Blain: Will The Fed Hike Unleash The "Swing" Moment When Suddenly Balance Is Lost?

Submitted by Bill Blain of Mint Partners

Fed, Stratospheric dangers, US corporate leverage and the greater competition to manage funds.

“Of all extinct life-forms, dinosaurs are the most popular. Why that should be is not clear… ”

All eyes on the Fed today. They will hike by 25bp to 2% – the 6th hike in 7 quarters. Slow and gradual. This is something of a one-off in terms of the economic environment – unconventional being the word. Easy financial conditions in terms of growth, inflation, jobs and the ongoing fiscal spending and tax boosts. Plus, we’ve got the positive sentiment effects of strong equity and real estate markets – when folk feel rich they feel positive! Plus plus, with the rest of the world still on negative or zero interest rates, then money continues to pour into Treasuries making the ballooning deficit a SEPT (Someone Else’s Problem Tomorrow). Asset prices are inflated, but still weakness in consumer prices and wages. This remains an “interesting” space in terms of the potential policy pitfalls, and the “swing” moment – when suddenly balance is lost and the centre cannot hold...

Perhaps the writing is already on the wall? I was slightly concerned to read the National Federation of Independent Business (the US SME organisation) believes: “Main Street optimism is on a “stratospheric trajectory” thanks to recent tax cuts and regulatory changes”. Stratospheric is often confused with ballistic. Stratospheric could mean its’ going into orbit, or simply that a ballistic launch will reach the stratosphere. Sadly, ballistic means the kind of trajectory Kim Jong Un claims to no longer be interest in…`

(Last time someone was talking “stratospheric” it was in relation to Bitcoin, and that’s not ending well. Final comment on ballistic trajectories….I note a headline about Telsa slashing salaried staff.. )

Market mood this morning feels a little subdued. The judgement on yesterday’s gabfest in Singapore is Trump grandstanded and got very little in return. Perhaps, Donald is not the statesman he thinks he is?

Next week, Tuesday 19th I’ll be debating the markets at the Euromoney Global Borrowers and Bond Investor Conference at the Hilton in Hyde Park London. Its’ the largest and longest established event of its kind. I’ll be proposing the motion: “this House believes that every security is currently overvalued”. If any readers are attending, I’ll be looking for your support! (Any ideas gratefully accepted on how I win this thing….)

There is a lot of negativity out there. Yesterday I wa s reading about Euro buyers are pre-empting the end of the ECB’s corporate binge buying programme – (I don’t think so!) - and we’re already seeing it reflected in prices. This morning, its’ an article in the FT telling us, quell surprise, BAML has noticed: “Fund Managers are getting twitchy about corporate debt.” A “No Sh*t Sherlock” award for services in spotting the bleeding obvious is winging its way to Merrill as you read this.

Even as Jeff Gundlach, CIO of Doubleline comments about the US being on a suicide mission as the deficit rises as rate rises, and predicts 6% 10-year in 2020, the BAML June fund manager survery says 42% of fund managers are worried about overleveraged companies. (!!! Ding ding ding !!!)

And, if US Corporates are over-borrowed at a time when interest rates were effectively negative that’s a concern as rates are rises. And, of course, all that money they borrowed was actually spent on buying back their own stock (boosting executive bonuses) rather than building plant, machinery and stuff that produces a return. The money spent on stocks is no longer available to pay back lenders…. and there is no new plant making things to pay them back either. Ooops?

Funnily enough, the most crowded trades the BAML survey notes are long FAANG+BAT, Short Treasuries and Long the Dollar.

Another eye-opener, and significant moment, for the future occurred yesterday. The Japan Government Pension Investment Fund – the largest fund on the planet running $1.5 trillion has just done a remarkable thing with the money it hands to external managers – it’s no longer going to pay them fees for their expertise. Instead, it’s going to treat them as trackers and only pay them if they pay above index results. Its changing the model by moving to a performance based fee structure for external managers.

That’s a fundamental shift likely to impact the whole fund management business! And maybe its about time…

There is a great story on Bloomberg by Mark Gilbert on the subject, which I would link to the porridge, but Bloomberg has gone subscription only. Fortunately, my own macro economist Martin Malone has also been watching this development and quickly concluded when the Japan Pension Fund goes, the rest will quickly follow.

From Mark’s comment: “As an incentive to generate alpha, there will be no limit on how much a manager can earn by outperforming. That’s a groundbreaking development.” Over the past few years the fund has seen the amount of fees it pays to external managers balloon. When it was just a bond fund buying JGBs, then fees were modest. Now it’s a major international player in stocks and seen its fees explode. Its reigning them fees back!

About 20% of the Japan funds assets are managed by external managers, but only a small number of these have actually beaten the indices and achieved targeted excess returns. While the fund will no longer pay fees for underperformance, they are committing to multi-year contracts to give external managers the incentive to make medium-to-long-term excess returns.

The message is simple and unsubtle. Perform or don’t get paid. I’m worried many funds just won’t get it. Many have become rules-driven, run to meet regulations rather than return goals. Compliance and reporting outranks investment picks. Juniorisation is the norm (remember a number I quoted recently – that more than 40% of fund managers have been in the business less than 8 years!) I am not so certain many established funds today will have the evolutionary DNA to become more competitive into the future…

Do I smell opportunity? Yes I do!


bshirley1968 Handful of Dust Wed, 06/13/2018 - 08:48 Permalink


What's this shit about "losing balance"? Does he mean the balance like when the parasite takes just enough blood so as not to kill the host, but just keep it weak enough so it can't remove the parasite?

These banksters and the fed have fattened this massive debt hog and now they ar going to cut some large, thick pieces of bacon of its belly and some ham off its ass. They would like to do this without killing it so they can repeat the process.

Balanced? Not for a long time now.

P.S. That chart is full of shit as well, because that red line indicates deficits will be declining......that's hilarious!

In reply to by Handful of Dust

Money_for_Nothing Wed, 06/13/2018 - 06:39 Permalink

If you just had Ford, Carter, Bush 1, Clinton 1, Bush 2, Obama back. Maybe FDR and Truman. How about Hoover? Tax, spend, manage, start little wars. No leadership required. Nixon was so much worse than JFK, LBJ. Gold-is-money Greenspan and helicopter Ben. (sarcasm)

So what about Trump? I think it's his year!

Endgame Napoleon Idiocracy's Not Sure Wed, 06/13/2018 - 08:24 Permalink

More tent cities cost less to build than the Trump Wall. Deficit hawks, an extinct species, will jump on that as an excuse to flood the labor market with 3 million more womb-productive illegal aliens on welfare who can afford to work part time for beans. They will do this not for US citizens sleeping in tents, but for the Chamber of Commerce lobbyists who line their pockets with gold. 

Laugh all you want, but rent-too-d*****-high guy from NYC—the other one—might have a chance in such an unreported housing & underemployment climate.

This could be the reason why the US media is not reporting on the proliferation of tent cities throughout our nation’s most “prosperous” (for the top 20%) cities.

This might explain why they pass right on by the maze of neighborhood curbsides loaded with the cars of adult children.

Maybe, that’s why they skip over the 95 million US citizens of working age who are out of the workforce, the 78 million gig-job pieceworkers and the 42 million employed-in-name-only citizens & noncitizens who are so underemployed that they fall under the income limits for everything from free EBT food and free rent to refundable child tax credits up to $6,431.

Even with all of the pay-per-birth freebies available to the sex-and-reproduction crowd in single-earner households, when your country rapidly exceeds the manufacturing quota for new homeless, children start showing up in the tent cities.

At that point, while they have ignored all of the adult homelessness, you’d think the fake newspeople would start to cover it. Gotta fall under an identity politics sermon category for them to get near it.

The Fake News Media might just be trying to help their pick for the next Black POTUS: Rent Too D***** High Guy.

The more homeless citizens sleeping in tents that we have, the higher the chances of the gentleman from NY with the snappy jingle about the rent that takes more than half of the earned-only income of the non-welfare-eligible non-womb-productive citizens. 


In reply to by Idiocracy's Not Sure

chubbar gwar5 Wed, 06/13/2018 - 08:22 Permalink

Me thinks that the FED isn't happy that they are standing out bareass as the only reason this economy crashes, when it does. They need cover otherwise they are bye-bye when it is obvious they are the problem, Trump isn't giving them that cover. He knows it'll crash, he wants to make sure they get the blame, imo. The Deep State has very little time left to create a reason for the crash, that's why the fear of a false flag is rising.

In reply to by gwar5

Endgame Napoleon gwar5 Wed, 06/13/2018 - 08:39 Permalink

The six-figure-to-multi-millionare corporate media glitterati—insulated as they are in their yuppie bubble—might be shocked to learn that the combination of tent cities & food riots is more disruptive to society than any candidate—EVER.

If they stopped engaging in ratings-hiking gossip for 5 minutes, they might be able to note some causal factors in candidate selection that have nothing to do with the topics that perk up their ratings better than Real News. 

The causal links can be made using math so simple that even non-mathematical Deplorables get it. Surely, our educated elite globetrotters, our pumped-up pontificators in the corporate news media, can add it up in their well-versed heads. 

Hint: Forty years of falling or stagnant wages due, in part, to mass-scale, welfare-buttressed immigration = Trump. Add in housing inflation that puts even a one-room apartment out of reach for millions of non-welfare-eligible citizens, multiplying the effect for Fed-fed inflation. 

In reply to by gwar5

ElTerco Wed, 06/13/2018 - 06:57 Permalink

"the 6th hike in 7 quarters. Slow and gradual."

They have to be slow so derivatives can adjust without bringing down the system. Those assholes who silenced Brooksley Born are also idiots.

Fantasy Free E… Wed, 06/13/2018 - 08:21 Permalink

The market is managed with organized support. Friends of the Fed already know what the decision will be.

They know the public will react one way or the other. More selling calls for more support. It is as simple as that. The goal is more than ever rising asset values. The larger goal is to consolidate stock holdings into just a few strong hands. This will make manipulating the market even easier.

LotUnsold Wed, 06/13/2018 - 09:04 Permalink

Bill, you are on the right side of the debate so winning it should be easy.  Just discount all the possible (even optimistic) cash flows that these securities could ever offer, back to today, and see if they tot up to anywhere near the price.  That is the litmus test - they won't!  And if you can get me a guest ticket I'll come along and have a coffee with you.