This week’s reading list is a collection of articles from people who have been “getting it right” for the last few years. While they are often dismissed by the media because they disagree with “mainstream thinking,” it is quite apparent they had a better grasp of the issues in the end.
El-Erian Says "The Market Believes Central Banks Are Our Best Friends Forever", Just Don't Show It "Figure 4"Submitted by Tyler Durden on 11/21/2015 17:38 -0400
Liquidity in the junk (and all other markets) is evaporating, and according to Citi the spread between an illiquid and liquid junk bond portfolio just hit 100 bps, the most in the history of the series. Meanwhile according to Mohamed El-Erian "The market is comfortable that whenever we hit a hiccup, the Fed is going to come back in," he said. "It's very deeply embedded that central banks are our best friends forever."
While it is already common knowledge that China has thrown virtually everything at the market in order to halt the ongoing market crash, including arresting "malicious sellers", journalists, and suspicious hedge fund managers, blaming HFTs for daring to sell in addition to buy, and even making trading index futures practically impossible, perhaps the most interesting revelation showcasing China's desperation came from CNBC today which reported that the government recently invited none other than Mr. ETF himself, BlackRock CEO Larry Fink to "discuss the market situation there", or said otherwise: how to manipulate the market better.
Corporate executives offer three main reasons for share repurchases: 1. Buybacks are investments in our undervalued shares signaling our confidence in the company’s future; 2. Buybacks allow the company to offset the dilution of EPS when employee stock options are exercised or stock is granted to employees; or 3. The company is mature and has limited investment opportunities, therefore we are obligated to return unneeded cash to shareholders. The logic behind each of these explanations is in the vast majority of cases is flawed, to be kind, and deceptive to be blunt.
Sense of desperation among CEOs?
Strategists were largely wrong about the yes taper in September, and then they were just as largely wrong about the no taper in December, and yet their opinion is just as largely gospel and people continue to listen to them (what else is there to be distracted by in a still very much centrally-planned market and economy). Which is why the below summary by Bloomberg of what global financial strategists and investors, also known as "they", are saying about how to trade assets in the post-taper world, should probably be taken, largely, with a grain of salt.
BlackRock's fixed income CIO Rick Rieder is worried about the impact that higher rates will have on the stock market. In this brief interview with Bloomberg TV's Tom Keene, Rieder explains that while equities look 'cheap' given where rates are, this is a mis-pricing and warns (as we have repeatedly) that "people don't spend any time looking at cash-flow discounted by cost of financing, which is really where we think equity should be valued." In that case (as we have noted), a surge in financing costs will weigh heavily on stocks. While he is concerned about investors' general lack of awareness of the risk in bond funds - "the volatility in fixed income could actually be higher than the equity market," he fears the impact of higher rates on mortgages and other credit vehicles on the recovery. However, as Rieder notes they have been saying for a long time, "QE’s too big. You’ve got to taper down QE. It's created this tremendous distortion in interest rates," as he sees fair-value for the 10Y around 3.25%.
When Spanish bonds traded at yields above 7% last Summer, the world's central banks went into a whirlwind to proclaim that these levels did not represent reality (in spite of the depression-era style economic data the nation was spewing). Fast forward nine months, the data is worse and getting worserer but yields - through the guiding hand of Draghi, the self-referential buying of domestic banks, and the BoJ's risk-is-no-object reach for anything non-JPY denominated - have crushed to 4.3% pre-crisis levels. Meanwhile, a few thousand miles south, the nation of Rwanda is issuing its first international debt today at a 7% yield (to the Japanese we are sure) as over 90% of the world's sovereign bond markets are at or near all-time low yields. But, the smart money is leaving, as PIMCO notes, "this central bank-inspired rally has made the markets expensive... relative to fundamentals"
It has been well known for years that PIMCO's Dr. Jekyll and Mr. Gross, the original bond king in charge of Allianz' $1+ trillion bond portfolio, has been a vocal critic of QE even in the face of his daily tweet barrage, which often recommends positions in complete contradiction to what said king opined on in his expansive monthly essays. What will come a great surprise, however, is that the "other" fund, which is just as big, is run by Wall Street's shadow king Larry Fink, and which has been advocating to go all in stocks for over a year (preferably using ETFs) interim drawdowns be damned (after all everyone by now should have an infinite balance sheet) - BlackRock - just went all out against QE. As the FT reports, BlackRock's fixed income guru, formerly at Lehman Brothers, Rick Reider, "has called on the Federal Reserve to rein in its programme of quantitative easing, saying its bond-buying tactics are a “large and dull hammer” that have distorted markets and risk stoking inflation." Why, it is almost as if we wrote that... Oh wait, we did. Back in 2009.
Curious how in the New Normal a nation is brought to its untimely end without a single shot being fired? Dimos Dimosthenous, who has worked at the Bank of Cyprus for over 30 years, explains:
"That will be the end. Our jobs, our rights, our welfare funds will be lost and Cyprus will be destroyed."
In short: not with a bang, but a bailout.
Austerity is coming our way, it's just a matter in what manner and by how much, and whether it becomes an orderly or disorderly process. The fiscal cliff is really a bit of a ruse in that respect, but the key here is that years of fiscal profligacy is coming to an end and the Fed at this point, having used its bazookas, is now down to firecrackers. The economic outlook as such is completely muddled and along with that the prospect for any turnaround in corporate earnings... Once we get past the Fiscal Cliff we will confront the inherent inability of the Democrats and the GOP to embark on any grand bargain to blaze the trail for true fiscal reforms. The U.S. has not had a rewrite of its tax code since 1986, which was the year Microsoft went public and a decade prior to Al Gore's invention of the Internet. The tax system is massively inefficient and leads to a gross misallocation of resources that impedes economic progress — rewarding conspicuous consumption at the expense of savings and investment. It is the lingering uncertainty over the road to meaningful fiscal reform that is really the mot cause of the angst — the fiscal cliff is really a side show because who doesn't know that we are going to have a Khrushchev moment?