Is high yield the new risk-free asset class...
Normally the New York Fed would not have to bother itself with such Series 7, 63-registration requiring, "financial advisor"-type things as predicting where the stock market will go, especially when it is its own trading desk that provides the impetus for more than 100% of the current equity rally. However, these are not normal times - they are New Normal. And as a result, Fed economists Fernando Duarte and Carlo Rosa have penned a "research" paper titled "Are Stocks Cheap?" in which they view the same reflexive "evidence" that Ben Bernanke himself used to answer a question during a recent press conference if he would still be buying stocks at record levels, namely the risk premium. This is what the NYFed's economists say on the matter: "We surveyed banks, we combed the academic literature, we asked economists at central banks. It turns out that most of their models predict that we will enjoy historically high excess returns for the S&P 500 for the next five years."
Over the years, Jim O'Neill, former Chairman of GSAM, rose to fame for pegging the BRIC acronym (no such luck for the guy who came up with the far more applicable and accurate PIIGS, or STUPIDS, monikers, but that's neither here nor there). O'Neill was correct in suggesting, about a decade ago, that the rise of the middle class in these countries and their purchasing power would prove to be a major driving force in the world economy. O'Neill was wrong in his conclusion as to what the ultimate driver of said purchasing power would be: as it has become all too clear with the entire world drowning in debt (and recently China), it was pure and simply debt. O'Neill was horribly wrong after the Great Financial Crisis when he suggested that it would be the BRIC nation that would push the world out of depression. To the contrary, not only is the world not out of depression as the fourth consecutive year of deteriorating economic data confirms (long since disconnected with the actual capital markets), but it is the wanton money (and bad debt) creation by the central banks of the developed world (as every instance of easing by China has led to an immediate surge of inflation in the domestic market) that has so far allowed the day of reckoning, and waterfall debt liquidations, to take place (and certainly don't look at the stock index performance of China, Brazil, India or Russia). Despite his errors, he has been a good chap having taken much of the abuse piled upon him here at Zero Hedge somewhat stoically, as well as a fervent ManU supporter, certainly at least somewhat of a redeeming quality. Attached please find his final, farewell letter as Chairman of the Goldman Asset Management division, as he moves on to less tentacular pastures.
The commodity market is saying global growth is slowing. But, there is hope, as BofAML's David Woo notes, the US equity market is saying US consumers are still going strong; and the FX and European sovereign markets seem to believe Mrs. Watanabe is about to embark on a global shopping spree. However, like us, Woo thinks it is unlikely that these markets will all turn out to be right. At the same time, we agree completely with Woo's assessment that markets may be under pricing three macro risks: the ability of Beijing to ease policy aggressively in the face of strong home price appreciation may be limited; the positive wealth effect of US housing recovery may not be enough to offset the contractionary impact of fiscal tightening; Japanese money may stay at home longer than expected. As he concludes, "something will have to give and a major re-alignment of the markets, the odds of which are rising, will probably not be either smooth or benign."
It is the yen, not the dollar, that is the key currency in the foreign exchange market.
There exists a super-Bernanke who proved also a super-Hollande, a gentleman who Japanese Prime Minister Shinzo Abe cannot compete with: his name is Robert Mugabe, the president of Zimbabwe. When he took power, he seized the farmlands of one social group to give them to another social group. Afterwards, in part because the new social group did not manage the farms that well, the economy took a turn for the worse. Therefore, the state issued some bonds to finance its spending and asked the central bank to issue some money to buy this government debt. But they printed big time and turned the printing press into something of a cosmic proportion. According to Professor Steve Hanke from John Hopkins, monthly inflation was 80 billion percent, so per year it is a 65 followed by 107 zeros. This is what we call Mugabenomics, the conjunction of (i) state-forced wealth transfer between two social groups along with (ii) the monetisation of the debt. As we shall see below, Mugabenomics, or at least its mild version implemented now in the Western hemisphere, has drastic consequences on the final episode of the global financial crisis.
From Goldman: "We recommend closing long positions in 5-year Spanish bonds, one of our Top Trade recommendations for 2013. Since inception on 6 December, the position would have returned 5.5%. On 6 December 2012, we recommended going long Spanish 5-year government bonds (SPGB 5 ½ 30-July-17 – the 5-year generic at the time), with an initial target of 3.50%. On January 11, the yield fell below 3.50% and we extended the target to 3.00%. Since inception, the 5-year Spain has rallied 111bp, from an initial yield of 4.29% to 3.18% currently (mid-market)."
In a testament to just how euphoric stock markets are right now, James K. Glassman the co-author of the fabled Dow 36,000 — a book published in 1999 that claimed that stock prices could hit 36,000 by as soon as 2002 (and which quite understandably is now available for just 1 cent per copy) — has written a new column for Bloomberg View claiming that he might have been right all along... The uber-optimistic atmosphere permeating much of the financial press is frightening to me. The resurrection of the Dow 36,000 zombie is a symbolically significant event that likely signals much the same thing as it did first time around: a correction.
Bernanke's Tools: "Belts, Suspenders... Two Pairs Of Suspenders" And Other Senate Testimony HighlightsSubmitted by Tyler Durden on 02/26/2013 21:20 -0400
Ben Bernanke: "In terms of exiting from our balance sheet, we have put out -- a couple of years ago we put out a plan; we have a set of tools. I think we have belts, suspenders -- two pairs of suspenders. We have different ways that we can do it."
From JPM: "The market implications are not positive in our view: we see risks of no agreement or slow progress on a grand coalition over the next few days. Even if an agreement is reached we see a very weak political mandate for further austerity measures and any type of structural reforms. This coupled with recent weakness in some macro releases, is likely to halt the progress on the virtuous circle of improving financial conditions, lower volatility and increasing investor appetite for riskier assets such as peripheral bonds. Although we believe tail risk is greatly reduced relative to last summer, we recommend investors to open risk-off trades. Technicals are supportive, with our client survey showing that benchmarked investors entered the Italian elections long peripherals vs. core countries. We recommend longs in 10Y Bunds (with a 1.35% target) and find 5s/10s flatteners an attractive bullish proxy. We unwind trades with a bearish duration bias such as 3s/7s steepeners and 10s/30s flatteners in Germany. In terms of core spreads, we close 5Y overweights in Belgium and turn neutral. In peripherals, we open shorts in 10Y Italy as we believe that 10Y BTP yield could exceed 5.00% in coming days."
Last October, among the various statements by Hugh Hendry at the annual Buttonwood gathering was this blurb by the man who is otherwise a big fan of physical gold: "I am long gold and I am short gold mining equities. There is no rationale for owning gold mining equities. It is as close as you get to insanity. The risk premium goes up when the gold price goes up. Societies are more envious of your gold at $3000 than at $300." Vivid imagery aside, he was spot on as the GDX tumbled 30% since then. Yet with the gold miners now universally abhorred and hated by virtually everyone, has the time come to take advantage of the capitulation? That is the question posed by John Goltermann of Obermeyer Asset Management, a firm better known for its deeply skeptical view toward Apple express as part of its April 2012 letter, and which also ended up being spot on. Goltermann says: "Whatever the reason, the underperformance of the mining shares in the last 18 months has been significant. At this point, because of the price divergence, the valuation disparity, and general capitulating sentiment, there doesn’t seem to be a case for selling mining shares. Given the valuations, we are evaluating whether it is appropriate to add to the position. The negative sentiment towards gold could continue for a time, but as economist Herbert Stein cautions, “If something cannot go on forever, it will stop.” When price divergences like this occur, they usually self-correct. In the interim, there is a strong case that gold mining stocks are cheap and that much bad news is priced in." Then again, as Hendry said, it may just as well be insanity.
Central Banks have repressed the sovereign bond markets of the world's currency printers to extreme. This relative pricing makes stocks look extremely cheap on an equity risk premium basis (thank you Ben); however, everyone knows this and, as we have discussed many times, margin balances and net long positions are as high as they have ever been. A zealous belief in the power of the central bank has compressed the market's risk perception to near-zero - but at the same time, returns have been crushed as even junk bond yields are at record lows. In other words - there is no risk any more, and no conventional return. Or rather, the only "return" is in the wholesale herding of cattle into the "safety" of the equity beta butcher house.
Thursday’s ECB meeting is important in the context of recent market moves and statements regarding the level of the euro. Citi notes that the rise in short-dated vol indicates considerable investor focus on the meeting. Expectations have been building that ECB President Draghi may offer a more cautious tone to ‘talk down’ the moves seen in the short-term rates and FX. In light of President Hollande’s advocation of an exchange rate policy aimed at ‘safeguarding competitiveness’, Draghi will likely face further questioning on FX. However, Citi does not believe that he will reverse his position and explicitly talk the currency down. Goldman also notes that while 'Taylor-Rule' users might infer a 30-50bps lowering of rates (thanks to growth, FX, and inflation) the improvement in 'fiscal risk premium' balances that dovishness leaving Draghi likely on hold. However, he is unlikely to stand 'idly by' without some comment on the ensuing currency wars.
Profits and leverage are locked in a deadly embrace. There is a time-honoured tradition in statistics: whipping the data until they confess. Bullish and bearish equity analysts are equally guilty of this practice. It would seem that statistical conclusions are merely an ex-post justification of a long-held prior belief about equity markets being cheap or overpriced. Clearly, consensus, notably among sellside analysts, is bullish. GLG's CIO Jamil Baz presents the bullish view before discussing the bearish counterpoint - consensus disregards leverage. In the short term, it is clear that central banks need to entertain the illusion of viable stock market valuations by pulling rabbits from a hat. But as high-powered money reaches ever higher levels, the probability of accidents looms large.
Just when one thought the old overnight futures levitation on a surging EURUSD regime was over, and was replaced by some semblance of normalcy, here comes Europe, sending the EURUSD screeching higher by some 100 pips from a support threatening 1.3460 on no news, with absolutely nothing changed, and pushing US futures to virtually unchanged from yesterday morning wiping out the entire day's losses in 3 short hours of near-zero volume overnight trading.