For the the latest "unintended casualty" of Bernanke and his ZIRP policy, we look at corporate pension funds, which as WaPo reports, are finally starting to crack under the weight of pervasive central planning, brought to the brink by none other than the Chairman's "good intentions." On the surface this makes no sense: after all pension funds invest in assets - the same assets that Bernanke's policy of serial cheap credit funded bubble creation are supposed to inflate. And they do. The only problem is that pension funds also have offsetting matching liabilities: or the amount of money a company has to inject in order to cover future retiree obligations. And in a period of low discount rates brought by a record low interest rate environment, these liabilities painfully and relentlessly increase when discounting future cash needs. Quote WaPo: "Assets held by pension plans of the firms that make up the Standard & Poor’s 500-stock index increased by $113.4 billion in 2012, according to a report by Wilshire Associates, a consulting firm. But largely because of low rates, company liabilities increased even more: by $173.6 billion. That left the median corporation’s pension plan 76.9 percent funded, with just over $3 of assets for every $4 of liabilities."
Just when you thought the R&R debate was finished, it seems Paul Krugman's latest "spectacularly uncivil behavior" pushed Reinhart and Rogoff too far. In what can only be described as the most eruditely worded of "fuck you"s, the pair go on the offensive at Krugman's ongoing tete-a-tete. "You have attacked us in very personal terms, virtually non-stop... Your characterization of our work and of our policy impact is selective and shallow. It is deeply misleading about where we stand on the issues. And we would respectfully submit, your logic and evidence on the policy substance is not nearly as compelling as you imply... That you disagree with our interpretation of the results is your prerogative. Your thoroughly ignoring the subsequent literature... is troubling. Perhaps, acknowledging the updated literature on drawbacks to high debt-would inconveniently undermine your attempt to make us a scapegoat for austerity."
The aftermath of the largest liquidity injection process in the history of the world, is that politics, and the entire fiscal process, has effectively been rendered obsolete, and politicians are now nothing but figureheads in a central banker world. Perhaps, the general public would be angry if it were to realize that the only entity left making global macro economic decisions is a private organization run by academics, who in turn are merely firgureheads for the world's private banks. That, however, would entail that the co-opted media would actually explain to the broader population just what is going on behind the scenes: a process that would entail the loss of core advertising revenue, which is why expect confusion about just who pulls the strings to linger for years.
It is not just the massive short positioning in Gold futures that has BofAML's commodity strategists concerned; but the regime changes in the precious metal's volatility structures suggests risks are significantly mispriced relative to equities, rates, and other commodities. Following the most abrupt price collapse in 30 years, near-dated implied volatility in gold spiked dramatically in the past month. The term structure of implied gold volatility has also changed shape and the market now shows a marked put skew. Even then, the spike in precious metals volatility had remained a rather isolated event until this week’s sharp drop in Japanese equities. As the following chartapalooza demonstrates, while large-scale QE has tempered volatility across all asset classes for months, we remain concerned about the recent sharp price movements in gold or Japanese equities, and see a risk that other bubbling asset classes may follow.
The Big Buyers ... Unmasked
The influence of central banks on markets seems to have reached unparalleled heights. We look at why, turning to behavioural finance for some clues.
With the first arrow of Abenomics perhaps hitting its limit, it will be the second and third arrows that need to occur quickly and aggressively to carry this momentum forward (and for the economy to grow into stock valuations). Barclays lays out 15 of its most frequently asked questions below but concerns remain as the BoJ’s planned absorption of nearly 80% of new JGB issuance from the markets this fiscal year has triggered a dramatic change not only in JGB supply/demand and ownership structure but in the JGB market risk profile itself, which has moved from “low carry, low volatility and high liquidity (superior to other assets from perspective of risk-adjusted returns or Sharpe ratio)” to “low carry, high volatility and low liquidity (inferior from same perspective)”. Barclays added that with a wave of major political and policy events ahead, starting with a crucial Upper House election, there was no big change in the basic belief among foreign investors that Japan is likely to be the main source of surprise for the global economy and of volatility in financial markets.
"The last 36 hours have perhaps been evidence as to what might happen if stimulus is withdrawn before the global recovery has been cemented and what might happen if Japan makes mistakes along the way to their attempted new dawn. With the Chinese data still ambiguous, Europe still in recession, Japan in the very early stages of a growth experiment and with the US recovery still historically very weak one has to say that liquidity has been the main market fuel in recent months. So central banks have to tread carefully and the Fed tapering talk and the BoJ's seemingly benign neglect policy towards JGBs has had the market fretting." - Deutsche Bank
The only sane central banker in the world, the Bundesbank's Jens Weidmann, take the prize for today's quote of the day with the following:
- ECB'S WEIDMANN WISHES JAPAN `GOOD LUCK IN THEIR EXPERIMENTS'
So do we. They will need it.
The Nikkei dropped by 7.3% at the end of the day and Hong Kong’s Hang Seng dipped by 2.5%. Shanghai maintained a moderate fall at just 1.2% (if you believe that data now!). The Asian markets are down.
Today’s AM fix was USD 1,386.00, EUR 1,074.92 and GBP 919.16 per ounce.
Yesterday’s AM fix was USD 1,385.25, EUR 1,071.43 and GBP 917.75 per ounce.
Once again: The FOMC minutes had nothing to do with overnight's events, especially since both Ben Bernanke and Bill Dudley made it very clear previously that for any tapering to occur (and which is supposedly bullish according to David Tepper, who may finally be done selling to momentum chasers) if ever, the economy would have to be be stronger (which is of course a paradox because it is the Fed's QE that is making the economy weaker). If anything, the minutes reminded us that there is a mutiny in the FOMC with finally someone having the guts to say on the record that Bernanke is blowing a bubble - something never seen before on the official FOMC record. And after all, the Nikkei opened way up, not down. It was only after the realization of what soaring bond yields mean for, wait for it, stocks (despite central planner promises that it is soaring bond yields that are a good thing - turns out, they aren't) that the sell-off really started. That, and of course copper, and the end of the Chinese Copper Financing Deals arrangement that has been China's illicit cross-asset rehypothecation scheme for years (more shortly). So in a nutshell, here is what has transpired so far, courtesy of Bloomberg.
What is 410 words and is released precisely 180 seconds after the FOMC's minutes? Why Jon Hilsenrath's FOMC minute-parsing piece of course. Which we can only assume means Jon was on the "preapproved" list for early distribution and pre-analysis, because not even we can analyze and type that fast. We are confident he did not breach the embargo. Because that would not look good for the Fed already being investigated by the Inspector General for last month's humilating breach.
Well that escalated quickly... the S&P is now 30 points off its earlier highs and it seems (for once) that it is stocks and none of the other risk-assets that are taking the brunt of the disappointment. And no, it wasn't the mention of a June taper that spooked markets: as the Fed itself said that will be a function of the economy, and as everyone knows there bad news and good news are both goods news. What spooked the market is that finally someone on the FOMC is not only acknowledging asset bubbles, but putting it in writing: "a few participants expressed concern that conditions in certain U.S. financial markets were becoming too buoyant.... One participant cautioned that the emergence of financial imbalances could prove difficult for regulators to identify and address, and that it would be appropriate to adjust monetary policy to help guard against risks to financial stability." Now this is a problem because unlike the economy where QE may or may not trickle down to the unemployment rate (it won't as QE is causing it but fear not - more QE is just around the corner to fix a problem caused by QE) asset bubbles only get bigger and bigger and bigger, until QE has to be not only tapered, not only stopped, but actually unwound. And with some finally on the record, the blame will be cast squarely at those who ignored the first warnings.
FOMC Minutes: This Is What It Sounds Like When Doves Cry, And When Others Start To See An Asset BubbleSubmitted by Tyler Durden on 05/22/2013 14:02 -0400
It appears (as we noted here) that the size of the balance sheet, difficulty of the exit, frothiness of markets, and not-totally-dismal labor headlines have even the doves a little more hawkish about the possibility of an exit at some point - though obviously the minutes are clear that the 'flow' can increase (as well as decrease) based on the data.
- FOMC MINUTES: MANY SAID MORE PROGRESS NEEDED BEFORE SLOWING QE
- FED'S BROAD PRINCIPLES ON EXIT `STILL VALID,' FOMC MINUTES SHOW
- SOME ON FOMC WILLING TO SLOW ASSET PURCHASES AS EARLY AS JUNE
- SOME SAID "CONDITIONS IN CERTAIN FINANCIAL MARKETS WERE BECOMING TOO BUOYANT"
Two things seem clear: 1) the Fed is explicitly forcing the market to hope for bad data to maintain gains as the gap between market and reality is now too large for a soft-landing; and 2) the Fed has explicitly admitted that it is the 'flow' not the 'stock' that matters - as we have been vociferous about for years. But what is worst, is that now that some at the FOMC are openly seeing asset bubbles, Bernanke is facing a mutiny on his hands!