There is nothing like the release of secret tape recordings to clarify an inconclusive debate. Actually, what the tapes really show is that the Fed’s latest policy contraption - macro-prudential regulation through a financial stability committee - is just a useless exercise in CYA. Macro-pru is an impossible delusion that should not be taken seriously be sensible adults. It is not, as Janet Yellen insists, a supplementary tool to contain and remediate the unintended consequence - that is, excessive financial speculation - of the Fed’s primary drive to achieve full employment and fill the GDP bathtub to the very brim of its potential. Instead, rampant speculation, excessive leverage, phony liquidity and massive financial instability are the only real result of current Fed policy.
The last few days have been hectic for PIMCO executives. As we already noted, expectations of outflows persist and today's open in CDS markets suggested major concerns among market participants that PIMCO redemptions would force selling through an illiquid market. Sure enough, Bloomberg reports that PIMCO's Total Return Fund ETF was behind the auction of more than $170m of Fannie Mae CMBS on Friday (and more BWICs were seen today). As one trader noted, "you're going to sell your most liquid stuff first." Additionally, PIMCO has seen fit to delete all Bill Gross' tweets... so here are the last six months for the record.
The reason why the first article we wrote on Friday after news hit that PIMCO co-founder was shockingly leaving the firm on Friday, was listing the massive bond fund's biggest holdings, was because it was only a matter of time: it, being of course, the massive redemptions that would follow Gross' departure by people that his 30+ tenure at the bond fund made very rich, and who couldn't care less about a brief central planning-inspired flame out. After all Gross isn't the first person who has lost the plotline due to the Fed's manipulation of every market. So just how bad is it? Not for Gross of course: he has made his billions and is simply doing what he and Icahn do in their age: what they love. No, for Pimco, where the redemptions requests are already flooding in. According to the WSJ, just two days after the Gross announcement (both of which non-workdays), already some $10 billion has been withdrawn. And that is just the beginning.
- This is why the locals are furious at the US: U.S-led raids hit grain silos in Syria, kill workers (Reuters) explaining this
- Billions Fly Out the Door at Pimco: About $10 Billion Is Withdrawn After Departure of Gross (WSJ)
- Pimco’s Ivascyn Takes on Gross With Unconstrained Fund (BBG)
- Revealed - the Troika threats to bankrupt Ireland (The Independent)
- Private Bad Debt Build-Up Casts Shadow on Greek Rebound (BBG)
- Fed Questions Bank Maneuver to Reduce Hedge Funds' Dividend Taxes (WSJ)
- Yuan-Euro Direct Trading Begins Tomorrow as China Promotes Usage (BBG)
- Geneva Report warns record debt and slow growth point to crisis (FT)
- Greenberg Team to Grill Bernanke, Geithner on AIG Bailout (BBG)... sadly only metaphorically
While the bond market is still reeling from Friday's shocking Bill Gross departure, and PIMCO has already started to bleed tens of billions in redemptions (see "Billions Fly Out the Door at Pimco About $10 Billion Is Withdrawn After Departure of Gross"), stocks which may have been hoping for a peaceful weekend after Friday's ridiculous no volume ramp in the last two hours of trading, got hit by a double whammy of first Catalan independence fears rising up again after Catalan President Mas signed a decree committing Catalonia to a referendum bid on November 9th, leading to a move wider in Spanish bond yields, and second the sharpest surge in Hong Kong violence in decades, which led to a 2% drop in the Hang Seng, are now solidly lower across the board, with the DAX dropping below its 50 DMA, while US equity futures are printing about 9 points lower from Friday's close despite another epic ramp in the USDJPY which flited with 110 briefly before retracing to 109.50, and also threaten to push below the key technical support level unless the NY Fed's "Markets group" emerges out of its new Chicago digs and buys up enough E-minis to restore confidence in a rigged market.
This week's 35bps rise in high-yield credit spreads (or ~10%) is the worst since at least June of last year and anxiety spread through other asset-classes appropriately as cheap-buyback-funding and liquidity concerns weighed on all equities - most aggressively small caps. The Russell 2000 is down around 4% from FOMC (and for the year) even with today's buying-panic this afternoon trying to rescue yesterday's losses. Much of today's moves were thanks to The Bill Gross Effect - Treasury short-end sold (2Y-5Y +5bps, 30Y unch), corporate bond spreads jumped wider (HY +20bps, IG +4bps), and European bonds (and German stocks) lurched lower. Markets recovered some of the early move but 2Y closed at 2014 yield highs. The USD closed 1% higher for the 11th week in a row to June 2010 highs. WTI crude close +1.5% on the week, gold unchanged, and copper and silver lower. VIX jumped 22% on the week, closing above 14.5.
Having held positions at PIMCO since 1998, Deputy Chief Investment Officer Daniel "Dan" Ivascyn is said to be the likley successor to Bill Gross, according to Bloomberg.
After co-founding PIMCO in 1971, Bill Gross has called it quits...
*WILLIAM H. GROSS JOINS JANUS CAPITAL
*JANUS:GROSS TO START MANAGING FUND,RELATED STRATEGIES OCT.6,'14
“I look forward to returning my full focus to the fixed income markets and investing, giving up many of the complexities that go with managing a large, complicated organization,” said Mr. Gross. Full Bill Gross, Dick Weil statements...
With more than $65 billion pulled from PIMCO's funds since May 2013, Bill Gross' firm had been struggling amid spotty performance and it seems, according to The Wall Street Journal, PIMCO (not Allianz) was set to fire the 70-year old bond king this weekend. It seems clear that Mr. Gross move was pre-emptive as sources cite his "increasingly erratic behavior" and ultimatums as factors in the move. Assumptions about Mohamed El-Erian returning to run the company have been denied. Some have estimated PIMCO could see a further 10-30% in fund outflows on the back of Mr. Gross' departure.
Black Swan? Having seen liquidations of a relatively small fund yesterday send the NASDAQ down 2% and credit reeling, world bond and stock markets are reacting aggressively to Bill Gross' move from PIMCO. German stocks (PIMCO's parent Allianz is the 7th largest stock in DAX) are tumbling, European peripheral bond spreads are pushing wider (major holdings of PIMCO) and US credit markets are getting smashed (PIMCO is a major player in CDS markets and obviously a huge holder of US corporate debt) and concerns spread of redemptions triggering the kind of liquidity suck out we described yesterday.
The depression that followed the stock-market crash of 1929 took a turn for the worse eight years later, and recovery came only with the enormous economic stimulus provided by the second world war, a conflict that cost more than 60 million lives. By the time recovery finally arrived, much of Europe and Asia lay in ruins. The current world situation is not nearly so dire, but there are parallels, particularly to 1937. Now, as then, people have been disappointed for a long time, and many are despairing. They are becoming more fearful for their long-term economic future. And such fears can have severe consequences.
This month's Bill Gross letter, notably shorter than usual, is as close to the bond manager discussing an Austrian economics worldview as we will likely ever see him: in brief, it's all about the credit/money creation, with an emphasis on the use of proceeds of said creation under ZIRP, i.e., malinvestment , or as Gross puts it: "credit growth is a necessary but not sufficient condition for economic growth. Economic growth depends on the productive use of credit growth, something that is not occurring."
- Headline of the day: Complacency Breeds $2 Trillion of Junk as Sewage Funded (BBG)
- Israel intensifies Gaza offensive after surge in rocket fire (Reuters)
- Profits plunge at Vatican bank (FT)
- Investors Are Buying Troubled Golf Courses and Giving Them Makeovers (NYT)
- Pimco Dissidents Challenge Bill Gross in ‘Happy Kingdom (BBG)
- That's a new one: Marks and Spencer blames new website for sales drop (Reuters)
- Iran's Supreme Leader calls for more enrichment capacity (Reuters)
- Boeing Faces Long-Term Credit Risk if Ex-Im Bank Closed, S&P Says (WSJ) not to mention the collapse risk to US durable goods orders
- U.K. Manufacturing Unexpectedly Slumps Most in 16 Months (BBG)
- Some Still Lack Coverage Under Health Law (WSJ)
These Fake Rallies Will End In Tears: "If People Stop Believing In Central Banks, All Hell Will Break Loose"Submitted by Tyler Durden on 06/24/2014 14:11 -0500
Investors and speculators face some profound challenges today: How to deal with politicized markets, continuously “guided” by central bankers and regulators? In this environment it may ultimately pay to be a speculator rather than an investor. Speculators wait for opportunities to make money on price moves. They do not look for “income” or “yield” but for changes in prices, and some of the more interesting price swings may soon potentially come on the downside. They should know that their capital cannot be employed profitably at all times. They are happy (or should be happy) to sit on cash for a long while, and maybe let even some of the suckers’ rally pass them by. As Sir Michael at CQS said: "Maybe they [the central bankers] can keep control, but if people stop believing in them, all hell will break loose." We couldn't agree more.
"There's something going on in derivatives land," is the warning from ADM's Andy Ash and as Paul Mylchreest notes the relationship between VIX and SKEW suggests the options market is pricing in the possibility of a major market event. The process enables professionals to maintain the illusion of calmness in VIX while hedging their positions (as they attempt to unwind as we have shown). Whether this 'event' is a crash or melt-up is historically unclear but given the taper and the trend of the last few years, we suspect the former more likely that the latter.