fixed

... the Bank of Israel!

There is no plan, no scheme that the Fed can concoct for exiting their support for the U.S. economy that will not negatively affect both the bond and equity markets and have a positive effect on the Dollar. The markets have relied upon the manna from Heaven to rise and virtually nothing else. The American economy cannot justify either the absolute levels of yield or the compression that has taken place or the lofty levels of our stock markets. All of this has had a single driver which is the Fed. The Fed has spent four years providing gifts for those that borrow and for the banks while penalizing those who save and invest. What one group gained the other lost. Now the Fed faces the dilemma of its own making; how to gradually exit their current strategy without setting the financial markets on their rear ends.

There a couple of good reasons to be more than moderately concerned about what’s happening in the fixed income space. Once more my gallant crew, we are sailing into choppy waters... which may mean trouble ahead, but it also spells opportunity! Two things concern us: Firstly, despite global easing, global bond yields have backed up last few days. Immediately the Fed gets the blame with rumours they may scale back QE – which is reactive nonsense. The Fed has made clear we need to see clear evidence of growth, not just hints, before they change course. But the Treasury market is off across the curve. JGBs, Gilts and Europe are all higher last few days. Is this a buying window after some mild panic, or has something really changed? The second issue with the market currently is that global rates are so low the market is losing the will to live/play. When highly speculative CCC names yield less than 7% what's the point in investing? The risk-reward is just too skewed toward higher risk over lowering returns that it simply makes little sense to take.

Critics of Japanese policy worry about its potential failure, here is a discussion of what happens if it succeeds.

A look at the main drivers.

Put down the Sunday newspaper; grab a pot of coffee; and call 'mom' and tell her she has to read this. Doug Rudisch has written a far-reaching summary of the true state of the world and 'why policy has failed'. Simply put, there is no faith in the system; real underlying faith and trust in the system, as opposed to the confidence born from economic steroid injections or entitlements. There also is a subtle but important distinction between faith and trust versus confidence. Faith and trust are longer term and more powerful concepts.There is more going on than a temporary lull in animal spirits that current fiscal and monetary policy will cure. If that was the case, it would be working already... We have ended up with a system where the worst of the risk takers have the ability to take the most risk and are currently taking it at extreme levels. We wish we could be more prescriptive and offer more solutions for the problems. But in order to solve a problem, you must first realize you have one. With respect to the Fed, we don’t think the U.S. realizes it has a problem.

While the stance of monetary policy around the world has, on any conceivable measure, been extreme, the question of whether such a policy is indeed sensible and rational has not been asked much of late. By rational we simply mean the following: Is this policy likely to deliver what it is supposed to deliver? And if it does fall short of its official aim, then can we at least state with some certainty that whatever it delivers in benefits is not outweighed by its costs? We think that these are straightforward questions and that any policy that is advertised as being in ‘the interest of the general public’ should pass this test. As we will argue in the following, the present stance of monetary policy only has a negligible chance, at best, of ever fulfilling its stated aim. Furthermore, its benefits are almost certainly outweighed by its costs if we list all negative effects of this policy and do not confine ourselves, as the present mainstream does, to just one obvious cost: official consumer price inflation, which thus far remains contained. Thus, in our view, there is no escaping the fact that this policy is not rational. It should be abandoned as soon as possible. This will end badly...

Sadly, not much in terms of macro observations this quarter or discussions of jelly donuts, but a whole lot on the fund's biggest Q1 underperformer, Apple and the hedge fund's ongoing fight for shareholder friendly capital reallocation as well as proving Modigliani-Miller wrong. And then this cryptic ellipsis: "Under the circumstances, it is curious that gold isn’t doing better." Say no more, David. We get it.

With markets screaming that Europe is fixed and Italian sovereign bond spreads back near pre-crisis levels, we thought it somewhat interesting that delinquent loans in the country just surged by their most in almost 18 months as bad debt begin to re-accelerate. ANSA notes that over EUR130 billion of Italian debt is currently delinquent (+21.7% YoY) and this comes on the heels of the Bank of Italy's demand that Italian banks increase their loan loss provisions are 'disappointing' audits in March. As we noted previously, the percentage of loans in delinquency rose from around 3% in 2008 to 6.3% in February 2012, and assuming a relatively flat total private sector credit creation in the last year (which is probably conservative since fragmentation has been soaring), the current percentage of loans in default is approaching 8% of the total.

"Is it healthy that the default/insolvency cycle is being sedated in so many large economies? Surely the financial system and life in general has prospered through history on the basis of creative destruction. Indeed all the good looking and intelligent readers of this note are products of survival of the fittest. Economic growth over time is helped by a regular cleansing. So are low defaults helping to lock in low growth for years to come across many large economies? Clearly there are other factors at work here but we think that what's great for credit investors isn't necessarily good for the global economy. A bit of a paradox. We would stress that we fully understand why the authorities wouldn't want free markets to operate today as the risk of a huge global default and unemployment cycle would still be very high. However their intervention has a cost in our opinion."

The biggest surprise from the JOLTS report is not in any of the standalone series, but in the time progression of the Net Turnovers number, which is simply the total new hires less total separations. Historically, the Net Turnover number tracks the total monthly nonfarm payroll change (establishment survey) on a almost tick for tick basis. Not this time. In fact as the chart below showed, the upward revised March NFP number to 138K, which preceded the even more optimistic, and much cheered April print of 165K, which sent the S&P and the DJIA soaring to new all time highs on Friday, not only did not get a confirmation, but in fact the JOLTS survey for Net Turnovers  - which came at only 46K in March compared to a revised 138K jobs added per the establishment survey - implied that the real NFP number in March should have tumbled to a level last seen in September of 2010!

A few weeks after Italy reelected its 87-year old president for a second term, we get news that its former 7-term Prime Minister, 94 year old, Giulio Andreotti, has passed away.

For those following Bitcoin, this interview with Gavin Andresen, the 46-year-old lead software developer for the Bitcoin project in today’s Wall Street Journal should be of interest. The chief scientist for the digital currency talks about its appeal - and pitfalls - in a world of fiat money. Politicians and their appointees are entirely cut out of Bitcoin’s monetary loop, Andresen explains, adding that "Bitcoin or a similar technology could threaten the power of not just central banks, but banks, period." It is perhaps the coder's parting words that are most insightful, "I tell people it’s still an experiment and only invest time or money you could afford to lose. If only investors could as easily follow that advice with fiat currencies."

Europe has already entered a Japanese sort of existence and America will be coming next in our opinion. We are caught in a trap of our own making and this will be the price for the printing of all of this money. As China has reached its apex and begun a gradual grinding down in their economy, as Japan wrestles with insolvency, as Europe falls further into its sinkhole; America will follow.  Make hay while you can but you may also wish to notice that the fields are shrinking and that less hay may be forthcoming. Borrowers have reaped the benefits. Those with money have paid the price. Wealth that can be redeployed is evaporating. Buying power is in decline. There is always a price. The reason is simple enough; it is the consequence of what the central banks are doing.

• Bank of America 125K
• UBS 130K
• Deutsche Bank 140K
• Citigroup 140K
  
• JP Morgan 145K
• Goldman Sachs 150K
  
• Barclays 150K
• HSBC 170K