, well, that's coming to an end. The
demographics are shifting, or shrinking. We're going back to more closed economies. You're
going to create this inflation problem again. OK, what's the timeline on that? About 20
years? A few years ago, we were told we had 12 years to fix the climate problem or we're in
deep shit. If we have to face the climate problem versus single to double-digit inflation,
I'm left wondering what is the real problem here? The best story on inflation is actually
Charles Goodhart's book that came out last year. We got a long period of low inflation
because of global supply chains, and because of demographic trends. It's a combination of
global supply chains, Chinese labor, and demographics all coming together to basically push
down labor costs, and that's why you get this long period of deflation, which leads to rising
profits and zero inflation. A perfectly reasonable way of explaining it. And his point is
that, well, that's coming to an end. The demographics are shifting, or shrinking. We're going
back to more closed economies. You're going to create this inflation problem again. OK,
what's the timeline on that? About 20 years? A few years ago, we were told we had 12 years to
fix the climate problem or we're in deep shit. If we have to face the climate problem versus
single to double-digit inflation, I'm left wondering what is the real problem here? OK,
what's the timeline on that? About 20 years? A few years ago, we were told we had 12 years to
fix the climate problem or we're in deep shit. If we have to face the climate problem versus
single to double-digit inflation, I'm left wondering what is the real problem here? OK,
what's the timeline on that? About 20 years? A few years ago, we were told we had 12 years to
fix the climate problem or we're in deep shit. If we have to face the climate problem versus
single to double-digit inflation, I'm left wondering what is the real problem here? A few
years ago, we were told we had 12 years to fix the climate problem or we're in deep shit. If
we have to face the climate problem versus single to double-digit inflation, I'm left
wondering what is the real problem here? A few years ago, we were told we had 12 years to fix
the climate problem or we're in deep shit. If we have to face the climate problem versus
single to double-digit inflation, I'm left wondering what is the real problem here?
Great piece. He put to words something I've thought about but couldn't articulate: if
wages are stagnant, how could you possibly get broad based inflation?
There is no upward pressure on labor costs anywhere in the economy. The pressures are
all downward.
You would need government spending in the order of magnitudes to drive up wages. Or
release from a lot of debt, like student loan forgiveness or what have you.
I'm not sure you need wage growth to get inflation. As Blyth notes, most of the time
inflation is a currency or a monetary issue. In the 70s, it was initially an oil thing " and
oil flows through a lot of products " and then really went crazy only when Volker started
raising interest rates. I don't think there is an episode of "wage-push" inflation in
history. (The union cost-of-living clauses don't "cause" inflation, they only adjust for past
inflation. If unions can cause wage-push inflation, someone needs to explain how they did
this in the late 70s, when they were much less powerful and unemployment was substantially
higher, than in the 1950s.) One could argue that expansive fiscal policy might drive
inflation but, even then, the mechanism is through price increases, not wage increases. You
do need consumption but that can always come from the wealthy and further debt immiseration
of the rest of us.
Blythe is one of those guys who is *almost* correct. For example he declares that
expectations drive inflation. What about genuine shortages? The most recent U.S. big inflation
stemmed from OPEC withholding oil"a shortage we answered by increasing the price ($1.75/bbl in
1971 -> $42/bbl in 1982). In Germany, the hyperinflation was driven by the French invading
the Ruhr, something roughly like shutting down Ohio in the U.S. A shortage of goods resulted.
Inflation! In Zimbabwe, the Rhodesian (white) farmers left, and the natives who took over their
farms were not producing enough food. A shortage of food, requiring imports, resulted.
Inflation!
I guess you could say people in Zimbabwe "expected" food"¦but that's not standard
English.
JFYI, Blythe is not a fan of MMT. He calls it "annoying." Yep, that's his well-reasoned
argument about how to think about it.
As a *political* economist, he may have a point in saying MMT is a difficult political sell,
but otherwise, I'd say the guy is clueless about it.
Inflation isn't caused by the amount of money in the economy but by the amount of
*spending*.
Like the other commenter, I've wondered this too"if wages have been stagnant for a
generation, then how are we going to get inflation? By what mechanism? It seems like almost all
of the new money just adds a few zeros to the end of the bank account balances of the already
rich (or else disappears offshore).
Still, you just cannot people to understand this because of houses, health care and
education. One might even argue that inflated house and education prices are helping keep
inflation down. If more and more of our meager income is going to pay for these fixed
expenditures, then there's no money left over to pay increased prices for goods and services.
So there's no room to increase the prices of those things. As Michael Hudson would point out,
it's all sucked away for debt service, meaning a lot of the "money printing" is just
subsidizing Wall Street.
But if you pay attention to the internet, for years there have been conspiracy theories all
across the political spectrum that we were really in hyperinflation and the government just
secretly "cooked the books" and manipulated the statistics to convince us all it wasn't
happening. Of course, these conspiracy theories all pointed to the cost of housing, medicine
and education as "proof" of this theory (three things which, ironically, didn't go up
spectacularly during the Great Inflation of the 1970's). Or else they'd point to gas prices,
but that strategy lost it's potency after 2012. Or else they'd complain that their peanut
butter was secretly getting smaller, hiding the inflation (shrinkflation is real, or course,
but it's not a vast conspiracy to hide price increases from the public).
I'm convinced that this was the ground zero for the kind of anti-government conspiratorial
thinking that's taken over our politics today. These ideas was heavy promoted by libertarians
like Ron Paul starting in the nineties, helped by tracts like "The Creature from Jekyll
Island," which argued that the Fed itself was one big conspiracy. I've seen plenty of people
across the political spectrum"including on the far Left"take all of this stuff as gospel.
So if the government is secretly hiding inflation and the Fed itself is a grand conspiracy
to convince us that paper is money (rather than "real" money, aka gold), then is it that hard
to believe they're manipulating Covid statistics and plotting to control us all by forcing us
all to wear masks and get vaccinated? In my view, it all started with inflation paranoia.
Blyth explains why housing inflation isn't really a sign of hyperinflation. But the average
"man on the street" just doesn't get it. To Joe Sixpack, not counting some of the things he has
to pay for is cheating. So are "substitutions" like ground beef when steak gets too pricey, or
a Honda Civic for a Toyota Camry, for example. The complexity of counting inflation is totally
lost on them, making them vulnerable to conspiratorial thinking. Since Biden was elected, the
ZOMG HyPeRiNfLaTiOn!!&%! articles are ubiquitous.
Does anyone have a good way of explaining this to ordinary (i.e. non-economically literate)
people? I'd love to hear it! Thanks.
"There is no such thing as house price inflation. Inflation is a general rise in the level
of all prices. A sustained rise in the level of prices. The fact that house prices in Toronto
have gone up is because Canada stopped building public housing in the 1980s and turned it into
an asset class and let the 10 percent top earners buy it all and swap it with each other. That
is singularly not an inflation."
Maybe I am totally off but, I would say"¦. By your definition, inflation does not exist
in the economic terminology as inflation only exists if generally all prices go up and a
singularity of soaring house prices and education and healthcare do not constitute an inflation
because the number of things inflating do not meet some unknown number of items needed for a
general rise in all prices to create an inflation.
What I read you to say is that if Labor prices go up " that could lead to inflation " but if
house prices go up (as they have) that is not inflation.
Hypothetically " if labor prices do not go up and the "˜nessesities of living' prices go
up (Housing and Med) " would you not have an inflation in the cost of living? " I am convinced
that economists and market experts try to claim that the economy and markets are seperate and
distinct from humans as a science " and that Political science has nothing to do with what they
present. Yet, humans are the only species to have formed the markets and money we all
participate and, the only species, therefore, to have an exclusive asset ownership, indifferent
to any other species " IE " if you can't pay you can't play and have no say.
I submit that one or a few asset price increases that are combined with labor price stasis(the
actual money outlayed for those asset price increased products not moving up) " especially one
that is a basic to living (shelter) and not mobile (like money) is inflation " Land prices
going up will generally increase the prices of all products created thereon.
I think there's two things going on here. There's different inflation indicators, and asset
prices are by definition never a part of inflation
The main indicator of CPI has so many different things in it that the inflation of any one
item is going to have little effect on it. But you can look up BEA's detailed GDP deflator to
see inflation for more specific things like housing expenses (rent) or transportation.
So back to real estate/land: real estate and land are like the stock market. They aren't
subject to inflation. They are subject to appreciation. There is somewhat of a feedback effect
for sure though: Increased real estate prices can drive up inflation. Rent for sure gets driven
up, but also any other good that's built domestically if the owners of capital need to pay more
to rent their factories/farms etc.
As noted in the article though, capitalists can simply move their production overseas so
there's a limit to how much US land appreciation can filter into inflation. Its definitely
happening with rent as housing can't be outsourced. But rent is only one part of overall
inflation
The point he was making is that the price change in housing is the result of a policy
restructuring of the market: no new public housing and financial deregulation.
The price of food is similarly a response to policy changes: industry consolidation and
resulting price setting to juice financial profits.
The point is distinguishing between political forces and market forces. The former is
socially/politically determined while the latter has to do with material realities within a
more or less static market structure.
This is a distinction essential to making good policy but useless from a cost of living
perspective.
One could prevent crossover for awhile, but eventually certain policies are going to affect
certain markets. The policy of giving the rich money drives up asset prices, real estate is a
kind of asset, eventually rising real estate costs affect the market the proles enter when they
have to buy or rent real estate.
If state institutions tell them there is no inflation, the proles learn that the state
institutions lie because they know better from direct experience. Once that gap develops, it's
as with personal relationships: when trust is broken, it is very hard to replace. Once belief
in state institutions is lost, significant political effects ensue. Often they are rather
unpleasant.
Blyth pointed to the lack of systemic drivers of price increases, and how the traditional
ones have disappeared. I think one that he missed, that results in a disconnect with the
evidence of price increases across multiple sectors, is the neoliberal infestation.
Rent-sucking intermediaries have imposed themselves into growing swaths of the mechanisms of
survival, hollowed out productive capacity, and crapified artifacts to the extent that their
value is irredeemably reduced. This is a systemic cause for reduced buying power, i.e.
inflation, but it is not a result of monetary or fiscal policy, but political and ideological
power.
> . . . The fact that house prices in Toronto have gone up is because Canada
stopped building public housing in the 1980s and turned it into an asset class and let the 10
percent top earners buy it all and swap it with each other.
That is a total load of baloney. The eighties were a time when the Conservative government
came up with the foreign investor program and it was people from Hong Kong getting out before
the British hand over to China in 1997.
I was there, trying to save for a house and for every buck saved the houses went up twenty.
I finally pulled the plug in 89 when someone subdivided a one car garage from their house and
sold it for a small fortune. The stories of Hong Kongers coming up to people raking their yard
and offering cash well above supposed market rates and the homeowner dropping their rakes and
handing over the keys were legendary.
It's still that way except now they come from mainland China, CCP members laundering their
loot.
Any government that makes domestic labor compete with foreign richies for housing is
mendacious.
When a Canadian drug dealer "saves up" a million to buy a house and the RCMP get wind of it,
they lose the house. When a foreigner show up at the border with a million, it's all clean.
Many people who talk about avoiding inflation are speaking euphemistically about preventing
wage growth, and only that; dog whistles, clearly heard by the intended audience. Yet they are
rarely confronted directly on this point. Instead we hear that they don't understand what the
word inflation means, and Mark seems to be saying these euphamists (eupahmites?) needn't be so
concerned because wages will not go up anyway. If so, what we are talking about here is merely
helping workers stay afloat without making any fundamental changes. Well, both sides can agree
to that as usual. Guess I'm just worn out by this kind of thing.
The thing that I like about Mark Blyth is how he cuts to the chase and does not waffle. Must
be his upbringing in Scotland I would say. The revelation that the US minimum wage should be
about $25-30 is just mind-boggling in itself. But in that talk he unintentionally put a value
on how much is at stake in making a fairer economic system and it works out to be about $34
trillion. That is how much has been stolen by the upper percentile and why workers have gone
from having a job, car, family & annual vacation to crushing student debt, a job at an
Amazon fulfillment center and a second job being an Uber driver while living out of car.
That $25-30 wage was keeping up with inflation , if it were keeping up with
productivity it would be, IIRC, nearly twice that. It is interesting to see a dollar
figure put on the amount you can reap after a generation or two of growing a middle class, by
impoverishing it.
But now what we've done, Suresh Naidu the economist was talking about this the other day,
is we have all these technologies for surveilling workers (instead of paying them
more) . So now what we can do is take that difference between seven and ten and just
pocket it because we can actually pay workers at your outside option, because I monitor
everything you do, and if you don't do exactly what I say I'll fire you, and get somebody
else for seven bucks.
Praise be the STEM workers. Without them where would the criminal corporate class be?
Every time I listen to the news (without barfing) the story is, we need moar STEM workers,
and I ask myself, what do they do for a living?
If that kind of tidbit excites you:
Before going into economics, Alan Greenspan was a sax and clarinet player who played with the
likes of Stan Getz and Quincy Jones.
And Michael Hudson studied piano and conducting .
Do failed musicians gravitate to economics? Perhaps for the same reason as my bank manager, a
failed bass player (honors graduate from Classy Cdn U in double bass), they see the handwriting
on the wall. He told me his epiphany came when he and his band-mates were trying to make
cup-o-noodles with tap water in a room over the pub in Thunder Bay where they were playing.
The mental gymnastics to get to "everything needed to survive costs more but wages have not
gone up in decades so therefore its all transitory and inflation does not exist" must be
painful. How high does the price for cat food have to get before we stop eating?
Yes! "The Hamptons are not a defensible position" ranks right up there with "It is easier to
imagine the end of the world than the end of (neoliberal) capitalism" by Mark Fisher (and F.
Jameson?).
Very good, Mark. This leads to the next Q. How do we maintain aggregate demand? The rich
guys increasingly Hoover everything up and pay no taxes. So, there is no T. Is the only way to
get cash and avoid deflation deficit spending by the G? There is no I worth a damn. (X-M) is a
total drain on everything since it's all M in the US and no X. The deficits will have to go out
of sight in the future.
You say that there is no velocity of money. Is this because the more money pored into the
economy by the G, the more money the rich guys steal? So, there is a general collapse in C.
Maybe the work around for the rich guy theft is a $2,000 (sorry, $1,400) check every now and
then to the great unwashed. The poors can circulate it a couple of times before the rich guys
steal it. Seems like the macro-economists have a lot of "˜splainin' to do. Oh, right,
they are busy right now measuring the output gap.
I'd like to see Mark go into a discussion on the velocity of money. I remember the old timey
Keynesians lecturing about it, and that's all I remember. I'm guessing that it's related to the
marginal propensity to consume.
I may be getting a bit out over my skis, but the St. Louis Fed calculates the velocity of
money ( https://fred.stlouisfed.org/series/M2V ). It is
defined as
The velocity of money is the frequency at which one unit of currency is used to purchase
domestically- produced goods and services within a given time period. In other words, it is the
number of times one dollar is spent to buy goods and services per unit of time. If the velocity
of money is increasing, then more transactions are occurring between individuals in an
economy.
So as velocity slows, fewer transactions happen. Based on the linked chart, the peak
velocity was 2.2 in mid-1997. In Q1 2021, it was 1.12. By my understanding, although the money
supply continues to increase, the money isn't flowing through the economy in the way it was
over the last 30 years (or even 10 years ago).
It's beyond my level of understanding to say with any certainty as to why the slowdown in
velocity has occurred, but I speculate it's directly related to the ever-growing inequality in
the US economy and the ongoing rentier-ism that Dr. Hudson discusses. [simplistically, if Jeff
Bezos has $1.3 billion more on Monday than on Friday, that money will flow virtually nowhere.
If each of Amazon's employees equally shared that $1.3 billion (about $1,000 each), the
preponderance of the money would flow into the economy in short order].
I've always speculated that money velocity is one of the key indicators of the stagnant
economy since 2008. It certainly has coincided with the dramatic increase in wealth in the top
fraction (not the 1% but the 0.001%) of the US population.
What Blythe has laid out is not a tale about inflation or money, but a tale about power.
If money goes to the non-elite, you get inflation. If it goes to the elite, you don't get
inflation.
If you are a country with little control of your resources (not lack of resources, but control)
and/or loans (think IMF)/debt (think war reparations) that give people with little interest in
whether you live or die control over your countries' finances, you can be prone to inflation or
even hyperinflation.
Yeah, I figured out a long time ago that none of this is any "natural economic law" because
there is no such thing as "nature" in economics. Inflation is all about political decisions and
perceptions.
And I saw this on YouTube a couple of days ago"¦and I still can't think of anything
around me that hasn't gone up on price.
This is a good response to Summers. But I have a quibble and a concern.
My quibble is that he offers no theory of inflation except implicitly aggregate supply
exceeding aggregate demand and there is nothing but hand-waving regarding what he is referring
to that he feels has a one chance in ten of happening versus Summers one in three. A second
part of this quibble is: what does it mean for inflation to "come roaring back." I assume it
means more than just a short-term adjustment to a shot of government spending and gifting. I
believe if he thought this through he would have to conclude that without changes in the
current structure of the global economy there is no way for this to happen. That really is the
case he has made. With labor beaten down not only in the US but worldwide inflation will not
come roaring back, period. That is unless there is a chance either that a labor renewal is a
near-term possibility. I doubt he believes this. Or does he believe there is another way for
inflation to roar back? If so, what is that way, what is the theory behind it?
A more fundamental concern is the part where he relies on marginal productivity theory when
discussing employment and exploitation. Conceptually that far from Marx's fundamental
distinction between labor and labor power.
Hyperinflation doesn't seem to be possible in this age of digital money no matter how much
you conjure up because nobody notices the extreme amount of monies around all of the sudden as
the average joe isn't in the know.
Used houses are always appreciating in value, but none dare call it inflationary, more of a
desired outcome in income advancement if you own a domicile.
There were no shortages of anything in the aftermath of the GFC, and now for want of a
semiconductor, a car sale was lost. Everything got way too complex, and we'll be paying the
price for that.
I think the inflation to come won't be caused by a lack of faith in a given country's money,
but the products and services it enabled us to purchase.
""¦and now for want of a semiconductor, a car sale was lost"¦."
Sometimes car sales are lost because the price of cars has gone up (new and used)"¦just
don't call it inflation"¦
I'm going to let some more time pass, but stimulus or not, we went from all economic
problems being laid at the feet of Covid to now moving on to "shortages"
everywhere"¦
Just enought to make you go"¦hmmmm"¦.unti more time passes.
Used houses always appreciate " or is it that they appreciate due to a combination of
inflation in income over time and the dramatic decrease in interest rates over the last 20
years?
A very quick back of the envelope calc (literally " and all number are approximate):
In June 2000, median US income was $40,500; 30 yr mortgage rate was 8.25%. 28% of monthly
income = $945. That supports a mortgage (30 yr fixed, P&I only " no tax, insurance, etc) of
roughly $125,000.
In June 2005, median US income was $44,000; 30 yr mortgage rate was 5.5%. 28% of monthly
income = $1026. That supports a mortgage (30 yr fixed, P&I only " no tax, insurance, etc)
of roughly $180,000.
In June 2010, median US income was $49,500; 30 yr mortgage rate was 4.69%. 28% of monthly
income = $1155. That supports a mortgage (30 yr fixed, P&I only " no tax, insurance, etc)
of roughly $225,000.
In June 2015, median US income was $53,600; 30 yr mortgage rate was 4.00%. 28% of monthly
income = $1250. That supports a mortgage (30 yr fixed, P&I only " no tax, insurance, etc)
of roughly $260,000.
Finally, In June 2020, median US income was $63,000; 30 yr mortgage rate was 3.25%. 28% of
monthly income = $1470. That supports a mortgage (30 yr fixed, P&I only " no tax,
insurance, etc) of roughly $340,000.
And for fun, if you went to 40% of income in 2020 (payment only), a $2100 monthly payment
will cover nearly a $500,000 mortgage in 2020.
For the vast majority of home buyers, the price isn't the main consideration " it's how much
will it cost per month. So a small increase in median income (roughly 2% per year) combined
with dramatically lower interest rates can drive a HUGE increase in a mortgage " and ultimately
the price that can be paid for a house.
Can't say I really understand this sort of thing but saying rocketing house-prices is
"˜a singularity' rather than "˜house-price inflation' has to me echoes of the
Bourbon's "Bread too expensive? Let them eat cake." And Versailles wasn't a defensive position
either.
In my version of economics-for-the-under-tens you get inflation in two situations. First is
where enough folk have enough cash in their pockets for producers/manufacturers/retailers to
hike their prices without hitting their sales too much and secondly where there's a shortage of
stuff people want and/or need which leads to a bidding war. However I'd agree with Blyth that
neither condition exists now or seems likely to arise for a while, making a "˜spike' in
inflation unlikely.
I am a non-economist, and so my thoughts below may be wrong. However, here goes.
I would say we have had inflation. Roaring inflation. For the past 20 years of so.
Inflation in wages and ordinary costs of living? No, wages have been stagnant. Health care
has led the charge in cost of living increases, but most other living expense increases have
been low.
Inflation in asset prices? We have had massive inflation in the costs of residential housing
where I live.
20 years ago I could buy a 5 br, 3 bath home on a decent block in a good area close to
everything for $270,000 dollars. Sure it needed some renovation, but still"¦. Now to buy
that home it would cost me around $1,250,000. So that home has gone up in value by 500%. Man,
that is inflation.
As I understand it, asset inflation is not counted by governments in the GDP or CPI. It
appears that those who have most of the assets don't want this to be counted, by the very fact
that they control the politicians who control what is counted, and asset inflation isn't
counted in the economic data that the politicians rely upon to prove how prudent they are.
So if you want a day to day example of where all this free money is going, look at housing.
And also have a quick look at the insane increases in the worth of billionaires. They love all
this government spending which magically? seems to end up, via asset purchase and asset price
inflation, in their pockets.
Price is what one pays, value is what one gets. That house is roughly the same, so the value
has not changed, but the price has gone up by a factor of 5
Same with stawks. One share of Amazon stawk is $3,467.42 as of yesterday.
What is its value? If Bezos can work his tools ever harder, monitor them down to the
nanosecond and wring ever moar productivity out of them before throwing them in the tool
dumpster behind every Amazon warehouse, the value proposition is that someone else will believe
the stawk price should be even higher, at which point one can sell it at greater price for a
profit.
What is inflation? Good question. I'd say inflation is fear of monetary devaluation. Not
devaluation, just the fear of it. We'll never overcome this unease if we always deal in
numbers. Dollars, digits, whatever. We need to deal in commodities " let's call just about
everything we live with and use a "commodity". Including unpaid family help/care; and the more
obvious things like transportation. If we simply took a summary of all the necessary things we
need to live decent lives " but not translated into dollars because dollars have no sense " and
then provided these necessities via some government agency so that they were not "inflated" in
the process and thereby provided a stable society, then government could MMT this very easily.
Our current approach is so audaciously stupid it will never make sense let alone balance any
balance sheets. That's a feature, not a bug because it's the best way to steal a profit. The
best way to stop demand inflation or some fake scarcity or whatever is to provide the necessary
availability. That's where uncle Joe is gonna run headlong into a brick wall. He has spent his
entire life doing the exact opposite.
The figure for the upward transfer of wealth from the Rand Study was $50 trillion between
1975-2018. It was adjusted up by the authors from $47 trillion to bring it up to 2020
trends.
Now the interesting thing to me is this " look at the date of the publication in Time
magazine: Sept. 14, 2020, so right in the heart of campaign fever, and it never came up in the
debates, in the press"¦I didn't hear about it until Blyth made one of his appearances on
Jay's show with Rana Foroohar. Long after the election.
As long as 80% of Americans are head over heels in debt and 52% of 18-to-29-year-olds are
currently living with their parents, there never will be the wage inflation of the 1970s. A
majority of the people arrested for the Capitol riot had a history of financial trouble. The
elite blue zones in Washington State and Oregon that prospered from globalism are seeing a
spike in coronavirus cases. North American neoliberal governments have failed dismally. It is
intentional in order to exploit more wealth for the rich from the natural resources and
workers. If the mRNA vaccines do not control coronavirus variants, and a workable national
public health system is not implemented; succession and chaos will bring on Zimbabwe type
inflation.
There is a reason why Portland Oregon has been a center of unrest for the past year. The
Elite just do not want to see it. How can Janet Yellen deal with this? She can't. She is an
Insider. She was paid 7.2 million dollars in speaker and seminar fees in the last two years not
to.
Treasury Secretary walks backs comments she made earlier suggesting that
rates might rise
Treasury Secretary Janet Yellen said Tuesday she is neither predicting nor recommending that
the Federal Reserve raise interest rates as a result of President Biden's spending plans,
walking back her comments earlier in the day that rates might need to rise to keep the economy
from overheating.
"I don't think there's going to be an inflationary problem, but if there is, the Fed can be
counted on to address it," Ms. Yellen, a former Fed chairwoman, said Tuesday at The Wall Street
Journal's CEO Council Summit.
Ms. Yellen suggested earlier Tuesday that the central bank might have to raise rates to keep
the economy from overheating, if the Biden administration's roughly $4 trillion spending plans
are enacted.
The prices of raw materials used to make almost everything are skyrocketing, and the upward trajectory looks set to continue as
the world economy roars back to life.
From steel and copper to corn and lumber, commodities started 2021 with a bang, surging to levels not seen for years. The rally
threatens to raise the cost of goods from the lunchtime sandwich to gleaming skyscrapers. It’s also lit the fuse on the massive
reflation trade that’s gripped markets this year and pushed up inflation expectations. With the U.S. economy pumped up on fiscal
stimulus, and Europe’s economy starting to reopen as its vaccination rollout gets into gear, there’s little reason to expect
a change in direction.
JPMorgan Chase & Co. said this week it sees a continued rally in commodities and that the “reflation and reopening trade will
continue.†On top of that, the Federal Reserve and other central banks seem calm about inflation, meaning economies could be left
to run hot, which will rev up demand even more.
“The most important drivers supporting commodity prices are the global economic recovery and acceleration in the reopening phase,â€
said Giovanni Staunovo, commodity analyst at UBS Group AG. The bank expects commodities as a whole to rise about 10% in the next
year.
The Treasury market's inflation bulls seem to have gotten a green light from Federal Reserve
Chair Jerome Powell to double down on wagers that price pressures will only intensify in the
months ahead.
The renewed mojo for the reflation trade follows Powell's reaffirmation this week of the
central bank's intention to let the world's biggest economy run hot for some time as it
recovers from the pandemic. The Fed's unwavering commitment to ultra-loose policy in the face
of robust economic data is what caught traders' attention. It took on added significance as it
coincided with signs infections are ebbing again in the U.S., and as President Joe Biden
unveiled plans for trillions more in fiscal spending.
Investors eying all this aren't ready to give the Fed the benefit of the doubt in its
assessment that inflationary pressures will prove temporary. A key bond-market proxy of
inflation expectations for the next decade just hit the highest since 2013, and cash has been
pouring into the largest exchange-traded fund for Treasury Inflation-Protected Securities.
Globally, there's been a net inflow into mutual and exchange-traded inflation-linked debt funds
for 23 straight weeks, EPFR Global data show.
The Fed is stressing that inflation's upswing "is transitory, but we likely won't have
better clarity on this assertion until this initial economic wave from reopening has subsided,"
said Jake Remley, a senior portfolio manager at Income Research + Management, which oversees
$89.5 billion. "Inflation is a very difficult macro-economic phenomenon to predict in normal
times. The uncertainty of a global pandemic and a dramatic economic rebound" has made it even
harder.
Ten-year TIPS provide a reasonably priced insurance policy against inflation risk over the
coming decade, Remley said. The securities show traders are wagering annual consumer price
inflation will average about 2.4% through April 2031. The measure has roared back from the
depths of last year, when it dipped below 0.5% at one point in March.
Brian Sozzi ·
Editor-at-Large Sat, May 1, 2021, 6:05 PM
Billionaire Warren Buffett is joining the long list of executives saying serious levels of
inflation are starting to take hold as the U.S. economy roars back from the COVID-19
downturn.
Buffett called out much higher steel costs impacting Berkshire's housing and furniture
businesses.
"People have money in their pocket, and they pay higher prices... it's almost a buying
frenzy," Buffett said, noting that the economy is "red hot."
The Oracle of Omaha isn't alone in battling inflation at the moment from everything to
higher steel prices to runaway copper prices.
The number of mentions of "inflation" during first quarter earnings calls this month have
tripled year-over-year, the biggest jump dating back to 2004, according to fresh research from
Bank of America strategist Savita
Subramanian . Raw materials, transportation, and labor were cited as the
main drivers of inflation .
Subramanian's research found that the number of inflation mentions has historically led the
consumer price index by a quarter, with 52% correlation. In other words, Subramanian thinks
investors could see a "robust" rebound in inflation in coming months in the wake of the latest
round of C-suite commentary.
"Inflation is arguably the biggest topic during this earnings season, with a broad array of
sectors (Consumer/Industrials/Materials, etc.) citing inflation pressures," Subramanian
notes.
The world's biggest companies are taking action, just like Buffett at Berkshire.
Kleenex maker Kimberly-Clark said it will increase prices in the U.S. and Canada on the
majority of its consumer products due to "significant" commodity cost inflation. The percentage
increases will range from mid- to high-single digits and go into effect in June.
The threat of higher inflation: For the past three decades, U.S. inflation has been low,
leading some investors to discount it as a threat. Yet veteran investors will remember that in
the late 1970s inflation reached double-digit levels. For the 1973â€"1982 period,
the annual inflation rate averaged 8.7%. At that rate, a car that cost $20,000 would be priced
at $21,740 one year later. Five years later, the price of the same car would be $30,351. Of
course, it’s not just big-ticket items that are affected by inflation.
Virtually everything you buy costs more â€" from a gallon of milk to a pair of
running shoes.
It’s safe to assume that inflation will be a factor to one degree or
another during your investing lifetime. For this reason, it’s vital to
consider inflation when you calculate how your investments will grow with time.
Inflation is also an important consideration in portfolio construction. The real returns
(i.e., adjusted for inflation) of cash investments have not kept pace with inflation. Bonds are
particularly vulnerable, too, because a considerable portion of their return consists of
interest payments, which are worth a little less each year in an inflationary period. (At one
point in the 1970s, bonds were facetiously known as “certificates of
confiscation.â€) As such, most long-term investors need to hold a significant stake
in stocks, which provide more stable dividends and the potential to increase substantially in
value
Pius
Twelvetrees 5 hours ago Excellent advice from someone who's seen a lot of ups and downs. Many
of today's investors/traders have never experienced a truly bear market. There will be some
hard lessons learned over the next few months/years. I predict inflation will come roaring
back.
...“The economy went off a cliff in March [2020],†Buffett said. “It was resurrected in an extraordinarily effective way
by Federal Reserve actions and, later, on the fiscal front, by Congress.â€
Buffett added that the Fed’s actions helped companies brace for impact, as the initial spread of COVID sent companies scrambling
to raise funds. Berkshire Hathaway was among the many companies that turned to debt issuance as the stock market tanked in late February
and early March last year, issuing a $500
million 10-year bond on March 4, 2020.
The appetite for corporate debt dried up shortly after that, prompting the Fed weeks later to create
several liquidity facilities
that would take on commercial paper and medium-term investment grade debt.
By entering the debt market as its own counterparty (through separate vehicles with equity investment from the U.S. Treasury),
the central bank hoped to not only backstop markets but give private players the confidence to provide their own liquidity.
“[The Fed] took a market where Berkshire couldn't sell bonds on the day before and turned it into one where Carnival Cruise
Lines, a day or two later, had record issuance of corporate debt,†Buffett said. “Companies losing money, companies were closed.
It was the most dramatic move that you could imagine.â€
Those purchases included over $40 million
in debt issued by Berkshire Hathaway, covering its insurance, finance, and energy businesses.
Buffett applauded Powell for his “speed and decisiveness†in backstopping the corporate debt market, adding that his persistence
on getting more fiscal support was also helpful to the federal government’s relief efforts.
Buffett
similarly said at Berkshire Hathaway’s meeting last year that “every one of those people that issued bonds in late March
and April [2020] ought to send a thank you letter to the Fed.â€
The Oracle of Omaha added that the Fed and the government have helped the economic rebound, estimating that 85% of the U.S. economy
now appears to be “running a super high gear.â€
By Joseph
Carson , former chief economist of Alliance Bernstein
Federal Reserve Chairman Jerome Powell has played down the current runup in inflation,
arguing it is associated with the reopening of the economy. And as the low inflation readings
of one year ago drop out, the twelve-month calculation (i.e., the so-called base effect) of
reported inflation is likely to move up in the coming months.
Yet, Mr. Powell's "base effect" inflation argument is nonsense. For the "base effect"
argument to be correct, the twelve-month reading of reported inflation should be markedly lower
when the economy was closed than what occurred before the pandemic. But that's not the
case.
Last week, the Bureau of Economic Analysis reported that the twelve-month change ending in
March 2021 in the core personal consumption index (the Fed's preferred price index) was 1.83%.
That compares to the 1.87% reading for the year ending in February 2020 and 1.7% for the year
before that.
The 1.83% reading for twelve months ending March 2021 essentially matches the average
inflation rate of the two prior years. And that 12 month period includes the three months
(April to June) when the economy was closed, and GDP plunged a record 31% annualized. How could
there be a "base effect" on reported inflation when the base year has the same inflation rate
as it did before the pandemic?
Mr. Powell's "base effect" inflation argument has not been questioned or challenged by
analysts or reporters. Regardless of that, investors need to ignore the Fed's rhetoric and
treat upcoming price increases as "new" inflation.
As nonsensical as the explanation for the uptick in inflation, so too is the remedy. Demand
has always been the primary force behind broad inflation cycles. Yet, Mr. Powell argues that
product price inflation will ease once manufacturers increase output and eliminate "supply
bottlenecks," and home inflation will slow once builders build more homes.
It's hard to see how more supply (or growth) will slow inflation anytime soon. Federal Home
Loan Mortgage Company (Freddie Mac) estimates that the US needs almost 4 million new homes to
meet demand. That could take two to three years. Also, it's hard to see how increasing product
output will solve the inflation problem. The supply-side argument solution; fight inflation
with more demand and more commodity inflation.
The Fed's mantra has always been "inflation is everywhere and always a monetary phenomenon."
But nowhere in Mr. Powell's statements or comments do you find any monetary policy role for
increased inflation or any responsibility for containment. Investors forewarned.
The recent calm in the Treasury market contrasts with early-year selling that pushed yields to their highest levels since the
pandemic started.
... Foreign investors purchased around $135 billion worth of long-term Treasuries on a net basis in January and February, according
to data recently compiled by Citiâ€"the best two-month start to a year since 2012.
...But buying from foreign investors and even pension funds may not be enough to quell a rise in yields, said Mr. Goldberg. His firm
is forecasting the 10-year yield to rise to 2% by the end of the year, supported by improving economic data and passage of a fiscal
package later this year.
I don't share David P. Goldman's ideology and convictions. They are almost the polar
opposite of mine's.
But he has something I don't have, something that only a bourgeois specialist can give:
insider information.
I once hypothesized here that, if the USA were to collapse suddenly (which I don't think
it ever will, but if it do happen), then it would surely involve an uncontrolled growing
spiral of inflation/hyperinflation. That's the logical conclusion of an hypothetical collapse
of the USD standard.
So far, I can only see a mild rise in inflation. I don't think the USA will ever
experience hyperinflation (four-digit) or even true high inflation (two-digit). Goldman is a
rabid neoliberal, and anything above 2% is hyperinflation for him, so we should take these
kind of analyses with a grain of salt.
Mary 5 days ago As an alternative to PTTRX, which is waning in the current interest rate
environment...
A special deal is available and it's one of the few times you can lock in a great return
with no risk. On May 1, the inflation component on US Treasury I-Bonds will adjust to an
annualized rate of 3.54%. This is a tremendous jump due to inflation ramping up. I-Bonds,
similar to TIPS combine the inflation rate with an interest rate component (currently 0% for
I-Bonds) to get the overall yield. There is a $10k/person/year cap on the amount of I-Bonds
that can be purchased through Treasury Direct. Between the folks living under your roof, that
could amount to a good chunk.
In any case, you can easily set up an account on Treasury Direct and any money going in
on/after May 1 will get the new 3.54% rate. You can't withdraw the funds for 5 years to avoid
penalty. However, with a 3.54% yield, if you do need to withdraw early, the 6 months penalty
still leaves you significantly better off than CDs or other alternatives.
The inflation component adjusts every 6 months, so the yield you get will vary. However,
it's pretty well known that Powell/Treasury are looking to let the economy run hot for a while,
basically committing not to raise interest rates until 2023.
Anyhow, have a look. There's a couple of good articles out there about this situation. I
personally like the one on tipswatch. Mary 2 days ago @DOOGIE1 My pleasure. It's a tough
environment for fixed income investors these days...I take what I can get. I think the I-Bonds
are one of the best inflation hedges out there. TIPS should be good, but again, as a result of
the crazy interest rate environment, the interest rate component on short-term TIPS is
negative! I-Bonds never have negative interest component.
Lastly, re-reviewing terms, if you withdraw earlier than 5 years, penalty is last 3 months
of interest, not 6 - so even better.
"... The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets. ..."
"... The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets. ..."
"... The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets. ..."
"... The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets. ..."
"... The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets. ..."
"... The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets. ..."
"... The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets. ..."
"... The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets. ..."
"... The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets. ..."
"... The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets. ..."
"... The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets. ..."
The spread between the two-year Treasury yield and a key interest rate set by the Federal Reserve is the narrowest since the depths
of the coronavirus market selloff, a potential sign of financial-system stress.
The two-year Treasury yield, which closed Tuesday at 0.115%, is 0.015 percentage point above the interest rate on excess reserves,
or IOER. It traded as low as 0.105% earlier in February. The Fed pays banks on the reserves held above and beyond those required by
central-bank regulatory policy as part of its effort to maintain liquidity in the financial system.
When the coronavirus
sent
markets and the economy into a tailspin
in March, the Fed cut IOER by 1 percentage point to 0.10% --
alongside
other interventions
-- to shore up short-term lending markets and support economic activity. The spread between IOER and the
two-year yield has typically been above 0.05 percentage point since the Fed cut the rate to its lowest level ever in March.
Yield on U.S. 10-year Treasury note
Source:
Tullett Prebon
%
March
2020
'21
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Traders said the shrinking of this spread reflects appetite for short-term debt as investors gobble up safe assets and park
their cash. It also highlights a key tension point in financial markets: to what extent is Fed support for markets taking asset
prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals
...bond traders are concerned that inflation could rise in coming months and years as the government prints money to support the
economy and cover future borrowing costs.
Traders contend that short-term yields would be higher if the central bank wasn't anchoring rates.
The Fed has been
buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets.
The idea is that low interest rates and bond buying boost spending by providing cheap credit to businesses and households.
Some bond investors fear too much cheap credit will mean inflation.
...
Another
corner of U.S. markets is sending warning signals: the 10-year break-even rate, which tracks annual inflation expectations over
the next decade, traded as high as 2.24% last week.
....The difference between the break-even rate and the Treasury yield recently widened to more than 1 percentage point. For some
this is a sign that inflation isn't far off, and in the meantime that financial markets remain vulnerable to bubbles.
"I would characterize the phase we are in now as an era of hyperstimulation between fiscal and monetary policy," said Thomas
Pluta, global head of linear rates trading at JPMorgan Chase & Co. "The byproduct is all this cash sloshing around the system
chasing assets like crypto, commodities and meme stocks." (Traders on Reddit's WallStreetBets forum use memes such as a rocket
emoji to accompany favorite stock picks like GameStop Corp.)
SUBSCRIBER
1 month ago
So every time the stock market wobbles the Fed is going to step up and say "don't worry, hang onto your stocks
and bonds, we'll keep printing more money?"
The spread between the two-year Treasury yield and a key interest rate set by the Federal Reserve is the narrowest since the depths
of the coronavirus market selloff, a potential sign of financial-system stress.
The two-year Treasury yield, which closed Tuesday at 0.115%, is 0.015 percentage point above the interest rate on excess reserves,
or IOER. It traded as low as 0.105% earlier in February. The Fed pays banks on the reserves held above and beyond those required by
central-bank regulatory policy as part of its effort to maintain liquidity in the financial system.
When the coronavirus
sent
markets and the economy into a tailspin
in March, the Fed cut IOER by 1 percentage point to 0.10% --
alongside
other interventions
-- to shore up short-term lending markets and support economic activity. The spread between IOER and the
two-year yield has typically been above 0.05 percentage point since the Fed cut the rate to its lowest level ever in March.
Yield on U.S. 10-year Treasury note
Source:
Tullett Prebon
%
March
2020
'21
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Traders said the shrinking of this spread reflects appetite for short-term debt as investors gobble up safe assets and park
their cash. It also highlights a key tension point in financial markets: to what extent is Fed support for markets taking asset
prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals
...bond traders are concerned that inflation could rise in coming months and years as the government prints money to support the
economy and cover future borrowing costs.
Traders contend that short-term yields would be higher if the central bank wasn't anchoring rates.
The Fed has been
buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets.
The idea is that low interest rates and bond buying boost spending by providing cheap credit to businesses and households.
Some bond investors fear too much cheap credit will mean inflation.
...
Another
corner of U.S. markets is sending warning signals: the 10-year break-even rate, which tracks annual inflation expectations over
the next decade, traded as high as 2.24% last week.
....The difference between the break-even rate and the Treasury yield recently widened to more than 1 percentage point. For some
this is a sign that inflation isn't far off, and in the meantime that financial markets remain vulnerable to bubbles.
"I would characterize the phase we are in now as an era of hyperstimulation between fiscal and monetary policy," said Thomas
Pluta, global head of linear rates trading at JPMorgan Chase & Co. "The byproduct is all this cash sloshing around the system
chasing assets like crypto, commodities and meme stocks." (Traders on Reddit's WallStreetBets forum use memes such as a rocket
emoji to accompany favorite stock picks like GameStop Corp.)
SUBSCRIBER
1 month ago
So every time the stock market wobbles the Fed is going to step up and say "don't worry, hang onto your stocks
and bonds, we'll keep printing more money?"
The spread between the two-year Treasury yield and a key interest rate set by the Federal Reserve is the narrowest since the depths
of the coronavirus market selloff, a potential sign of financial-system stress.
The two-year Treasury yield, which closed Tuesday at 0.115%, is 0.015 percentage point above the interest rate on excess reserves,
or IOER. It traded as low as 0.105% earlier in February. The Fed pays banks on the reserves held above and beyond those required by
central-bank regulatory policy as part of its effort to maintain liquidity in the financial system.
When the coronavirus
sent
markets and the economy into a tailspin
in March, the Fed cut IOER by 1 percentage point to 0.10% --
alongside
other interventions
-- to shore up short-term lending markets and support economic activity. The spread between IOER and the
two-year yield has typically been above 0.05 percentage point since the Fed cut the rate to its lowest level ever in March.
Yield on U.S. 10-year Treasury note
Source:
Tullett Prebon
%
March
2020
'21
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Traders said the shrinking of this spread reflects appetite for short-term debt as investors gobble up safe assets and park
their cash. It also highlights a key tension point in financial markets: to what extent is Fed support for markets taking asset
prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals
...bond traders are concerned that inflation could rise in coming months and years as the government prints money to support the
economy and cover future borrowing costs.
Traders contend that short-term yields would be higher if the central bank wasn't anchoring rates.
The Fed has been
buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets.
The idea is that low interest rates and bond buying boost spending by providing cheap credit to businesses and households.
Some bond investors fear too much cheap credit will mean inflation.
...
Another
corner of U.S. markets is sending warning signals: the 10-year break-even rate, which tracks annual inflation expectations over
the next decade, traded as high as 2.24% last week.
....The difference between the break-even rate and the Treasury yield recently widened to more than 1 percentage point. For some
this is a sign that inflation isn't far off, and in the meantime that financial markets remain vulnerable to bubbles.
"I would characterize the phase we are in now as an era of hyperstimulation between fiscal and monetary policy," said Thomas
Pluta, global head of linear rates trading at JPMorgan Chase & Co. "The byproduct is all this cash sloshing around the system
chasing assets like crypto, commodities and meme stocks." (Traders on Reddit's WallStreetBets forum use memes such as a rocket
emoji to accompany favorite stock picks like GameStop Corp.)
SUBSCRIBER
1 month ago
So every time the stock market wobbles the Fed is going to step up and say "don't worry, hang onto your stocks
and bonds, we'll keep printing more money?"
The spread between the two-year Treasury yield and a key interest rate set by the Federal Reserve is the narrowest since the depths
of the coronavirus market selloff, a potential sign of financial-system stress.
The two-year Treasury yield, which closed Tuesday at 0.115%, is 0.015 percentage point above the interest rate on excess reserves,
or IOER. It traded as low as 0.105% earlier in February. The Fed pays banks on the reserves held above and beyond those required by
central-bank regulatory policy as part of its effort to maintain liquidity in the financial system.
When the coronavirus
sent
markets and the economy into a tailspin
in March, the Fed cut IOER by 1 percentage point to 0.10% --
alongside
other interventions
-- to shore up short-term lending markets and support economic activity. The spread between IOER and the
two-year yield has typically been above 0.05 percentage point since the Fed cut the rate to its lowest level ever in March.
Yield on U.S. 10-year Treasury note
Source:
Tullett Prebon
%
March
2020
'21
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Traders said the shrinking of this spread reflects appetite for short-term debt as investors gobble up safe assets and park
their cash. It also highlights a key tension point in financial markets: to what extent is Fed support for markets taking asset
prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals
...bond traders are concerned that inflation could rise in coming months and years as the government prints money to support the
economy and cover future borrowing costs.
Traders contend that short-term yields would be higher if the central bank wasn't anchoring rates.
The Fed has been
buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets.
The idea is that low interest rates and bond buying boost spending by providing cheap credit to businesses and households.
Some bond investors fear too much cheap credit will mean inflation.
...
Another
corner of U.S. markets is sending warning signals: the 10-year break-even rate, which tracks annual inflation expectations over
the next decade, traded as high as 2.24% last week.
....The difference between the break-even rate and the Treasury yield recently widened to more than 1 percentage point. For some
this is a sign that inflation isn't far off, and in the meantime that financial markets remain vulnerable to bubbles.
"I would characterize the phase we are in now as an era of hyperstimulation between fiscal and monetary policy," said Thomas
Pluta, global head of linear rates trading at JPMorgan Chase & Co. "The byproduct is all this cash sloshing around the system
chasing assets like crypto, commodities and meme stocks." (Traders on Reddit's WallStreetBets forum use memes such as a rocket
emoji to accompany favorite stock picks like GameStop Corp.)
SUBSCRIBER
1 month ago
So every time the stock market wobbles the Fed is going to step up and say "don't worry, hang onto your stocks
and bonds, we'll keep printing more money?"
The spread between the two-year Treasury yield and a key interest rate set by the Federal Reserve is the narrowest since the depths
of the coronavirus market selloff, a potential sign of financial-system stress.
The two-year Treasury yield, which closed Tuesday at 0.115%, is 0.015 percentage point above the interest rate on excess reserves,
or IOER. It traded as low as 0.105% earlier in February. The Fed pays banks on the reserves held above and beyond those required by
central-bank regulatory policy as part of its effort to maintain liquidity in the financial system.
When the coronavirus
sent
markets and the economy into a tailspin
in March, the Fed cut IOER by 1 percentage point to 0.10% --
alongside
other interventions
-- to shore up short-term lending markets and support economic activity. The spread between IOER and the
two-year yield has typically been above 0.05 percentage point since the Fed cut the rate to its lowest level ever in March.
Yield on U.S. 10-year Treasury note
Source:
Tullett Prebon
%
March
2020
'21
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Traders said the shrinking of this spread reflects appetite for short-term debt as investors gobble up safe assets and park
their cash. It also highlights a key tension point in financial markets: to what extent is Fed support for markets taking asset
prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals
...bond traders are concerned that inflation could rise in coming months and years as the government prints money to support the
economy and cover future borrowing costs.
Traders contend that short-term yields would be higher if the central bank wasn't anchoring rates.
The Fed has been
buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets.
The idea is that low interest rates and bond buying boost spending by providing cheap credit to businesses and households.
Some bond investors fear too much cheap credit will mean inflation.
...
Another
corner of U.S. markets is sending warning signals: the 10-year break-even rate, which tracks annual inflation expectations over
the next decade, traded as high as 2.24% last week.
....The difference between the break-even rate and the Treasury yield recently widened to more than 1 percentage point. For some
this is a sign that inflation isn't far off, and in the meantime that financial markets remain vulnerable to bubbles.
"I would characterize the phase we are in now as an era of hyperstimulation between fiscal and monetary policy," said Thomas
Pluta, global head of linear rates trading at JPMorgan Chase & Co. "The byproduct is all this cash sloshing around the system
chasing assets like crypto, commodities and meme stocks." (Traders on Reddit's WallStreetBets forum use memes such as a rocket
emoji to accompany favorite stock picks like GameStop Corp.)
SUBSCRIBER
1 month ago
So every time the stock market wobbles the Fed is going to step up and say "don't worry, hang onto your stocks
and bonds, we'll keep printing more money?"
The spread between the two-year Treasury yield and a key interest rate set by the Federal Reserve is the narrowest since the depths
of the coronavirus market selloff, a potential sign of financial-system stress.
The two-year Treasury yield, which closed Tuesday at 0.115%, is 0.015 percentage point above the interest rate on excess reserves,
or IOER. It traded as low as 0.105% earlier in February. The Fed pays banks on the reserves held above and beyond those required by
central-bank regulatory policy as part of its effort to maintain liquidity in the financial system.
When the coronavirus
sent
markets and the economy into a tailspin
in March, the Fed cut IOER by 1 percentage point to 0.10% --
alongside
other interventions
-- to shore up short-term lending markets and support economic activity. The spread between IOER and the
two-year yield has typically been above 0.05 percentage point since the Fed cut the rate to its lowest level ever in March.
Yield on U.S. 10-year Treasury note
Source:
Tullett Prebon
%
March
2020
'21
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Traders said the shrinking of this spread reflects appetite for short-term debt as investors gobble up safe assets and park
their cash. It also highlights a key tension point in financial markets: to what extent is Fed support for markets taking asset
prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals
...bond traders are concerned that inflation could rise in coming months and years as the government prints money to support the
economy and cover future borrowing costs.
Traders contend that short-term yields would be higher if the central bank wasn't anchoring rates.
The Fed has been
buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets.
The idea is that low interest rates and bond buying boost spending by providing cheap credit to businesses and households.
Some bond investors fear too much cheap credit will mean inflation.
...
Another
corner of U.S. markets is sending warning signals: the 10-year break-even rate, which tracks annual inflation expectations over
the next decade, traded as high as 2.24% last week.
....The difference between the break-even rate and the Treasury yield recently widened to more than 1 percentage point. For some
this is a sign that inflation isn't far off, and in the meantime that financial markets remain vulnerable to bubbles.
"I would characterize the phase we are in now as an era of hyperstimulation between fiscal and monetary policy," said Thomas
Pluta, global head of linear rates trading at JPMorgan Chase & Co. "The byproduct is all this cash sloshing around the system
chasing assets like crypto, commodities and meme stocks." (Traders on Reddit's WallStreetBets forum use memes such as a rocket
emoji to accompany favorite stock picks like GameStop Corp.)
SUBSCRIBER
1 month ago
So every time the stock market wobbles the Fed is going to step up and say "don't worry, hang onto your stocks
and bonds, we'll keep printing more money?"
The spread between the two-year Treasury yield and a key interest rate set by the Federal Reserve is the narrowest since the depths
of the coronavirus market selloff, a potential sign of financial-system stress.
The two-year Treasury yield, which closed Tuesday at 0.115%, is 0.015 percentage point above the interest rate on excess reserves,
or IOER. It traded as low as 0.105% earlier in February. The Fed pays banks on the reserves held above and beyond those required by
central-bank regulatory policy as part of its effort to maintain liquidity in the financial system.
When the coronavirus
sent
markets and the economy into a tailspin
in March, the Fed cut IOER by 1 percentage point to 0.10% --
alongside
other interventions
-- to shore up short-term lending markets and support economic activity. The spread between IOER and the
two-year yield has typically been above 0.05 percentage point since the Fed cut the rate to its lowest level ever in March.
Yield on U.S. 10-year Treasury note
Source:
Tullett Prebon
%
March
2020
'21
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Traders said the shrinking of this spread reflects appetite for short-term debt as investors gobble up safe assets and park
their cash. It also highlights a key tension point in financial markets: to what extent is Fed support for markets taking asset
prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals
...bond traders are concerned that inflation could rise in coming months and years as the government prints money to support the
economy and cover future borrowing costs.
Traders contend that short-term yields would be higher if the central bank wasn't anchoring rates.
The Fed has been
buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets.
The idea is that low interest rates and bond buying boost spending by providing cheap credit to businesses and households.
Some bond investors fear too much cheap credit will mean inflation.
...
Another
corner of U.S. markets is sending warning signals: the 10-year break-even rate, which tracks annual inflation expectations over
the next decade, traded as high as 2.24% last week.
....The difference between the break-even rate and the Treasury yield recently widened to more than 1 percentage point. For some
this is a sign that inflation isn't far off, and in the meantime that financial markets remain vulnerable to bubbles.
"I would characterize the phase we are in now as an era of hyperstimulation between fiscal and monetary policy," said Thomas
Pluta, global head of linear rates trading at JPMorgan Chase & Co. "The byproduct is all this cash sloshing around the system
chasing assets like crypto, commodities and meme stocks." (Traders on Reddit's WallStreetBets forum use memes such as a rocket
emoji to accompany favorite stock picks like GameStop Corp.)
SUBSCRIBER
1 month ago
So every time the stock market wobbles the Fed is going to step up and say "don't worry, hang onto your stocks
and bonds, we'll keep printing more money?"
The spread between the two-year Treasury yield and a key interest rate set by the Federal Reserve is the narrowest since the depths
of the coronavirus market selloff, a potential sign of financial-system stress.
The two-year Treasury yield, which closed Tuesday at 0.115%, is 0.015 percentage point above the interest rate on excess reserves,
or IOER. It traded as low as 0.105% earlier in February. The Fed pays banks on the reserves held above and beyond those required by
central-bank regulatory policy as part of its effort to maintain liquidity in the financial system.
When the coronavirus
sent
markets and the economy into a tailspin
in March, the Fed cut IOER by 1 percentage point to 0.10% --
alongside
other interventions
-- to shore up short-term lending markets and support economic activity. The spread between IOER and the
two-year yield has typically been above 0.05 percentage point since the Fed cut the rate to its lowest level ever in March.
Yield on U.S. 10-year Treasury note
Source:
Tullett Prebon
%
March
2020
'21
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Traders said the shrinking of this spread reflects appetite for short-term debt as investors gobble up safe assets and park
their cash. It also highlights a key tension point in financial markets: to what extent is Fed support for markets taking asset
prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals
...bond traders are concerned that inflation could rise in coming months and years as the government prints money to support the
economy and cover future borrowing costs.
Traders contend that short-term yields would be higher if the central bank wasn't anchoring rates.
The Fed has been
buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets.
The idea is that low interest rates and bond buying boost spending by providing cheap credit to businesses and households.
Some bond investors fear too much cheap credit will mean inflation.
...
Another
corner of U.S. markets is sending warning signals: the 10-year break-even rate, which tracks annual inflation expectations over
the next decade, traded as high as 2.24% last week.
....The difference between the break-even rate and the Treasury yield recently widened to more than 1 percentage point. For some
this is a sign that inflation isn't far off, and in the meantime that financial markets remain vulnerable to bubbles.
"I would characterize the phase we are in now as an era of hyperstimulation between fiscal and monetary policy," said Thomas
Pluta, global head of linear rates trading at JPMorgan Chase & Co. "The byproduct is all this cash sloshing around the system
chasing assets like crypto, commodities and meme stocks." (Traders on Reddit's WallStreetBets forum use memes such as a rocket
emoji to accompany favorite stock picks like GameStop Corp.)
SUBSCRIBER
1 month ago
So every time the stock market wobbles the Fed is going to step up and say "don't worry, hang onto your stocks
and bonds, we'll keep printing more money?"
The spread between the two-year Treasury yield and a key interest rate set by the Federal Reserve is the narrowest since the depths
of the coronavirus market selloff, a potential sign of financial-system stress.
The two-year Treasury yield, which closed Tuesday at 0.115%, is 0.015 percentage point above the interest rate on excess reserves,
or IOER. It traded as low as 0.105% earlier in February. The Fed pays banks on the reserves held above and beyond those required by
central-bank regulatory policy as part of its effort to maintain liquidity in the financial system.
When the coronavirus
sent
markets and the economy into a tailspin
in March, the Fed cut IOER by 1 percentage point to 0.10% --
alongside
other interventions
-- to shore up short-term lending markets and support economic activity. The spread between IOER and the
two-year yield has typically been above 0.05 percentage point since the Fed cut the rate to its lowest level ever in March.
Yield on U.S. 10-year Treasury note
Source:
Tullett Prebon
%
March
2020
'21
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Traders said the shrinking of this spread reflects appetite for short-term debt as investors gobble up safe assets and park
their cash. It also highlights a key tension point in financial markets: to what extent is Fed support for markets taking asset
prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals
...bond traders are concerned that inflation could rise in coming months and years as the government prints money to support the
economy and cover future borrowing costs.
Traders contend that short-term yields would be higher if the central bank wasn't anchoring rates.
The Fed has been
buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets.
The idea is that low interest rates and bond buying boost spending by providing cheap credit to businesses and households.
Some bond investors fear too much cheap credit will mean inflation.
...
Another
corner of U.S. markets is sending warning signals: the 10-year break-even rate, which tracks annual inflation expectations over
the next decade, traded as high as 2.24% last week.
....The difference between the break-even rate and the Treasury yield recently widened to more than 1 percentage point. For some
this is a sign that inflation isn't far off, and in the meantime that financial markets remain vulnerable to bubbles.
"I would characterize the phase we are in now as an era of hyperstimulation between fiscal and monetary policy," said Thomas
Pluta, global head of linear rates trading at JPMorgan Chase & Co. "The byproduct is all this cash sloshing around the system
chasing assets like crypto, commodities and meme stocks." (Traders on Reddit's WallStreetBets forum use memes such as a rocket
emoji to accompany favorite stock picks like GameStop Corp.)
SUBSCRIBER
1 month ago
So every time the stock market wobbles the Fed is going to step up and say "don't worry, hang onto your stocks
and bonds, we'll keep printing more money?"
The spread between the two-year Treasury yield and a key interest rate set by the Federal Reserve is the narrowest since the depths
of the coronavirus market selloff, a potential sign of financial-system stress.
The two-year Treasury yield, which closed Tuesday at 0.115%, is 0.015 percentage point above the interest rate on excess reserves,
or IOER. It traded as low as 0.105% earlier in February. The Fed pays banks on the reserves held above and beyond those required by
central-bank regulatory policy as part of its effort to maintain liquidity in the financial system.
When the coronavirus
sent
markets and the economy into a tailspin
in March, the Fed cut IOER by 1 percentage point to 0.10% --
alongside
other interventions
-- to shore up short-term lending markets and support economic activity. The spread between IOER and the
two-year yield has typically been above 0.05 percentage point since the Fed cut the rate to its lowest level ever in March.
Yield on U.S. 10-year Treasury note
Source:
Tullett Prebon
%
March
2020
'21
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Traders said the shrinking of this spread reflects appetite for short-term debt as investors gobble up safe assets and park
their cash. It also highlights a key tension point in financial markets: to what extent is Fed support for markets taking asset
prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals
...bond traders are concerned that inflation could rise in coming months and years as the government prints money to support the
economy and cover future borrowing costs.
Traders contend that short-term yields would be higher if the central bank wasn't anchoring rates.
The Fed has been
buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets.
The idea is that low interest rates and bond buying boost spending by providing cheap credit to businesses and households.
Some bond investors fear too much cheap credit will mean inflation.
...
Another
corner of U.S. markets is sending warning signals: the 10-year break-even rate, which tracks annual inflation expectations over
the next decade, traded as high as 2.24% last week.
....The difference between the break-even rate and the Treasury yield recently widened to more than 1 percentage point. For some
this is a sign that inflation isn't far off, and in the meantime that financial markets remain vulnerable to bubbles.
"I would characterize the phase we are in now as an era of hyperstimulation between fiscal and monetary policy," said Thomas
Pluta, global head of linear rates trading at JPMorgan Chase & Co. "The byproduct is all this cash sloshing around the system
chasing assets like crypto, commodities and meme stocks." (Traders on Reddit's WallStreetBets forum use memes such as a rocket
emoji to accompany favorite stock picks like GameStop Corp.)
SUBSCRIBER
1 month ago
So every time the stock market wobbles the Fed is going to step up and say "don't worry, hang onto your stocks
and bonds, we'll keep printing more money?"
The spread between the two-year Treasury yield and a key interest rate set by the Federal Reserve is the narrowest since the depths
of the coronavirus market selloff, a potential sign of financial-system stress.
The two-year Treasury yield, which closed Tuesday at 0.115%, is 0.015 percentage point above the interest rate on excess reserves,
or IOER. It traded as low as 0.105% earlier in February. The Fed pays banks on the reserves held above and beyond those required by
central-bank regulatory policy as part of its effort to maintain liquidity in the financial system.
When the coronavirus
sent
markets and the economy into a tailspin
in March, the Fed cut IOER by 1 percentage point to 0.10% --
alongside
other interventions
-- to shore up short-term lending markets and support economic activity. The spread between IOER and the
two-year yield has typically been above 0.05 percentage point since the Fed cut the rate to its lowest level ever in March.
Yield on U.S. 10-year Treasury note
Source:
Tullett Prebon
%
March
2020
'21
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Traders said the shrinking of this spread reflects appetite for short-term debt as investors gobble up safe assets and park
their cash. It also highlights a key tension point in financial markets: to what extent is Fed support for markets taking asset
prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals
...bond traders are concerned that inflation could rise in coming months and years as the government prints money to support the
economy and cover future borrowing costs.
Traders contend that short-term yields would be higher if the central bank wasn't anchoring rates.
The Fed has been
buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets.
The idea is that low interest rates and bond buying boost spending by providing cheap credit to businesses and households.
Some bond investors fear too much cheap credit will mean inflation.
...
Another
corner of U.S. markets is sending warning signals: the 10-year break-even rate, which tracks annual inflation expectations over
the next decade, traded as high as 2.24% last week.
....The difference between the break-even rate and the Treasury yield recently widened to more than 1 percentage point. For some
this is a sign that inflation isn't far off, and in the meantime that financial markets remain vulnerable to bubbles.
"I would characterize the phase we are in now as an era of hyperstimulation between fiscal and monetary policy," said Thomas
Pluta, global head of linear rates trading at JPMorgan Chase & Co. "The byproduct is all this cash sloshing around the system
chasing assets like crypto, commodities and meme stocks." (Traders on Reddit's WallStreetBets forum use memes such as a rocket
emoji to accompany favorite stock picks like GameStop Corp.)
SUBSCRIBER
1 month ago
So every time the stock market wobbles the Fed is going to step up and say "don't worry, hang onto your stocks
and bonds, we'll keep printing more money?"
"... Still, credit risk has been rising in the $1.2 trillion market of below-investment-grade loans, like those Cyxtera took on for its 2017 acquisition by private-equity firms. Issuers of such "leveraged loans" are also being acquired by SPACs. That will likely lead to higher levels of distress among such companies in the next economic downturn, according to Mr. Daigle. ..."
... Conditions are significantly different now than in 1999, when speculative telecommunications companies raised capital by issuing
stock and high-yield bonds, Mr. Daigle said. That bubble enabled companies like Global Crossing Ltd., Iridium LLC and WorldCom Inc.,
to raise billions of dollars
before they went bankrupt .
"The biggest lesson for the leveraged finance market from the late 1990s is that no amount of equity can salvage a bad business
model," Mr. Daigle said.
In contrast, the average credit quality of high-yield bond issuers today is relatively strong. More than half of high-yield bonds
are rated double-B, the highest below-investment-grade rating, compared with a historical average of 35%, Citigroup's Mr. Anderson
said.
Still, credit risk has been rising in the $1.2 trillion market of below-investment-grade loans, like those Cyxtera took on
for its 2017 acquisition by private-equity firms. Issuers of such "leveraged loans" are also being acquired by SPACs. That will
likely lead to higher levels of distress among such companies in the next economic downturn, according to Mr. Daigle.
"It's the opposite of what we saw in the 1990s when the speculative lending was happening in the high-yield bond market,"
he said.
Money from stock offerings is flowing into below-investment-grade companies
at a pace not seen since the dot.com boom of the 1990s
The wave of cash raised by
special-purpose acquisition companies is rolling into the junk debt market, aiding
distressed companies and rewarding investors who own their bonds and loans.
SPACs, also known as blank-check companies, have issued roughly $100 billion of stock this
year, a record, to buy private companies and take them public. Some SPACs are targeting
companies with below-investment-grade credit ratings, hoping to use their cash piles to pay
down debt and grow the businesses.
Not since the dot.com-boom two decades ago has stock-market enthusiasm been hot enough
to fuel such activity in debt markets , bond investors and analysts say.
Mutual funds managers that owned WeWork bonds booked paper gains of 25% after the ailing
shared-office provider
started merger talks in January with a SPAC, according to MarketAxess. Companies with junk
credit ratings are typically required to buy back their debt, often at a premium, when a change
of control occurs via a merger. Loans of Cyxtera Technologies Inc.â€"which
credit-rating companies recently warned was in danger of defaultâ€"jumped 16% in
February when the data-center operator
agreed to merge with one of the blank-check companies , according to AdvantageData Inc.
“There’s a lot of deja-vu of the late 1990s happening
in the high-yield market right now,†said Michael Anderson, a managing director for
credit research at Citigroup Inc.
We've been outlining how the Fed and other central banks have unleashed an inflationary
bubble in all assets truly an Everything Bubble.
We've already assessed the impact this is having on commodities, bonds and other asset
classes. Today I want to assess the impact this will have on stocks.
To do that, we need to look at emerging markets.
Inflation is a common occurrence for emerging markets, primarily because more often than not
they devalue their currencies, whether by choice or because the markets lose faith in their
ability to pay off their debts.
Because of this, emerging markets can provide a glimpse into how inflation affects stocks.
So, let's dig in.
Here is a chart of South Africa's stock market since 2003. As you can see, the stock market
rallied significantly until 2010, but has effectively gone nowhere ever since then.
The reason this chart looks so lackluster is because it is priced in U.S. dollars. The $USD
has been strengthening against the South African currency (the Rand) since 2010.
Watch what happens we price the South Africa stock market in its domestic currency (blue
line). Suddenly, this stock market has been ROARING, rising some 750% since 2003. That means
average annual gains of 41%!!!
Let's use another example.
Below is a chart of the Mexican stock market priced in $USD. Once again, we see a stock
market that has done nothing of note for years.
Now let's price it in pesos (actually the exchange rate of pesos to $USD, but close
enough).
You get the general idea. So if hot inflation is in the U.S. financial system, it would make
perfect sense for stocks (denominated in the $USD which is losing value due to inflation) to
ERUPT higher.
Something like I don't know what's happened since mid-2020?
Look, we all know what's going on here. The stock market is erupting higher as inflation
rips into the financial system based on Fed NUCLEAR money printing. And we all know what comes
when this bubble bursts.
On that note, we just published a Special Investment Report concerning FIVE secret
investments you can use to make inflation pay you as it rips through the financial system in
the months ahead.
The report is titled Survive the Inflationary Storm. And it explains in very simply terms
how to make inflation PAY YOU.
We are making just 100 copies available to the public.
Don't believe your lying eyes, will be the message tomorrow from The Fed's Jay Powell as he
hypnotizes investors to believe that "inflation is transitory" and they have "the tools" to
manage it.
'Bond King' Jeff Gundlach is not buying that line and told BNN Bloomberg in an interview
this morning.
"...more importantly, I'm not sure why they think they know it's transitory... how do they
know that?"
"...there's plenty of money-printing that's been going on, and we've seen commodity prices
going up massively... home prices in the US are inflating very substantially... so there's a
lot of inflation that's already baked in to input prices ."
Gundlach does admit that Powell has a point in the very near term as the prints were about
to see "which could be as high as 4% [for CPI]" are off of year-ago, very depressed levels.
"...what he means by transitory is that the base effect will lead to problems in the next few
months but then the base effect will become less problematic."
But, Gundlach adds, "it's not clear to me that inflation is going to go back down to around
2 to 2.5%... we don't know, nobody knows... but we're most concerned with the fact that The Fed
thinks they know."
This is worrisome because The Fed's track record is anything but inspiring...
"when I go back to the global financial crisis, when we almost had a complete meltdown of
the financial system, Ben Bernanke completely missed all of the problems that led to the
crisis."
Bernanke's infamous "contained to subprime... and subprime is only a sliver of the market"
comments could be about to be trumped by Powell's "inflation is transitory" comments as
Gundlach warns "there's plenty of indicators that suggest inflation is going to go higher and
not just on a transitory basis."
The Fed is "trying to paint the picture" of control, but Gundlach tries to make clear:
"they're guessing."
So, what does that mean for markets?
While some fear "we ain't seen nothing yet" in terms of yields rising (and multiple
contraction), Gundlach notes that "it really depends on just how much manipulation the
authorities are willing to do."
The billionaire fund manager notes that yields are "still very low... well below the current
inflation rate... so we have negative yields everywhere on the yield curve."
It's also "hard to figure out who's going to buy the bonds," he notes, "as we are about to
see issuance like we have never seen before." Foreigners have been selling bonds for years and
domestically there is little demand, so Gundlach notes the only one left to soak up all this
extra supply is The Federal Reserve, which has already expanded its balance sheet massively in
the last 12 months.
"Who's going to buy all these many trillions of dollars of bonds? Foreigners have been
selling for years and they've accelerated their selling in the last several quarters,
domestic buyers are not exactly selling, but they're not adding to their holdings. So what's
left to absorb all of the spawn supply is the Federal Reserve ."
"Left to true, free markets, bond yields at the long-end would obviously be higher than
they are now."
And so who will buy all these bonds with negative real yields - The Fed... "and they have
been transparent about their willingness and ability to buy bonds and expand their balance
sheet with no ceiling."
Gundlach is talking about Yield Curve Control, reminding viewers that "The Fed can set the
long-end wherever they want it... there's a precedent for this from back in the 1940s into the
50s," in order to ease the pain of the debt from World War II.
Of course, Gundlach warns ominously, "once they stopped the yield curve control, we went
into a 27 year massive bear market in bonds, because of 'guns-n'butter' policies... which look
like our policies today."
Simply put, he sees "an echo [in current markets and policies] of what happened in the late
1970s into the early 1980s."
His forecast is that "The Fed will allow the market forces to take yields to higher levels
[10Y 2.25%] before stepping in."
The Bond King also note that the US stock market is very overvalued by virtually every
important metric , and especially so versus foreign markets such as Asia and even Europe.
"I bought European equities a couple of weeks ago, literally for the first time in many
years. I can't remember the last time I did it. And that's largely because I think the U.S.
dollar is almost certain to decline over the intermediate to long term."
There's a lot more in the interview on the impact of Biden's stimmies and potential tax
hikes...
https://webapps.9c9media.com/vidi-player/1.9.19/share/iframe.html?currentId=2189621&config=bnn/share.json&kruxId=&rsid=bellmediabnnbprod,bellmediaglobalprod&siteName=bnnb&cid=%5B%7B%22contentId%22%3A2189621%2C%22ad%22%3A%7B%22adsite%22%3A%22ctv.bnn%22%2C%22adzone%22%3A%22ctv.bnn%22%7D%7D%5D
10,571 48 NEVER
Sound of the Suburbs 26 minutes ago
We are going to train you in this Mickey Mouse economics that doesn't consider private
debt and put you in charge of financial stability at the FED.
They don't stand a chance.
Financial stability arrived in the Keynesian era and was locked into the regulations of
the time.
"This Time is Different" by Reinhart and Rogoff has a graph showing the same thing (Figure
13.1 - The proportion of countries with banking crises, 1900-2008).
Neoclassical economics came back and so did the financial crises.
The neoliberals removed the regulations that created financial stability in the Keynesian
era and put independent central banks in charge of financial stability.
Why does it go so wrong?
Richard Vague had noticed real estate lending balloon from 5 trillion to 10 trillion from
2001 – 2007 and knew there was going to be a financial crisis.
Richard Vague has looked at the data for financial crises going back 200 years and found
the cause was nearly always runaway bank lending.
We put central bankers in charge of financial stability, but they use an economics that
ignores the main cause of financial crises, private debt.
Most of the problems are coming from private debt.
The technocrats use an economics that ignores private debt.
The poor old technocrats don't stand a chance.
WITCH PELOSI 39 minutes ago
42" entry level lawnmower @ Home Depot, spring 2014, $999. Spring 2021 $1549. That's what
I call inflation! And maybe a little greed to boot!
atomp 34 minutes ago
$30 is the new $10.
Sound of the Suburbs 25 minutes ago remove link
In 2008 the Queen visited the revered economists of the LSE and said "If these things were
so large, how come everyone missed it?"
It's that neoclassical economics they use Ma'am, it doesn't consider private debt.
Brian Sozzi
·
Editor-at-Large
Thu, April 22, 2021, 4:32 PM
If you believe the market is a
forward
looking mechanism
-- and most investors would agree that it is -- then you may want to prepare your portfolios for a sharp
slowdown in economic growth later this year and into 2022 as fiscal stimulus wanes.
U.S. economic growth for this year is "peaking," Goldman Sachs strategists led by Ben Snider warned in a new note on Thursday.
Snider said Goldman's economists predict 10.5% GDP growth for the second quarter, the strongest quarterly growth rate since 1978.
The projection is also near the high-end of most economists on Wall Street.
From there, well, it's all downhill for GDP growth.
Goldman estimates growth in the third and fourth quarters of this year will clock in at 7.5% and 6.5%, respectively. Growth is
then seen slowing in each quarter of 2022 -- by the fourth quarter Goldman is modeling a mere 1.5% GDP increase.
Economic growth is peaking, warns Goldman Sachs.
"Although our economists expect U.S. GDP growth will remain both above trend and above consensus forecasts through the next few
quarters, they believe the pace of growth will peak within the next 1-2 months as the tailwinds from fiscal stimulus and economic
reopening reach their maximum impact and then begin to fade," Snider said.
The economic growth peak could have major implications for investor returns, Snider thinks.
Goldman's research shows decelerating economic growth usually leads to weaker -- though still positive -- equity returns and
greater volatility. Since 1980, the S&P 500 has averaged a monthly return of 0.6% when economic growth was positive but
decelerating. That is half the 1.2% average gain when economic growth was positive and accelerating, points out Snider.
"Decelerating economic growth is also typically accompanied by sector rotations within the equity market,' Snider added.
"Cyclical industries tend to lead the market in environments of positive and accelerating economic growth, but as growth peaks
and decelerates more defensive industries typically outperform."
Bond investors are bewildered after last week's stellar US economic data sparked a rally in
haven US Treasuries -- a market reaction that breaks the typical dynamic for fund managers. The
price of highly rated government bonds tends to jump in response to bad news, pushing down
yields. Mike Riddell, a portfolio manager at Allianz Global Investors, described the market
move as "bonkers".
The recent run-up in government bond yields is a gift to any fund manager fretting over
market risks ranging from geopolitics to leverage. It is true that the first quarter of this
year was no fun for holders of government bonds, which dropped in price on the largest scale in
four decades. The pullback means that, just as Russia and the US once again lock horns, and as
the Archegos implosion stirs concerns over potentially systemic risks stemming from plentiful
global leverage, government bonds again offer something of a safety net.
At least $120 billion a month of Treasury debt and mortgage-backed securities bought by FED
since last June is around trillion dollars now. This is just putting money from one pocket to
another not a real buy or sell. Essentially the naked emission of dollars -- attempt to export
inflation.
So FED seeks to increase inflation to somewhere between 2 and 3 percent a year. Which means
payment to the forign owners of the US national debt will increase accordingly. And payments to
foreign owners is a real thing as central banks are now reluctant to recirculate supruss dollars
into treasuries and China cuts it purchases of dollar denominated debt.
The Fed has been buying at least $120 billion a month of Treasury debt and mortgage-backed
securities since last June to hold down long-term borrowing costs. Since December, the central
bank has said the economy must make "substantial further progress" toward its goals of maximum
employment and 2% inflation before it scales back those purchases.
"We will taper asset purchases when we've made substantial further progress toward our
goals, from last December when we announced that guidance," Mr. Powell said in a virtual event
held by the Economic Club of Washington, D.C. "That would in all likelihood be before -- well
before -- the time we consider raising interest rates."
The Fed has said it will hold rates near zero until it sees the labor market return to full
employment and inflation rise to 2% and is forecast to moderately exceed that level for some
time. Mr. Powell reiterated that he thinks it is highly unlikely that the Fed would raise
interest rates this year and noted that most central-bank officials see rates remaining near
zero through 2023.
Tuesday's report fueled concerns that inflation, dormant through the record-long economic
expansion from 2009 to 2020, could soon become a challenge for policy makers. Mr. Powell
acknowledged those worries while reiterating that the Fed seeks inflation "that is moderately
above 2% for some time" to make up for the past decade's shortfalls.
Both the Biden administration and the Fed acknowledge the possibility of prices rising
faster than usual in coming months as the economic recovery strengthens and demand for goods
and services temporarily outruns supply. But both expect the acceleration in inflation to prove
temporary.
What has driven bonds lower from 10 year interest around 1.7% to around 1.5%? Which means
around 2% difference in the price of the bonds. This is the question.
Is this about the concerns about the status of dollar as global reserve currency, that were
eased? Or that Biden administration is paralyzed and will not be able to extend the USA debt as
it planed to do.
Treasury yields still remain much higher than where they started the year.
The 10-year finished last year at 0.913%. The yield on the 30-year bond settled Thursday at
2.210%, down from 2.325% Wednesday but up from 1.642% at the end of last year.
Instead, the muni market "yawned" when the bill was passed, said Eric Kazatsky, Bloomberg Intelligence head municipal strategist, a
signal that the aid money had already been priced in. But muni ETFs are still worth a look, he thinks.
Kazatsky is a fan of the "gorillas" in the marketplace for all the usual reasons -- what he calls "solid" management, low fees,
liquidity and robust inflows. He mentions the $21 billion iShares National Muni Bond ETF
MUB,
-0.06%
,
which
tracks investment-grade bonds. For investors willing to take on a little more risk, there's the VanEck Vectors High Yield Muni ETF
HYD,
-0.02%
,
which
has $3.3 billion under management. For taxable munis, the Invesco Taxable Municipal Bond ETF
BAB,
-0.21%
is
one of the bigger funds.
For investors unfamiliar with the municipal space, "high-yield" is a different animal than in the corporate sector: much safer, with
very infrequent defaults. The space "could actually offer a much bigger reward because there are a lot of bargains to be had from
the market dislocation last year, if you don't think they've run their course," Kazatsky told MarketWatch.
With slightly less risk comes a bit less reward: HYD has a 30-day SEC yield of 2.82% as of March 5 while the largest corporate
junk-bond ETF, the iShares iBoxx $ High Yield Corporate Bond ETF
HYG,
-0.21%
,
has
yielded 3.42%.
For a third consecutive month, everyday prices moved sharply higher with gains led by
motor fuels prices.
On the core services side, significant increases came from motor vehicle insurance (up
3.3 percent for the month), transportation services (+1.8 percent), and motor vehicle
maintenance services (+1.0 percent).
Energy prices continue to drive the Everyday Price Index higher in the early part of
2021.
For a given time-horizon, it has been conventional for those estimating such a "rational"
market forecast of expected inflation to take the appropriate Treasury security nominal yield
of that time horizon (say 5 years) and simply subtract from it the yield on the same time
horizon TIPS, which covers security holders for inflation. So it has long looked like this
difference is a pretty good estimate of this market expectation of inflation, given that TIPS
covers for it while the same time horizon Treasury security does not.
Well, it turns out that there are some other things involved here that need to be taken
account, one for each of these securities. On the Treasury side, it turns out that the proper
measure of the expected real yield must take into account the expected time path of shorter
term yields up to that time horizon. This time path has associated with it a risk regarding the
path of interest rates throughout the time period. This is called the Treasury risk premium, or
trp. It can be either positive or negative, with it apparently having been quite high during
the inflationary 1979s.
The element that needs to be taken into account with respect to the TIPS is that these
securities are apparently not as liquid in general as regular Treasury securities, and the
measure of this gap is the Liquidity premium, or lp. This was apparently quite high when these
were first issues and also saw a surge during the 2008-09 financial crisis. In principle this
can also be of either sign, although has apparently been positive.
Anyway, the difference between the nominal T security yield and the appropriate TIPS yield
is called the "inflation breakeven," the number that used to be focused on as the measure of
market inflation expectations. But the new view is that this must be adjusted by adding (tpr
– lp).
In a post just put up on Econbrowser by Menzie the current inflation breakeven for five
years out is 2.52%. But according to Menzie the current (tpr – lp) adjustment factor is
-0.64%. So adding these two together gives as the market expected inflation rate five years
from now of 1.88%, although Menzie rounded it out to 1.9%.
If indeed this is what we should be looking at it says the market is not expecting all that
much of an increase in the rate of inflation from its current 1.7% five years from now. The Fed
and others are looking at a short term spike in prices this year, but the market seems to agree
with their apparent nonchalance (shared by Janet Yellen) that this will wain later on, with
that expected 5 year rate of inflation still below the Fed's target of 2%.
Certainly this contrasts with the scary talk coming from Larry Summers and Olivier
Blanchard, not to mention most GOP commentators, regarding what the impact of current fiscal
policies passed and proposed by Biden will do to the future rate of inflation. Not a whole lot,
although, of course, rational expectations is not something that always forecasts all that
well, so the pessimists might still prove to be right.
Barkley Rosser
Likbez , April 14, 2021 6:27 pm
Larry Summers is a puppet of financial oligarchy. Everything that he writes should be
viewed via this prism. He also is highly overrated.
IMHO rates are no longer are determined by only domestic factors.
I think that the size of foreign holdings of the USA debt and their dynamics is another
important factor. FED will do everything to keep inflation less then 2% but this is possible
only as long as they can export inflation.
BTW realistically inflation in the USA is probably 30%-60% higher than the official
figure. Look at http://www.shadowstats.com/ :
March 2021 annual Consumer Price Index inflation hit an unadjusted three-year high of
2.62%, as gasoline prices soared to multi-year highs, not seen since well before the 2020
Oil Price War. -- March Producer Price Index exploded, with respective record annualized
First-Quarter PPI inflation levels of 9.0% in Aggregate, 16.0% in Goods and 5.6% in
Services.
• L A T E S T .. N U M B E R S .. March 2021 unadjusted year-to-year March 2021
CPI-U Inflation jumped 2.62% -- a one-year high -- as gasoline prices soared, not only
fully recovering pre-Oil Price War levels of a year ago, but also hitting the highest
unadjusted levels since May of 2019 (April 13th, Bureau of Labor Statistics –
BLS). Headline March 2021 CPI-U gained 0.62% in the month, 2.62% year-to-year, against
monthly and annual gains of 0.35% and 1.68% in February.
That inflation pickup reflected more than a full recovery in gasoline prices, which
had been severely depressed by the Oil Price War of one year ago. Such had had the
effect of depressing headline U.S. inflation up through February 2021, including
suppressing the 2021 Cost of Living Adjustment (COLA) for Social Security by about
one-percentage point to the headline 1.3%. By major sector, March Food prices gained
0.11% in the month, 3.47% year-to-year (vs. 0.17% and 3.62% in February); "Core" (ex-Food
and Energy) prices gained 0.34% in March, 1.65% year-to-year (vs. 0.35% and 1.28% in
February); Energy prices gained 5.00% in March, 13.17% year-to-year (vs. 3.85% and 2.36% in
February), with underlying Gasoline prices gaining 9.10% in the month, 22.48% year-to-year
(vs. 6.41% and 1.52% in February).
The March 2021 ShadowStats Alternate CPI (1980 Base) rose to 10.4% year-to-year, up
from 9.4% in February 2021 and against 9.1% in January 2021. The ShadowStats Alternate
CPI-U estimate restates current headline inflation so as to reverse the government's
inflation-reducing gimmicks of the last four decades, which were designed specifically to
reduce/ understate COLAs.
Related graphs and methodology are available to all on the updated ALTERNATE DATA
tab above. Subscriber-only data downloads and an Inflation Calculator are available there,
with extended details in pending No. 1460 .
In this sense China and Japanese policies will influence the USA rates. If they cut buying
the US debt the writing for higher rates is on the wall. In a way, recent events might signal
that FED can lose the control over rate if and when foreign actors cut holding of the USA
debt.
Behavior of foreign actors is probably the key factor that will determine the rates in the
future.
[Apr 13, 2021] U.S. Treasury yields slip despite surge in inflation to 2½-year high by very small number of companies. Treasury yields slipped Tuesday after bond investors shrugged off an increase in U.S. consumer prices in March that sent yearly inflation measures to the highest level in two and a half years. Treasury yields slipped Tuesday after bond investors shrugged off an increase in U.S. consumer prices in March that sent yearly inflation measures to the highest level in two and a half years.
The 10-year Treasury note yield
TMUBMUSD10Y,
1.653%
fell
to 1.659%, down from 1.675% at the end of Monday, while the 2-year note
TMUBMUSD02Y,
0.168%
was
steady at 0.169%. The 30-year bond yield
TMUBMUSD30Y,
2.339%
slid
0.9 basis point to 2.336%.
What's driving Treasurys?
The U.S. consumer price index rose
0.6% in March, while the core gauge that strips out for energy and food prices came in
at an 0.3% increase.
The annual rate of inflation climbed to 2.6% from 1.7% in the prior month, marking the highest level since the fall of 2018.
More content below More content below More content below More content below More content below
More content below Jared
Blikre Sat, April 10, 2021, 8:22 AM
Warren Buffett's Berkshire Hathaway should scale back its passive investment in the S&P
500 ( ^GSPC ) and plow it
right back into Berkshire stock ( BRK-A , BRK-B) . That's because the environment for stock
picking is ripe for a shift away from passive investing, which could suffer a decade of low or
nonexistent returns.
"This is the single worst time to be a passive investor in since they started passive
investments... The [S&P 500] index is highly likely to not make money over the next 10
years," said Bill Smead, chief investment officer of Smead Capital Management, during the most
recent Yahoo Finance Plus
webinar on Wednesday. "Whether you look at historical price earnings ratios, whether you look
at the normalization of interest rates, whether you look at ridiculously high levels of
participation by individual investors -- compared to household network going back for decades,
it all points to the same thing. The markets are not designed to make the majority
succeed."
'You have to be a deviant to outperform'
In investing parlance, alpha is the return above and beyond a benchmark, such as the S&P
500 -- in other words, a trader's edge. By definition, an investor in an ETF that tracks the
index, such as the SPDR S&P 500 ETF ( SPY ), will see no alpha. But an active trader needs
to find alpha by thinking differently.
"Alpha comes from deviation. You have to be a deviant to outperform -- not a non-deviant,"
said Smead.
Not all stock pickers are alike.
Cathie Wood 's ARK Innovation ETF quickly became the world's largest actively managed ETF,
with $28 billion in assets under management at its February peak. Over the last year, the fund
loaded up on high growth names like Tesla ( TSLA ), Square ( SQ ) and the Grayscale Bitcoin Trust ( GBTC ).
Smead prefers a more value-focused approach that also incorporates growth strategies. He
uses a few recent examples to warn how quickly momentum trades can reverse. "[W]hen money comes
out of popular growth stocks, it's like a fire hose. And the companies that it's going into are
a teacup. You're pouring water from a fire hose into a teacup. And that's also part of what
happened with Reddit and Archegos," he said.
For low-income Americans, it has been a double-whammy of job losses
(the total
number of Americans receiving jobless benefits from the government has basically stagnated for the last four months)...
Source: Bloomberg
...and significant increases in the costs of living.
As
Bloomberg
reports
, while the headline consumer inflation rate in the U.S. remains subdued, at 1.7% - but it
masks
large differences in what people actually buy
.
If you like to eat,
food-price inflation is running at more than double the headline rate
,
and staples like household cleaning products have also climbed.
Source: Bloomberg
if you drive a car,
gas prices have soared
in recent months...
Source: Bloomberg
All of which might explain why confidence among the lowest income Americans is lagging significantly (because
groceries
or gas take up a bigger share of their monthly shopping basket than is the case for wealthier households, and they're items that
can't easily be deferred or substituted
)...
Source: Bloomberg
An analysis by Bloomberg Economics
, which reweighted consumer-price baskets based on the spending habits of different income
groups, found that
the richest Americans are experiencing the lowest level of inflation
.
"On average, higher-income households spend a smaller fraction of their budgets on food,
medical care, and rent, all categories that have seen faster inflation than the headline in recent years, and 2020 in
particular."
The question of who exactly gets hurt most by higher prices could become more urgently concerning as most economists - and even The
Fed itself - expect inflation to accelerate in the next 12 months.
So, in summary, The Fed is telling Americans - ignore "transitory" spikes in non-core inflation (such as food and energy), it's just
temporary and base-effect-driven (oh and we have the "tools" to manage it). However,
despite
all The Fed's pandering and virtue-signaling about "equity" and "fairness", it is precisely this segment of the costs of living that
is crushing most of the long-suffering low-income population ($1400 checks or not)
.
And now all eyes will be on this morning's PPI print which is expected to surge to +3.8% YoY.
Bond markets are firmly in the driving seat. For too long, inflation has disappeared from
investors' radar. The key ones include a hostile environment for trade and globalisation,
business and labour support public programmes and the extraordinary debt burden fuelled by the
pandemic. These are set to create a turning point in the current market regime before long.
American savers could once count on bonds to provide meaningful returns with modest risk. Not anymore.
More than a decade of easy money has kept the U.S. economy afloat in times of crisis and fueled an
unprecedented boom in financial markets.
But it's also created a whole new series of risks, especially for savers.
Where there was once a vast pool of safe debt in which they could park their cash and count on annual
payouts of 5% or more -- comfortably above inflation -- today there's little more than a puddle, and a shrinking one at that. In fact,
never has the amount of new government and corporate debt paying even modest yields been so minuscule.
Institutional investors and savers looking for a 5% annual interest rate had plenty of new bond and loan offerings rated BB
and above to choose from prior to the 2008 financial crisis. These included debt from government-sponsored mortgage-loan
companies like Fannie Mae and Freddie Mac.
$932.6B
580 parent issuers
Rating:
BB
BBB
A
AA
AAA
$84.0B
Federal National Mortgage
Association
(Fannie Mae)
$179.4B
Federal Home Loan Banks
$85.2B
Federal Home Loan Mortgage Corp
(Freddie Mac)
By 2019, after a decade in which the Federal Reserve kept benchmark rates near zero, the pool had shrunk dramatically, despite
the fact that issuance of new debt was near record levels. Debt rated A or above paying 5% virtually disappeared, leaving the
vast majority of such offerings rated in the lowest tier of investment-grade, or worse.
$333.0B
301 parent issuers
$7.5B
Altice USA Inc
▼
$11.7B
◀
The Walt Disney Company
Now, after the Fed's unprecedented intervention in bond markets drove rates down even further in the pandemic, finding anything
paying more than 5% has become difficult, except for investors willing to dip into the riskiest parts of the junk-bond market.
While cheap borrowing costs have been a boon for corporate America, the same can't be said for money managers that need to
generate returns that match their long-term obligations.
$131.7B
138 parent issuers
$23.9B
Petroleos Mexicanos
The repercussions -- for pension managers, endowments, insurance companies and 70 million baby boomers starting
their retirements -- are vast. Sure, yields aren't negative like in much of Europe, but many are nonetheless being forced to, as
legendary investor Warren Buffett recently
put it
, "juice the pathetic
returns now available by shifting their purchases to obligations backed by shaky borrowers."
Others may choose to heed the advice of Ray Dalio, the founder of hedge fund giant Bridgewater Associates, who
now recommends
avoiding the U.S. bond market
entirely and focusing on higher-returning, non-debt investments.
Junk's Rock-Bottom Rates
The average yield on bonds rated BB and lower recently fell to a record low.
Average yield
12%
Covid-19
Recession
▶
10
8
6
3.89%
4
2011
2013
2015
2017
2019
2021
While the potential payout is greater, such moves also carry significant risk, especially for groups
previously accustomed to holding only the safest assets.
It's possible that as savers push deeper into lower-rated debt, equities and more esoteric markets, the
reckoning never comes.
But most know that's ultimately unlikely.
"It's a struggle that all of the public pension plans have been facing for a number of years -- there are some
solutions, and there are some hope and pray trades," said Steve Willer, who helps manage $21 billion as deputy chief investment
officer at the Kentucky Public Pensions Authority, which has lowered certain return targets amid the changing investment
environment. "People are having to be more creative in looking at different segments of the debt market. That comes with
different risks."
Source: Bloomberg compilation of government and corporate dollar-denominated bond and loan offerings with a yield of 5% or more
at issue and at least one BB- or higher rating from S&P Global Ratings, Moody's Investors Service or Fitch Ratings. Issuance is for
the six months ended March 31. Debt amounts are aggregated by issuer and ratings tier. Data includes debt issued in exchange for
older bonds and notes linked to currencies that may yield more than traditional securities.
Editors: Boris Korby, Natalie Harrison and Alex Tribou
...Economists do expect inflation to rise to above 2% as more states reopen and then stay
there. And the St. Louis Fed is forecasting a 2.35% rate for the next 10 years.
...China's economy has dynamics that could raise the U.S. inflation rate over time. Key to
the argument are China's aging population and the value of the country's currency, the Yuan.
First, age. Today, the average age in China is 38, the same as in the U.S. By 2040, though, the
number skyrockets to 47 in China and dips to 37 here.
The shift means fewer Chinese workers and upward pressure on pay. Higher wages probably
would cause Chinese manufacturers to raise prices of exports, which could be passed onto
American consumers.
Now, the Yuan. The currency bottomed at 7.12 per dollar in late 2019 after a more than
five-year down-trend. China wants a weaker currency so its exports are more competitive --
cheaper -- for global buyers. Since the end of 2019, the Yuan has risen to 6.50 per dollar. If
the trend continues, U.S. importers might raise prices because the cost of their imports are
higher.
"Over the next decade, Asia's growth will slow dramatically, its wages will rise, its
factories will close, its surpluses will melt and its currencies will rise sharply," wrote
Vincent Deluard, global macro strategist at StoneX in a note. "For the rest of the world, this
will be a massive and unexpected inflationary shock."
Bill Gross expect that it will end the year at 2.5% Gross said he bet against the 10-year Treasury through
the futures market and remains short, anticipating a combination of rising commodity prices, a weaker dollar and stimulus-driven demand
will spark inflation. "Inflation, currently below 2%, is not going to be below 2% in the next few months," Gross said. "I see a 3% to
4% number ahead of us."
Bloomberg
...High-yield bonds rated in the CCC tier, usually the lowest-graded bonds that trade,
gained 3.58% year-to-date, according to Bloomberg Barclays index total return data. They
performed better than leveraged loans, which saw returns of 1.78%, and high-grade bonds, which
posted a 4.65% loss. They outperformed mortgage bonds and Treasuries too.
The higher coupons that the securities pay can offer insulation against the sting of rising
yields. CCC notes average coupons of 7.7%, compared with 5.9% for high yield debt overall and
3.7% for investment-grade corporate notes, according to Bloomberg Barclays index data.
"The lower quality trade still has some legs," said Scott Kimball, co-head of U.S. fixed
income at BMO Global Asset Management. "Investors typically look to high-yield securities,
particularly CCCs, when yields are on the rise. Now, we see record positive revisions for U.S.
growth by economists being further boosted by record fiscal stimulus expectations."
Krugman is is barking on the wrong tree. The question right now is not wage inflation but the
inflation due to weakening dollar as purchases of Treasuries by foreign buyers weakened. That
what probably caused the spike on 10 year Treasuries yield.
Without foreign buyers of the US debt the deficit spending does not work. So it is quite
possible that this time inflationary pressures will come from the weakening of the status of the
dollar as the world reserve currency. As along the this status is unchallenged the USA will be
OK. If dollar is challenged the USA will experience the Seneca cliff.
Paul Krugman argues once's again this morning that any increase in inflation this year as
part of a post-pandemic boom will be transitory:
I agree. I want to elaborate on one point he hasn't emphasized; namely, you can't have a
wage-price inflationary spiral if wages don't participate!
To make my point, let me show you three graphs below, covering wages and prices in three
different periods: (l) the inflationary 1960s and '70's, (2) the disinflationary
Reagan-era 1980s and early '90's, and (3) the low inflation period of the late 1990s to the
present.
In addition to the YoY% change in CPI, I also show CPI less energy (gold), better to show oil
shocks, and also that it takes about a year for inflation in energy prices to filter through to
inflation in other items.
Also, hourly wages were greatly affected (depressed) by the entry of 10,000,000's of women
into the workforce between the 1960s and mid-1990s. This increased median household income, which
would be the better metric, but since that statistic is only released once a year, I've
approximated its impact by adding 1% to the YoY% change in average hourly wages (light blue).
"It took really more than a decade of screwing things up -- year after year -- to get to
that pass, and I don't think we're going to do that again," Krugman said of the inflation
scourge of the 1970s to early 1980s. He spoke in an interview with David Westin for Bloomberg
Television's "Wall Street Week" to be broadcast Friday.
...The worst-case scenario out of the fiscal stimulus package would be a transitory spike in
consumer prices as was seen early in the Korean War, Krugman said. The relief bill is
"definitely significant stimulus but not wildly inflationary stimulus," he said.
...Economists predict that the core inflation measure tied to consumer spending that the Fed
uses in its forecasts will remain under 2% this year and next, a Bloomberg survey shows. A
different gauge, the consumer price index is seen at 2.4% in 2021 and 2.2% next year. The
CPI peaked at over 13% in 1980.
The risk is that policy makers are "fighting the last war" -- countering the undershooting
of the 2% inflation target and limited fiscal measures taken after the 2007-09 financial
crisis, the economists said.
Even so, he argued that "redistributionist" aspects of the pandemic-relief package will
reduce the need for the Fed to keep monetary stimulus too strong for too long in order to
address pockets of high unemployment. Fed Chair Jerome Powell has repeatedly said the central
bank wants to see very broad strengthening in the labor market, not just a drop in the national
jobless rate.
"It's not silly to think that there might be some inflationary pressure" from the fiscal
package, Krugman said. But it was designed less as stimulus than as a relief plan, he
said.
The Asia times article did it connect the dots for me. china especially is not buying US
bonds anymore. Hence low demand for it , causing the yields to ride to attract buyers.
The 30-year Treasury yield has climbed all the way back to its 2019 level, mainly because
inflation expectations built into the yield have risen to the highest level since 2014. A US
government deficit equal to 20% of GDP, a falling dollar and rising commodity prices mean more
inflation in the future.
The Federal Reserve bought most of the Treasury debt issued in the past year, and will have
to buy most of the Treasury debt issued during the coming year, as Bridgewater's Ray Dalio told
the China Economic Forum on Sunday.
Unlike the period after the 2009 crash, when foreigners financed roughly half of the US
government deficit, foreigners haven't increased their holdings of US debt during the past
twelve months.
Dalio, one of the world's most successful investors, warns that they might start to sell the
debt they already own. "The situation is bearish for the dollar," Dalio concluded.
As the late Herbert
Stein said, anything that can't go on forever won't.
Budan University Professor Bai Gang told China's Observer website last week: "For the
past year, the US has continued to issue more currency to ease its internal situation. The
pressure will eventually seriously damage the status of the US dollar as the core currency in
the international payment system."
The UBS economics team holds the out-of-consensus view that annual core PCE inflation won't
exceed the Fed's 2% target until 2024. And what will happen with S&P500 if inflation brakes
3% barrier in late 2021 or 2022. Pumping money into stock market is a Ponzi scheme by definition
so at one point mistki moment might arrive.
Biden hailed the new law's focus on
growing the economy "from the bottom up and the middle out," after decades of supply-side,
or "trickle down" tax policies. It "changes the paradigm" for the first time since President
Johnson's Great Society programs, he said.
But the last time free-spending, inflation-permissive "regime shifts for fiscal and monetary
policymakers" coincided, wrote Deutsche Bank economists David Folkerts-Landau and Peter Hooper,
"such shifts touched off a sustained surge in inflation in the U.S.," beginning in 1966.
Growth in core prices, which exclude food and energy, jumped from well under 2% in 1965 to
nearly 3.5% in 1966 and approached 5% by late 1968, Deutsche Bank noted. Inflation remained
elevated into the early 1970s, even before an oil shock hit in 1973. The pickup was
broad-based, but health care inflation played a key role, going from less than 3% to nearly 7%
by early 1967.
The S&P 500 suffered through a bear market in 1966. Another 19-month bear market began
in late 1968. The Dow Jones made a major top in January 1966. It would take the Dow Jones until
1982 to finally break through that ceiling for good.
Almost everyone expects a notable pickup in inflation this year -- including the Fed.
Monetary policymakers expect the personal consumption expenditures (PCE) price index to rise
2.4% this year. That's vs. 1.5% in the 12 months through January.
Fed Chair Jerome Powell said March 17 that the Fed will discount this year's jump in prices
as a transitory bounce from pandemic-induced weakness. What happens in 2022 will be key. Fed
projections show inflation easing back to 2%. But if pressures don't ease, the Fed will have to
reassess its 2024 timetable for the cycle's first rate hike.
It's easy to see how Fed projections might understate next year's inflation. Policymakers
likely are not factoring in any impact from the Democrats' next massive spending package.
Subdued health care prices might help keep inflation in check, depending on what Congress
does. A 2% hike in Medicare reimbursements is scheduled to lapse in April, but lawmakers appear
set to extend it. A 3.75% increase in Medicare fees for physicians could end in January,
Deutsche Bank said.
Democrats also are eyeing spending curbs to help pay for their infrastructure package.
Letting Medicare negotiate prescription drug prices is high on the list of options.
Longer term, the inflation outlook may depend on whether a
post-pandemic productivity boom offsets upward price pressure as globalization
backslides.
10-Year Treasury Yield Surges On U.S. Economy Growth Outlook
This week, the 10-year Treasury yield has eased to 1.66%, after hitting 1.75% last week, the
highest of the Covid era. Still, the 10-year yield is up 66 basis points since Jan. 5.
Financial market pricing now indicates an expectation that inflation will average 2.35% over
the coming decade. That's the difference between the 10-year Treasury yield and the -0.69%
yield on 10-year Treasury Inflation-Protected Securities, or TIPS.
"Negative real yields seem highly incongruous with the robust economic growth in train,"
Moody's Analytics chief economist Mark Zandi wrote. As real yields rebound, Zandi sees the
10-year Treasury yield reaching 2% by year end, 2.5% in 2022 and 3% by late 2023.
What Do
Taxes, Interest Rates Mean For S&P 500?
As the new fiscal and monetary policy regime takes hold, investors will have a lot to
process. If the era of too-little inflation and ultralow interest rates is drawing to an end,
but earnings growth surges as the economy catches fire, what will that mean for the S&P
500? And how might tax hikes affect stock prices?
... ... ...
The UBS economics team holds the out-of-consensus view that annual core PCE inflation won't
exceed the Fed's 2% target until 2024. Chief U.S. economist Seth Carpenter expects the new
stimulus checks to be largely saved. The next fiscal package might likewise have a "muted" bang
for the buck, while adding just $600 billion to the federal deficit.
... ... ...
Interest Rates: Parker finds that a 50-basis-point rise in the 10-year Treasury yield
compresses price-earnings multiples by six-tenths of a point. Based on the S&P 500's
current forward earnings multiple of about 21.5, that would equate to about a 3% decline in the
S&P 500.
Capital Gains Taxes: Biden has proposed hiking the capital gains tax rate from 20% to 39.6%
for high earners. Parker figures that could slice 1.5 points off the S&P 500 P/E multiple,
potentially a 7% hit. However, UBS expects that not quite half the tax plan will become
law.
Parker arrives at a 19.5 forward earnings multiple for the S&P 500. That also factors in
some compression because the fiscal boost to earnings is bound to slacken...
... On December 7, 2009, I sent out a warning from our Managing Director, J. Kim, to
thousands of people via email about the deterioration of the global economy...
...J. Kim: "Despite the weapons of mass financial destruction that bankers have created
and governments worldwide have coddled and shielded from proper regulation, the majority of
people still incredibly do not understand the crime syndicate-like relationships among
governments, corporations and banks. The public sees that the US markets are up a little over
10% this year and many are duped into believing that that the stock market performance means
that the economy is recovering. And this belief is reinforced by idiot talking heads on TV like
Jim Cramer that do nothing but misinform people. Sure, US markets have now risen by more than
36.79% since they crashed in 2008, a figure that sounds impressive on the surface level. Then
combine this impressive sounding figure with US Fed Reserve Chairman Ben Bernanke's national
appearance on 60 Minutes, when he lies to the nation about inflation rates and about continuing
to create more money out of thin air, and you have millions more that are converted into
sheeple. How do I know? Because I talk almost every month to people in the US that tell me they
believe the economy is recovering. So when people believe that inflation is still less than 2%
because the Fed tells them to believe this, they look at a near 37% gain in the US markets in
the last two years and believe that they have made substantial recovery in their pensions and
IRAs and consequently believe the economy must be recovering as well! (by comparison, J. Kim's
Crisis Investment Opportunities newsletter(that he published back then) has returned more than
105.25% over the same time period, clobbering the S&P 500's 36.79% return, and yielding
very substantial REAL gains, even after the inflationary monetary effects of the US Federal
Reserve's schemes)."
James C : "So besides the government and bankers deliberately keeping people in the dark,
why else do you think some, or even many, people believe the economy is recovering?"
J. Kim: "First of all, the Federal Reserve's insane POMO (Permanent Open Market
Operation) schemes this year (2010) are largely responsible for propping up the US market this
year. In 2009, when I stated that the US would experience significant economic shocks in 2010
and 2011, I did not yet know the duration of the Fed's POMO operations and how insane they were
going to be. Although daily POMOs had already reached upwards of $6 billion and $7 billion per
day as of mid-2009 (just for US Treasuries, but up to multiples of these figures when including
US Treasuries and other debt-related financial products), many had speculated that the POMOs
would soon end. Obviously, with projected cumulative POMOs of nearly $1,000,000,000,000 just
between November 2010 and June 2011 (again just for US Treasuries), the Fed Reserve POMO scheme
not only did not end, but it received an injection of steroids in 2010. So POMOs that were used
to buy future contracts of US market indexes is a major factor that has kept the US market
afloat at this juncture and may continue to keep it afloat for several more months. Rising
stock markets have no correlation to a strong economy anymore due to scams run by Central Banks
and due to gains that largely occur due to the devaluing currencies that these markets are
denominated in . The best performing stock market of the past decade has been the Zimbabwe
stock market. Still, it's irrelevant if you made a quadrillion Zimbabwe dollar profit investing
in the Zimbabwe stock market, as by 2008, a loaf of bread would have cost you 1.6 trillion
Zimbabwe dollars."
James C: "If the economy is really not recovering, then can you explain what is really
going on?"
J. Kim: "Let me explain what is really going on with the economy with the following
disaster analogy. In June of 1995, the Sampoong department store, a five-story building with
four basement levels, suddenly collapsed in Seoul, South Korea, tragically killing 501 people
and injuring 937 others. When the Sampoong department store was constructed, the owners, due to
a desire to cut costs, made several fatal decisions. First, they decided to cut away a number
of support columns in the original blueprint in order to install escalators. Secondly, in order
to cut costs, the owners shrunk the original width of the support columns from the required
80cms to only 60 cms, an inadequate width to support the load of the building. In addition, the
original blueprint called for only a four-story building but the owners built an additional
fifth story that housed a restaurant with a very heavy heated concrete base that quadrupled the
load of the original building design.
Two months before the building collapsed, worrisome cracks appeared in the ceiling of the
south wing's floor. On the day of the collapse, cracks as wide as 10 centimeters appeared in
the top floors of the building five hours before the building collapsed, but the owners hid
this information from its patrons and refused to shut down and/or evacuate the building as they
did not want to lose its daily revenue. When it became clear that the building was going to
collapse, senior executives of the department store fled without warning any of the patrons
still inside the building. An alarm to evacuate the building was only sounded when the building
started to make loud cracking sounds, just 7 minutes before its collapse at 5:57 PM despite
signs of an imminent collapse being clearly visible more than five hours prior. City officials
Lee Chung-Woo and Hwang Chol-Min, in charge of overseeing the construction of the building,
were responsible with concealing the illegal changes to the original blueprint designs and were
later charged with and convicted of bribery."
"Amazingly, the above story serves as nearly a perfect analogy for the US economy. The
government and bankers laud a rising stock market as proof that the economy is recovering. They
go on record stating that inflation is less than 2% when in reality it is more than four times
higher. They state unemployment is less than 10% when it is nearly 23% [Editor's Note: These
statistics all apply to the year in which this original interview was conducted, 2010]. Thus,
to many people, the economy appears as the Sampoong department store's exterior appeared to the
public right before its collapse, structurally sound and with a solid exterior. This is the
reason why 40,000 people a day visited the department store despite its fatal structural
integrity problems. The government and bankers are just like the Sampoong department store
owners, actively concealing all warning signs from the public and selling them an illusion that
all is okay when instead, the economy is heading for collapse. Just as the Sampoong department
store owners constructed a crappy building destined to collapse due to excessive greed, bankers
with the help of government officials, constructed dozens of financial derivative products
destined to collapse due to their excessive greed as well."
"The US regulators that also see the impending cracks in the economy, are just like Lee
Chung-Woo and Hwang Chol-Min. They receive inordinate pressure and bribes from the bankers to
look the other way and keep the public in the dark about the impending doom that is coming. In
the case of the Sampoong disaster, when the contractors refused to continue work on the
building when the owners changed structural regulations that endangered the integrity of the
building, the owners fired the contractors and hired ones that would cut corners. US regulators
that are honest and that try to protect the American public, like Brooksley Born, received the
same fate as the original Sampoong contractors and are also fired or forced to resign. When the
entire system is corrupt, even the rare good person can't save disasters from happening. Thus,
the public is none-the-better-off despite the presence of regulators that are supposed to
protect the public's interests and safety, but in reality, protect the greed and profits of
companies that exploit the public's interests."
"And finally, the economy itself is like Sampoong's interior. It is replete with cracks
and fractures that warn us of the disaster ahead. But even so, a large percentage of the masses
still remains ignorant because the banker/corporate/government three-headed monster keeps the
people's vision in a tunnel by pummeling the public with a constant stream of propaganda on
MSNBC, newspapers, and financial talk shows. In Seoul, Sampoong's owners distracted the
public's attention away from the developing disaster with stores fully of luxury goods. So when
the US economy finally experiences shocks in the future more disastrous than those in 2008, as
was the case with the Sampoong department store collapse, many will believe that now warning
signs had existed despite the evidence that exists to the contrary today. And I'm quite certain
the media, just as they did in 2008, will stupidly ask the same questions they did back then,
such as "How did this happen?" when in fact, all the answers stare them in the face right now.
With the Fed's POMO schemes, regulators that aid and abet fraud, and governments and bankers
that conceal truth from the public, the combined effect of these actions is just to delay
disaster for another year or two. So that is why I say now that disaster will visit the US
sometime between 2011-2013."
... As I already stated above, anyone that has a rudimentary understanding of real finance
(meaning finance as it operates in the real world, not finance as taught in MBA programs)
already understood that Central Bankers' massive provisions of liquidity in the overnight repo
market pointed to US banks being undercapitalized in cash
... in my referenced April 2020 article above, I only explained why it was necessary for
Central Bankers to keep interest rates extremely low, and I had not yet realized, as we were
only a few weeks into a global economic lockdown that was promised to last only a few weeks,
that the global economic destruction caused by lockdowns would be the mechanism used to achieve
this goal of keeping interest rates extremely low. In other words, only in hindsight, a few
months into the lockdown, did I connect the dots myself and understand why it was necessary to
keep the economic lockdowns going forever, which is also why I stated at the end of 2020 that
only the extremely naïve and foolish believe that the bankers and politicians would end
the lockdowns in the New Year, as the problem I explained in April 2020 that needs to be
managed to avoid meltdown of the global financial system still very much exists in March of
2021.
I often look at rising US corporate junk bond yields after long periods of decline as the
proverbial "canary in the coal mine" to predict major trouble ahead in global stock
markets.
As you can see, US corporate junk bond yields have just started to rise after nearly a full
year of plunging yields. Is the rise enough to spark concern? In my opinion, the rise in yields
is not significant enough to yet spark major concern, but if they break 5.0% then at this
point, I will dive deeper into the muck to see what I can find.
So stay tuned, and if you have not yet subscribed to my free newsletter, please do so at the
link at the top of this page.
Higher inflation in any country is typically currency negative. Fears of rampant inflation in
the US have gone unfulfilled for years. the current level of deficit spending raises the question
whether some sort of existential crisis for the dollar is in the books. In 2020 the US budget
deficit hit 14.9% of GDP , the highest level since 1945. FEd now owns around 22% of the US beft
-- in essence, one branch of the government buys debt from the another part of government. This
might be a bad news for stocks, bonds and the dollar. The demand for Treasuries from private
investors, including foreign buyers, appears to have weakened recently.
Trust in government statistics, especially such measures as inflation and unemployment hit
new low (see comnets below) and that also spell troble in the long run.
Under neoliberalism financial oligarchy dominates and labor reduced to the role of "debt
slaves" and lacks any wage bargaining power. So the main danger is deficits and eroding trust in
the US economy which supports the role of dollar as world reserve currency. US foreign policy and
sanctions encourages "flight from dollar" for Russia and China.
Notable quotes:
"... the difference between longer-term and shorter-term yields remains far greater in real yields than in nominal yields. This difference over time, known as the yield curve, illustrates how much investors expect interest rates to rise in the future: A steep curve equals more rate rises. ..."
"... For normal Treasury yields, that five-year to 10-year gap was 0.798 percentage points, up from 0.550 percentage points at the end of 2020 ..."
"... Seems like a very effective way to "tax" 401k money indirectly. ..."
The Fed reiterated last week that its rate-setting committee doesn't expect to increase
interest rates until after 2023. However, investors predict that it will, according to
Sebastien Galy, senior macro strategist at Nordea Asset Management.
... the difference between longer-term and shorter-term yields remains far greater in
real yields than in nominal yields. This difference over time, known as the yield curve,
illustrates how much investors expect interest rates to rise in the future: A steep curve
equals more rate rises.
... For normal Treasury yields, that five-year to 10-year gap was 0.798 percentage
points, up from 0.550 percentage points at the end of 2020 .
... ... ...
Some investors also fear that a sharper rise in interest rates later will be more
destabilizing for other assets such as stocks or riskier corporate debt...
... ... ...
Harold Begzos SUBSCRIBER 1 week ago The value of fiat currency is only
as good as the government that prints the paper. We are managing the dollar like a Caudillo
running a banana republic. The U.S. is experiencing a sugar high. When the sugar runs out the
crash will cause harm for the next decade.
A Andy Kives SUBSCRIBER 1 week ago One of my many price increases this year was this
morning from my metal and plastic container wholesaler, who I buy a few hundred thousand pieces
from annually. Prices are only going up 10-26% in April.
What inflation? Like thumb_up 3 Share link Report flag
S Susan Croxton SUBSCRIBER 1 week ago (Edited) The dollar tanked under Trump, like he
wanted Like thumb_up Share link Report flag
G Gerald Garibaldi SUBSCRIBER 1 week ago (Edited) My grandmother was a deft investor, and
her credo when investing was always "Don't ignore what's around you." I'm not her equal, but
what's around me doesn't seem to be middle/working class families and people gearing up to
shoot their stimulus wad on new TV sets and sunglasses. I think growth will after a short
spirt, disappoint. And inflation will hit like a tsunami. EU is not following our example, by
the way. Most inflation will be imported. 1 Share link Report flag
J John Harris SUBSCRIBER 1 week ago (Edited) An included modest understatement of the
year:
"The flip side of this exceptionalism is a growing fear of higher inflation that could
eventually reverse the dollar's fortunes, according to some investors."
J John Harris SUBSCRIBER 1 week ago (Edited) Duh --
Did anybody look at M2 ?? Austin Lowrie SUBSCRIBER 1 week ago The currency debasement will
continue, until morale improves.... Like thumb_up 5 Share link Report
flag
I Ivaylo Ivanov SUBSCRIBER 1 week ago The article misses an important component of the
equation. Various estimates suggest about half of all US cash in circulation, about $700-800
billion, circulates outside US borders. The trigger of a run on the dollar (a collapse, really)
might be these holders, not foreign governments. The moment they realize they are holding
increasingly worthless money they will try to dump it. Often ordinary people figure out the
worthlessness of a currency much faster than governments.
M1 (hot money) has increased by 70% in 12 months. The question is how fast people realize
what that means.
Like thumb_up Share link Report flag Frank Mostek SUBSCRIBER 1 week ago If you drive car, own a home,
require healthcare, have kids and eat - you have noticed plenty of inflation...
L Lester Brown SUBSCRIBER 1 week ago Makes you realize how slanted the CPI measurement is.
1.4% in 2020 - my a $$!!
B Brett M SUBSCRIBER 1 week ago go through the exercise of reconstructing the CPI with
research online. I did. It won't take you long to see that there is no component less than 2%.
you will find edu costs +5% annully for years, medical costs +4% annually for years. 2 Share
link Report flag
B bruce strong SUBSCRIBER 1 week ago So the Federal debt as a percentage of GDP was about
30% in 2001 and it's now around 100%. Seems we are living way beyond our means and this can
only lead to trouble in the coming years. The only question is will Congress do anything to
stop the spending? Forget about worrying about inflation as it;s the least of our concerns.
p 5 Share link Report flag Frank Mostek SUBSCRIBER 1 week ago I think it around 130% now...
T Ted Terry SUBSCRIBER 1 week ago Apparently the Business Kids are surprised at the
strength of the dollar but knowledgeable readers are not that surprised. The Dollar competes
against the Euro and look at where the EU is. They are squabbling at each other over their
ineffective response to the virus and their economies are struggling to break back to normal.
I'm not sure where the Dollar is with respect to the Pound but the Brits too are still more
virus bound than we are.
B bruce strong SUBSCRIBER 1 week ago Japan's been running with a debt load of over 200% and
the Yen has held up quite well. 2 Share link Report flag
S Stephen S S Hyde SUBSCRIBER 1 week ago "The U.S. has a big advantage because the dollar
is the world's most commonly used currency."
This both understates and buries the lede on this seemingly granitic foundation of a
fiscal/monetary system that has allowed us to get away with simultaneously lowering taxes,
explosively expanding borrowings, creating the money to cover it, and then lending it to
ourselves. (Eat your heart out, Argentina.)
Unfortunately, having the world's reserve currency is not a skyhook, as our British cousins
learned with their once indomitable Sterling. Like thumb_up 23 Share link Report
flag
I Ivaylo Ivanov SUBSCRIBER 1 week ago If you do everything in your power to debase your
currency foreigners eventually notice. It will take one big player noticing to bring down the
house (of cards). In the 60-s and the gold backed dollar it was de Gaulle. It will be
interesting to see who will jump the gun this time around. 3 Share link Report
flag
S Stephen S S Hyde SUBSCRIBER 1 week ago You obviously have an informed sense of history.
The dollar's gold backing had been increasingly precarious but relatively stable until de
Gaulle pulled the fatal trigger. David Van Wie SUBSCRIBER 1 week ago
Fears of rampant inflation have gone unfulfilled for years. The U.S. has had low and stable
inflation for nearly three decades.
Indeed. That point can't be emphasized enough. Said differently: for all of our
research, economic theories and modeling, we still don't understand what causes inflation in
our economy.
Is it caused by massive amounts of deficit spending? Nope. We've had lots of that and no
serious inflation. Higher taxes? Lower taxes? No and no. What about high or low trade deficits?
Sorry, try again. No correlations here.
I could go on, but you get my point. All of the things forecasters such as myself rely on to
model inflation all sound like they should be predictive, but they aren't. Intuition creates
cognitive bias, which in turn leads to bad trades that don't work.
We won't figure out what's going on until about 6-12 months after inflation restarts,
unfortunately. Then, everyone will have known it all along! Just don't ask to see their old
forecasts. Like thumb_up 15 Share link Report flag
S Stephen S S Hyde SUBSCRIBER 1 week ago Great comment, Mr. Van Wie. On top of your point
(or underneath it) is the tendency for complex systems to fail not gradually, but suddenly and
catastrophically. Think the Great Depression, the Soviet Union, the Great Credit Crunch, and
Long Term Capital Management (talk about a moniker to challenge the gods!). I don't know when,
how, or why, but I think our lifetimes will witness the opportunity to dig through the ruins of
a once magnificent edifice built on sand. Like thumb_up 10 Share link Report
flag
B Brett M SUBSCRIBER 1 week ago Yes but your whole basis is on the government orgs giving
your inflation information [% year over year ] are telling the truth. They are not. Like
thumb_up Share link Report flag J Domingo SUBSCRIBER 1 week ago Everyone is worried about inflation except
the Fed.
Which is why everyone is worried about inflation except the Fed. Like thumb_up 21
Share link Report flag
I Ivaylo Ivanov SUBSCRIBER 1 week ago
Everyone is worried about inflation except the Fed.
Which is why everyone should be very worried about inflation. The
seeming carelessness of the Fed is the best indication inflation will get out of hand. Like
thumb_up 3 Share link Report flag Stuart Young SUBSCRIBER 1 week ago With the government pumping
trillions of dollars into the economy, anyone who chooses to ignore serious inflation problems
is just fooling themselves. Like thumb_up 11 Share link Report flag
A Anne T SUBSCRIBER 1 week ago Not an investment expert here at all.
But anyone with a mind knows where the Biden-Harris Administration is going and it's worse
than route Obama-Biden took us on.
Seems Democrats still refuse to stop themselves from getting in the way of a budding
recovery.
And learned nothing between 2009-2020. Like thumb_up 6 Share link Report
flag
P Paul Kaufmann SUBSCRIBER 1 week ago Did you happen to notice the debt/gdp graph in the
article? The slope in the past 4 years is so great that it is almost uncalculable...infinite.
Like thumb_up Share link Report flag
A Anne T SUBSCRIBER 1 week ago Yes I did.
From 2008-1016 it soared from 40% to 76% where it pretty much stayed until the Covid stimulus
of 2020. Like thumb_up Share link Report flag
H H S Howell SUBSCRIBER 1 week ago We are already in an inflationary spiral. Don't rely on
gov figures, just take a trip to the local hardware or grocery store. In the past the danger of
big socialist government was Tax and Spend, today it is Print and Spend resulting in an
enormous escalation of Debt (the largest in the world).
China officially holds $1.1 trillion of our debt, but actually much more when counting Hong
Kong, other regions of China. Should China sell (debt dump) their US bonds, it would have the
destabilizing effect of lower bond prices and higher yields, devaluation of the dollar, higher
cost of servicing our debt and a stock market crash.
J Jeffrey Cunningham SUBSCRIBER 1 week ago Seems like a very effective way to "tax"
401k money indirectly.thumb_up Share link Report flag
P Peter Sherman SUBSCRIBER 1 week ago Bond investors are selling.
The Unholy Marriage of the Federal Reserve and Treasury allowing for the implementation of MMT
( Magic Money Tree ) probably create high inflation .
Given the rotten value in bonds now ( negative real yield) and rising odds of higher
inflation, expect to see more selling.
B Brett M SUBSCRIBER 1 week ago (Edited) I read a quote in an article one time
"until the bond market rebels"
It means people become like me - refusing to own US treasuries nor USA bonds. The only
exception is a 529 account I have which limits choices.
If people became like me relatively fast, investors sell bonds off, interest rates shoot
through the roof as the USA gov loses control of their puppet show. Then the government
defaults - and rather quickly, say within a year after.
I personally believe that USA government debt is worthless. I am a big fan of gold right
now.
If China ever moved toward being a reformed country that didn't have George Orwell cameras in
every alley, field and wooded grove, then the dollar would plummet. If there was another
country that was not pathetic financially I would move my money there.
The investment seeks to track the performance of the Bloomberg Barclays U.S. Treasury
Inflation-Protected Securities (TIPS) 0-5 Year Index. The index is a
market-capitalization-weighted index that includes all inflation-protected public obligations
issued by the U.S. Treasury with remaining maturities of less than 5 years. The manager
attempts to replicate the target index by investing all, or substantially all, of its assets in
the securities that make up the index, holding each security in approximately the same
proportion as its weighting in the index.
Vanguard Short-Term Inflation-Protected
Securities Index Fund ETF Shares (VTIP) NasdaqGS - NasdaqGS Real Time Price. Currency in
USD Add to watchlist
WASHINGTON (Reuters) - Inflation will hit 2.5% this year and not fall much in 2022, which
the Federal Reserve should welcome as a way to reaffirm the central bank's inflation target,
St. Louis Federal Reserve Bank President James Bullard said on Tuesday.
" I am not seeing the inflation rate come down very much in 2022 ... maybe just
slightly, " Bullard said in comments that placed him among the more aggressive Fed
officials in terms of willingness to see inflation move higher this year and remain there
without raising interest rates.
"Part of the goal is to take the increase in inflation that we have this year penciled in
and allow some of that to move through to inflation expectations," and keep them cemented at
the Fed's 2% inflation target.
The real inflation for the past 20 years was probably around 5%: that buypoer of$100
dinimisnes by 50% in 20 years. In some areas like education and healthcare much faster that that.
In some areas slower then that. Official inflation was around half of that (and this discrepancy
is systemic -- due to the desire of any regime based of fiat currency to underestimate inflation
and thus diminish additional payment to Social Security and other linked to inflation budget
items) . Thanks to a massive federal deficit inflation might pick up.
Higher inflation in 2021-2023 is now the consensus,
"The Fed has signaled that its dovish monetary policy is here indefinitely," Mr. Toomey
said, noting a recent uptick in commodity prices and a brightening outlook for economic growth.
"I worry that the Fed will be behind the curve when inflation picks up."
Mr. Powell, however, reiterated that he doesn't expect supply-chain bottlenecks or an
expected surge in consumer demand later this year as the economy reopens to change in long-term
price trends. The Fed generally doesn't alter its policies in response to temporary price
pressures.
"In the near term, we do expect, as many forecasters do, that there will be some upward
pressure on prices," Mr. Powell said. "Long term we think that the inflation dynamics that
we've seen around the world for a quarter of a century are essentially intact. We've got a
world that's short of demand with very low inflation and we think that those dynamics haven't
gone away overnight and won't."
Sen. Richard Shelby (R., Ala.) pressed Ms. Yellen on her changing views on the risks of high
and rising federal debt. Government red ink has swelled over the past year as economic activity
stalled and Congress ramped up spending to combat the pandemic.
Lloyd B. Thomas, Ph.D. University of Missouri Columbia, Mo.
The Federal Reserve is capable of nipping any surge of inflation, but it has made clear it
will be behind the curve as inflation rises. It has announced that it will not boost interest
rates until it is confident we have reached full employment and until inflation substantially
exceeds 2% annually for a considerable period.
Ed Kah, l Woodside, Calif,
The Fed's "foresight" in the 1970s sleepwalked us over 10 years into 14.5% inflation,
18.5% mortgage rates, 7.5% unemployment and a severe recession in 1980. The Fed's repression
of interest rates has already inflated asset prices. It is now favoring spending that will
move the national debt held by the public toward 150% of GDP if the Democrats keep passing
multitrillion-dollar stimulus spending bills in a fast recovering economy.
The big risk comes when interest rates regress to higher historic averages that increase
the cost of government debt. Even a very small rise in short-term rates shook the markets
recently. The Fed should at the very least hedge this risk by lengthening the maturity of
most government debt. They should also caution Congress about the sorry history of countries
whose debt exceeds GDP.
Jacob R. Borden , P.E. Trine University, Angola, Ind.
Prof. Blinder uses macroeconomic anecdotes to argue that upward of 4% inflation is no big
deal. But it is a big deal when you recognize that inflation is a tax on the accumulation of
wealth. Sen. Elizabeth Warren must be smiling.
Even worse, inflation is a regressive tax on wealth. The professional class is already
shifting assets to protect against inflationary headwinds. Mary B. Flyover, on the other
hand, has few such assets and instead spends relatively more of her money on fuel and
groceries, the very elements missing from Mr. Blinder's preferred measure of
inflation.
Every year, inflation saps the spending power of a dollar earned, putting future savings
further out of reach for people already being left behind. What little savings is available
is largely in checking and savings accounts that don't even keep up with current inflation,
let alone just a little more. Then add the compounding impact of inflated incomes on inflated
tax bills. Once 4% inflation is baked in, Ms. Flyover's tax bill will be forever higher,
while her purchasing power will trend ever lower.
Thomas Porth, Hockessin, Del.
The facts that Prof. Blinder doesn't cite are what worry me. When I studied economics at
Princeton in 1981 (using Prof. Blinder's textbook), the yield on the 10-year Treasury stood at
14% as of the end of December, while the CPI-U inflation rate stood at 8.9%. The real risk-free
rate of return was therefore a positive 5.1% or so. In contrast, today the CPI-U stands at 1.7%
(March 10), while the yield on the 10-year Treasury stands at 1.71% (March 18), for a real
risk-free rate of return of what is effectively zero.
Even relying on current measures of inflation, the real rate of return has dropped from
positive 5.1% in 1981 to zero or, let's be serious, less than zero today (when I am retired).
Sorry, Prof. Blinder, but I'm starting to panic.
But if FED lost control think can became really break soon. Theoretically TIP bought directly
from Treasury might be an escape for misery but currently they are not as their yield right now
is just 0.125% while inflation is somewhere probably between 2 and 6 percent per year. CPI Inflation Calculator
shown that $1K in 200 is equivalent to $1558 now so the official annual inflation is around
2.5%
...The economics of trading from stocks and real estate to interest rates would be turned
upside down if projections of runaway prices are to be believed.
Yet there are clear divisions. Goldman Sachs Group Inc. says commodities have proven their
mettle over a century while JPMorgan Asset Management is skeptical -- preferring to hide in
alternative assets like infrastructure.
Pimco, meanwhile, warns the market's inflation obsession is misplaced with central banks
potentially still set to undershoot targets over the next 18 months.
... There will be rotation into real-economy assets such as small caps, financials and
energy stocks instead of rates and credit, and that will generate a lot of volatility.
... TIPS (only if bought directly from the treasury) offer reasonable insurance for an
inflation overshoot. Commodities and assets linked to real estate should also benefit in an
environment of rising inflation.
Bind vigilanties is a myth... Concerned speculators are real. They would "sell first and ask
questions later", pushing up interest rates and battering bonds and stocks...
The bond vigilantes appear to have returned, punishing not only the Treasury market but also
exacting a toll on the Nasdaq Composite's highfliers. What's different this time is that the
bond vigilantes are fighting the Fed, to mix two market aphorisms. The Federal Reserve just
reiterated its intention to maintain its ultra-accommodative policy until it sees what it deems
as maximum employment and inflation steadily above 2%.
This is the first tine the benchmark 10-year note trades up above 1.7% since Covid-19
pandemic began. Though much higher than last year, when it spent months between 0.6% and 0.9%,
the 10-year yield also remains low on a historical basis, It have been above 3% as recently as
2018.
The key problem is that the S&P500 level is in the bubble territory using Shiller metric
and that means that a large correction is a possibility.
As 10-year TSY yields briefly touched 1.75% this morning in the wake of Wednesday's FOMC, an
overnight note from Zoltan Pozsar
predicting the end of SLR relief , and a report by the Nikkei noting that the BOJ would
allow long-term interest rates to move in a slightly larger range of about 0.25%, versus 0.2%
now...
Bank of America warned that ... 10-year yields above that level could become a headwind for
the equity complex. As BofA strategist Savita
Subramanian wrote "history suggests that 1.75% on the 10-yr (the house forecast and ~25bp above
current levels) is the tipping point at which asset allocators begin to shift back to bonds"
and thus sell stocks in the next wave of aggressive liquidations.
Why 1.75%? Because that yield on the 10Y is decisively above the S&P's dividend yield,
and where according to BofA "there is an alternative to stocks", or TIAA.
Separately, in its fund manager survey, Bank of America found that while few believed that
rates at 1.5% would cause an equity correction (which they did as
Nomura originally predicted one month ago ), the move from 1.5% to 2% is critical as 43% of
investors now think 2% is the level of reckoning in the 10-year Treasury that will cause a 10%
correction in stocks .
Ajax_USB_Port_Repair_Service_ 7 hours ago
2.0 is the new 1.75
paid_attention 4 hours ago (Edited)
I've noticed that there hasn't been any down days over 2% in months...
Globalistsaretrash 7 hours ago remove link
Just last week an article said 1.54% would trigger Armageddon.
Boxed Merlot 7 hours ago
...last week...1.54% would trigger Armageddon...
I know this is getting old, but being cursed with a "boomer memory", I still remember when
interest only real estate purchases at 1% of purchase price per month to service one's "note"
was considered a steal. Home loans at 16-18% were common and t-bills were paying a mere
10-12% a year.
What's more, me and mine are still here after all those years, albeit a bit longer in the
tooth, but that's life.
I know, I know, this time is different.
Seasmoke 7 hours ago
So no Ponzi Collapse at 1.65 ?? Because I read that somewhere last week.
Globalistsaretrash 7 hours ago
Me too.
radical-extremist 7 hours ago (Edited) remove link
OMG! I can't decide whether I want a 1.75% yield in treasuries or SPY dividends....just so
I can keep pace with 2.2% inflation of the DXY...of my $1400 stimmie.
nope-1004 7 hours ago remove link
1.75.... lmao. The rigged casino is THAT weak?
mtl4 7 hours ago (Edited) remove link
Everyone was a genius back in the Dot Com era too.......works until it doesn't.
drjd 6 hours ago
Because life is all about the pursuit of profits?
I woke up 7 hours ago
How much more fake money needs to be printed to cover the debt when yields go to 1.75
gcjohns1971 6 hours ago
When everyone is a finacialized zombie, a rotation from stocks bankrupts everyone. If
corporates are deprived of their financial casino takes, then you have until quarterlies to
see that as a GDP bloodbath.
Then the only place to go will be commodities. The inflation the Fed has been searching
for lives there. PPI will go wild, up double and some times triple digits in a matter of
days, spooking everyone.
itstippy 7 hours ago
Does the Fed have some sort of tool in their toolbox they could use to suppress market
yields on the 10 year if needed?
JZimmerman901 7 hours ago
They only have one "tool" and that's to print money. And sure, if they print money to buy
10 years, that would suppress yields.
Chutney ferret Harris 7 hours ago
Correction to the article - "Then again, Goldman has been wrong about virtually everything
it has said publicly in recent years so take the bank's optimism with a metric ton of
salt."
We know privately Goldman knows what is going on and happily collecting its vig from the
taxpayers.
ReadyForHillary 6 hours ago
Why would anyone assume that what GS states publicly is their true opinion?
silverredux 7 hours ago
Goldman has been correct because they've invested in the other side of the argument every
time
Goldman up 152% in 12 months.
Rising rates keep metals in check too. Just a bonus
MrNoItAll 7 hours ago
Goldman Sach bank's optimism is fabricated hope-filled messaging to the "investors" their
mega-bonuses are dependent on.
QE4MeASAP 7 hours ago
Maybe we'll get to see if "Not in my Lifetime" Bernanke was correct.
Everybody All American 7 hours ago remove link
We are now over the 100% debt to GDP ratio barrier and if rates rise from here to any even
small degree it is game, set, match. Since the market top of the 10yr in price there has been
a 7% loss for those who bought as it stands right now. We are talking some big losses.
Remember, no one is buying this stuff for the yield.
incalescent 7 hours ago
While I like to disagree with Goldman on principle. I think there is a better argument
than the dividend yield of S&P500 stocks to account for the upcoming shift. The 2% and 3%
inflections points have more weight with the general trends. This 1.5% number feels like an
exercise in finding a reason to pick the number, not a sharp pin to prick the bubble.
Bubble though, it is, and we live in cactus times.
Calvinharrison 1 hour ago
I put all my pension into government bond funds.. it will drop the least compared to
stocks. And I could enter stocks again later. 30% up on the year is ridiculous and there are
some funds that went up close to 50%.
AUD 3 hours ago
I think it's the volatility of the move which concerns the Fed. If interest rate spreads
stay tight as rates move higher, the casino can stay afloat. If rates move to fast, things
get out of control.
Ozarkian 7 hours ago
Does this mean you can't have your cake and eat it too?
A worry for retirees: Inflation forecasts hit 8-year high
A worry for retirees: Inflation forecasts hit 8-year high
Brett Arends
Mon, March 15, 2021, 10:01 AM
Nobody suffers more from high inflation than retirees. Back in the 1970s, it was those in retirement living
on fixed income that got hit the hardest as prices rose year after year. The investment returns from their
bonds and cash fell way behind.
Real inflation in the USA is probably close to 3-4% a year judging from the dynamic of rental
payments and prices on on food. Annual Food inflation was between 3.93%, to 3.78% in December to
February timeframe.
The February 2021 ShadowStats Alternate CPI (1980 Base) increased 9.4% year-to-year, up from
9.1% in January 2021, 9.0% in December 2020 and against 8.8% in November. The ShadowStats
Alternate CPI-U estimate restates current headline inflation so as to reverse the government's
inflation-reducing gimmicks of the last four decades, which were designed specifically to reduce/
understate COLAs.
Inflation may be on many investors' minds, but it has yet to show up in the numbers.
Moreover, a close reading of the data suggests that inflation won't be a problem for some time,
if ever.
The latest reading of the consumer price index shows that Americans' cost of living was only
1.7% higher in February 2021 than a year earlier. That's the fastest inflation reading since
the pandemic began, but still substantially slower than the pre-pandemic average. Exclude
volatile food and energy prices, and inflation is running at 1.3%...
The understatement of housing inflation in the consumer price index has reached a new
milestone.
As reported, the gap between the actual change in house prices and owners' rent, published by the Bureau
of Labor Statistics (BLS), exceeds the "bubble" levels.
In February, BLS reported owner's rent increased 2% over the last 12 months. House price inflation, as reported by the Federal
Housing Finance Agency (FHFA), increased 11.4%. That gap over 900 basis points exceeds the 800 basis point gap recorded during
the housing bubble peak.
The consumer price index was created and designed to measure prices paid for purchases of specific goods and services by
consumers. The CPI was often referred to as a buyers' index since it only measured prices "paid" by consumers.
The CPI has lost that designation.
It
is no longer measures actual prices.
For the past two decades, BLS imputes the owners' rent series, using data from
the rental market, no longer using price data from the larger single-family market.
Imputing prices for the cost of housing services make the CPI a hybrid index or a cross between a price index and a cost of
living index. A hybrid index is not appropriate as a gauge to ascertain price stability, especially when the hypothetical
measure of owner's rent accounts for 30% of the core CPI.
The CPI missed the price "bubble" of the mid-2000s, and the economic and financial fallout was historic.
History
sometimes repeats itself in economics and finance. Policymakers forewarned.
The FED has been inflating a cheap money bubble for 40 years. The response to every
recession is to cut rates. But the Fed never returns rates to pre-recession levels so the
economy ultimately enters one recession after the next at lower and lower rates. Now at near
zero, the gig is up. Dropping rates by nearly 50 basis points per year for four decades has
created the mother of all bubbles.
Greed is King 1 hour ago remove link
USA, the new Roman Empire and just like the old Roman Empire was, the scourge of the
planet.
A Sovereign debt ridden nation, that only survives due to its enormous military that
enables the USA to pillage the resources of other countries via a foreign policy of threat,
intimidation, invasion and occupation; exactly the same tactics used by the original Roman
Empire.
Unfortunately for the USA, the MIC and American armed forces, are the biggest consumer of
all of the income and resources obtained from pillaging and debt, they are a greedy
insatiable monster that continues to grow and demands more and more to be fed.
We`re now in the ludicrous, unsustainable and unacceptable situation of, all of the
countries who are having their resources stolen by the USA, and all of the American tax
payers who are underwriting the debt incurred by the USA are in fact paying for the MIC and
armed forces to repress them.
Here`s a radical idea; why not stop borrowing to feed the MIC monster, and try treating
the rest of planet Earth with respect and cooperation.
Commenter R.J.S. Discuses CPI Rising led by Food, Energy, and Medical
The consumer price index rose 0.4% in February , as higher prices for fuel, groceries,
utilities, and medical services were only partly offset by lower prices for clothing, used
vehicles, and airline fares the Consumer Price Index Summary from the Bureau
of Labor Statistics indicated that seasonally adjusted prices averaged 0.4% higher in February,
after rising by 0.3% in January, 0.2% in December, 0.2% in November, 0.1% in October, 0.2% in
September, 0.4% in August, by 0.5% in July and by 0.5% in June, after falling by 0.1% in May,
falling by 0.7% in April and by 0.3% in March, but after rising by 0.1% in February of last
year .the unadjusted CPI-U index, which was set with prices of the 1982 to 1984 period equal to
100, rose from 261.582 in
January to 263.014 in February , which left it statistically 1.6762% higher than the
258.678 reading of February of last year, which is reported as a 1.7% year over year increase,
up from the 1.4% year over year increase reported a month ago .with higher prices for energy
and foods both factors in the overall index increase, seasonally adjusted core prices, which
exclude food and energy, were up just 0.1% for the month, as the unadjusted core price index
rose from 269.755 to 270.696, which left the core index 1.2826% ahead of its year ago reading
of 267.268, which is reported as a 1.3% year over year increase, down from the 1.4% year over
year core price increase that was reported for January and the 1.6% the year over year core
price increase that was reported for December
The volatile seasonally adjusted energy price index rose 3.9%
in February , after rising by 3.5% in January, 2.6% in December, 0.7% in November, 0.6% in
October, 1.4% in September, 0.9% in August, 2.1% in July, and by 4.4% in June, but after
falling by 2.3% in May, by 9.5% in April, 5.8% in March, and by 2.5% last February, and hence
is only 2.4% higher than in February a year ago the price index for energy commodities was 6.6%
higher in February, while the index for energy services was 0.9% higher, after falling 0.3% in
January .the energy commodity index was up 6.6% on a 6.4% increase in the price of gasoline and
a 9.9% increase in the index for fuel oil, while prices for other energy commodities, including
propane, kerosene, and firewood, were on average 7.3% higher within energy services, the price
index for utility gas service rose 1.6% after falling 0.4% in January and is now 6.7% higher
than it was a year ago, while the electricity price index rose 0.7% after falling 0.2% in
January .energy commodities are now averaging 1.6% higher than their year ago levels, with
gasoline price averaging 1.5% higher than they were a year ago, while the energy services price
index is now up 3.2% from last February, as electricity prices are also 2.3% higher than a year
ago
The seasonally
adjusted food price index rose 0.2% in February, after rising by 0.1% in January and 0.3%
in December, after being unchanged in November, rising 0.2% in October, rising 0.1% in August
and in September, after falling 0.3% in July, rising 0.5% in June, 0.7% in May, 1.4% in April,
0.3% in March, and by 0.3% last February, as the price index for food purchased for use at home
was 0.3% higher in January, after falling 0.1% in January, while the index for food bought to
eat away from home was 0.1% higher, as average prices at fast food outlets rose 0.4% and prices
at full service restaurants rose 0.3%, while food prices at employee sites and schools averaged
12.2% lower notably, the price index for food at elementary and secondary schools was down
13.7% and is now down 32.5% from a year ago
Yet anyone hoping for a quick and painless reprieve from surging rates will be disappointed.
In his latest Weekly Kickstart, Goldman's David Kostin writes that the bank's economists expect
that rates will continue to rise in coming months and forecast 11% real US GDP growth in 2Q
with core PCE inflation rising to 2.3% "suggesting that investors will have to continually
grapple with the anxiety about economic overheating and Fed tightening that has gripped markets
in recent weeks." Goldman also expects the 10-year yield will rise to 1.8% by mid-year and 1.9%
by year-end. At the rate it is going, it may get there next week.
HARLEY BASSMAN: Well, that's a good question. I would say that this notion that rates are
exploding higher and bad things are happening, it's not quite the case. I would say that when
10-years were at 0.75, that was the wrong price. All we're doing now is going to the right
price as opposed to where we were before , which is the wrong price. I would push back at you.
We've seen a significant curve steepening. I'm quite certain we're going to talk about that
today quite a bit.
... ... ...
The banking system, maybe there's bad guys in there and certainly there were villains 10
years ago who should have gone to jail, and didn't, but the banking system is the plumbing of
our financial economy, and we need to maintain it. Therefore steeper curve helps that plumbing
system, so the government can do it. The Fed and fiscal policy can be more efficient.
... ... ...
HARLEY BASSMAN: Circling back to our first two sentences here, it's never different this
time. That's my mantra. It's never different this time. I can't explain why or how but I just
do not think that we've reinvented human tragedy. Hubris, greed, ego. We wrote about it, the
Greeks wrote about it, Shakespeare wrote about it. It just hasn't changed, and it's this idea
that we've invented a new paradigm I just don't believe it. It's a different song, but it's
still music and I think that we'll find some way to go and cause trouble, which is why I
believe in inflation ultimately.
Is it next year? No. Is it in 20 years? I don't know. What I do think, it's going to happen
in two to four years when the demographic bubble rolls over. We could do that later on. I think
we're going to get it because I don't think you could print the coin of the realm at a faster
pace than the overall growth of the economy without inflation at some point. Now, could it take
20 years? Why not? It took 400 years for the Roman Empire collapsed, so in the grand scheme of
things, maybe not.
This policy of money printing is not going to end well. That doesn't mean it was a bad
public policy, by the way, because having the economy totally collapse either in 2009 or last
year is certainly a bad idea, so maybe deferring the pain or spreading the pain out. I think
that inflation is the ultimate solution. Because inflation is a beautiful tax. It taxes,
everybody. It taxes them silently, and the politicians dumped a vote on it. As a tax, everyone
-- well, I wasn't happy, but it's the easiest one to live with in a democracy.
ebworthen 1 hour ago remove link
" They purchase a Rembrandt for a sandwich and our souls for a glass of whisky. Krupp and
Stinnes get rid of their debts, we of our savings. The profiteers dance in the palace
hotels." -- Klaus Mann, 1923; Weimar, Germany.
The more things change, the more they stay the same.
YuriTheClown 1 hour ago
And the Weimar Republic was run by who? Very similar make up to that of the
Bolsheviks.
85% non members of the Royal Church of Scotland.
Creamaster 1 hour ago
Covid timing was sure convenient for a lot of things to occur
You decide, was it naturally occurring, or released intentionally?
Son of Loki 1 hour ago (Edited)
The 10-years will hit 2% soon, and 3% by end of year.
Given the sad state of the economy and leadership (Yellen, Bribem, etc), no way of
stopping it.
Son of Loki 1 hour ago (Edited)
The 10-years will hit 2% soon, and 3% by end of year.
Given the sad state of the economy and leadership (Yellen, Bribem, etc), no way of
stopping it.
Jalmar Shockt 14 minutes ago
It doesn't work that way and it's not about inflation the way one usually thinks of
it.
Hyperinflation is not the same as the ultimate inflation of the money supply. It is the
ultimate depreciation of the currency unit. The two concepts are far from being the same.
When the populace eventually figures out what's going on the bonds, notes, bills, and other
obligations of the United States government that are all irredeemable will be repudiated.
aeslong 48 minutes ago (Edited) remove link
"I would say that when 10-years were at 0.75, that was the wrong priceI would say that
when 10-years were at 0.75, that was the wrong price. All we're doing now is going to the
right price as opposed to where we were before , ....."
yea, only bond was mispriced, right? other assets, including public debts don't have to be
priced to where they were before.
Ted Baker 1 hour ago
more market manipulation...
Bank_sters 1 hour ago (Edited)
Central banksters print money and give most to the wealthy and connected, foreign govts,
the war machine and then send a few crumbs to the serfs. Meanwhile destroy their currency,
savings and future.
Yields? what a joke. CPI- pure fiction.
Finance so easy a psychopathic child can do it.
overbet 1 hour ago
Wall Street adage:
The most dangerous words on Wall Street are, this time its different.
YuriTheClown 1 hour ago (Edited)
Bassman's outlook for rates and markets. Unsurprisingly, he sees more volatility, and
higher convexity, ahead.
I've tried searching for the definition of "convexity" in this context and had no luck.
Anyone care to enlighten?
Oops. I guess the internet had some additions since then.
Convexity
Ron_Paul_Was_Right 46 minutes ago remove link
"A steeper curve helps the baking system."
Did you mean like, a more steeply curved cookie sheet? To help the baking of brownies? I
don't follow.
vote_libertarian_party 1 hour ago remove link
Something will trigger the stock and bond bubble to pop...
The consumer-price index rose 0.4% in February from the prior month, as the pace of the
economic recovery increased following a winter lull, buoyed by higher gasoline and energy
costs.
A bond market selloff is calling the tune across financial markets. Equilibrium is unlikely
to return until the yield on the benchmark 10-year U.S. Treasury note hits 2%, a well-known
macro strategist argued Friday.
"There will be no peace until U.S. 10s reach 2%," said Kit Juckes, global macro strategist
at Société Générale, in a note.
... ... ...
"The pattern seems clear enough: The equity market is seeing a sector rotation but not a
correction; the bond market is seeking a new equilibrium in the light of a vastly improved
economic outlook in both the U.S. and elsewhere; some policy makers are pushing back against
the bond moves, with little success," Juckes wrote.
As yields rise, the dollar rallies, but when yields settle at a new level, the dollar drops
back. The pattern probably goes on until bonds find an equilibrium, unlikely before 10-year
note yields have a 2-handle, judging by taper tantrums and past cycles," he said.
"2020 marked the secular low point for inflation and interest rates," warned Michael Hartnett, chief investment strategist for
Bofa Global Research, in a Thursday note. "The 40-year bull market in bonds is over."
His cautionary words come as investors contend with the sudden surge in long-term Treasury yields this year which has surprised
even the bond bears.
The 10-year note yield
TMUBMUSD10Y,
1.540%
was
at 1.532% on Thursday, over 60 basis points from where it traded at the beginning of the year.
That rise has, in turn, heightened concerns around stretched valuations in equities, briefly sending the Nasdaq Composite
COMP,
+2.52%
into
correction territory this week, defined as a 10% fall from its intraday peak. Stocks have recently found their footing again,
with the S&P 500
SPX,
+1.04%
up
nearly 3% this week.
Investors throughout the multidecade long bull market in bonds have sometimes bet against a continued slide in long-term Treasury
yields, but as inflation has struggled to break above the Federal Reserve's 2% target for any sustained stretch, forecasts for
higher yields have often proved a losing proposition.
Still, Hartnett suggested any complacency is dangerous as undercurrents in the economy and policymaking pointed towards a tidal
wave of inflationary pressures that could overwhelm buyers of Treasurys.
The blunt answer is that the Fed, in sync with the fiction writers at the Bureau of Labor Statistics (BLS), reports consumer
inflation as honestly as Al Capone reported taxable income.
In short: The Fed has been lying about (i.e. downplaying) inflation for years.
As we've shown in many prior reports, the Consumer Price Index (CPI) scale used by the BLS to measure U.S. consumer price
inflation is an open charade, allowing the BLS, and hence the Fed, to basically "report" inflation however they see fit -- at least
for now.
If, for example, the weighting methodologies hitherto used by the Fed to measure CPI inflation in the 1980's were used today,
then US, CPI-measured inflation would be closer to 10% not the reported 2%.
Concerned about by rising consumer costs, the Fed simply tweaked its CPI scale for measuring the same, effectively downplaying
rising costs like a fat-camp scale which downplayed the significance of say beer, chocolate or pizza.
In short, the Fed didn't like the old CPI scale for measuring inflation, and so they simply replaced it with one in which 2+2 =2.
But why all the mathematical gymnastics and creative writing at the current BLS and Fed?
What explains the ongoing double-speak wherein the Fed wishes to target higher inflation yet simultaneously and deliberately mis-reports
it at far lower levels?
Necessity: The Mother of Invention
.
The Fed, in deep
need
of keeping its IOU-driven (i.e debt-driven) façade of "recovery" in
motion, has no choice but to
invent
a respectably controlled (i.e. LOW) CPI inflation
rate in order to make US Treasury bonds look even moderately attractive to others.
After all, the US lives on those IOU's. They need to look pretty.
If, however, the more honest and much higher 10% inflation rate were honestly reported on an honest CPI scale, the
inflation-adjusted
yield
on the US 10-Year Treasury would be
negative
8%–which hardly makes it a pretty bond for
the world to either admire or buy.
That's a problem for Uncle Sam.
And so the Fed invents a CPI inflation number that is less embarrassing than reality. It's just that simple.
By the way, if real yields on the US 10-Year were honestly reported at -8%, gold would be ripping to the moon right now (it
skyrocketed in the 1970's when real yields were -4%).
We all know, however, that the Fed (and the bullion banks it serves) are terrified of rising gold prices, as a rising gold price
confirms the absolute failure of their monetary policies and the open, and ongoing, debasement of the US Dollar.
This further explains why the world's central and bullion banks
openly
manipulate
the paper gold price in the COMEX markets on a daily basis.
Furthermore, given that the only thing that seems to be "healthy" in the US today is the biggest stock and bond market bubble in
its history, the Fed wants to keep that bubble growing rather than naturally popping.
And toward this end, the Fed may be desperate, dishonest and delusional, but they aren't completely stupid.
They know, for example, that for the last 140 years, ALL (and I mean ALL) of the stock market's gains came during
disinflationary
periods,
not
inflationary
periods -- which is all the more reason for the Fed to lie about inflation
and keep the bubble rising.
So, please don't fall for Powell's double-speak that he's more concerned about focusing on
employment than inflation.
The unspoken truth is that Powell (as well as Yellen, Bernanke et al) have been absolutely obsessed with inflation for years.
They simply mis-report it (i.e. lie), as the dollar's
purchasing power
continues its slow
fall toward the floor of history.
Having Your Cake and Eating it Too.
What the Fed has been doing ever since Greenspan (the veritable "Patient Zero" of the current global $280T debt disaster) is very
clever yet extremely toxic, as well as openly duplicitous.
Specifically, the Fed now prints over $120B per month (to buy $80B in unwanted Treasury bonds and another $40B in unwanted, toxic
MBS paper) with no apparent inflationary effect (despite the fact that inflation is defined by money supply) beyond its 2%
"allowance."
Such extreme money creation openly dilutes the USD to inflate away US debt with increasingly diluted dollars, now a desperate as
well as deliberate Fed policy.
But by simultaneously and dishonestly mis-reporting CPI inflation as they dilute the dollar, the Fed can inflate away US debt
without having to make the inflation-adjusted yields on Treasury bonds appear too embarrassingly ugly (i.e. grotesquely
negative
)
for circulation and consumption.
Such open fraud, of course, allows the Fed to have its cake (debased currencies to inflate away debt) and eat it too (by
under-reporting the otherwise disastrous CPI inflationary consequences of such a desperate policy.)
In short, by putting lipstick on the pig of what would otherwise by
highly negative
real
yields on an openly bogus Treasury bonds if the CPI inflation rate were
accurately
reported,
the Fed can continue to live on more debt, more IOU's and more dishonesty.
Such veiled inflationary dishonesty allows the U.S. to effectively extend and pretend as the US credit market marches forward
like a veritable Frankenstein -- that is dead, yet still marching, arms outstretched and moaning like a beast.
QuiteShocking
4 hours ago
Gas was
around $2 a gallon on Election Day (Nov 3rd 2020)... and now over $2.70 a gallon for a 35% increase and we're just
getting started... So much for the 2% fantasy...
PodissNM
PREMIUM
3 hours ago
The
price of practically everything has doubled in the past 20 years. Other than a few outliers like TVs,
which have seemingly never been cheaper.
Now
they're reducing package quantities in consumer staples to obfuscate further price increases.
philipat
3 hours ago
(Edited)
It's all a confidence game. The Fed CANNOT let rates rise (USG can't afford to pay higher rates on
interest on the ever increasing debt, let alone paying down principal - that can never happen) but on the
other hand it needs inflation to inflate away some of the debt. And it cannot allow Equity markets to
crash (they have become the surrogate US economy) so as the debt grows the equity markets must continue
to grow. Just a smallish sustained drop would cripple GDP.
Which means the USD should collapse.
BUT
it's like keeping all the plates spinning together. All three are manipulated. EVERYTHING is manipulated,
there are NO free markets. The ESF and Central Banks (Why does the Fed need trading floors?) intervene
daily in everything. And so far they are getting away with it.
Which brings us back to confidence......
buzzsaw99
4 hours ago
(Edited)
remove
link
The principal value of TIPS rises as inflation rises.
Inflation is the pace at which prices increase throughout the U.S. economy, as measured by the Consumer Price
Index (CPI)...
real yields
all negative baybee, except the 30y is a whopping +0.010%
The
purpose of the consumer price index (CPI) is to reflect just how much inflation is eating into both our
incomes and our savings.
Currently,
the government understates inflation by using a formula
based
on the concept of a "constant level of satisfaction" that evolved during the first half of the 20th
century in academia.
More on this subject in the article below.
There are many reasons the stock market HAS to keep rising. One of the main ones is that all of the
city and state pension funds are heavily invested in the stock market. If the stock market wasn't rising,
tax-payers would have to pick up a greater share of pensions. Simply put, this can't happen.
MrBoompi
1 hour ago
remove
link
Come on. The only jobs Fed employees care about are their own jobs. They supervised the dismantling of
our manufacturing jobs, without lifting a finger, since 1971. They are not screaming to end the
lockdowns either.
Just like minimum wage, Seniors have been denied the true COL increases, which are the law, for Social
Security. These payments should at least be double what they are today.
They are globalists and as such could care less about common folk. A must-have skill if you want to be
Fed Chair is the ability to lie. This skill will be needed much more than your business, law, and
accounting degrees.
Give Me Some Truth
1 hour ago
remove
link
Thanks to
the author for pointing out the elephant in the room that "officials" and the mainstream media are not allowed to
discuss. Namely (from this article):
"We all
know, however, t
hat the Fed (and the
bullion banks it serves) are terrified of rising gold prices, as a rising gold price confirms the absolute failure
of their monetary policies and the open, and ongoing, debasement of the US Dollar.
This further explains why the world's
central and bullion banks
openly
manipulate
the paper gold price in the COMEX markets on a daily basis."
In short, EVERYTHING the "Powers that
Be" do is designed to keep gold and silver prices contained, which thus protects the all-important fiat printing
press.
Inflation
numbers are rigged to help achieve this result and so too are precious metal markets rigged.
I'd also add that the
"unemployment" numbers are equally bogus.
So too are many of the COVID numbers and metrics.
If numbers
can be rigged - if definitions can be changed - to support a specious narrative, they will be ... All for the same
purpose.
Top 10 Holdings AS OF 12/31/2020; 47.15% of Total Portfolio
10 Year Treasury Note Future Mar 211 2.37%
Federal National Mortgage Association 2.5% 03/11/2051 6.76%
Federal National Mortgage Association 2.5% 02/11/2051 5.93%
Federal National Mortgage Association 2% 03/11/2051 5.41%
Pimco Fds 5.38%
Federal National Mortgage Association 3% 2.97%
FTSE Bursa Malaysia KLCI Future Mar 21 2.60%
Federal National Mortgage Association 2% 02/11/2051 2.18%
CSMC TRUST 3.32183% 1.86%
Fin Fut Us Ultra 30yr Cbt 03/22/21 1.69%
7706 holdings as of 12/31/2020
In one of his latest Flows and Liquidity reports, JPM quant Nick Panigirtzoglou writes that as we approach quarter-end, the
equity rebalancing flow question is resurfacing in client conversations. As we notes, "the equity rally and the bond sell-off
during the current quarter is naturally creating a pending rebalancing flow for multi-asset investors away from equities into
bonds for pension funds and balanced mutual funds. How much of equity/bond rebalancing flow should we expect into current
quarter-end?"
To answer this question, the Greek strategist applies a familiar framework and looks at the four key multi-asset investors that
have either fixed allocation targets or tend to exhibit strong mean reversion in their asset allocation.
These
are balanced mutual funds, such as 60:40 funds, US defined benefit pension plans, Norges Bank, i.e. the Norwegian oil fund, and
the Japanese government pension plan, GPIF.
For those curious about the details, below is a more detailed summary of the considerations behind the four key investor classes
ahead of month and quarter-end.
1. Balanced mutual funds including 60:40 funds
,
a
close to $7.5tr AUM universe globally, tend to rebalance over 1-2 months or so. The lesson from last Nov/Dec is that balanced
mutual funds exhibit flexibility and they do not necessarily rebalance every single month.
During
the previous quarter, they appear to have postponed rebalancing for Nov-end or Dec-end and to have waited until January to
de-risk/rebalance.
JPM believes that funds de-risked in January, as a result of the tumble in balanced MFs equity
beta...
.. and since it would have been too soon to rebalance again in February, the quant believes that they have likely postponed any
pending rebalancing to March. Assuming they were fully rebalanced at the end of January, which is a reasonable hypothesis given
the reduction in their betas in January and by taking into account the performance of global equities and bonds since then,
JPMorgan
estimates
around $107bn of equity selling by balanced mutual funds globally
into the end of
March in order to revert to their 60:40 target allocation.
lay_arrow
HankMFRearden
PREMIUM
18 hours ago
Reconcile this with previous post about off the hook equity inflows. Would not passive mostly be
rebalancing by targeted direction of new flows vs. selling of existing positions, particulalry in tech
which has declined?
Americans aren't spending but saving, by paying down debt at an enormous rate, the nightmare
of Keynesians the world over.
They are unleashing trillions in new spending but cutting back, in the stimulus bill,
support for actual Americans whose lives they've ruined with lockdowns and public health
terrorism.
They have held interest rates at or below zero for so long that when the market makes the
slightest move to go somewhere else, it precipitates massive market dislocation in fundamental
markets.
We're no longer talking about the sub-prime mortgage market or Turkish corporate
debt loads . We're talking about massive short bets against the U.S. 10 year Treasury
Note.
Eventually reality always reasserts itself. The central banks are running out of maneuvering
space before he entire system collapses. Maybe that's what they want.
Maybe they think they can maintain their narrative of competence long enough to shift the
blame to incompetent governments who have incurred the wrath of their people through inhuman
COVID-19 lockdowns and endless psychological torture.
I don't know at this point. But I can tell you that debt first extends and then destroys all
illusions about who is and who isn't truly solvent.
And over the past few weeks it's clear there are an increasing number of people who command
real amounts of money who don't buy the narratives the central banks are selling.
* * *
play_arrow
Hickory Dickory Dock 21 hours ago
Inflation expectations are rising because of fiscal and monetary stimulus and the
"re-opening" of the economy.
Those rising inflation expectations cause nominal interest rates to rise.
If nominal interest rates rise more than inflation rises, real interest rates rise.
Rising real interest rates cause stocks, bonds and gold/silver to fall.
Falling 'markets' cause the Fed to step in and save the day by capping nominal interest
rates.
Capped nominal interest rates cause real rates of interest to fall (assuming no change in
inflation rates).
Falling real rates of interest mean higher gold and silver prices.
conraddobler 21 hours ago (Edited)
Interest rates were near 15% in 1979, what did gold and silver do back then?
Hickory Dickory Dock 21 hours ago
Incorrect. Real interest rates were below zero in 1979-1980.
Real rates are interest rates (just not nominal interest rates).
hisnamewas 7 hours ago
I assume by "real" you mean an imaginary number called the "inflation" which they can set
arbitrarily low by choosing what is included in the calculation.
Hickory Dickory Dock 17 hours ago
Since real interest rates are calculated as being equal to nominal interest rates minus
the rate of inflation, understating inflation (whether intentionally or simply through
mis-measurement) will have the effect of overstating real interest rates, not understating
them. E.g., if the nominal interest rate is 10% and the inflation rate is 7%, the real
interest rate is 3%. However, if the inflation rate is understated in this example as being
4% instead of 7%, the real interest rate (10% nominal interest rate minus 4% inflation rate)
will appear as 6% rather than 3% (thus overstating the real inflation rate).
I do believe that the inflation data on Shadowstats is more accurate than the CPI or other
government-supplied figures, which are heavily gamed.
I believe it's only a matter of time before yield curve control will be implemented. Keep
in mind it may not be called that, but the net effect will be to suppress longer term
interest rates. Assuming the policy is effective at doing that, you can expect gold and
silver to resume their bull runs, virtually overnight.
George Bayou 21 hours ago remove link
It is obvious what the Fed is doing, they want to devalue the dollar so the gov't can
continue to service the debt. YCC will keep the debt serviceable and devalues the dollar at
the same time. The Fed is on board with any spending the democrats can dream up now because
they know the dollar will be devalued in the future. That is the only way they can get out of
this mess.
The problem with devauling the dollar is it will transfer real wealth to the wealthy
elites in the process. That is something that the democrats fail to tell their base.
itstippy 22 hours ago remove link
Today's Central Bankers never stop jawboning. They think it's their job to somehow
"justify" the way they support banks and the financial sector at the expense of the working
and middle classes. They're no longer economists, but just more politicians.
Central Banker: "Please stop yawning when I'm talking."
Real Economist: "I'm not yawning, I'm trying to say something."
dead hobo 22 hours ago
Long yields have about 3/4% to rise to reach recent historical levels. The world didn't
end a couple of years ago at these rates. It won't end now. No YCC for you.
zorrosgato 19 hours ago
Since September 21,1981 the yield on the US 10yr treasury has been falling. A 40 year
descent to where we are at today, at times easing off from the fall but seemingly never to
take back over 3%. If the powerful bond market and/or the Fed decided that inflation, yields
or interest rates were either too high or too low they most likely wouldn't have waited until
today to fix the problem. A day when insurmountable debt has pretty much taken that option
out of the equation. Lets not forget, as always, no market goes straight down or straight
up.
Interactive chart showing the daily 10 year treasury yield back to 1962. The 10 year
treasury is the benchmark used to decide mortgage rates across the U.S. and is the most liquid
and widely traded bond in the world. The current 10 year treasury yield as of March 04, 2021 is
1.54% .
Passer by @21 and @26, had a thought related to your mention that "the US dollar still
remains 62% of world currency reserves" , or "nearly two thirds of world currency
reserves" . That seems to correspond to the IMF figure of 61.5% from December 2019. The
IMF figure from December 2020, however, is now down to 60.4% .
A few months ago I read that Goldman Sachs had suggested the USD could drop 6% in 2021,
while Citigroup suggested
that it could drop as much as 20%.
Assuming no other changes to reserves, a 6% drop in the USD seems to imply the 60.4%
percentage would become less than 58%. And a 20% drop in the USD seems to imply that US
dollar holdings could fall to around 50% of world currency reserves.
And if it gets to around 50%, does a tipping point, as William Gruff @28 mentioned, kick
in?
On the other hand, other Wall Street strategists think the USD will strengthen in 2021, so
who knows ...
High-yield bond default rates may double as companies struggle with a protracted economic
downturn even as the Federal Reserve props up valuations, said Jeffrey Gundlach.
The investment grade corporate debt market has skewed toward lower quality BBB- rated debt,
but if just 50% of that were to be downgraded it could fuel a near doubling of the high-yield
market, Gundlach said Tuesday on a webcast for his firm's flagship DoubleLine Total Return Bond Fund .
Gundlach's views reflect broad skepticism about the market's connection to economic
realities. He criticized the Fed's emergency actions as buoying asset prices and spurring
unsustainable corporate borrowing binges.
Risk assets such as equities and high yield credit markets are responding to this support,
and government stimulus, disproportionately as the Covid-19 pandemic remains a threat to the
recovery, he said.
"It's foolhardy to believe that one can have this kind of a shock to an economy and it just
gets healed through a one-shot deal" from the Treasury, he said.
Gundlach pointed out that the global GDP forecast is -3.9%, whereas the U.S. lags at -5%
despite the country's response to the Covid-19 crisis being "one of the highest in the
world."
Highlighting the effect of the weekly $600 stimulus checks, he called it a distortion of the
personal-income spending picture akin to the Fed's effect on the markets.
"This is a large incentive to stay on public assistance," Gundlach said, noting that benefit
payments have exceeded many workers' regular income.
Gundlach also snubbed one of the market's favorite trades on a U.S. recovery, saying he's
"betting against" the inflation-linked bond market. TIPS products have seen some of the
strongest monthly inflows in four years, and market-implied expectations for inflation have
touched a 2020 high. Gundlach repeated that the impact of the pandemic is deflationary.
The stock market now is completely disconnected from the economy. Stein's Law, which he expressed in 1976 states: "If
something cannot go on forever, it will stop."
Notable quotes:
"... Junk Bonds play a critical role in highlighted investor sentiment. When junk bonds (lower-rated debt) is performing well, then that means investors are taking more risks. When junk bonds struggle, that means investors are taking on less risk. ..."
"... At the same time, there is a divergence between the stock market (the S&P 500 made new all-time highs) and Junk Bonds (well below all-time highs and 5 percent off 2019 highs). ..."
As investors, we have several tools and indicators at our disposal.
Whether it is technical indicators such as Fibonacci levels, moving averages, or price
supports, or fundamental indicators such as corporate earnings or economic data, we have a lot
of information to use when making decisions.
Today's chart incorporates both. Junk Bonds play a critical role in highlighted investor
sentiment. When junk bonds (lower-rated debt) is performing well, then that means investors are
taking more risks. When junk bonds struggle, that means investors are taking on less risk.
So today, we highlight the Junk Bonds ETF (JNK). Using
technical analysis, we can see that JNK is trading near line (A), a price level that has served
as support and resistance over the past several years. It is currently serving as price
resistance.
At the same time, there is a divergence between the stock market (the S&P 500 made new
all-time highs) and Junk Bonds (well below all-time highs and 5 percent off 2019 highs).
So this is an important resistance test for junk bonds. Will Junk Bonds (JNK) break down
from here (bearish) or break out (bullish).
What happens here will send an important message to stocks (and investors)!
High-yield bonds (avoid the oil patch), emerging-markets bonds and dividend-paying stocks
such as real estate investment trusts and utilities are good places to hunt for yield. Funds to
consider include Vanguard High Yield Corporate ( VWEHX ),
yielding 4.5%, and TCW Emerging Markets Bond ( TGEIX ),
yielding 5.1%. Schwab US Dividend Equity ( SCHD , $56), a
member of the Kiplinger ETF 20 list of our favorite ETFs, invests in high-quality dividend
payers and yields just over 3%. Spath, at Sierra Funds, is bullish on preferred stocks. IShares
Preferred and Income Securities ETF ( PFF , $37)
yields 5.5%. (For more ideas, see Income
Investing .)
Suppose my outlook for the bond market is either wrong, or at best, premature. Bond yields
could fall next year, or just stay relatively flat. That's why it usually makes sense to own
more than one bond fund.
Vanguard Intermediate-Term Tax-Exempt Investor ( VWITX ,
$14.41) should hold up pretty well if rates rise only a small amount in 2020, and it could
trounce the other funds in this article if rates fall.
VWITX's duration is 4.9 years. That means if bond yields rise by one percentage point, the
fund's price should decline by 4.9%. That wouldn't be fun for investors, but it would hardly be
catastrophic, especially when you factor in the yield.
Like most Vanguard bond offerings, Vanguard Intermediate-Term Tax-Exempt Investor is plain
vanilla, and that's OK. It sticks almost entirely to high-quality municipal bonds. Its weighted
average credit quality is a sterling AA.
VWITX also has been a decent performer, at an annualized 3.1% total return over the past
five years.
Price of oil does have problem that will play out over next 6-8 months. Without a trade war
and Brexit hanging over markets. There isn't a whole lot of reason to be holding government
bonds which yield next to nothing or less than nothing in some cases. Fed is buying bills so
Repo market won't implode into another 2008. Only problem is they need to be buying coupons
or treasuries also. They are buying some treasuries but it's not near enough to hold interest
rates down. Yields on debt are going to rise without something like a trade war holding them
down. That is a problem if your long oil.
Keep an eye on 10 year US treasuries. If they become just a little less liquid and yields
rise as i believe they will. These OPEC cuts aren't going to mean as much as some might
think.
An unprecedented frenzy of debt sales around the world is threatening to cool this year's
hot returns on corporate bonds.
Companies have sold a record $2.43 trillion so far this year across currencies, surpassing
previous full-year records. Investors rushed to snap up all this debt because they were
desperate for yield as central banks cut rates. That has pushed up valuations.
Now, some troubling signs for the direction of those valuations are converging. Recent
data suggest that the worst may be over for the global economy, which means many central
banks could have less reason next year to guide down borrowing costs. That will all make it
harder to top the double-digit returns that some investors scored on corporate bonds this
year.
---
Wealthy made some real money betting on our government bailouts, in Europe an the US. Now the
yields are gone, where to? China, the only rational central banker left means, park your
money in China.
What this means now is that things will only get more complicated for Beijing from here on
out. Chinese President Xi Jinping bet on letting the people of Hong Kong decide, and they
did. Only it was against him.
We'll return to the political situation in Hong Kong momentarily, but before we do,
another major development, this time on the business front.
On Tuesday, Alibaba executed a slam-dunk secondary offering in Hong Kong, raising $12.9
billion. That easily surpassed Uber's $8.1 billion IPO in May, making it the biggest public
offering of 2019. For those who were predicting the death of Hong Kong -- and they've been
doing that for decades, (and Kyle Bass and others are still at it) -- that again appears to
be premature.
---
Clueless reporting. Xi came out of this looking great. He has one country three systems, he
now has a sound central banking, investment is flowing in, not out. They are immune from
sanctions, and even the trade tariffs are expanding Chinese influence in Asia, Iran, Russia
and China can look forward to a new global banking system, absent the dollar. Belt and
suspenders is moving forward.
I like it, I have no priors, I can point this fact without contradiction. Go Xi.
What's behind the
ever-increasing need for emergency repos?
A couple of correspondents have an eye on
shadow banking.
Shadow Banking
The shadow banking system consists of lenders, brokers, and other credit intermediaries who
fall outside the realm of traditional regulated banking.
It is generally unregulated and not subject to the same kinds of risk, liquidity, and
capital restrictions as traditional banks are.
The shadow banking system played a major role in the expansion of housing credit in the run
up to the 2008 financial crisis, but has grown in size and largely escaped government oversight
since then.
Let's recap before reviewing excellent comments from a couple of valued sources.
The Fed keeps increasing the size and duration of "overnight" funding. It's now up $120 billion
a day, every day, extended for weeks. That is on top of new additions.
Three Fed Statements
Emergency repos were needed for "
end-of-quarter funding
".
Balance sheet expansion is "
not QE
". Rather, it's "
organic growth
".
This is
"not monetary policy
".
Three Mish Comments
Hmm. A quick check of my calendar says the quarter ended on September 30 and today is
October 23.
Hmm. Historically "organic" growth was about $2 to $3 billion.
Hmm. Somehow it takes an emergency (but let's no longer call it that), $120 billion "
at
least
" in repetitive "
overnight
" repos to control interest rates, but that does
not constitute "monetary policy"
I made this statement:
I claim these "non-emergency", "non-QE", "non-monetary policy"
operations suggest we may already be at the effective lower bound for the Fed's current balance
sheet holding
.
Shadow Banking Suggestion by David Collum
Pater Tenebrarum at the Acting Man blog pinged me with these comments on my article, emphasis
mine.
While there is too much collateral and not enough reserves to fund it,
we don't know
anything about the distribution [or quality] of this collateral
. It could well be that some
market participants do not have sufficient high quality collateral and were told to bugger off
when they tried to repo it in the private markets.
Such market participants would become unable to fund their leveraged positions in CLOs or
whatever else they hold.
Mind, I'm not saying that's the case, but the entire shadow banking system is opaque
and
we usually only find out what's what when someone keels over or is forced to report a huge loss.
Reader Comments
Axiom7: Euro banks are starving for dollar funding and if there is a hard Brexit both UK and
German banks are in big trouble. I wonder if this implies that the EU will crack in negotiations
knowing that a DB fail is too-big-to-bail?
Cheesie: How do you do repos with a negative interest rate?
Harry-Ireland: [sarcastically], Of course, it's not QE. How can it be, it's the greatest
economy ever and there's absolutely nobody over-leveraged and the system is as healthy as can
be!
Ian: Taking bad collateral to keep banks solvent is not QE.
In regards to point number four, I commented:
This is not
TARP
2009.
[The Fed is not swapping money for dodgy collateral] Someone or someones is caught in some sort of
borrow-short lend-long scheme and the Fed is giving them reserves for nothing in return. Where's
the collateral?
Pater Tenebrarum partially agrees.
Yes, this is not "TARP" - the Fed is not taking shoddy collateral, only treasury and agency
bonds are accepted. The primary dealers hold a huge inventory of treasuries that needs to be
funded every day in order to provide them with the cash needed for day-to-day operations - they
are one of the main sources of the "collateral surplus".
Guessing Game
We are all guessing here, so I am submitting possible ideas for discussion.
Rehypothecation
I am not convinced the Fed isn't bailing out a US major bank, foreign bank, or some other
financial institution by taking
rehypothecated
,
essentially non-existent, as collateral.
Rehypothecation is the practice by banks and brokers of using, for their own purposes, assets
that have been posted as collateral by their clients.
In a typical example of rehypothecation, securities that have been posted with a prime
brokerage as collateral by a hedge fund are used by the brokerage to back its own transactions
and trades.
Current Primary Dealers
Amherst Pierpont Securities LLC
Bank of Nova Scotia, New York Agency
BMO Capital Markets Corp.
BNP Paribas Securities Corp.
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse AG, New York Branch
Daiwa Capital Markets America Inc.
Deutsche Bank Securities Inc.
Goldman Sachs & Co. LLC
HSBC Securities (USA) Inc.
Jefferies LLC
J.P. Morgan Securities LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
It's important to note those are not "shadow banking" institutions, while also noting that
derivative messes within those banks would be considered "shadow banking".
Tenebrarum Reply
In this case the problem is specifically that the primary dealers are holding huge
inventories of treasuries and bank reserves are apparently not sufficient to both pre-fund the
daily liquidity requirements of banks and leave them with enough leeway to lend reserves to repo
market participants.
The Fed itself does not accept anything except treasuries and agency MBS in its repo
operations, and only organizations authorized to access the federal funds market can participate
by offering collateral in exchange for Fed liquidity (mainly the primary dealers, banks, money
market funds,...).
Since most of the repo lending is overnight - i.e., is reversed within a 24 hour period
(except for term repos) - I don't think re-hypothecated securities play a big role in this.
But private repo markets are broader and have far more participants, so possibly there is a
problem elsewhere that is propagating into the slice of the market the Fed is connected with.
Note though, since the Treasury is borrowing like crazy and is at the same time rebuilding its
deposits with the Fed (which lowers bank reserves, ceteris paribus), there is a several-pronged
push underway that is making short term funding of treasury collateral more difficult at the
moment.
So I'm not sure a case can really be made that there is anything going on beyond what meets
the eye - which is already bad enough if you ask me.
Preparation for End of LIBOR
What about all the LIBOR-based derivatives with the end of LIBOR coming up?
Libor is a scandal-plagued benchmark that is used to set the price of trillions of dollars of
loans and derivatives globally. A group of banks and regulators in 2017 settled on a replacement
created by the Federal Reserve known as the secured overnight financing rate, or SOFR. Companies
must move away from Libor by the end of 2021, when banks will no longer be required to publish
rates used to calculate it.
"We don't expect that 100% of the Libor-based positions today will migrate 100% to SOFR,"
Jeff Vitali, a partner at Ernst & Young, said this week during a panel at an Association for
Financial Professionals conference in Boston. "It is going to be a scenario where entities are
going to have to prepare and be flexible and build flexibility into their systems and models and
processes that can handle multiple pricing environments in the same jurisdiction."
Repro Quake
I invite readers to consider Tenebrarum's "
Repro
Quake - A Primer
" but caution that it is complicated.
He informs me "a credit analyst at the largest bank in my neck of the woods sent me a mail to
tell me this was by far the best article on the topic he has come across".
Note: That was supposed to be a private comment to me. I placed it in as an endorsement.
Tenebrarum live in Europe. Here are his conclusions.
What Else is the Fed Missing?
Contrary to similar spikes in repo rates in 2008, it was probably not fear of counterparty
risk that led to the recent repo quake. What's more, the Federal Reserve without a doubt knew
that something like this was coming. We say this because even we knew it – it was not a secret.
A number of analysts have warned of just such a situation for months.
It is astonishing that the Fed somehow seemed unprepared and quite surprised by the extent
of the liquidity shortage.
We would submit that this fact alone is a good reason for markets
to be concerned. If the Fed is not even able to properly gauge such a "technical problem" in
advance, what else is there it does not know?
Effective Lower Bound
Finally, Tenebrarum commented: "
I agree on your effective lower bound comment, since
obviously, the 'dearth' of excess reserves was pushing up all overnight rates, including the FF
rate
."
that some of this
money is leaking out to continue to prop up the stock market.
I've been trading for 46 years and current valuations are beyond
ridiculous. for example, Tesla made a buck a share in the last
quarter. woop di do. and the stock zooms to $300++ a share with a
market cap of $58 bil. 60% more than Ford???!!! We
know
that Porsche and BMW and Mercedes and Audi are going to build a
much better EV. another one, Cintas. They rent uniforms. what
a sexy business! valued at a p/e of 32 with a $28 bil. market
cap. Book value of
$29
a share. the stock is at
$270
!!!
the list goes on and on and on Carvana, etc.
personally, I have 5% bitcoin 5% gold and have a nice chunk in
a very high quality diversified commodity mutual fund.
Commodities (relative to stocks) are at multi decade lows. a
deep value trade. very best wishes to you. Argento
On occasion, it is important to revisit issues that have been
swept under the rug or simply overlooked. For most people, the
derivatives market falls into this category, partly because they
don't understand exactly what derivatives are or why this market
is so important.
Anyone paying attention knows that the size
of the derivatives market dwarfs the global economy. Paul Wilmott
who holds a doctorate in applied mathematics from Oxford
University has written several books on derivatives. Wilmott
estimates the derivatives market at $1.2 quadrillion, to put that
in perspective it is about 20 times the size of the world economy.
That is an OLD guess... today it is estimated that derivatives
exceeds $2 quadrillion, and that just commodity derivatives
approaches the old figure. Interest rate based derivatives
still dominate, my guess is much higher.
One of the key U.S. borrowing markets saw a massive surge Monday, a sign the Federal
Reserve is having trouble controlling short-term interest rates.
Amid the settlement of Treasury coupon auctions and the influx of quarterly corporate tax
payments, the rate on overnight repurchase agreements soared by 153 basis points to 3.80%,
the largest daily increase since December, based on ICAP pricing.
---------
The would be Treasury trying to tilt the curve, deposit short borrow long. Finance, in
general, is rescaling to accommodate the next 2 trillion in debt while rolling over trillions
of 'Uncle can do it later' debt. A quick downturn, readjustment, and the 'Uncle do it later'
payments to the wealthy will continue.
This is common, our progressive tribe has moles who suddenly rush off and do a deal with
the wealthy leaving the rest of us in the dark.
Repo Squeeze Threatens to Spill Over Into Funding Markets
By Stephen Spratt
September 17, 2019, 3:19 AM PDT Updated on September 17, 2019, 5:24 AM PDT
Cross-currency basis, FX forwards, eurodollar futures shift
Sale of $78 billion in Treasuries led to sudden cash squeeze
----------------
Treasury is ahead of finance in paying for the 'Uncle do it later' trick. The short rate
has jumped 10 basis points, not much but there was a reading on the overnight market of 7%.
This may mean nothing, but more likely means higher consumer credit charges. W have to pay
for 'Uncles later'.
Sep.04 -- Sean Carney, head of municipal strategy at BlackRock, discusses the municipal bond
market posting its best returns since 2014. He speaks with Bloomberg's Taylor Riggs in this
week's "Muni Moment" on "Bloomberg Markets."
Tariff Tantrums and Recession Risks
Why trade war scares the market so much
By Paul Krugman
If the bond market is any indication, Donald Trump's escalating belligerence on trade is
creating seriously increased risks of recession. But I haven't seen many clear explanations
of why that might be so. The problem isn't just, or even mainly, that he really does seem to
be a Tariff Man. What's more important is that he's a capricious, unpredictable Tariff Man.
And that capriciousness is really bad for business investment.
First things first: why do I emphasize the bond market, not the stock market? Not because
bond investors are cooler and more rational than stock investors, although that may be true.
No, the point is that expected economic growth has a much clearer effect on bonds than on
stocks.
Suppose the market becomes pessimistic about growth over the next year, or even beyond. In
that case, it will expect the Fed to respond by cutting short-term interest rates, and these
expectations will be reflected in falling long-term rates. That's why the inversion of the
yield curve -- the spread between long-term and short-term rates -- is so troubling. In the
past, this has always signaled an imminent recession:
[That scary yield curve]
And the market seems in effect to be predicting that it will happen again.
But what about stocks? Lower growth means lower profits, which is bad for stocks. But it
also, as we've just seen, means lower interest rates, which are good for stocks. In fact,
sometimes bad news is good news: a bad economic number causes stocks to rise, because
investors think it will induce the Fed to cut. So stock prices aren't a good indicator of
growth expectations.
O.K., preliminaries out of the way. Now let's talk about tariffs and recession.
You often see assertions that protectionism causes recessions -- Smoot-Hawley caused the
Great Depression, and all that. But this is far from clear, and often represents a category
error.
Yes, Econ 101 says that protectionism hurts the economy. But it does its damage via the
supply side, making the world economy less efficient. Recessions, however, are usually caused
by inadequate demand, and it's not at all clear that protectionism necessarily has a negative
effect on demand.
Put it this way: a global trade war would induce everyone to switch spending away from
imports toward domestically produced goods and services. This will reduce everyone's exports,
causing job losses in export sectors; but it will simultaneously increase spending on and
employment in import-competing industries. It's not at all obvious which way the net effect
would go.
To give a concrete example, think about the world economy in the 1950s, before the
creation of the Common Market and long before the creation of the World Trade Organization.
There was a lot more protectionism and vastly less international trade then than there would
be later (the containerization revolution was still decades in the future.) But Western
Europe and North America generally had more or less full employment.
So why do Trump's tariff tantrums seem to be having a pronounced negative effect on
near-term economic prospects? The answer, I'd submit, is that he isn't just raising tariffs,
he's doing so in an unpredictable fashion.
People are often sloppy when they talk about the adverse effects of economic uncertainty,
frequently using "uncertainty" to mean "an increased probability of something bad happening."
That's not really about uncertainty: it means that average expectations of what's going to
happen are worse, so it's a fall in the mean, not a rise in the variance.
But uncertainty properly understood can have serious adverse effects, especially on
investment.
Let me offer a hypothetical example. Suppose there are two companies, Cronycorp and
Globalshmobal, that would be affected in opposite ways if Trump imposes a new set of tariffs.
Cronycorp would like to sell stuff we're currently importing, and would build a new factory
to make that stuff if assured that it would be protected by high tariffs. Globalshmobal has
already been considering whether to build a new factory, but it relies heavily on imported
inputs, and wouldn't build that factory if those imports will face high tariffs.
Suppose Trump went ahead and did the deed, imposing high tariffs and making them
permanent. In that case Cronycorp would go ahead, while Globalshmobal would call off its
investment. The overall effect on spending would be more or less a wash.
On the other hand, suppose that Trump were to announce that we've reached a trade deal:
all tariffs on China are called off, permanently, in return for Beijing's purchase of 100
million memberships at Mar-a-Lago. In that case Cronycorp will cancel its investment plans,
but Globalshmobal will go ahead. Again, the overall effect on spending is a wash.
But now introduce a third possibility, in which nobody knows what Trump will do --
probably not even Trump himself, since it will depend on what he sees on Fox News on any
given night. In that case both Cronycorp and Globalshmobal will put their investments on
hold: Cronycorp because it's not sure that Trump will make good on his tariff threats,
Globalshmobal because it's not sure that he won't.
Technically speaking, both companies will see an option value to delaying their
investments until the situation is clearer. That option value is basically a cost to
investment, and the more unpredictable Trump's policy, the higher that cost. And that's why
trade tantrums are exerting a depressing effect on demand.
Furthermore, it's hard to see what can reduce this uncertainty. U.S. trade law gives the
president huge discretionary authority to impose tariffs; the law was never designed to deal
with a chief executive who has poor impulse control. A couple of years ago many analysts
expected Trump to be restrained by his advisers, but he's driven many of the cooler heads
out, many of those who remain are idiots, and in any case he's reportedly paying ever less
attention to other people's advice.
None of this guarantees a recession. The U.S. economy is huge, there are a lot of other
things going on besides trade policy, and other policy areas don't offer as much scope for
presidential capriciousness. But now you understand why Trump's tariff tantrums are having
such a negative effect.
I just assume the 10Y yield is reverting to trend – the trend downward it has had
since 1982. The counter trend move upward in 2018 assumed the fiscal spigots were going to be
turned on, that the deficit was no longer a dirty word and therefore inflation was no longer
a dirty word. It's just taken til now to capitulate that none of that's going to happen.
Seems the Federal Reserve was caught by surprise by this too. Otherwise I don't think they
would have raised their Fed Funds rate to where it is. Because now that the 10Y yield has
capitulated, it's actually lower than the Fed Funds rate, creating an inverted yield curve.
Which is unusual because normally an inverted yield curve is created on purpose by the
Federal Reserve – they raise their rate above the 10Y yield rather than wait for the
10Y yield to drop below their rate. Still, every good trader knows an inverted yield curve is
bad juju. So what's the Fed Reserve to do? Sit on its hands and let the inverted yield curve
work its magic and create a recession?
Seems to me that the Federal Reserve doesn't want the market to crash on Trump's watch. At
least not until after the 2020 election. So the Fed Reserve is signaling to the traders, "we
feel your pain", they'll lower their rate to bring it back below the 10Y yield. They just
need a pretext on why they're doing so, something that doesn't simply smack of the Fed
Reserve propping up the stock market. "It's the PMI, it's the employment report, it's trade,
it's one of those, yeah that's the ticket."
Anyways, even if the fiscal spigots get turned on, I don't see the 10Y yield reversing
trend until spiraling wage inflation is a thing again. I.e. when people aren't worried about
their exposure to inflating prices as long as their wages are increasing / tracking with
inflation. Making it safe for them to take on debt at increasing interest rates – i.e.
generating inflation. And I don't see that happening anytime soon unless there's some kind of
JG program.
Until then, the trend line of the 10Y yield is downwards. Giving the Federal Reserve less
and less room for their Fed Funds rate to operate in without inverting the yield curve. Seems
like that won't be able to continue at some point. Interesting years ahead.
The fourth-quarter stock market rout that wiped out $12 trillion in shareholder value and
sparked a bout of
Christmas Eve panic may have quickly been forgotten by most Americans, but not by the
salespeople and financial engineers of Wall Street.
No, the selloff, it would appear, wound up triggering fears that time was running out on the
longest bull market in history. And so, when early 2019 delivered a miraculous rebound, they
wasted no time in peddling all sorts of deals and arrangements that test the limits of risk
tolerance: from health-food makers fast-tracked into public hands to stretched retailers wrung
for billions by private equity owners in the debt market.
Junk bonds are flying out the door once again. Deeply indebted companies are borrowing even
more to pay
equity holders . And while you can't say the megadeal IPOs got rushed to market, two that
were held up as heralding a return to IPO glory days have been flops. It's quickly turning
Uber and Lyft into poster children for Wall Street eagerness amid an equity-market bounce
that has all but banished memories of the worst fourth quarter in a decade.
"At some point, people are going to get burned," said Marshall Front, the chief investment
officer at Front Barnett Associates and 56-year Wall Street veteran. "People want to take their
companies public because they don't know what the next years hold, and there are people who
think we're close to the end of the cycle. If you're an investment banker, what do you do? You
keep dancing until the music stops."
For more than a decade, income investors have been plagued by paucity wrapped in misery. The bellwether 10-year Treasury note has
doled out an average 2.6% interest since 2008. Although the Federal Reserve has nudged its target interest rate range to 2.25% to
2.50%, it has signaled that it's done raising rates for now. Even worse, the yield on the 10-year T-note briefly sank below the yield
on the three-month T-bill -- an unusual inversion that can sometimes herald a recession and lower yields ahead. The takeaway: Locking
your money up for longer periods is rarely worth the negligible increase in yield. What could increase your yield these days? Being
a little more adventurous when it comes to credit quality. When you're a bond investor, you're also a lender, and borrowers with
questionable credit must pay higher yields. Similarly, stocks with above-average yields probably have some skeletons in their balance
sheets.
You can ameliorate credit risk -- but not eliminate it -- through diversification. Invest in a mutual fund, say, rather than a
single issue. And invest in several different types of high-yielding investments -- for example, investment-grade bonds, preferred
stocks and real estate investment trusts -- rather than just one category. Despite such caveats, income investing is not as bad as
it was in 2015, when it was hard to milk even a penny's interest out of a money market. Now you can get 3.3% or more from no-risk
certificates of deposit at a bank. We'll show you 33 ways to find the best yields for the risk you're willing to take, ranging from
2% all the way up to 12%. Just remember that the higher the payout, the greater the potential for some rough waters.
Short-term interest rates largely follow the Fed's interest rate policy. Most observers in 2018 thought that would mean higher rates
in 2019. But slowing economic growth in the fourth quarter of 2018 and the near-death experience of the bull market in stocks changed
that. The Fed's rate-hiking
campaign is likely on hold for 2019. Still, money markets are good bets for money you can't stand to lose. Money market funds
are mutual funds that invest in very-short-term, interest-bearing securities. They pay out what they earn, less expenses. A bank
money market account's yield depends on the Fed's benchmark rate and the bank's need for deposits.
The risks: Money market mutual funds aren't insured, but they have a solid track record. The funds are designed to maintain a
$1 share value; only two have allowed their shares to slip below $1 since 1994. The biggest risk with a bank money market deposit
account is that your bank won't raise rates quickly when market interest rates rise but will be quick on the draw when rates fall.
MMDAs are insured up to $250,000 by the federal government. How to invest: The best MMDA yields are from online banks, which don't
have to pay to maintain brick-and-mortar branches. Currently, a top-yielding MMDA is from Investors eAccess , which is run by Investors
Bank in New Jersey. The account has no minimum, has an annual percentage yield of 2.5% and allows six withdrawals per month. You'll
get a bump from a short-term CD, provided you can keep your money locked up for a year. Merrick Bank , in Springfield, Mo., offers
a one-year CD yielding 2.9%, with a $25,000 minimum. The early-withdrawal penalty is 2% of the account balance or seven days' interest,
whichever is larger. The top five-year CD yield was recently 3.4%, from First National Bank of America in East Lansing, Mich.
Your primary concern in a money fund should be how much it charges in expenses. Vanguard
Prime Money Market Fund (symbol
VMMXX , yield 2.5%) charges an ultralow 0.16% a year and consistently sports above-average yields. Investors in high tax brackets
might consider a tax-free money fund, whose interest is free from federal (and some state) income taxes, such as Vanguard Municipal
Money Market Fund ( VMSXX 1.6%).
To someone paying the maximum 40.8% federal tax rate, which includes the 3.8% net investment income tax, the fund has the equivalent
of a 2.7% taxable yield. (To compute a muni's taxable-equivalent yield, subtract your tax bracket from 1, and divide the muni's yield
by that. In this case, divide 1.6% by 1 minus 40.8%, or 59.2%). The fund's expense ratio is 0.15%.
Muni bonds are IOUs issued by states, municipalities and counties. At first glance, muni yields look as exciting as a month in
traction. A 10-year, AAA-rated national muni yields 2.0%, on average, compared with 2.6% for a 10-year Treasury note. But the charm
of a muni bond isn't its yield; it's that the interest is free from federal taxes -- and, if the bond is issued by the state where
you live, from state and local taxes as well. As with tax-free money funds, investors should consider a muni fund's taxable equivalent
yield; in the case above, it would be 3.4% for someone paying the top 40.8% federal rate.
Yields get better as you go down in credit quality. An A-rated 10-year muni -- two notches down from AAA but still good -- yields
2.3%, on average, or 3.9% for someone paying the top rate. The risks: Munis are remarkably safe from a credit perspective, even considering
that defaults have inched up in recent years. But like all bonds, munis are subject to interest rate risk. If rates rise, your bond's
value will drop (and vice versa), because interest rates and bond prices typically move in opposite directions. If you own an individual
bond and hold it until it matures, you'll most likely get your full principal and interest. The value of muni funds, however, will
vary every day.
How to invest: Most investors should use a mutual fund or ETF, rather than pick their own individual bonds. Look for funds with
rock-bottom expenses, such as Vanguard Limited-Term Tax-Exempt (
VMLTX , 1.8%). The fund charges
just 0.17%, and yields the equivalent of 3% for someone paying the highest federal tax rate. It's a short-term fund, which means
it's less sensitive to interest rate swings. That means its share price would fall less than longer-term funds' prices if rates were
to rise. The average credit quality of the fund's holdings is a solid AA–. Fidelity Intermediate Municipal Income (
FLTMX , 2.0%), a member of
the
Kiplinger 25 , the list of our favorite no-load funds, gains a bit of yield (a taxable equivalent of 3.4% for those at the top
rate) by investing in slightly longer-term bonds. The fund's expense ratio is 0.37%; the largest percentage of assets, 39%, is in
AA bonds. Vanguard High-Yield Tax-Exempt Fund Investor Shares (
VWAHX , 2.9%) also charges
just 0.17% in fees and yields 4.9% on a taxable-equivalent basis for someone at the highest rate. The extra yield comes from investing
in a sampling of riskier bonds. But the fund's average BBB+ credit rating is still pretty good, and its return has beaten 96% of
high-yield muni funds over the past 15 years.
You get higher yields from corporate bonds than you do from government bonds because corporations are more likely to default. But
that risk is slim. The one-year average default rate for investment-grade bonds (those rated BBB– or higher), is just 0.09%, going
back to 1981, says Standard & Poor's. And corporate bonds rated AAA and maturing in 20 or more years recently yielded 3.7%, on average,
while 20-year Treasury bonds yielded 2.8% and 30-year T-bonds, 3.0%. You can earn even more with bonds from firms with lightly dinged
credit ratings. Bonds rated BBB yield an average 4.0%. The risks: The longer-term bond market moves independently of the Fed and
could nudge yields higher (and prices lower) if inflation worries pick up. Though corporate defaults are rare, they can be devastating.
Lehman Brothers, the brokerage firm whose bankruptcy helped fuel the Great Recession, once boasted an investment-grade credit rating.
How to invest: Active managers select the bonds at Dodge & Cox Income (
DODIX , 3.5%). This fund
has beaten 84% of its peers over the past 15 years, using a value-oriented approach. It holds relatively short-term bonds, giving
its portfolio a duration of 4.4 years, which means its share price would fall roughly 4.4% if interest rates rose by one percentage
point over 12 months. The fund's average credit quality is A, and it charges 0.42% in expenses. If you prefer to own a sampling of
the corporate bond market for a super-low fee, Vanguard Intermediate-Term Corporate Bond Index Fund Admiral Shares (
VICSX , 3.6%) is a good choice.
Vanguard recently lowered the minimum investment to $3,000, and the fund charges just 0.07%. Interest-rate risk is high with Vanguard
Long-Term Bond ETF ( BLV , $91,
3.8%). The exchange-traded fund has a duration of 15, which means fund shares would fall 15% if interest rates moved up by one percentage
point in a year's time. Still, the yield on this long-term bond offering is enticing, and the fund's expense ratio is just 0.07%.
SEE ALSO:
The 7 Best Bond Funds for Retirement Savers in 2019//www.dianomi.com/smartads.epl?id=4908
Dividend stocks have one advantage that bonds don't: They can, and often do, raise their payout. For example, Procter & Gamble (
PG , $106, 2.7%), a member of
the
Kiplinger Dividend 15 , the list of our favorite dividend-paying stocks, raised its dividend from $2.53 a share in 2014 to $2.84
in 2018, a 2.3% annualized increase. Preferred stocks, like bonds, pay a fixed dividend and typically offer higher yields than common
stocks. Banks and other financial services firms are the typical issuers, and, like most high-dividend investments, they are sensitive
to changes in interest rates. Yields for preferreds are in the 6% range, and a generous crop of new issues offers plenty of choices.
The risks: Dividend stocks are still stocks, and they will fall when the stock market does. Furthermore, Wall Street clobbers
companies that cut their dividend. General Electric slashed its dividend to a penny per share on December 7, 2018, and the stock
fell 4.7% that day. How to invest: Some slower-growing industries, such as utilities or telecommunications firms, tend to pay above-average
dividends. Verizon Communications (
VZ , $58, 4.2%), a Kip 15 dividend
stock, is the largest wireless carrier in the U.S. Its investment in Fios fiber-optic cable should pay off in coming years. SPDR
Portfolio S&P 500 High Dividend ETF (
SPYD , $39, 4.3%) tracks the
highest-yielding stocks in the S&P 500 index. The fund has 80 holdings and is sufficiently diversified to handle a clunker or two.
Utility PPL Corp. ( PPL , $31,
5.3%) derives more than 50% of its earnings from the United Kingdom. Worries that the U.K.'s departure from the European Union will
pressure PPL's earnings have weighed on the stock's price, boosting its yield. Nevertheless, PPL's U.S. operations provide strong
support for the company's generous payout. Ma Bell is a
Dividend Aristocrat , meaning that AT&T (
T , $32, 6.4%) has raised its dividend
for at least 25 consecutive years (35 straight years, in AT&T's case). The company has plenty of free cash flow to keep raising its
payout. SEE ALSO:
9 High-Yield Dividend Stocks That Deserve Your Attention//www.dianomi.com/smartads.epl?id=4908
You can invest in two types of REITs: those that invest in property and those that invest in mortgages. Both types must pass on at
least 90% of their revenue to investors, which is partly why they have such excellent yields. Typically, REITs that invest in income-producing
real estate have lower yields than those that invest in mortgages. The average property REIT yields 4.1%, compared with the average
mortgage REIT yield of 10.6%, according to the National Association of Real Estate Investment Trusts. Why the big difference? Property
REITs rack up expenses when they buy and sell income properties or lease them out as landlords. Mortgage REITs either buy mortgages
or originate them, using borrowed money or money raised through selling shares as their capital.
The risks: When the economy slows down, so does the real estate market, and most REITs will take a hit in a recession. Mortgage
REITs are exceptionally sensitive to interest rate increases, which squeeze their profit margins, and to recessions, which increase
the likelihood of loan defaults. REIT dividends are not qualified dividends for tax purposes and are taxed at your ordinary income
tax rate. How to invest: Realty Income Corp. (
O , $69, 4.0%) invests in property
and rents it to large, dependable corporations, such as Walgreens, 7-Eleven and Fed-Ex. It's a
Kiplinger 15 dividend stalwart and pays dividends monthly. Fidelity Real Estate Income (
FRIFX , 4.0%) isn't a REIT,
although it invests in them (among other things). The fund puts income first. It has 43% of its assets in bonds, most of them issued
by REITs. The fund lost 0.6% in 2018, compared with a 6% loss for other real estate funds. Investors will forgive a lot in exchange
for a high yield. In the case of iShares Mortgage Real Estate Capped ETF (
REM , $44, 8.2%), they're choosing
to accept a high degree of concentration: The top four holdings account for 44% of the ETF's portfolio. Although concentration can
increase risk, in this instance the fund's huge position in mortgage REITs has helped returns. Falling interest rates late in 2018
pushed up mortgage REITs, limiting the fund's losses to just 3% in 2018. Annaly Capital Management (
NLY , $10, 12%) is a REIT that
borrows cheaply to buy government-guaranteed mortgage securities. Most of those holdings are rated AA+ or better. Annaly boosts its
yield by investing in and originating commercial real estate loans and by making loans to private equity firms. Its 2018 purchase
of MTGE Investment, a mortgage REIT that specializes in skilled nursing and senior living facilities, will help diversify the firm's
portfolio. Annaly is the largest holding of iShares Mortgage Real Estate Capped ETF.
If you think interest rates are low in the U.S., note that most developed foreign countries have even lower rates because their economies
are growing slowly and inflation is low. The U.K.'s 10-year bond pays just 1.2%; Germany's 10-year bond yields 0.1%; Japan's yields
–0.03%. There's no reason to accept those yields for a day, much less a decade. You can, by contrast, find decent yields in some
emerging countries. Emerging-markets bonds typically yield roughly four to five percentage points more than comparable U.S. Treasury
bonds, which would put yields on some 10-year EM debt at about 7%, says Pramol Dhawan, emerging-markets portfolio manager at bond
fund giant Pimco.
The risks: You need a healthy tolerance for risk to invest in emerging-markets bonds. U.S. investors tend to be leery of them
because they remember massive defaults and currency devaluations, such as those that occurred in Asia in the late 1990s. But in the
wake of such debacles, many emerging countries have learned to manage their debt and their currencies better than in the past. But
currency is still a key consideration. When the U.S. dollar rises in value, overseas gains translate into fewer greenbacks. When
the dollar falls, however, you'll get a boost in your return. A higher dollar can also put pressure on foreign debt denominated in
dollars -- because as the dollar rises, so do interest payments. How to invest: Dodge & Cox Global Bond (
DODLX , 4.5%) can invest anywhere,
but lately it has favored U.S. bonds, which were recently 48% of the portfolio. The fund's major international holdings show that
it isn't afraid to invest in dicey areas -- it has 11% of its assets in Mexican bonds and 7% in United Kingdom bonds. Fidelity New
Markets Income ( FNMIX , 5.6%),
a
Kip 25 fund, has been run by John Carlson since 1995. That makes him one of the few emerging-markets debt managers who ran a
portfolio during the currency-triggered meltdown in 1997-98. He prefers debt denominated in dollars, which accounts for 94% of the
portfolio. But he can be adventurous: About 6.5% of the fund's assets are in Turkey, which is currently struggling with a 19% inflation
rate and a 14.7% unemployment rate. IShares Emerging Markets High Yield Bond ETF (
EMHY , $46, 6.2%) tracks emerging-markets
corporate and government bonds with above-average yields. The holdings are denominated in dollars, so there's less currency risk.
But this is not a low-risk holding. It's more than twice as volatile as the U.S. bond market, although still only half as volatile
as emerging-markets stocks. SEE ALSO:
39
European Dividend Aristocrats for International Income Growth
Junk bonds -- or high-yield bonds, in Wall Street parlance -- aren't trash to income investors. Such bonds, which are rated BB+ or
below, yield, on average, about 4.7 percentage points more than the 10-year T-note, says John Lonski, managing director for Moody's
Capital Markets Research Group. What makes a junk bond junky? Typical high-yield bond issuers are companies that have fallen on hard
times, or newer companies with problematic balance sheets. In good times, these companies can often make their payments in full and
on time and can even see their credit ratings improve. The risks: You're taking an above-average risk that your bond's issuer will
default. The median annual default rate for junk bonds since 1984 is 3.8%, according to Lonksi. In a recession, you could take a
big hit. In 2008, the average junk bond fund fell 26%, even with reinvested interest.
How to invest: RiverPark Strategic Income (
RSIVX , 4.8%) is a mix of cash
and short-term high-yield and investment-grade bonds. Managers choose bonds with a very low duration, to cut interest rate risk,
and a relatively low chance of default. Vanguard High-Yield Corporate (
VWEHX , 5.5%), a
Kip 25 fund, charges just 0.23% in expenses and invests mainly in the just-below-investment-grade arena, in issues from companies
such as Sprint and Univision Communications. SPDR Bloomberg Barclays High Yield Bond ETF (
JNK , $36, 5.8%) charges 0.40%
in expenses and tracks the Barclays High Yield Very Liquid index -- meaning that it invests only in easily traded bonds. That's a
comfort in a down market because when the junk market turns down, buyers tend to dry up. The fund may lag its peers in a hot market,
however, as some of the highest-yielding issues can also be the least liquid. Investors who are bullish on the economy might consider
Northern High Yield Fixed Income Fund (
NHFIX , 7.0%). The fund owns
a significant slice of the junkier corner of the bond market, with about 23% of its holdings rated below B by Standard & Poor's.
These bonds are especially vulnerable to economic downturns but compensate investors willing to take that risk with a generous yield.
You might be surprised to learn how much income you can generate from moving hydrocarbons from one place to another. Most MLPs are
spin-offs from energy firms and typically operate gas or oil pipelines. MLPs pay out most of their income to investors and don't
pay corporate income taxes on that income. Those who buy individual MLPs will receive a K-1 tax form, which spells out the income,
losses, deductions and credits that the business earned and your share of each. Most MLP ETFs and mutual funds don't have to issue
a K-1; you'll get a 1099 form reporting the income you received from the fund.
The risks: In theory, energy MLPs should be somewhat immune to changes in oil prices; they collect fees on the amount they move,
no matter what the price. In practice, when oil gets clobbered, so do MLPs -- as investors learned in 2015, when the price of West
Texas intermediate crude fell from $53 a barrel to a low of $35 and MLPs slid an average 35%. Oil prices should be relatively stable
this year, and high production levels should mean a good year for pipeline firms. How to invest: Magellan Midstream Partners (
MMP , $62, 6.5%) has a 9,700-mile
pipeline system for refined products, such as gasoline, and 2,200 miles of oil pipelines. The MLP has a solid history of raising
its payout (called a distribution) and expects a 5% annual increase in 2019. The giant of MLP ETFs, Alerian MLP ETF (
AMLP , $10, 7.2%), boasts $9
billion in assets and delivers a high yield with reasonable expenses of 0.85% a year. Structured as a C corporation, the fund must
pay taxes on its income and gains. That can be a drag on yields compared with MLPs that operate under the traditional partnership
structure. EQM Midstream Partners (
EQM , $46, 10.1%) is active in
the Appalachian Basin and has about 950 miles of interstate pipelines. The firm paid $4.40 in distributions per unit last year and
expects to boost that to $4.58 in 2019.
Closed-end funds (CEFs) are the forebears of mutual funds and ETFs. A closed-end fund raises money through an initial stock offering
and invests that money in stocks, bonds and other types of securities, says John Cole Scott, chief investment officer, Closed-End
Fund Advisors. The fund's share price depends on investors' opinion of how its picks will fare. Typically, the fund's share price
is less than the current, per-share value of its holdings -- meaning that the fund trades at a discount. In the best outcome, investors
will drive the price up to or beyond the market value of the fund's holdings. In the worst case, the fund's discount will steepen.
The risks: Many closed-end income funds borrow to invest, which can amplify their yields but increase their price sensitivity
to changes in interest rates. Most CEFs have higher expense ratios than mutual funds or ETFs, too.
How to invest: Ares Dynamic Credit Allocation Fund (
ARDC , $15, 8.5%) invests in
a mix of senior bank loans and corporate bonds, almost all of which are rated below investment grade. Borrowed money as a percentage
of assets -- an important indicator for closed-end funds known as the leverage ratio -- is 29.6%, which is a tad lower than the average
of 33% for closed-end funds overall. The fund's discount to the value of its holdings has been narrowing of late but still stands
at 12.1%, compared with 11.2%, on average, for the past three years.
Advent Claymore Convertible Securities and Income Fund (
AVK , $15, 9.4%), run by Guggenheim
Investments, specializes in convertible bonds, which can be exchanged for common stock under some conditions. The fund also holds
some high-yield bonds. Currently, it's goosing returns with 40% leverage, which means there's above-average risk if rates rise. For
intrepid investors, the fund is a bargain, selling at a discount of 10.6%, about average for the past three years.
Clearbridge Energy Midstream Opportunity (
EMO , $9, 9.7%) invests in energy
master limited partnerships. It sells at a 12.1% discount, compared with a 6.6% average discount for the past three years. Its leverage
ratio is 33% -- about average for similar closed-end funds.
The global bond market's soaring performance has left investors queasy about the ride
ahead.
The Bloomberg Barclays Global Aggregate index has earned 2.3 percent through March 28, its
best quarter since mid-2017. But with yields sinking across major sovereign markets, investors
now face a dilemma. Buying government bonds at these levels is perilous because economic data
may improve, while taking more risk could leave investors nastily exposed to a global
downturn.
"... In the ongoing desire on their part to be transparent they have, until Wed., projected their expectations for increases to short-term rates over the next two years to be 4 increases this year and 4 next year. ..."
"... As of Wednesday, that's all gone. The new dot chart says zero increases this year and at most 1 next year. The 10-year treasury immediately cratered its yield to 2.5something percent. ..."
Re shale financing . . . Folks should go and read financial articles from Wednesday afternoon
of this week.
The Fed basically took a sledgehammer to their dot charts. In the ongoing desire on their
part to be transparent they have, until Wed., projected their expectations for increases to
short-term rates over the next two years to be 4 increases this year and 4 next year.
As of Wednesday, that's all gone. The new dot chart says zero increases this year and at
most 1 next year. The 10-year treasury immediately cratered its yield to 2.5something
percent. Still falling. Overseas we see Germany tracking, and Japan, and more and more
maturities on their yield curves return to negative. Not just real negative. Outright nominal
negative.
This is something that Financial media does not talk about. Negative nominal interest
rates from major country government bonds. How could they talk about it? It is utterly
obvious that this specific reality demonstrates that the entirety of all analyses has no
meaning. Their only defense is silence. Shale would prefer that it stay that way.
The Fed also announced an end to balance sheet normalization, which is euphemism for
trying to get rid of all of those bonds and MBS that were purchased as part of QE. They are
ending their purchases late this year. They dare not continue the move towards normal. I
believe that leaves their balance sheet still holding in excess of 3 trillion. That's not
normalization, sports fans. And it has been TEN YEARS.They havent been able to get to
"normal" in ten years, and as of Wed, they will stop trying.
The Treasury notes are the underlying basis for what shale companies have to pay to borrow
money. Thoughts by folks here that the monetary gravy train will shut off shale drilling need
rethinking. Bernanke changed everything. Forever.
These Fed actions are indistinguishable from whimsy. Imagining that Powell is Peak Oil
cognizant and is focused on shale is a tad extreme, but only a tad.
I recall a Bernanke quote during the crisis that made clear he knew what Peak would mean
-- at any price.
"Bond markets globally, along with dovish central banks, have been telling us a slowdown is
on the way," said Jeffrey Halley, senior market analyst at Oanda Corp. in Singapore. "Some
parts of the world will be better equipped than others to handle this. The U.S. can at least
cut rates and apply monetary tools, while things could be worse for Europe and Japan, where
they cannot."
It does feel like in 2017. But that does not means much as economy changed substantially and probably nor in the right
direction... Purchasing power of population probably was eroded despite growth of absolute numbers of customers because of
decimation of well paying jobs. Also the market now is dominated by HFT which serves as an amplifier of pre-existing
trend and can by itself course a crash or mini crash. Another factor is oil prices.
But the idea of disconnect if a very useful idea and many other analysts predicted negative year for S&P500. I see dot-com
bubble No.2 here, not so much subprime mortgages problem of 2008. Subprime exists now in junk bond produced by shale oil players,
but it is much less in size.
He said
the stock market, for now,
"likes the fact that they (the Fed) aren't going to give them any problems."
But things could change quickly and dramatically, he said, with his final comment, the most
ominous:
"It feels eerily like '07,"
he said.
"
The stock market is near its high and the economy is noticeably weaker
- and yet everyone is saying 'Everything is Great!
'"
And just in case you wondered how bad the underlying is - despite equity market's enthusiasm -
Citi's Economic Data Change index as its worst level since 2009...
Today at 4:15pm EDT, DoubleLine founder Jeff Gundlach is holding his latest live webcast
open to investors and casual listeners, titled enticingly 'Highway to Hell', and which we
assume will discuss either Brexit, the US-China trade deal, the long-term US debt picture or
how this, latest asset bubble finally ends.
Readers can register and follow it live at
this address
,
or clicking on the image below
As usual, we will grab and highlight the most interesting charts from Gundlach's
presentation as they come in.
* * *
Gundlach, as usual, starts with one of his favorite charts, the one showing the global
central bank balance sheet level juxtaposed to the global market, as the background for the
Fed's "180 degree turn" in the stock market's recent rebound, which is understandable since the
"S&P was and is in a bear market."
... ... ...
If that wasn't bad enough, Gundlach also said that
stocks will take out the December low
during the course of 2019 and markets will roll over earlier than they did last year.
Shifting from the market to the economy, Gundlach shows that global economic momentum is getting
worse across the globe...
Gundlach then highlights the sudden collapse in global trade, which would suggest the world is in
a global recession.
And yet at the same time, US economic data, at least in the labor market,
has never been stronger as Gundlach shows:
Of course, another big red flag is the collapse in December retail sales, and despite the sharp rebound in the January print
as we saw yesterday, Gundlach highlights the sharp drop in the 6 month average and highlights it as another potential
recessionary risk factor.
Going back to one of his favorite topics, the relentless growth of US debt, Gundlach shows the following chart of debt by
sector. Needless to say, it is troubling, and as Gundlach said.
And tied to that, the following new warning on the US interest expense: "The US interest expense is projected by the CBO to
explode higher starting yesterday"
Gundlach then went on a rant against MMT, calling it a "crackpot" theory, which is based on a "completely fallacious
argument", and adds that "People who have PhDs in economics actually are buying the complete nonsense of MMT which is used to
justify a massive socialist program."
Gundlach also discusses the US trade deficit, which recently soared, saying that "the trade deficit is not shrinking but
expanding," and the goods deficit is at "an all-time record", which according to Gundlach may hurt Trump's re-election chances.
Having predicted president Trump early, when everyone else was still mocking him, Gundlach admits that he is "not really sure
what's going to happen,'' when it comes to the next election. "If you ran on promising a lesser trade deficit'' and elimination
of national debt, and both have "exploded" higher, Gundlach thinks it's hard to say that you're winning.
And speaking of the next president, Gundlach suggests that if the economy falls into recession and Trump gets thrown out, we
might get the chance to see how MMT, i.e. helicopter money, really works with the next, socialist, president.
Perhaps this is also why to Gundlach "the next big move for the dollar is lower."
Looking ahead, Gundlach also touches on the future of monetary policy, and once again highlights the discrepancy between the
bond market, which expects half a rate cut, and the Fed's dot plot which expects three hikes in 2019-2020.
What happens? To Gundlach, "Fed expectations are likely to show capitulation to the Fed this time...the bond market is having
none of the Fed's two dots that they revealed in December." He then adds that the Fed "will absolutely drop the 2019 dot,"
suggesting it may be dropped to 1/2 a hike.
Optimism that a new trade deal will occur between America and
China has driven stock markets higher even as data continues to
emerge confirming economies across the world continue to slow. It
seems much of the current market fervor is based on optimism and
hope falls into the category of "irrational exuberance" a term
that Allen Greenspan has in the past used to describe unbridled
enthusiasm. More on the realities being ignored in the following
article.
Hmm....Kinda strange call there Jeffy Jeff on those higher
interest rates.
Especially considering just today where the 1yr
yield is higher than...get this, the 2yr, the 3yr, the 5yr
aaaaand the 7year bond. Kinda strange setup for rates exploding
higher isn't it? Or if you like to think of it as a belly that
sumbuck is getting one BIG pot gut.
Politicians are imbeciles and have no remedies. The US is the
least ugly pig of the bunch. The EU needs major structural tax
and regulatory reform; open borders with a pervasive social
welfare state has proven a recipe for disaster. The US is in
similar circumstances, but its tax and regulatory environment are
at least rational. It requires massive entitlement and spending
reforms with some minor tax hikes on the top end marginal income
and capital gains brackets.
Today at 4:15pm EDT, DoubleLine founder Jeff Gundlach is holding his latest live webcast
open to investors and casual listeners, titled enticingly 'Highway to Hell', and which we
assume will discuss either Brexit, the US-China trade deal, the long-term US debt picture or
how this, latest asset bubble finally ends.
Readers can register and follow it live at this address ,
or clicking on the image below
As usual, we will grab and highlight the most interesting charts from Gundlach's
presentation as they come in.
* * *
Gundlach, as usual, starts with one of his favorite charts, the one showing the global
central bank balance sheet level juxtaposed to the global market, as the background for the
Fed's "180 degree turn" in the stock market's recent rebound, which is understandable since the
"S&P was and is in a bear market."
"At this point in the cycle, a pickup in inflation will generally lead to corporate margin
compression, which is potentially more supportive of maintaining a long duration stance,"
Bartolini, lead portfolio manager for U.S. core bond strategies, said after the jobs figures.
He sees annual CPI remaining around this report's consensus of 1.6 percent -- the slowest since
2016 -- for a while.
Benchmark 10-year yields enter the week at 2.63 percent, close to the lowest level in two
months. In the interest-rate options market, traders have been ramping up positions that target
lower yields in five- and 10-year notes.
DougDoug,
The Fed is pretty much DONE with rate hikes, as paying the INTEREST on, 22 Trillion in
Debt will get,.. UGLIER and UGLIER ! Especially with, all the new,.. Tax and SPEND Demo'Rat
Liberals, coming into, Congress ! "We the People", will be,.. TOAST !!
I'm HOLDING, my "Floating Rate" senior secured, Bond CEF's and my Utility and Tech, CEF's,
too ! Drawing NICE Dividends,.. Monthly !
The World is NOT ending for, the USA,.. THANKS,.. to Trump !
NEW YORK, Jan 17 (Reuters) - U.S. fund investors charged into high-yield "junk" bonds during
the latest week, pouring in $3.3 billion, the most cash flowing into that market since late
2016, Lipper said on Thursday, boosted by soothing words by Federal Reserve Chairman Jerome
Powell.
Underscoring investors' appetite for some risk-taking, investors pulled $15 billion net cash
from U.S.-based money market funds, according to the Refinitiv research service. For their
part, U.S.-based equity mutual funds - which exclude exchange-traded funds - posted inflows of
$4.8 billion, Lipper data showed.
Does William Cohan's New York Times Tirade Against Low Interest Rates Make Any Sense?
By Dean Baker
It doesn't as far as I can tell. Cohan has been on a rant * for years about how high risk
corporate bonds are going to default in large numbers and then ... something. It's not clear
why most of us should care if some greedy investors get burned as a result of not properly
evaluating the risk of corporate bonds. No, there is not a plausible story of a chain of
defaults leading to a collapse of the financial system.
But even the basic proposition is largely incoherent. Cohan is upset that the Federal
Reserve has maintained relatively low, by historical standards,interest rates through the
recovery. He seems to want the Fed to raise interest rates. But then he tells readers:
"After the fifth straight quarterly rate increase, Mr. Trump, worried that the hikes might
slow growth or even tip the economy into recession, complained that Mr. Powell would 'turn me
into Hoover.' On January 3, the president of the Federal Reserve Bank of Dallas said the Fed
should assess the economic outlook before raising short-term interest rates again, a signal
that the Fed has hit pause on the rate hikes. Even Mr. Powell has signaled he may be turning
more cautious."
It's not clear whether Cohan is disagreeing with the assessment of the impact of higher
interest rates, not only by Donald Trump, but also the president of the Dallas Fed, Jerome
Powell, and dozens of other economists.
Higher interest rates will slow growth and keep people from getting jobs. The people who
would be excluded from jobs are disproportionately African American, Hispanic, and other
disadvantaged groups in the labor market. Higher unemployment will also reduce the bargaining
power of tens of millions of workers who are currently in a situation to secure real wage
increases for the first time since the recession in 2001.
If Cohan had some story of how bad things would happen to the economy if the Fed doesn't
raise rates then perhaps it would be worth the harm done by raising rates, but investors
losing money on corporate bonds doesn't fit the bill.
"Goldman cuts 10-year Treasury yield target for 2019 to 3%"
By Sunny Oh...Jan 8, 2019...10:45 a.m. ET
"Goldman Sachs has rolled back its call for much higher rates in U.S. government bonds in
the U.S., though it still expects a gradual climb from the current muted levels in the
Treasury market.
In a Tuesday note, Goldman Sachs said they expect the 10-year yield TMUBMUSD10Y, +0.06% to
hit 3% by year-end, a 50 basis point cut from their forecast of 3.5%. Since last week, the
benchmark bond yield has steadily risen to 2.710% Tuesday, after hitting an 11-month low of
2.553% last Thursday, according to Tradeweb data.
"... However, despite the signs, Goldman Sachs assumes the indicators are wrong and that "recession risk remains fairly low, in the neighborhood of 15% over the next year." The bank has predicted that the S&P 500 will finish 2019 at 3,000, up from the current value just below 2,600. ..."
Confidence in continued economic growth has been waning. A huge majority of chief financial officers
around the world say a recession will happen by the end of 2020. Most voters think one will hit by the end
of this year.
Now the Goldman
Sachs economic research team says that the
market shows a roughly 50% chance of a recession over the next year, according to
Axios.
Goldman Sachs looked at two different measures: the yield curve slope and credit spreads.
The former refers to a graph of government bond interest rates versus the years attaining
maturity requires. In a growing economy, interest rates are higher the longer the investment
because investors have confidence in the future. A frequent sign of a recession is the
inversion of the slope, when investors are uncertain about the future, so are less willing to
bet on it.
Credit spreads compare the interest paid by government bonds, which are considered the
safest. Corporate bonds, which are riskier, of the same maturity have to offer higher interest
rates. As a recession approaches, credit spreads tend to expand, as investors are more worried
about companies defaulting on their debt.
However, despite the signs, Goldman Sachs assumes the indicators are wrong and that
"recession risk remains fairly low, in the neighborhood of 15% over the next year." The bank
has predicted that the S&P 500 will finish 2019 at 3,000, up from the current value just
below 2,600.
(Bloomberg) -- Jeffrey Gundlach said yet again that the U.S. economy is gorging on debt.
Echoing many of the themes from his annual "Just Markets" webcast on Tuesday, Gundlach took
part in a round-table of 10 of Wall Street's smartest investors for Barron's. He highlighted
the dangers especially posed by the U.S. corporate bond market.
Prolific sales of junk bonds and significant growth in investment grade corporate debt,
coupled with the Federal Reserve weaning the market off quantitative easing, have resulted in
what the DoubleLine Capital LP boss called "an ocean of debt."
The investment manager countered President Donald Trump's claim that he's presiding over the
strongest economy ever. The growth is debt-based, he said.
Gundlach's forecast for real GDP expansion this year is just 0.5 percent. Citing numbers
spinning out of the USDebtClock.org website, he pointed out that the U.S.'s unfunded
liabilities are $122 trillion -- or six times GDP.
"I'm not looking for a terrible economy, but an artificially strong one, due to stimulus
spending," Gundlach told the panel. "We have floated incremental debt when we should be doing
the opposite if the economy is so strong."
Stock Bear
Gundlach is coming off another year in which his Total Return Bond Fund outperformed its
fixed-income peers. It returned 1.8 percent in 2018, the best performance among the 10 largest
actively managed U.S. bond funds, according to data compiled by Bloomberg.
Gundlach expects further declines in the U.S. stock market, which recently have steadied
after reeling for most of December since the Great Depression. Equities will be weak early in
the year and strengthen later in 2019, effectively a reversal of what happened last year, he
said.
"So now we are in a bear market, which isn't defined by me as stocks being down 20 percent.
A bear market is determined by the way stocks are acting," he said.
Rupal Bhansali, chief investment officer of International & Global Equities at Ariel
Investments, picked up on Gundlach's debt theme in the Barron's cover story. Citing General
Electric's woes, she urged investors to focus more on balance-sheet risk rather than whether a
company could beat or miss earnings. Companies with net cash are worth looking at, she
said.
"... In what is still a low-interest-rate environment globally, the perpetual search for yield has found a comparatively new and attractive source in the guise of collateralized loan obligations (CLOs) within the USEM world. According to the Securities Industry and Financial Markets Association, new issues of "conventional" high-yield corporate bonds peaked in 2017 ..."
"... These CLOs share many similarities with the mortgage-backed securities that set the stage for the subprime crisis a decade ago. During that boom, banks bundled together loans and shed risk from their balance sheets. Over time, this fueled a surge in low-quality lending, as banks did not have to live with the consequences. ..."
"... A world economy geared toward increasing the supply of financial assets has hooked us into a global game of waiting for the next bubble to emerge somewhere. ..."
A decade after the subprime bubble burst, a new one seems to be taking its
place in the market for corporate collateralized loan obligations. A world economy geared toward increasing the supply of financial
assets has hooked market participants and policymakers alike into a global game of Whac-A-Mole.
A recurrent topic in the financial press for much of 2018 has been the rising
risks in the emerging market (EM) asset class. Emerging economies are, of course, a very diverse group. But the yields on their
sovereign bonds have climbed markedly, as capital inflows to these markets have dwindled amid a general perception of
deteriorating conditions
.
1
Historically, there has been a tight positive relationship between
high-yield US corporate debt instruments and high-yield EM sovereigns. In effect, high-yield US corporate debt is the
emerging market that exists within the US economy (let's call it USEM debt). In the course of this year, however, their
paths have diverged (see Figure 1). Notably, US corporate yields have failed to rise in tandem with their EM counterparts.
What's driving this divergence? Are financial markets overestimating the
risks in EM fixed income (EM yields are "too high")? Or are they underestimating risks in lower-grade US corporates (USEM
yields are too low)?
Taking together the current trends and cycles in global factors (US
interest rates, the US dollar's strength, and world commodity prices) plus a variety of adverse country-specific economic
and political developments that have recently plagued some of the larger EMs, I am inclined to the second interpretation.
In what is still a low-interest-rate environment globally, the perpetual search for yield has found a comparatively new
and attractive source in the guise of collateralized loan obligations (CLOs) within the USEM world. According to the
Securities Industry and Financial Markets Association, new issues of "conventional" high-yield corporate bonds peaked in
2017
and are off significantly this year (about 35% through November). New issuance activity has shifted to the CLO
market, where the amounts outstanding have soared, hitting new peaks almost daily. The
S&P/LSTA US
Leveraged Loan 100 Index
shows an increase of about 70% in early December from its 2012 lows (see Figure 2), with
issuance hitting record highs in 2018. In the language of emerging markets, the USEM is attracting large capital inflows.
These CLOs share many similarities with the mortgage-backed
securities that set the stage for the subprime crisis a decade ago. During that boom, banks bundled together loans and shed
risk from their balance sheets. Over time, this fueled a surge in low-quality lending, as banks did not have to live with
the consequences.
Likewise, for those procuring corporate borrowers and bundling corporate
CLOs, volume is its own reward, even if this means lowering standards for borrowers' creditworthiness. The share of
"Weakest Links"
– corporates rated B-
or lower (with a negative outlook) – in overall activity has risen markedly since 2013-2015. Furthermore, not only are the
newer issues coming from a lower-quality borrower, the covenants on these instruments – provisions designed to ensure
compliance with their terms and thus minimize default risk – have also become lax.
Covenant-lite
issues are on the rise and
now account for about 80% of the outstanding volume.
As was the case during the heyday of mortgage-backed securities, there
is great investor demand for this debt, reminiscent of the "capital inflow problem" or the "
bonanza
"
phase of the capital flow cycle. A recurring pattern across time and place is that the seeds of financial crises are sown
during good times (when bad loans are made). These are good times, as the US economy is at or near full employment.
The record shows that capital-inflow surges often end badly. Any number
of factors can shift the cycle from boom to bust. In the case of corporates, the odds of default rise with mounting debt
levels, erosion in the value of collateral (for example, oil prices in the case of the US shale industry), and falling
equity prices. All three sources of default risk are now salient, and, lacking credible guarantees, the CLO market (like
many others) is vulnerable to runs, because the main players are lightly regulated shadow banking institutions.
And then there are the old and well-known concerns about shadow banking
in general, which stress both its growing importance and the opaqueness of its links with other parts of the financial
sector. Of course, we also hear that a virtue of financing debt through capital markets rather than banks is that the shock
of an abrupt re-pricing or write-off will not impair the credit channel to the real economy to the degree that it did in
2008-2009. Moreover, compared to mortgage-backed securities (and the housing market in general), the scale of household
balance sheets' exposure to the corporate-debt market is a different order of magnitude.
A decade after the subprime bubble burst, a new one seems to be taking
its place – a phenomenon aptly characterized by Ricardo Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas as "
Financial
'Whac-a-Mole
.'"
A world economy geared toward increasing the supply of financial assets has hooked us into a global
game of waiting for the next bubble to emerge somewhere.
Like the synchronous boom in residential housing prior to 2007 across
several advanced markets, CLOs have also gained in popularity in Europe. Higher investor appetite for European CLOs has
predictably led to a
surge in issuance
(up almost 40% in 2018). Japanese banks, desperately seeking higher yields, have swelled the ranks of
buyers. The networks for financial contagion, should things turn ugly, are already in place.
1
Carmen M. Reinhart is Professor of the International Financial System at Harvard University's Kennedy School of
Government.
Douglas
Leyendecker
Dec 23, 2018
The most important questions isn't when or why this bubble will burst but how we got here in the first place. It all
starts with BAD economic and social policies. Now we require more and more "money" to keep the wheels on. Bubble to
bubble...this is where we are in the developed world today. When the reboot finally hits there won't be any
cryptocurrency because there won't be any internet. This is what happens in a fiat currency system.
Read More
MARCO
TEAMNEURS
Dec 23, 2018
Certain deterministic outcome such as the one presented by Professor Carmen M. Reinhart fits with the Idols refereed by
Francis Bacon in Novum Organum. We will be using financialization until it will be not relevant because something else
had emerged or most of us de-merged. This time might be that we are on those moments where something relevant is moving
under our feet.
What seems to be making the difference is strength of soft/hard power the CCP (Communist Chinese Party) has to leverage
decisions over the world. What happened when in the Subprime Crises Russia called China to together attack capital
markets of USA and China refused (according to Mr. Henry Paulson) might have not the same reply this time.
Read less
Paul Daley
Dec 23, 2018
Good article. But -- do I dare say it -- this time may be different. As Reinhart points out, CLOs do not have heavily
engaged public institutions, as was the case with mortgage backed securities and sovereign debt. A collapse in CLO prices
would fall largely on private shoulders. And, after their first experiments with QE, central banks should have a better
grip on the risks and consequences of asset price support programs in encouraging and sustaining asset price bubbles, and
be prepared this time to employ income support measures to sustain real economic activity, if necessary.
nigel southway
Dec 22, 2018
The best course of action is stop the easy movement of capital across borders that way it stops the phoney wealth
transactions caused by a foolish focus on the global economy start more national centered wealth funds
Jacob Alhadeff
Dec 20, 2018
I had no idea any of this was going on. This was very informative, but I don't know yet exactly what to do with this
information. I'm cynical about our ability to avoid such bubbles, but we can prepare for them. In terms of how low/middle
income Americans can prepare what would anyone suggest? Also, I'm not looking for advice on investing decisions
Read less
nigel
southway
Dec 24, 2018
We need to come to terms with who owns capital. It's mostly the nation that created it. The capitalists should only rent
it and the traders and globalists have zero rights to it hence the justification for stricter controls
"... The 30-year U.S. yield fell to 2.91 percent on Thursday, the lowest since January 2018 ..."
"... The other interpretation is that the company chose to refinance with long-term fixed-rate debt because it sees the big drop in 30-year yields as unsustainable ..."
Berkshire, with the third-highest credit rating from both Moody's Investors Service and
S&P Global Ratings, is expected to price the debt on Thursday with a spread of 150 to 155
basis points above benchmark Treasuries. The 30-year U.S. yield fell to 2.91 percent on
Thursday, the lowest since January 2018.
The other interpretation is that the company chose to refinance with long-term fixed-rate
debt because it sees the big drop in 30-year yields as unsustainable. After all, if a borrower
expects interest rates to rise in the future, it would prefer to lock in a fixed rate now
rather than face higher payments down the road.
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.
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."
We'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:
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%.*
Which bond fund is right for you?
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:
Investment-grade corporate and government-related entities
An actively managed bond fund that focuses on U.S., nongovernment
exposure.
Making the most of Vanguard's management resources
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.
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.
I disagree.
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.
From comments "Tough to ween an entire community off its generational addiction to financial
heroin"
Notable quotes:
"... 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. ..."
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.
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."
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.
"(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
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.
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.
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.
"A minority of Fed officials, however, have become increasingly forceful in registering their concerns. Those officials are
more worried about moving too fast than too slow. They fear that the persistence of sluggish inflation could damage the economy,
for example, by permanently eroding public expectations about the future pace of inflation.
The minutes said that some of those officials are reluctant to vote for additional rate increases until they are convinced
that inflation is indeed gaining strength.
The officials "indicated that their decision about whether to increase the target range in the near term would depend importantly
on whether the upcoming economic data boosted their confidence that inflation was headed toward the Committee's objective.""
"... permanently eroding public expectations about the future pace of inflation..."
[The public, being voting age people at large and all working people and so on, really would rather not expect any inflation
at all. It usually does not work out for them all that well since food prices and other headline inflation goods often rise ahead
of wages and core inflation goods. The public is not going to bail us out of this one. Poor and lower middle income people do
not even have mortgages to refinance. Economic illiteracy among the public is not our friend. The establishment however cannot
afford to make the public more economically literate for fear they will understand how the balance of trade over the last forty
year has ripped them off.]
"It usually does not work out for them all that well since food prices and other headline inflation goods often rise ahead of
wages and core inflation goods."
People also don't like being taxed to pay for infrastructure and public services.
Except for older voters, most people in advanced nations have never experienced moderate inflation.
If macro policy was done entirely by fiscal policy/better trade policy and interest rates were left alone, we'd still see higher
inflation after years of running the economy hot.
I just think that had the government did more fiscal/monetary policy after the financial crisis and allowed inflation to run over
target instead of being paranoid about accelerating inflation, the recovery would have been much quicker and people would have
been much happier even with a little inflation. Hillary would have won and inflation expectations would be higher among people
who think about such things.
When sellers of groceries, household goods, utility services, etc. can successfully raise prices, then shouldn't one think there
is still untapped consumer surplus? People with "extra money" will probably pay more, what do people with no extra money do? Buy
less, substitute down, forgo other more discretionary expenses? Shift other expenses to loaned money? Furniture and appliances
have always had financing programs, not obvious that more is bought on loan.
OTOH where I'm currently shopping, it seems grocery prices were stable over the last year. OTOH "sales" and other frequent short
term price variations are of a larger magnitude than inflation, so it's hard to tell. But a number of years ago I have definitely
noticed YOY price moves - not so now.
Grocery stores operate with very thing margins. Retail prices rise when wholesale prices rise. Rising transportation fuel costs
can push wholesale grocery prices, but a lot of food prices has to do with supply variances due to weather. Demand is not very
price elastic on staples, but luxury demand can fall severely with rising prices. Chuck roast is more of a staple for many people.
Filet mignon is a luxury for most people. Or maybe milk is a staple and candy is a luxury most of the time.
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."
For the last several year buying "junkest junk" was a profitable strategy. Now it came to abrupt
end.
Notable quotes:
"... 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. ..."
"... 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. ..."
Interesting 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.
"... 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. ..."
"... 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. ..."
"... 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. ..."
"... 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. ..."
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?
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.
'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?
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.
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.
"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 see
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.
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.
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.
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.
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....
"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."
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?
"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.
"... By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street ..."
"... 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 Booming ..."
By 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!
It 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.
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!
tegnost, December 3, 2015 at 1:07 pm
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. ...
Redemptions at the Pimco Total Return Fund reached 30 straight months in October as the former
world's largest mutual fund fell to $93.7 billion in assets.
The Pimco Income Fund continues to head in the other direction, surpassing $50 billion in assets
for the first time as group Chief Investment Officer Daniel Ivascyn's pool has attracted $11.5 billion
in net new cash this year, according to Newport Beach, California-based Pacific Investment Management
Co.
"The Income Fund benefited from defensive positioning in the energy sectors and the recovery in
the higher quality segments of the emerging markets," Ivascyn said.
Total Return is less than a third of its peak size as investors pulled $1.6 billion from the fund
in October, the smallest monthly outflow since July 2014, two months before Pimco's ouster of co-founder
Bill Gross prompted a rush to the exits. The fund peaked at about $293 billion in April 2013, shortly
before Federal Reserve policy makers sparked the so-called taper tantrum by threatening to reduce
their investments in Treasuries and mortgage-backed securities, prompting investors to flee bonds.
The Total Return Fund returned 1 percent this year through Nov. 2, outperforming 74 percent of
its peers, according to data compiled by Bloomberg.
'Extreme Worry'
"We took advantage of market pricing that reflected extreme worry about spillovers from China
and global deflation in September," said Scott Mather, a manager on Total Return and Pimco's CIO
for core strategies. "As markets calmed and reassessed the probabilities with new data in October,
our positions in corporate credit, mortgages and Treasuries benefited."
The $51 billion Pimco Income Fund has returned 3.6 percent in 2015, beating 98 percent of peers.
It ranks in the 99th percentile for the three- and five-year periods.
While Pimco Total Return has lost assets, investors have added money to competitors such as TCW's
Metropolitan West Total Return Bond Fund and the DoubleLine Total Return Bond Fund. DoubleLine's
fund has returned 2.6 percent this year, outperforming 93 percent of peers, while the MetWest fund
is up 0.6 percent, besting 45 percent of peers.
"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)?
"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)?
"...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." . "...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."
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.
Anonymouse
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.
Two months ago, in "ETF
Issuers Quietly Prepare For Meltdown With Billions In Emergency Liquidity," we outlined the rather
disconcerting circumstances that have led some large fund managers to quietly line up emergency liquidity
facilities that can be tapped in the event of a sudden retail exodus from bond funds.
"The biggest providers of exchange-traded funds, which have been funneling billions of
investor dollars into some little-traded corners of the bond market, are bolstering bank credit lines
for cash to tap in the event of a market meltdown. Vanguard Group, Guggenheim Investments
and First Trust are among U.S. fund companies that have lined up new bank guarantees or expanded
ones they already had, recent company filings show,"
Reuters reported at the time, in a story we suspect did not get the attention it deserved.
At a base level, these precautionary measures are the result of the interplay between central
bank policy and the unintended consequences of the post-crisis regulatory regime. ZIRP creates a
hunt a for yield and simultaneously incentivizes companies (especially cash strapped companies) to
tap the bond market while borrowing costs remain artificially suppressed. Clearly, this is a self-fulfilling
prophecy. The longer rates on risk free assets remain near, at, or even below zero, the more demand
there is for new corporate issuance (the rationale being that at least corporate credit offers some
semblance of yield). More demand means rates on corporate credit are driven still lower, and once
yields on high grade issues get close to the lower limit, yield-starved investors are then herded
into HY.
All of this supply in the primary market comes at a time when liquidity in the secondary market
for corporate credit is non-existent thanks to the shrinking dealer books that resulted from the
government's (maybe) well-meaning attempt to crack down on prop trading. The result: a crowded theatre
with a tiny exit.
This situation has been exacerbated by the proliferation of bond ETFs which have allowed
retail investors to pile into corners of the fixed income world where they might not belong.
All of the above can be summarized as follows.
"MF assets too large versus dealer inventories" (via Citi)...
... clear evidence of "structural damage in corporate bond trading liquidity" (via JP Morgan)...
... and the rapid growth of bond funds in the post-crisis world (via BIS)...
So given the above, the question is this: if something were to spook the market - a rate
hike cycle for instance, or an October revolver raid on HY energy names, or an exogenous geopolitical
shock - causing an exodus from these funds, what would happen to prices if fund managers were suddenly
forced to transact in size in an illiquid secondary market in order to meet redemptions?
"Nothing good", is the answer.
The solution is to avoid selling the underlying bonds - even when investors are selling their
shares in the funds.
But how is this possible?
To a certain extent, outflows in one fund can be offset by inflows to another. These "diversifiable
flows" are one happy byproduct of the great ETF proliferation. Here's a refresher on how this works
courtesy of Barclays.
* * *
Portfolio Products Replace Dealer Inventory
While diversifiable flows limit the risks to portfolio managers in principle, the reality of the
high yield market is more complicated. Managers have specific views on tenor, callability, sectors,
covenants, and, most importantly, individual credits, such that actually finding buyers for specific
bonds can be quite difficult. In the pre-crisis period, dealers ran large inventories that effectively
facilitated the netting of flows across funds (Figure 1). A fund with an outflow would sell bonds
into the dealer community, and funds with outflows would buy bonds out of the dealer inventory. When
inventory is large, the fact that the specific bonds bought and sold did not match was largely irrelevant.
Funds with outflows could sell the bonds of their choice, and the funds with inflows could pick investments
from the large variety of inventory held by dealers.
The matching problem has become more acute as dealer inventories have declined.
Even funds can net flows in principle, dealers are much less willing to warehouse bonds,
and are much more likely to buy only when they believe they can quickly offload the risk. Under this
scenario, the fact that flows can theoretically be netted is of little practical use to fund managers
– actually netting individual bonds is extremely difficult, particularly in the short time frame
required by funds offering daily liquidity to end investors.
This is where portfolio products come in. Investors can use portfolio products to fund outflows/invest
inflows immediately and execute the necessary single-name bond trades over time as liquidity in the
underlying bond market allows (Figure 2). In this scenario, funds with inflows and outflows
simply exchange portfolio products, sidestepping the immediate need to trade single-name corporate
bonds.
* * *
Ok great, so ETFs provide a kind of "phantom" liquidity if you will. There are two problems with
this:
It only works when flows are diversifiable. Once flows become unidirectional, it all
goes out the window.
It makes the underlying markets even more illiquid.
In other words, if I'm a fund manager, the idea that ETFs provide liquidity rests on the
assumption that when I experience outflows, someone else will be experiencing inflows and thus
I can sell ETFs and avoid offloading my bonds into an illiquid corporate credit market. Put another
way: I am depending on new money coming into the market to fund redemptions from previous investors
who are exiting the market, all so that I can avoid liquidating assets that are declining in value
and that I believe will be difficult to sell. There's a term for that kind of business.
It's called a ponzi scheme and just like all other ponzi schemes, when the new money dries up
(so, for example, when HY bond ETF flows are all headed in the wrong direction), the only way
to meet redemptions is to get what I can for the assets I have and when the market for those assets
is thin (as the secondary market for corporate credit most certainly is), I may incur substantial
losses.
Note also that the more often ETFs are used as a way of avoiding the underlying bond market,
the more illiquid that market becomes, making the situation still more precarious in the event
of a panic.
So what is a fund manager to do?
This is where we come full circle to the emergency liquidity lines mentioned at the outset. In
order to avoid tapping the underlying illiquid bond market in a situation where flows are unidirectional,
fund managers may instead pay out redemptions in borrowed cash.
This is, to quote Citi's Matt King, "creative destruction destroyed."
Only worse.
That is, this represents the willful delay of a long overdue episode of creative destruction layered
atop another delay of the much needed Schumpeterian endgame. Stripping out the metaphysics and philosophy
references, that can be translated as follows: this strategy is yet another example of delaying
the inevitable. If fund managers are forced to tap these liquidity lines it likely means
investors have found a reason to sell en masse and if that reason turns out to be something that
permanently impairs the value of the underlying bonds (as opposed to a transitory, irrational panic)
then all the funds are doing by borrowing to meet redemptions is employing leverage to stave off
the recognition of losses, which is ironically the same thing (in principle anyway) that the companies
whose bonds they're holding have done to stay in business. It's a delay-and-pray scheme designed
to avoid selling the debt of companies whose similar delay-and-pray schemes have run their course.
In closing, it's important to note that no fund manager in the world will be able to line up enough
emergency liquidity protection to avoid tapping the corporate credit market in the event of panic
selling in the increasingly crowded market for bond funds.
In other words, when the exodus comes, the illiquidity that's been chasing markets for the better
part of seven years will finally catch up, and at that point, all bets are officially off.
[Jun 05, 2015] BONDS: U.S. government bond prices rose,
pushing yields down. The yield on the 10-year Treasury note dropped to 2.30 percent from 2.36
percent late Wednesday.
According to Bloomberg, bonds wiped out all their gains for the year. 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%.
There is chaos in global markets. Bonds sold off sharply on Thursday morning for a second day
in a row. They've reversed the decline, but stocks are still lower, after the chaos spilled over.
... ... ...
The International Monetary Fund slashed US growth forecasts, and urged the Federal Reserve to
delay its first interest rate hike until 2016, in a statement that crossed as the stock market
opened.
In a speech last month, Fed chair Janet Yellen said it would be appropriate to raise interest
rates "at some point this year" if the economy continues to improve.
In a morning note before the open, Brean Capital's Peter Tchir wrote: "It is time to reduce US
equity holdings for the near term and look for a 3% to 5% move lower. The Treasury weakness
is NOT a 'risk on' trade it is a 'risk off' trade, where low yields are viewed as a risk asset
and not a safe haven."
The sell off in global bonds started Wednesday, as European Central Bank president Mario
Draghi gave a news conference in which he said markets should get used to episodes of higher
volatility.
Draghi also emphasized that the ECB had no intention to soon end its €60 billion bond-buying
program, called quantitative easing, before its planned end date of September 2016.
Bond yields, which move in the opposite direction to their prices, spiked across Europe on
Wednesday, and on Thursday this move is continuing, with German bund yields and US Treasury
yields hitting new 2015 highs and continuing to climb overnight.
According to Bloomberg, bonds wiped out all their gains for the year.
... ... ...
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%.
The Last but not LeastTechnology 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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