America is being run by an unelected gang of essentially self-perpetuating PhDs. The notion of an economics coup d’ etat is not so far-fetched. So the last 35 years have brought the greatest exercise in mission creep ever undertaken by an agency of the state. That explains why the monetary politburo persists in its absurd quest to force more debt into an economy which is already saturated with $59 trillion of the same. To pretend, as does Yellen and most of the monetary politburo that they must plow ahead printing money at lunatic rates because Congress so mandated it, is the height of mendacity. The Fed has seized power and is not about to let go - common sense be damned, and the constitution, too.
Nikkei 225 (+1.04%) outperformed overnight, buoyed by S&P 500 posting a new all-time high, a dovish BoJ's Tankan inflation survey and reports that the GPIF is to invest in funds specializing in Japanese stocks with high returns. Overall, another quiet session this morning as market participants continued to position for the upcoming ECB meeting, with Bunds under pressure amid further unwind of expectation of more policy easing by the central bank. According to ECB sources, there is no clear consensus at present on policy action, intense debate seen on Thursday after March HICP data, adding that it fears "over-interpretation" by market of QE possibility.
With another session in which US futures levitate into the open, despite a modest drop in the Nikkei225 (to be expected after the president of Japan’s Government Pension Investment Fund, the world’s largest pension fund, said that a review of asset allocations into stocks is not aimed at supporting domestic share prices) and an unchanged Shanghai Composite while the currency pair du jour, the USDCNY, closes higher despite tumbling in early trade (which also was to be expected after a former adviser to the People’s Bank of China said China is headed for a “mini crisis” in its local- government debt market as economic reforms lead to the first defaults) everyone is asking: will it be deja vu all over again, and after a solid ramp into 9:30 am, facilitated without doubt by the traditional Yen carry trade, will stocks roll over as first biotech and then all other bubble stocks are whacked? We will find out in just over two hours.
In what many thought was a miracle of modern money-printing-driven yield-chasing, Puerto Rico managed to get $3.5 billion of bonds off last week with no problem (albeit at a 8.73% yield). The issue (while perhaps not as surprising as the low yield issues of Uganda we have reflected on previously) raised some eyebrows and in the trading since its release, FINRA noticed something concerning. The bonds, as Bloomberg reports, are supposed to 'minimum denomination $100,000' blocks and yet 75 trades this week have been for no more than $25,000 violating regulations which deem these for "institutional purchasers" and strongly suggesting the heavy hedge fund demand was nothing more than a pump-and-dump scheme to unsophisticated retail investors. PR bonds have plunged from par to $92 this week.
Thanks to the repression of the world's central banks, investors have exited cash and piled into "everything else," but while this is no surprise to most, Citi's Matt King warns of the possibility of an "entrance with no exit" as investors reach for yield has distorted primary and secondary markets, forced risk-averse investors into alternative asset classes, distorted markets beyond any fundamentals, and left markets incredibly illiquid. This, he concludes, sets up a problem that we are already seeing as investors are disillusioned one asset at a time...
"The best way to define the mood in the market right now is panic," warns one commodity broker, adding that "everyone understands why we are going down, but nobody can tell where the bottom is." As the WSJ notes, the economic slowdown in China is hammering prices of some raw materials, driving down industrial commodities from copper to iron ore and coal - exacerbated by the vicious cycle of credit-collateral-contraction. So what is the cheapest way to play continued stress (with potentially limited downside)? The diversified natural resources company Glencore has a huge $55 billion of debt, is drastically sensitive to copper (and other commodity) prices, and its CDS remains just off record tights...
Puerto Rico muni owners who never saw the Barron’s story or the rating firms’ downgrades are better off than those who kept up with the financial news.
With the world still on edge over developments in the Ukraine, overnight newsflow was far less dramatic than yesterday, with no "bombshell" uttered at today's Putin press conferences in which he said nothing new and simply reiterated the party line and yet the market saw it as a full abdication, he did have some soundbites saying Russia should keep economic issues separate from politics, and that Russia should cooperate with all partners on Ukraine. Elsewhere Gazprom kept the heat on, or rather off, saying Ukraine recently paid $10 million of its nat gas debt, but that for February alone Ukraine owes $440 million for gas, which Ukraine has informed Gazprom it can't pay in full. Adding the overdue amounts for prior months, means Ukraine's current payable on gas is nearly $2 billion. Which is why almost concurrently Barosso announced that Europe would offer €1.6 billion in loans as part of EU package, which however is condition on striking a deal with the IMF (thank you US taxpayers), and that total aid could be as large as $15 billion, once again offloading the bulk of the obligations to the IMF. And so one more country joins the Troika bailout routine, and this one isn't even in the Eurozone, or the EU.
Diversification with a solid strategy
In the aftermath of the recent Wall Street Journal profile piece that, rather meaninglessly, shifted attention to Bill Gross as quirky manager (who isn't) to justify El-Erian's departure and ignoring Bill Gross as the man who built up the largest bond fund in the world, the sole head of Pimco was eager to return to what he does best - thinking about the future and sharing his thoughts with one of his trademark monthly letters without an estranged El-Erian by his side. He did that moments ago with "The Second Coming" in which the 69-year-old Ohian appears to have pulled a Hugh Hendry, and in a letter shrouded in caveats and skepticism, goes on to essentially plug "risk" assets. To wit: "As long as artificially low policy rates persist, then artificially high-priced risk assets are not necessarily mispriced. Low returning, yes, but mispriced? Not necessarily.... In plain English – stocks, bonds and other “carry”-sensitive assets would outperform cash."
Three unlucky attempts in a row to retake the S&P 500 all time high may have been all we get, at least for now, because the fourth one is shaping up to be rather problematic following events out of the Crimean in the past three hours where the Ukraine situation has gone from bad to worse, and have dragged the all important risk indicator, the USDJPY, below 102.000 once again. As a result, global stock futures have fallen from the European open this morning, with the DAX future well below 9600 to mark levels not seen since last Thursday. Escalated tensions in the Ukraine have raised concerns of the spillover effects to Western Europe and Russia, as a Russian flag is lifted by occupying gunmen in the Crimean (Southern Ukrainian peninsula) parliament, prompting an emergency session of Crimean lawmakers to discuss the fate of the region. This, allied with reports of the mobilisation of Russian jets on the Western border has weighed on risk sentiment, sending the German 10yr yield to July 2013 lows.
For the second night in a row, China, and specifically its currency rate which saw the Yuan weaken once more, preoccupied investors - and certainly those who had bet on endless strenghtening of the Chinese currency - however this time it appeared more "priced in, and after trading as low as 2000, the SHCOMP managed to close modestly green, which however is more than can be said about the Nikkei which ended the session down 0.5%. Still, the USDJPY was firmly supported by the 102.00 "fundamental" fair value barrier and as a result equity futures, which had to reallign from tracking the AUDUSD to the old faithful Yen carry, have been propped up once more and are set to open at all time highs. If equities fail to breach the record barrier for the third time in a row and a selloff ensues after the open in deja vu trading, it will be time to watch out below if only purely for technical reasons.
It would indeed be supremely ironic if the "strong" foreign law bond indenture would be tested, and breached, not by Greek bonds, as so many expected in late 2011 and early 2012, but by one of the last contries in Europe which is still AAA-rated. We would find it less ironic if the next leg of the global financial crisis was once again unleashed by an Austrian bank: after all history does rhyme...
Debt is the great palliative that has enabled the US and other major economies to escape reality, at least for a time. Ayn Rand described such behavior:
You can avoid reality, but you cannot avoid the consequences of avoiding reality.
It is possible to steal from tomorrow to improve today but only at the cost of having less of a future. That is what both nations and citizens have been doing. The ability to continue doing so has about run its course.
The default cycle that should have occurred, given historical patterns of issuance cycles, has morphed (thanks to the Fed) into a refinancing cycle; but while DoubleLine's Jeff Gundlach suggests that fundamentals are supportive, "the valuation of junk bonds as a category is at its all-time overvalued versus long-time treasury bonds." So despite Yellen exclaiming that she sees no bubbles, one of the world's largest bond fund managers has never seen corporate bonds (investment grade and high yield) more expensive. Gundlach goes on to note he has sold some Apple (but believes it will remain range-bound), is baffled by the valuation of Chipotle, and sees 10Y Treasury yields dropping to 2.5% or lower.