I gave a 45-minute presentation on Yield Purchasing Power at American Institute for Economic Research in Great Barrington, MA on October 14, 2016. I am grateful to the Institute for recording video of my presentation plus extended Q&A.
The effective duration on Bank of America’s global government bond index climbed to an all-time high of 8.23 in 2016, from 5 when it began in 1997. A one-percentage point increase in interest rates equates to about $2.1 trillion in losses for global investors, based on a Bloomberg Barclays sovereign-debt index.
Goldman has been using the proceeds from the new deposits to directly fund speculative activity such as trading and investments, as well as more conventional activity such as creating looans. Goldman Sachs built up its consumer bank, led by 40-year-old Goldman partner and credit trading veteran Gerald Ouderkirk, whose job is to use consumer deposits and other types of funding for trades, investments and loans.
At least according to one advisor, GS Banque's Loic Schmid, it is prudent to keep some volatility protection on after the recent risk-off episode. As a reminder, in mid-July Schmid suggested buying the VIX, a trade that has been profitable ahead of the Friday surge and while he says that he is taking profits on half the position, he is also keeping the other half on for the following reasons.
The outlook for the US economy is deteriorating, yet the Fed is trying to raise overnight rates to keep unseen inflation from rising. Success in its strategy could force consumption lower, unemployment higher, and exacerbate real output contraction. The market, however, should not underestimate the Fed’s power based on its apparent incompetence.
Moments ago Bank of America joined the parade of "beating" banks despite declining earnings, when it reported adjusted Q2 EPS of $0.37 (excl. DVA), "higher" than a sharply reduced in recent weeks consensus estimate of $0.33, even as profits tumbled 19% from the $0.45 a year ago on sliding revenues of $20.6 billion ($20.4bn reported), vs consensus of $20.4 billion: the top line was $1.6 billion lower than a year ago if $0.9bn higher than Q1.
Wells' long overdue admission that it is woefully under-reserved for what may be a deluge of loan defaults should oil fail to rebound strongly... and certainly if oil continues to decline, has finally arrived in the form of this chart showing its LTM loan loss provision expense. It is, in a word, soaring.
In this increasingly gloomy world for retirees everywhere, one person has come up with a modest proposal: the UK's Lord Jonathan Adair Turner, Baron Turner of Ecchinswell, who judging by his title hardly has much to be worried about his own personal retirement funds. That said, Turner also happens to be the former chairman of the UK Pensions Commission, and as such his opinion will be closely followed. What he said is the following: people should work until they are 70 and then be rewarded with a more generous state pension.
Japanese banks may soon pay borrowers to accept loans if they can raise funds at even cheaper rates. Negative interest-rate lending is increasingly becoming a reality since the Bank of Japan started levying charges on idle cash. Lenders can now borrow for three months in the Tokyo interbank market at a record-low 6 basis-point annualized rate, versus 17 basis points since the BOJ move in January. They may eventually be able to be paid to borrow and then profit by paying less to lend, according to Credit Suisse Group AG, JPMorgan Chase & Co. and SMBC Nikko Securities Inc. This is also known as shoving money down people's throats... and then paying them for it.
Morgan Stanley's results were quite ugly: total revenue of $7.8 billion barely changed from the previous quarter, and was down 21% from Q1 2015, however due to the sharp drop in consensus estimates in recent months, revenues was a "beat" to the $7.76 billion expected. Earnings likewise were ugly, tumbling by 53% from $2.4 billion to $1.1 billion, or $0.55 per share. This too was a beat as a result of a sharp plunge in Q1 EPS expectations in recent months.
The punchline in Wells Fargo's earnings report is in the reminder of just how generous Wells has been in lending to junk-rated oil and gas companies in the recent past to compensate for its eclining NIM: Wells reported that ~22%, or $8.8 billion, of exposure to investment grade companies, which means $32 billion is to junk-rated companies!
Expectations of a "less terrible" first quarter for banks may have been premature following yesterday's stronger than expected JPM earnings report. First it was both PNC and Blackrock missing on the top and bottom line, but the highlight of the day was Bank of America which moments ago reported $0.20 in EPS, missing expectations of a $0.21 print, while revenue ex-DVA dropped by $1.4 billion to $19.7 billion, also missing expectations of a $20bn print. BofA reported Net Income of $2.68 billion, down from $3.1 billion one year ago.
The market reaction from last week’s dovish FOMC statement took many by surprise, including BofAML's HY Strategy team, but as they say the High-Yield Emperor has no clothes, warning that the underlying commentary provided by Chair Yellen shows the vulnerability for high yield issuers to longer-term growth trends. Couple the deteriorating fundamentals for HY issuers with downgrades outpacing upgrades by a ratio of 3.5:1 and a worsening of global growth potential, and they believe the recent rally, though boosted by strong inflows and cash generation, will ultimately fade.