Based on the following quotes just uttered by the Chairman...
- BERNANKE: WALL STREET HASN'T BENEFITED MORE THAN MAIN STREET
- BERNANKE SAYS FED `VERY FOCUSED' ON MAIN STREET
... Bernanke's next career as a sit-down comedian smash hit is guaranteed.
Is the global economic downturn going to accelerate as we roll into the second half of this year? There is turmoil in the Middle East, we are seeing things happen in the bond markets that we have not seen happen in more than 30 years, and much of Europe has already plunged into a full-blown economic depression. Sadly, most Americans will never understand what is happening until financial disaster strikes them personally. As long as they can go to work during the day and eat frozen pizza and watch reality television at night, most of them will consider everything to be just fine. Unfortunately, the truth is that everything is not fine.
From Bill Gross: "In trying to be specific about which conditions would prompt a tapering of QE, the Fed tilted overrisked investors to one side of an overloaded and overlevered boat. Everyone was looking for lifeboats on the starboard side of the ship, and selling begat more selling, even in Treasuries. While the Fed’s move may ultimately be better understood or even praised, it no doubt induced market panic. Without the presence of a “Bernanke Put” or the promise of a continuing program of QE check writing, investors found the lifeboats dysfunctional. They could only sell to themselves and almost all of them had too much risk. A band somewhere on the upper deck began to play “Nearer, My God, to Thee.”"
This a fairly broad topic, and any "rules" would be vague at best, so i'll use recent trading activity as an example. Often markets (and traders) are described as schizophrenic...and perhaps that should even be part of the job description....here's an example why...
Bill Gross, of PIMCO and serious bond duration pain, finally comes clean: the man who has been criticizing the Fed for years for one after another misguided policy (all of which ultimately culminate with the New York Fed's markets desk going "wave it in" this or that) to the point where he began sounding like a Zero Hedge broken record, opines on the taper. And it is here that Bill's colors truly shine through: "We agree that QE must end. It has distorted incentives and inflated asset prices to artificial levels. But we think the Fed’s plan may be too hasty." In other words, please let me have my Fed and central-planning criticizing cake (but don't actually enact my free market suggestions) and let me eat my management fees too (and no monthly redemptions please). And there you have it: populist critic by day, pandering P&L defender by night.
Did you know there was a large POMO Thursday? And, did you know Friday is quadwitching? Do you care?
The table is set for a counter-trend rally Friday given these events.
But, as with any oversold or overbought condition, markets can remain that way for longer than you expect—just look at gold as an example.
If anyone thought Bill Gross would take what is likely the worst P&L day in PIMCO history without a fight, they would be wrong.
Gross: To paraphrase #Bernanke 2002: “Regarding the Great (Re)pression. You’re right Milton, we did it. Sorry. We won’t do it again.” ???
— PIMCO (@PIMCO) June 20, 2013
So did Bernanke just do it again?
The biggest bond fund manager on the planet likely had a bad day today and judging by his comments during the following Bloomberg TV interview, he is not too impressed with the current Fed head, who is "driving in a fog," or the front-runner to fill Ben's shoes, Yellen "is a Siamese twin in terms of policy... [preferring someone] who would emphasize Main Street as well as Wall Street - which has been the emphasis for the past three or four years." The mistake the Fed is making, Gross explains, "is blaming lower growth on fiscal austerity and expects towards the end of the year once that is gone, all of the sudden the economy will be growing at 3%," or more simply the error of their policy-making ways is "to think that is a cyclical as opposed to a structural problem in terms of our economy." The bottom-line is that Gross sees less Taper (due to disinflation) and warns "those who are selling treasuries in anticipation that the Fed will ease out of the market might be disappointed."
We have discussed the idea of a VaR shock (driven by Abe/Kuroda's loss of control) a number of times recently but as Saxo's Steen Jakobsen fears, reality is about to hit as the marginal cost of capital normalizes. The world, so far, has been kept in artificial equilibrium by the way quantitative easing (QE) and fiscal policies bring support and endless liquidity to the 20 percent of the economy that mostly comprises large and already profitable companies and banks with good credit and good political access. The premise for supporting these companies is based on the non-existent wealth effect which unfairly culminates in supporting the haves to the detriment of the have-nots. However, as Jakobsen notes below, things are rapidly changing; the recent increase in yields has happened despite no real improvement in the underlying data. The the next few days are potential major game changers – the bloated VaRs will make people hedge and over hedge, and the normalization process of rising risk premiums and higher real rates (higher yield plus lower inflation) will lead to more selling off of those trades that have "worked so far"... and increase volatility in their own right.
"While we are not likely to see a repeat of that type of [30Y bond] bull market any time soon, we also do not believe we are at the beginning of a bear market for bonds."
"We are concerned by the growing downside of zero-based money and QE policies – among them a worrisome distortion in asset pricing, the misallocation of capital and ultimately a dis-incentivizing of risk taking by corporations and investors."
"We believe caution is warranted not just for fixed income investors, but for investors in all risk assets; avoiding long durations, reducing credit risk away from economically vulnerable companies and sectors"
Gross: Fed’s “Deep Throat” stops delevering for now. Markets await main man next week. Hilsenrath’s focus on policy rate VERY interesting.
— PIMCO (@PIMCO) June 14, 2013
There's no way to sugarcoat the dismal performance of the precious metals in recent months. But a revisitation of the reasons for owning them reveals no cracks in the underlying thesis for doing so. In fact, there are a number of new compelling developments arguing that the long heartbreak for gold and silver holders will soon be over.
A month ago, Bill Gross stirred up a storm in rates with his tweet that the "Bull bond market was dead" which caught us by surprise because just in the preceding month, PIMCO's flagship Total Return Fund raised its allocation to government-related (read TSY) bonds to the highest in three years, with a net exposure of 40% of AUM, or about $117 billion. Of course, the data was backward looking so it was possible that the firm had changed its opinion entirely and in the following two weeks proceeded to purge its TSY holdings. It didn't. In fact, as of the May TRF holdings update, PIMCO's TSY holdings, which many expected to collapse, declined by a whopping... 2% of total from 40% (net of agency and swaps) to 38%. So much for the great Newport Beach rotation.
- Pimco Sees 60% Chance of Global Recession in Five Years (BBG)
- Global Tumult Grips Markets (WSJ)
- NSA Secrecy Prompts a Pushback (WSJ)
- ANA Scraps 787 Dreamliner Flight as Engine Fails to Start (BBG) - one of these days, though, it shall fly
- Kuroda’s April-Was-Enough Message Faces Markets Wanting More (BBG)
- S&P warns top US banks are still ‘too big to fail’ (FT)
- Democracy for $500 per plate (Reuters)
- Iran, the United States and 'the cup of poison' (Reuters)
- Japan grapples with lack of entrepreneurs (FT)
- Greece First Developed Market Cut to Emerging at MSCI (BBG)
- Asia's ticking time bonds; time to cut and run? (Reuters)
- Sony Outduels Microsoft in First PS4-Xbox One Skirmish (BBG)
Gross: Surveillance policy of Bush 42 “puts forward a false choice btw the liberties we cherish & the security we provide.” B. Obama 2007
— PIMCO (@PIMCO) June 9, 2013