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Junk Bonds For 401K Investors

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Most profitable investing take place in the area of medium risk. With higher risks investors often can't stomach losses and sale in the most opportune time. In low risk area you can't beat inflation.

Investors in junk bonds need to deal with Wall Street. The sad truth is, however, that many investors are not well served in their dealings with Wall Street; Wall street in first and foremost is a huge propaganda machine that acts against the interests of common investors in order to enrich the Wall Street Firms. They regularly advice to take too much risk. that means that investors, especially 401K investors they would benefit from developing a greater understanding of the way Wall Street works.  That means that they need to stady such social system as corporatism and its latest incarnation -- neoliberalism

The problem is that what is good for Wall Street typically is not so good for investors. As for high  quality bonds they sell the general rule is  "Interest rate risks can always exceed an investor's time frame in most fixed-income sectors." And Junk bonds is no exception.

But they have contain advantages, if you buy then as specialized mutual funds, not as individual issues. firs of all they have shorter duration, so this risk is proportionally less then for 30 years Treasury bonds. But with junk funds like with stocks timing is everything: they are not suitable target for cost averaging. As PIMCO Gross notes by simply researching historical annual high yield default rates (5%), multiplying that by loss of principal in bankruptcy (60%), and coming up with an expected loss of 3% over the life of future loans. So fair return for junk bonds is LIBOR + 300 or more. In other words as Gross stresses "for LIBOR+250 high yield lenders are giving away money!"

High yield issuance topped $300 billion in 2012. The majority of that was used to refinance existing debt and by the end of 2012, 80 percent of market volume ($1.13 trillion) consisted of bonds sold since 2009. Thirty-two issuers defaulted on $20.5 billion in bonds in 2012, compared with 29 issuers and $15.9 billion in 2011. Fitch believes that the default rate on high yield debt in 2013 would “at least double if the economy slides back into recession or very low growth.” Last year’s riskiest sectors were the paper and pulp industry (7.7% default rate), utilities (10.5%), consumer products (4.7%), transportation (4.4%) and banks (3.3%). From July to year-end, the volume of ‘CCC’ rated new bond issues rose 54 percent and made up 18 percent of overall junk bond issuance.

Beyond pushing out debt maturities last year, high yield borrowers in 2012 saw a decline in their interest rates as demand for their bonds rose and interest rate dropped.

Vanguard High-Yield Corporate Adm (VWEAX)

The key question here is whether the economy will go into double dip (as was widely expected in 2010) or not. Junk like some other credit markets have signs of overheating as investors take larger risks in response to the persistence of low interest rates... Recent Fed speech underscored that the Fed increasingly regards bubbles, rather than inflation, as the most likely negative consequence of its efforts to reduce unemployment by stimulating growth with money printing. ...


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[Jun 14, 2021] Economist David Rosenberg says the Bond Market might have inflation right

The price of energy is growing. and that means inflation is accelerating, but it will probably take the form of stagflation...
Stagflation is characterized by slow economic growth and relatively high unemployment -- or economic stagnation -- which is at the same time accompanied by rising prices (i.e. inflation). Stagflation can also be alternatively defined as a period of inflation combined with a decline in gross domestic product (GDP). See also Stagflation - Wikipedia
Stagflation led to the emergence of the Misery index . This index, which is the simple sum of the inflation rate and unemployment rate, served as a tool to show just how badly people were feeling when stagflation hit the economy.
Under neoclassic economic doctrine stagflation was long believed to be impossible. This pseudoscience demonstrated in the Phillips Curve portrayed macroeconomic policy as a trade-off between unemployment and inflation.
Jun 14, 2021 | www.zerohedge.com

I commented above on direction. I believe the bond market has the direction in June correct (falling yields).

That said, the "real yield" is nearly -5% (CPI minus the 3-Month Treasury Yield). This fosters speculation in assets.

We are in the midst of the third big bubble in just over 20 years.

Extrapolating Conditions

It's usually a big mistake to extrapolate current conditions far into the future. And that includes now.

Sure, there are huge wage pressures and the price of some commodities, especially lumber, went through the roof.

But where to from here is what's important.

Despite Wage Increases, Real Hourly Pay Is Losing to Inflation

On June 11, I commented Despite Wage Increases, Real Hourly Pay Is Losing to Inflation

I also noted Huge Upward Wage Pressures for Both Skilled and Unskilled Labor

But Lacy Hunt is holding pat as well.

He pinged me in response to Explaining the Shortage of Skilled Workers and Why It Will Get Worse with these thoughts.

Mish,

Excellent analysis. I would add one point as a result of your conclusion. Older populations with declining birth rates and slower population, depress household, business and public investment. The contracting effect on investment is highly deflationary and overwhelms the impact of inflation due to the smaller labor force. This condition is plainly evident in Japan and Europe. Moreover, this pattern will be increasingly apparent in the US .

The Transitory Boat

The transitory boat is a small one. Powell and Yellen have to say that no matter what they believe.

Rosenberg, Hunt, and I are in the small boat.

And if you want another reason to be in that boat with us, then think about what happens when asset bubbles burst. It won't be inflationary, that's for sure.

Meanwhile, "I just say buy the gold," Rosenberg said. "Gold has 1/5 of the volatility that bitcoin has."

For more on gold and real interest rates, please see my June 11 post Real Interest Rates Suggest It's a Good Time to Buy and Hold Gold

[Jun 14, 2021] World War II Was Transitory- - Putting Inflation In Context

Jun 14, 2021 | www.zerohedge.com

Via Global Macro Monitor,

Let us preface our inflation note with one of our favorite quotes:

"World War II was transitory"

– GMM

Inflation has eroded my purchasing power in my transitory life. Bring back the $.35 Big Mac, which was only about 20% of the minimum wage. Now? About 40-50%... Enough to spark a revolution?

[Jun 12, 2021] Junk Bonds Are Dominating Even One of America's Safe Havens

Notable quotes:
"... The dynamics show how much the municipal-bond market has been swept up in the global push into higher yield assets as central banks worldwide hold interest rates low to stoke the economic recovery. ..."
"... That's fueled a surge in debt sales by corporations and governments battered by virus lockdowns. And for the state and local government debt market, it has revived the years-long rally in junk bonds that was only temporarily derailed by the coronavirus lockdowns. ..."
"... So far this year, government agencies across the U.S. have sold more than $6.5 billion of bonds that can only be marketed to institutional investors able to bear the risk, driving such issuance toward the biggest year on record, according to data compiled by Bloomberg. ..."
Jun 10, 2021 | finance.yahoo.com

The municipal junk-bond boom is roaring back.

With the economy rebounding swiftly from the pandemic, interest rates on high-yield state and local government securities have tumbled to the lowest in over two decades. Cash is pouring into mutual funds focused on the junk-rated debt so quickly that money managers are fighting to get in on new deals. And prices have rallied, driving high-yield bonds to their biggest run of outperformance since 2014.

The demand is so strong that a California agency sold 35-year bonds for the development of a senior-living community at a yield of 4.43%, about two-and-a-half percentage points less than bankers initially anticipated. The price went on to surge 8% in secondary trading.

"We couldn't think of a better time to come to market," said Sarkis Garabedian, an investment banker at Ziegler, the underwriter on the bonds. He said the firm hadn't seen such interest in a transaction for a new senior living campus since they started tracking the metrics in the 1980s. "We really hit the sweet spot here."

Recent bond sales have raised money for an ethanol production facility in North Dakota, a bevy of charter schools, and a youth-sports complex in Arizona. American Samoa, a junk-rated territory, is tapping the market for the first time since 2018. And the owner of a plant that recycles rice waste into fiberboard may sell more debt even though it has already been driven to default.

The dynamics show how much the municipal-bond market has been swept up in the global push into higher yield assets as central banks worldwide hold interest rates low to stoke the economic recovery.

That's fueled a surge in debt sales by corporations and governments battered by virus lockdowns. And for the state and local government debt market, it has revived the years-long rally in junk bonds that was only temporarily derailed by the coronavirus lockdowns.

So far this year, government agencies across the U.S. have sold more than $6.5 billion of bonds that can only be marketed to institutional investors able to bear the risk, driving such issuance toward the biggest year on record, according to data compiled by Bloomberg.

[Jun 12, 2021] Headline CPI is expected to jump 4.7% year-over-year

May CPI is expected at 8:30 a.m. ET Thursday. It is unclear to me why the 10-year Treasury yield fell below the key 1.5% Wednesday. Was it short-covering? if so what triggered it? If predictions are true it might jump up on Jun 10, 2021 because you can't have Headline CPI 4.7% and the 10-year Treasury yield 1.5%. That's the theatre of absurd.
Rent, owners' equivalent rent and medical care services collectively are 50% of the core CPI basket.
Notable quotes:
"... Headline CPI is expected to jump 4.7% year-over-year, the highest rate since sky high energy prices spiked inflation readings in the fall of 2008. ..."
"... "I am worried about rent and owners' equivalent rent because it should go up. It had decelerated," she said. Shelter is more than 30% of CPI , and rent costs have bottomed in some cities, Swonk added. "The issue is it could have longer legs and keep overall inflation measures buoyed more than people expect." ..."
Jun 09, 2021 | www.msn.com

...The consensus forecast for the core consumer price index, which excludes food and energy, is 3.5% on a year-over-year basis, according to Dow Jones. That's the fastest annual pace in 28 years.

Economists expect both core and headline CPI rose by 0.5% in May. Headline CPI is expected to jump 4.7% year-over-year, the highest rate since sky high energy prices spiked inflation readings in the fall of 2008.

... ... ...

"I am worried about rent and owners' equivalent rent because it should go up. It had decelerated," she said. Shelter is more than 30% of CPI , and rent costs have bottomed in some cities, Swonk added. "The issue is it could have longer legs and keep overall inflation measures buoyed more than people expect."

[Jun 06, 2021] Eurozone Inflation Above Target Sooner Than The ECB Expected

The USA is not immune. Energy price will drive inflation here too. So the decline of 10 years bond rate might a trap.
Jun 02, 2021 | www.wsj.com

The annual rate of inflation in the eurozone rose in May to hit the European Central Bank's target for the first time since late 2018, as energy prices surged in response to a strengthening recovery in the global economy.


[May 31, 2021] Yes inflation is transitionary. Thos only question is transitionary to what level?

Highly recommended!
As for whether this is "transitory," we may paraphrase J.M. Keynes: In the long run, everything is transitory.
May 31, 2021 | www.wsj.com
D

David Weisz

I accept the reality except that FED said this inflation is "transitory."

The Fed description is accurate... it's just whether the transition is to lower inflation or to runaway inflation.

Jim McCreary
The biggest single factor that will drive long-term inflation is the absence of downward price pressure from new Chinese market entrants. Cutthroat pricing from China is the ONLY reason the West has been able to get away with Money-Printing Gone Wild for the past 20 years without triggering runaway inflation.

There are no new Chinese entrants because the Chinese are now all in in the world economy. The existing Chinese competitors are seeing their costs go UP, not down, because they have fully employed the Chinese population, and have to pay up in order to get and keep workers.

So, without any more downward price pressure from China, this latest round of Money-Printing Gone Wild is showing up as price inflation, and will continue to do so.

Batten down the hatches! Stagflation and then runaway inflation are coming!

[May 29, 2021] Peter Schiff -- Inflation Crashes The Party

The read question is when this will happen. So far this year the yield of 10 year bond fluctuate in a rather narrow band. It does not steadily increases...
May 28, 2021 | www.zerohedge.com

The latest clue that trouble is brewing has come from the sudden and dramatic arrival of inflation. On May 12, it was revealed that the Consumer Price Index (CPI) had risen 4.2% year-over-year , the fastest pace since 2008.

Some tried to downplay concern by pointing out that the gains resulted from the "base effect" of comparing current prices with the artificially depressed "Covid lockdown" prices of March and April of last year. But that ignores the more alarming trend of near-term price acceleration.

According to the Bureau of Labor Statistics, in every month this year, the month-over-month change in prices has been greater than the change in the previous month.

In April prices jumped .8% from March, versus an expected gain of just .2%. Clearly, if this trend continues, or even fails to dramatically reverse, we could be looking at inflation well north of 5 or 6 percent for the calendar year. That would create a big problem.

Despite Federal Reserve officials' recent assurances that the inflation problem is "transitory," many investors are concluding that the central bank will have to deal with this problem by tightening monetary policy far sooner than had been expected. This would make sense if the Fed cared about restraining inflation or, more importantly, had the power to do anything to stop it. In truth, we are sailing into these waters with little ability to alter speed or course, and we will be wholly at the mercy of the waves we have spent a generation creating.

[May 29, 2021] Inflation Takes Its Cut - WSJ

May 28, 2021 | www.wsj.com

The Commerce Department on Friday reported that consumer spending rose 0.5% in April from a month earlier, which, coming after March's government stimulus-check-fueled surge, was impressive. The gain was driven by a 1.1% increase in spending on services""an indication of how, with Covid-19 cases dropping and vaccination rates rising , consumers are shifting their behavior. Spending on goods actually declined, with the weakness concentrated in spending on nondurable goods such as groceries and cleaning products.

But a closer look at April's overall gain indicates it was mainly driven by price increases. By the Commerce Department's measure, which is the Federal Reserve's preferred gauge of inflation, consumer prices rose 0.6% in April from March, putting them 3.6% above their year-earlier level. As a result, real, or inflation-adjusted spending declined. Core prices, which exclude the often volatile food and energy categories to better capture inflation's underlying trend, were up 0.7% from March, and 3.1% on the year. The Fed's inflation goal is 2%, though it has said it will tolerate higher readings than that for some time.

[May 29, 2021] Peter Schiff- Inflation Crashes The Party - ZeroHedge

May 28, 2021 | www.zerohedge.com

The latest clue that trouble is brewing has come from the sudden and dramatic arrival of inflation. On May 12, it was revealed that the Consumer Price Index (CPI) had risen 4.2% year-over-year , the fastest pace since 2008.

Some tried to downplay concern by pointing out that the gains resulted from the "base effect" of comparing current prices with the artificially depressed "Covid lockdown" prices of March and April of last year. But that ignores the more alarming trend of near-term price acceleration.

According to the Bureau of Labor Statistics, in every month this year, the month-over-month change in prices has been greater than the change in the previous month.

In April prices jumped .8% from March, versus an expected gain of just .2%. Clearly, if this trend continues, or even fails to dramatically reverse, we could be looking at inflation well north of 5 or 6 percent for the calendar year. That would create a big problem.

Despite Federal Reserve officials' recent assurances that the inflation problem is "transitory," many investors are concluding that the central bank will have to deal with this problem by tightening monetary policy far sooner than had been expected. This would make sense if the Fed cared about restraining inflation or, more importantly, had the power to do anything to stop it. In truth, we are sailing into these waters with little ability to alter speed or course, and we will be wholly at the mercy of the waves we have spent a generation creating.

[May 29, 2021] Money Market Funds See Massive Inflows As Investors Turn Defensive

May 28, 2021 | www.zerohedge.com

According to BofA's latest Flows Show, this week's EPFR data revealed a broad defensive retrenchment, culminating with the largest inflow to cash since Apr'20 & largest inflow to gold in 16 weeks ($2.6bn); and while broad inflows to equities continue ($512bn YTD) & largest inflow to Europe since Feb'18 ($2.8bn); we just experienced the largest 3-week outflow from tech since Mar'19 ($1.5bn) as well as the largest outflow from banks since Jun'20 ($0.6bn).

Refinitiv confirms this, reporting this morning that "global money market funds saw huge inflows" amounting to no less than $53.2 billion, the highest in four weeks, in the week ended May 26 amid caution that quickening inflation could alter the direction of U.S. monetary policy and shake up asset markets.

Despite the massive flows into the safety of money market, Refinitiv also finds that global equity funds attracted solid inflows of $8.84 billion, a 46% increase over the previous week, as stocks rallied somewhat after U.S. Federal Reserve officials reaffirmed a dovish monetary policy stance: U.S. equity funds received $2.87 billion, while European equity funds and Asian equity funds obtained $2.47 billion and $1 billion, respectively.

Where the EPFR and Refinitiv data diverge is when it comes to tech. Contrary to the EPFR observation, Refinitiv reports that tech funds attracted inflows worth $546 million after three straight weeks of outflows, while financial sector funds faced their first outflow in 16 weeks, hit by a decline in bond yields.


y_arrow
Pausebreak 6 hours ago

"Refinitiv's analysis of 23,865 emerging-market funds showed equity funds had net outflows worth $463 million, while bond funds had inflows worth $420 million after outflows in the previous week."

Not even a material impact to the stock market.

[May 29, 2021] VFSTX 10.97 -0.01 -0.09% - Vanguard Short-Term Investment-Grade Fund Investor Shares

So VFSTX is no longer high grade bond fund...
May 18, 2021 | finance.yahoo.com
Mary Beth 11 months ago Vanguard eliminated the 30% limitation on investments in non-investment grade bonds today . Any indication of how far they will go to increase returns?

[May 28, 2021] What Commodities Prices Are Saying About Inflation by Ryan Dezember, Joe Wallace and Andrew Barnett

May 20, 2021 | www.wsj.com

Prices for the building blocks of the economy have surged over the past year. Oil, copper, corn and gasoline futures all cost about twice what they did a year ago, when much of the world was locked down to fight the spread of the deadly coronavirus. Lumber has more than tripled.

... ... ...

N

Nidge M

Not sure its adding anything which hasn't been said already but to look at the same thing in a different way:
2, or if you look at it 'sideways' 3, main interwoven factors drive inflation:
Access to money to spend - That can be wage/earnings increases or access to cheap debt. That ups demand & prices follow.
Devaluation of the currency - Pushes up raw material imports & prices follow.

What curbs inflation?:
High taxation
High interest rates
High unemployment

And if anyone can point to any Western Democracy currently willing to implement any one, never mind all three, of those controls a lot of folk will probably be pretty surprised.

Michael Matus
Commodities prices are not the problem. They are high now because of a short-term surge in demand and supply chain issues. All should be worked out by this time next year.

The long-term structural problem could be wages. If inflation shows up in wages through wage increases through a multitude of industries then there will be a problem,....... a major one.

Having all these people on the Dole from the government didn't help things Joe!

But like all Presidents that came after HW Bush all you care about is getting re-elected. Doling out is a great way even if its at the cost of the country.

The FED as been intervening in the markets for so long that they have no tools left for the next crisis.

The FED painted themselves into a corner and the Stimulus that was not needed left them no Escape.

Michael Brown
"Having all these people on the Dole from the government didn't help things Joe!"

What about raising the minimum wage, and Joe commanding that all workers for federal contractors be paid $15 per hour or more? You think that could be inflationary?

Michael Matus
I would have to agree with yoiu Michael. I should have mentioned that, thank you for reminding me. However, the main problem with all the sources trhat I have out on the street and their are mnay. Is WAGE growth. As far as a national mimum wage there is none. Altough there probably will be now. Most states pay as high or higher than what the Federal Government was proposing.

90% of government contractors make at least $15.00 an hour anyway. The VAST majority of the problem is enhanced unemployment insurance. The 3 month averge of wage groth ending in March was 3.4%. If it hits > 4.0% that will be bad.

Michael Brown
Excellent points, Michael. The list of government actions instigating inflation would be long indeed.
Michael Matus
Unfortunately, Michael, I would have to Wholeheartedly agree with you, Have a Good Weekend!
JOSEPH MICHAEL
Serious, severe inflationary problems are here, they are just starting, and they are going to get much worse.
Brian Kearns
eh.
best to give corporations a large tax cut

so the can buy back stock

Bill Hestir
I will interested to see if new car prices, lumber prices, new home prices, gasoline prices, and food prices will ever go back down to pre-pandemic levels.

If not, with all the new anti-business taxes and reluctance of out-of-work laborers to go back to work, how will businesses not be forced to raise their wages and increase the price of their products even higher than they are today?

At what point, therefore, will the Fed end their "inflation is transitory" farce and raise interest rates?

Deirdre Hood
Food prices, regardless of when inflation ends, will not go down/return to 'normal'.

Supply lines are squeezed (NO ONE can hire reliable transport drivers), low supply of workers, plus factor in a bad year for wheat, and it turns into the perfect storm for commercial bakers.

Judy Neuwirth
Inflation is just getting started. Cho Bi-Den's hyper-regulated economy is only three months old and already it's 1976 all over again!
Jim Chapman
Now Judy, it's just "transitory" inflation as per Yellen, Powell and Buyden. You really must stick with the narrative, and remember, Adam Smith's scurrilous "Invisible Hand" is a ultra-right wing conservative myth. So we are not supposed to believe our lying eyes.

[May 28, 2021] Inflation Forces Investors to Scramble for Solutions - WSJ

May 24, 2021 | www.wsj.com

The price of the benchmark 10-year Treasury inflation-protected security logged its biggest one-day decline in a month. Shares of real-estate investment trusts slid the most since January. Commodities were generally flat but dropped the following day.

The three asset classes have vacillated since, but their initial moves showed the unexpected ways that markets can behave when inflation is rising, especially when many are already expensive by historical measures.

This week, investors will gain greater insight into the inflation picture when the Commerce Department updates the Federal Reserve's preferred inflation gauge, the personal-consumption-expenditures price index. They will also track earnings from the likes of Dollar General Corp. , Costco Wholesale Corp. and Salesforce.com Inc.

The stakes are high for investors. Inflation dents the value of traditional government and corporate bonds because it reduces the purchasing power of their fixed interest payments. But it can also hurt stocks, analysts say, by pushing up interest rates and increasing input costs for companies.

From early 1973 through last December, stocks have delivered positive inflation-adjusted returns in 90% of rolling 12-month periods that occurred when inflation""as measured by the consumer-price index""was below 3% and rising, according to research by Sean Markowicz, a strategist at Schroders, the U.K. asset-management firm. But that fell to only 48% of the periods when inflation was above 3% and rising.

A recent report from the Labor Department showed that the consumer-price index jumped 4.2% in April from a year earlier, up from 2.6% in March. Even excluding volatile food and energy prices, it was up 3% from a year earlier, blowing past analysts' expectations for a 2.3% gain.

Analysts say that there are plenty of reasons why inflation won't be able to maintain that pace for long. The latest year-over-year numbers were inflated by comparisons to deeply depressed prices from the early days of the pandemic. They were also supported by supply bottlenecks that many view as fixable and robust consumer demand that could dissipate once households have spent government stimulus checks.

... ... ...

By comparison, the S&P GSCI Commodity Total Return Index delivered positive inflation-adjusted returns in 83% of the high and rising inflation periods. "Commodities are a source of input costs for companies and they're also a key component of the inflation index, which by definition you're trying to hedge," said Mr. Markowicz.

At the same time, commodities are among the most volatile of all asset classes and can be influenced by an array of idiosyncratic factors.

T

Tracy Harris

Charles Goodhart, the economist from the Bank of England, has just written an important book arguing that worldwide demographic changes are going to result in a couple of decades of high inflation. See Charles Goodhart, The Great Democratic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival. Maybe the Journal could find someone to review it. Maybe Ms. Yellen should read it.

(Douglas Levene)

Bruce Fegley
This article is naive, if not ridiculous, for several reasons. I name a few.

1st - the stock market is the best hedge against inflation over a long time period - years, not daily, weekly, or quarterly. Especially with dividend reinvesting and with an automatic buying plan like the DRIP plans offered by many companies at no or very low cost.

2nd - Individuals can buy US government I-series savings bonds at NO COST directly from the US Treasury, and while they do not completely hedge against inflation, they offer good interest rates that beat bank interest and are completely insured.

3rd - Toyota and perhaps other car companies offer notes with higher interest than banks but not FDIC insured. About 1.5% now.

One does not have to blow money away on bitcoin or hold gold, which is taxed as a collectible and has assay fees on the front and back ends of any buy/sell transaction unless one is buying coins which have a markup to begin with.

Theo Walker
Started buying I-bonds this month. The rates are great! Easily the best safe investment right now.
Bryson Marsh
... why would you buy TIPS? The spread is a farce after all.
PHILIP NICHOLAS
Inflation is always sticky . In other words all the prices do not go down . Wages that are increased , usually stay . Companies sense a new level they can pass on to consumers . And the Government damage to energy prices will influence prices .
Bryson Marsh
Memory costs, data plans, and televisions are all examples that clearly demonstrate secular price declines despite periodic increases.
Charles D
"Inflation Forces Investors to Scramble for Solutions"
Hundreds of millions of Americans are going to suffer as the Federal Government inflates the national debt away over the next 10 to 15 years. Investors will figure it out, but the little guy will get crushed once again. Oh well, we get the government we deserve.
A Eichler
CME futures contracts ...

OIL - NAT GAS - PROPYLENE - COPPER - LUMBER - STEEL - SOYBEAN - 2 yr. and 5 yr. T-Note

They are all substantially down, one year from now; except Copper and financials which are flat.

What does that say about the economy & inflation in one year?

Paul Smith
I am under the impression that the Social Security COLA is based on a September to September comparison of the CPI-U. That is to say, for example, September 2020 CPI-U vs. September 2021 CPI-U. Is this not correct?

We have had inflation over over the past decade or so. As measured by the CPI-U, it has hovered around 2 percent. Not a big deal to the Fed's economists. Cumulatively, however, it adds up.

I have been retired for 16 years. Inflation has eroded the purchasing power of my fixed pension by 25.5. Mercifully, I have other resources to make up the loss, but for people on a fixed pension, so-called mild inflation can wreck it over time.

James Webb
Paul, one of the lower estimates for 2022:

"The Kiplinger Letter is forecasting that the annual cost-of-living adjustment for Social Security benefits for 2022 will be 4.5%, the biggest jump since 2008, when benefits rose 5.8%. That would also be higher than the 3% adjustment The Kiplinger Letter predicted earlier this year."

From SocialSecurity dot gov:

"To determine the COLA, the average CPI-W for the third calendar quarter of the most recent year a COLA was determined is compared to the average CPI-W for the third calendar quarter of the current year. The resulting percentage increase, if any, represents the percentage that will be used to increase Social Security benefits beginning for December of the current year. "

So the predicted 4.5-4.7% increase for 2022 will take effect December 31 this year.

Of course the calculation is not completed yet....

James Robertson
The Fed's inflation calculations have become increasingly "fuzzy" since the Boskin Commission in 1995. The CPI ignores housing, food, and energy. Healthcare gets weighted at 3 percent, though it accounts for 18 percent of expenditures. "Hedonic quality adjustment" is another knob the Fed turns to "control" inflation. Inflation calculated by comparing the price of a basket of goods this year to a basket of goods last year runs quite a bit higher than the CPI; even higher if you include food, shelter, and energy in that basket.
James Webb
What's in the CPI?

-Food and Beverages (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
-Housing (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)
-Clothes (men's shirts and sweaters, women's dresses, jewelry)
-Transportation (new vehicles, airline fares, gasoline, motor vehicle insurance)
-Medical Care (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)
-Recreation (televisions, toys, pets and pet products, sports equipment, admissions)
-Education and Communication (college tuition, postage, telephone services, computer software and accessories)
-Other Goods and Services (tobacco and smoking products, haircuts and other personal services, funeral expenses)

Tim Adams
The core CPI which the Fed uses excludes food and energy. The Consumer price index which is used for things like social security adjustments does not. These very similar but different uses of the same acronym just adds to the confusion.

[May 28, 2021] Inflation Debate Hits Emerging Markets

Notable quotes:
"... there's a growing sense that the forces behind the recovery will eventually feed through to higher prices if left unchecked. One harbinger could be the rally in commodities, with a key index of raw materials this month jumping to a five-year high. ..."
"... "If the stimulus continues, at some point it will become inflationary," said Sanjiv Bhatia, the chief investment officer at Pembroke Emerging Markets in London. "At some point, we believe it will become a problem." ..."
May 09, 2021 | finance.yahoo.com

The prospect of tighter monetary conditions in emerging markets still hasn't changed the overall calculus for many investors, with behemoths including Pacific Investment Management Co. and BlackRock Inc. focusing on the growth story instead. Developing-nation inflation remains near a record low, with the economic rebound making assets look "increasingly interesting," according to Dan Ivascyn, Pimco's group chief investment officer in Newport Beach, California.

Yet there's a growing sense that the forces behind the recovery will eventually feed through to higher prices if left unchecked. One harbinger could be the rally in commodities, with a key index of raw materials this month jumping to a five-year high.

"If the stimulus continues, at some point it will become inflationary," said Sanjiv Bhatia, the chief investment officer at Pembroke Emerging Markets in London. "At some point, we believe it will become a problem."

For now, assurances from the Federal Reserve that inflation in the U.S. is unlikely to get out of control have supported the bulls. The Fed appears in no rush to raise interest rates, a move that would siphon capital out of emerging economies currently enjoying the windfall from U.S. stimulus.

That major central banks currently view inflation as transitory should boost developing-nation currencies as a whole, according to Henrik Gullberg, a London-based macro strategist at Coex Partners Ltd.

MSCI Inc.'s emerging-market currency index has climbed to a record high, while the benchmark equity gauge just posted its biggest two-day rally in almost two weeks amid a rally in energy and technology shares. On Friday, risk assets got further support when U.S. job growth data significantly undershot forecasts.

"On the one hand, the valuations of growth stocks look meaningfully less demanding after recent underperformance coupled with earnings upgrades," said Kate Moore, the head of thematic strategy at BlackRock in New York. "On the other, rising inflationary pressures from the broad economic restart and low inventories should be supportive of cyclicals and commodity producers."

[May 28, 2021] Treasury yields to rise in the second half of the year, pushed higher by rises in yields on inflation-protected Treasurys

Notable quotes:
"... Mark Carbana, U.S. rates strategist at Bank of America, still expects U.S. rates to rise further especially if there is a strong reading for the Fed's preferred measure of inflation, personal consumption expenditures, due out next Friday. ..."
"... He expects Treasury yields to rise in the second half of the year ..."
May 21, 2021 | www.wsj.com

Originally from Government Bond Yields Fall as Investors Grapple With Muddied Economic Picture by By Paul J. Davies

In the U.S., inflation readings have been strong and the minutes of the last Fed meeting released Wednesday showed there had been some discussion about slowing bond purchases -- also known as taper talk.

... Mark Carbana, U.S. rates strategist at Bank of America, still expects U.S. rates to rise further especially if there is a strong reading for the Fed's preferred measure of inflation, personal consumption expenditures, due out next Friday. "Uncertainty around inflation is the highest it has been in decades," he said, particularly around whether recent high readings are temporary or due to changes in the underlying economy. He expects Treasury yields to rise in the second half of the year , pushed higher by rises in yields on inflation-protected Treasurys as the Fed starts to talk more seriously about tapering its bond purchases.

Write to Paul J. Davies at paul.davies@wsj.com

[May 28, 2021] How transitory is transitory inflation?

May 27, 2021 | www.zerohedge.com

As the credit strategist continues, "while it is easy to blame transitory factors, these were surely all known about before the last several data prints and could have been factored into forecasts. That they weren't suggests that the transitory forces are more powerful than economists imagined or that there is more widespread inflation than they previously believed. "

To be sure, all such "˜surprise' indices always mean revert so the inflation one will as well. However as Reid concludes, "the fact that we're seeing an overwhelming positive beat on US inflation surprises in recent times must surely reduce the confidence to some degree of those expecting it to be transitory. "

[May 28, 2021] Stocks could drop 20% when Fed fights inflation: hedge fund founder

May 25, 2021 | finance.yahoo.com

Inflation fears already roiled the market this week with the Nasdaq falling nearly 2%, but one hedge fund founder is sounding the alarm over a potential 20% collapse that could be sparked by the Federal Reserve signaling an end to accommodative pandemic-era monetary policy later this year.

Satori Fund founder Dan Niles recently told Yahoo Finance that this week's hotter-than-anticipated inflation data coupled with other central banks around the world already coming off their easy money policies will likely corner the Fed into tapering its accommodative policies sooner than expected.

"If you've got food prices, energy prices, shelter prices moving up as rapidly as they are, the Fed's not going to have any choice," he said, predicting that the Fed could signal the beginning of a move to wind down its monthly $120 billion a month pace of asset purchases by this summer. "They can say what they want, but this reminds me to some degree of them saying back in 2007 that the subprime crisis was well contained. Obviously it wasn't."

[May 28, 2021] Bond Traders See a Path to 2% Yields Lurking in US

Can it be wage driven inflation, when there is mass unemployment of the scale that we observer. That's a stupid idea. Commodites driven inflation is possible as oil if probably past its peak, but for now production continued at plato level and cars are getting slightly more economical, espcially passenger car, where hybrids reached 40 miles er gallon.
Notable quotes:
"... The prospect of a rebound to 2% yields on the world's benchmark bond is alive and well. ..."
May 09, 2021 | finance.yahoo.com

The prospect of a rebound to 2% yields on the world's benchmark bond is alive and well.

Treasury-market bears found a deeper message within Friday's weak employment report that's emboldened a view that inflationary pressures are on the rise, and could boost rates to levels not seen since 2019. For Mark Holman at TwentyFour Asset Management, the sub-par April labor reading indicated companies will need to lift wages to entice people back into the labor force; he's expecting a break of 2% on the 10-year this year.

That level has come to symbolize a return to pre-pandemic normalcy in both markets and the economy. The wild ride in markets on Friday suggests Holman likely has company in his views. Ten-year yields initially plunged to a more than two-month low of 1.46%, then reversed to end the day at 1.58%. Meanwhile, a key market proxy of inflation expectations surged to a level last seen in 2013.

[May 24, 2021] The Fed Has Lost Control -- John Williams Warns Of Hyperinflation In 2022

I agree that Fed might lose the control: much depends on the continuation of the status of the dollar as the main reserve currency. If this position continue to weaken all beta are off.
May 24, 2021 | www.zerohedge.com

What would happen to the financial system if the Fed stopped printing massive amounts of money for stimulus and debt service? Williams explains,

" You could see financial implosion by preventing liquidity being put into the system. The system needs liquidity (freshly created dollars) to function. Without that liquidity, you would see more of an economic implosion than you have already seen. In fact, I will contend that the headline pandemic numbers have actually been a lot worse than they have been reporting. It also means we are not recovering quite as quickly. The Fed needs to keep the banking system afloat. They want to keep the economy afloat. All that requires a tremendous influx of liquidity in these difficult times."

So, is the choice inflation or implosion? Williams says, "That's the choice, and I think we are going to have a combination of both of them. .."

" I think we are eventually headed into a hyperinflationary economic collapse. It's not that we haven't been in an economic collapse already, we are coming back some now. . . . The Fed has been creating money at a pace that has never been seen before. You are basically up 75% (in money creation) year over year. This is unprecedented. Normally, it might be up 1% or 2% year over year. The exploding money supply will lead to inflation. I am not saying we are going to get to 75% inflation -- yet, but you are getting up to the 4% or 5% range, and you are soon going to be seeing 10% range year over year. . . . The Fed has lost control of inflation. "

And remember, when the Fed has to admit the official inflation rate is 10%, John Williams says, "When they have to admit the inflation rate is 10%, my number is going to be up to around 15% or higher. My number rides on top of their number."

Right now, the Shadowstat.com inflation rate is above 11%. That's if it were calculated the way it was before 1980 when the government started using accounting gimmicks to make inflation look less than it really is. The Shadowstats.com number cuts out all the accounting gimmicks and is the true inflation rate that most Americans are seeing right now, not the "official" 4.25% recently reported.

Williams says the best way to fight the inflation that is already here is to buy tangible assets. Williams says,

"Canned food is a tangible asset, and you can use it for barter if you have to. . . . Physical gold and silver is the best way to protect your buying power over time."

Gold may be a bit expensive for most, but silver is still relatively cheap. Williams says, "Everything is going to go up in price."

When will the worst inflation be hitting America? Williams predicts,

"I am looking down the road, and in early 2022, I am looking for something close to a hyperinflationary circumstance and effectively a collapsed economy."

Join Greg Hunter of USAWatchdog.com as he goes One-on-One with John Williams, founder of ShadowStats.com.


2 play_arrow 1

Nikki Alexis 7 minutes ago

John Williams warning about hyperinflation is like Peter Schitt telling me stocks are going to crash. It's coming, it's coming! Boy crying wolf.

Cautiously Pessimistic 59 minutes ago

Accounting Gimmicks. Election Gimmicks. Gender Gimmicks. Science Gimmicks. Rule of Law Gimmicks.

America has become one big fun house of gimmicks.

Time for a RESET.

NoDebt 54 minutes ago remove link

Yeah, the Reset Gimmick. Where they fundamentally transform themselves into a permanent position of power. Never mind that they'll kill millions to achieve it.

Samual Vimes 47 minutes ago (Edited)

What about gutting primary dealers by buying T bills directly ?

https://www.zerohedge.com/economics/fed-prepares-go-direct-liquidity

[May 18, 2021] Who Bought the $4.7 Trillion of Treasury Securities Added Since March 2020 to the Incredibly Spiking US National Debt-

May 18, 2021 | wolfstreet.com

Who Bought the $4.7 Trillion of Treasury Securities Added Since March 2020 to the Incredibly Spiking US National Debt? by Wolf Richter • May 17, 2021 • 119 Comments The Fed did. Nearly everyone did. Even China nibbled again. Here's who holds that monstrous $28.1 trillion US National Debt. By Wolf Richter for WOLF STREET .

The US national debt has been decades in the making, was then further fired up when the tax cuts took effect in 2018 during the Good Times. But starting in March 2020, it became the Incredibly Spiking US National Debt. Since that moment 15 months ago, it spiked by $4.7 trillion, to $28.14 trillion, amounting to 128% of GDP in current dollars:

But who bought this $4.7 trillion in new debt?

We can piece this together through the first quarter in terms of the categories of holders: Foreign buyers as per the Treasury International Capital data, released this afternoon by the Treasury Department; the purchases by the Fed as per its weekly balance sheet; the purchases by the US banks as per the Federal Reserve Board of Governors bank balance-sheet data; and the purchases by US government entities, such as US government pension funds, as per the Treasury Department's data on Treasury securities.

Foreign creditors of the US.

Japan , the largest foreign creditor of the US, dumped $18 billion of US Treasuries in March, reducing its stash to $1.24 trillion. Since March 2020, its holdings dropped by $32 billion.

https://664e3285974f21e0f93cbda833cec3c8.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.html

China had been gradually reducing its holdings over the past few years, but then late last year started adding to them again. In March, its holdings ticked down for the first time in months, by $4 billion, bringing its holdings to $1.1 trillion. Since March 2020, it added $9 billion:

But Japan's and China's importance as creditors to the US has been diminishing because the US debt has ballooned. In March, their combined share (green line) fell to 8.3%, the lowest in many years:

All foreign holders combined dumped $70 billion in Treasury securities in March, bringing their holdings to $7.028 trillion (blue line, left scale). But this was still up by $79 billion from March 2020.

These foreign holders include foreign central banks, foreign government entities, and foreign private-sector entities such as companies, banks, bond funds, and individuals. Despite the increase of their holdings since March 2020, their share of the Incredibly Spiking US National Debt fell to 25.0%, the lowest since 2007 (red line, right scale):

After Japan & China, the 10 biggest foreign holders include tax havens where US corporations have mailbox entities where some of their Treasury holdings are registered. But Germany and Mexico, with which the US has massive trade deficits, are in 17th and 24th place. The percentages indicate the change from March 2020. Note the percentage increase of India's holdings:

US government funds hit record, but share of total debt drops further.

US government pension funds for federal civilian employees, pension funds for the US military, the US Social Security Trust Fund , and other federal government funds bought on net $5 billion of Treasury securities in Q1 and $98 billion since March 2020, bringing their holdings to a record of $6.11 trillion (blue line, left scale).

But that increase was outrun by the Incredibly Spiking US National Debt, and their share of total US debt dropped to 21.8%, the lowest since dirt was young, and down from a share of 45% in 2008 (red line, right scale):

Federal Reserve goes hog-wild: monetization of the US debt.

The Fed bought on net $243 billion of Treasury securities in Q1 and $2.44 trillion since it began the bailouts of the financial markets in March 2020. Over this period through March 31, it has more than doubled its holdings of Treasuries to $4.94 trillion (blue line, left scale). It now holds a record of 17.6% of the Incredibly Spiking US National Debt (red line, right scale):

US Banks pile them up.

US commercial banks bought on net $28 billion in Treasury securities in Q1 and $267 billion since March 2020, bringing the total to a record $1.24 trillion, according to Federal Reserve data on bank balance sheets. They now hold 4.4% of the Incredibly Spiking US National Debt:

Other US entities & individuals

So far, we covered the net purchases by all foreign-registered holders, by the Fed, by US government funds, and by US banks. What's unaccounted for: US individuals and institutions other than the Fed, the banks, and the government. These include bond funds, private-sector, state, and municipal pension funds, insurers, US corporations, hedge funds (they use Treasuries in complex leveraged trades), private equity firms that need to park billions in "dry powder," etc.

These US entities hold the remainder of Incredibly Spiking US National Debt. Their holdings surged by $149 billion in Q4 and by $2.35 trillion since March 2020, to a record $8.76 trillion (blue line, left scale). This raised their share of the total debt to 31.2% (red line, right scale), making these US individuals and institutions combined the largest holder of that monstrous mountain of debt:

The Incredibly Spiking US National Debt and who holds it, all in one monstrous pile:

Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

[May 17, 2021] Stocks could drop 20% when Fed fights inflation- hedge fund founder

May 17, 2021 | finance.yahoo.com

Guzman

May 17, 2021

Inflation fears already roiled the market this week with the Nasdaq falling nearly 2%, but one hedge fund founder is sounding the alarm over a potential 20% collapse that could be sparked by the Federal Reserve signaling an end to accommodative pandemic-era monetary policy later this year.

Satori Fund founder Dan Niles recently told Yahoo Finance that this week's hotter-than-anticipated inflation data coupled with other central banks around the world already coming off their easy money policies will likely corner the Fed into tapering its accommodative policies sooner than expected.

"If you've got food prices, energy prices, shelter prices moving up as rapidly as they are, the Fed's not going to have any choice," he said, predicting that the Fed could signal the beginning of a move to wind down its monthly $120 billion a month pace of asset purchases by this summer. "They can say what they want, but this reminds me to some degree of them saying back in 2007 that the subprime crisis was well contained. Obviously it wasn't."

For their part, Fed officials have remained adamant that a rise in inflation is to be expected as a transitory reality of the economy reopening from the pandemic lockdown. The latest print from the Bureau of Labor Statistics out this week , however, may have spooked investors when it showed consumer prices for the month of April rose at their fastest annual pace since 2008. That inflation metric, which is different than the Fed's preferred Personal Consumption Expenditures (PCE) index , jumped to a 4.2% rise over the last 12 months. The Fed has already signaled it would be comfortable staying accommodative even if inflation in the recovery shoots past 2% as measured by its preferred metric.

[May 16, 2021] Morgan Stanley- This Is The Biggest Threat To The Red-Hot Global Recovery - ZeroHedge

May 16, 2021 | www.zerohedge.com

In the US, this translates to a growth environment where GDP will be 3pp above its pre-COVID-19 path by end-2022 and underlying core PCE inflation (adjusted for base effects) rises above 2%Y from March 2022. The Fed, which is now aiming for inflation averaging 2%Y and maximum employment, should remain accommodative. Our chief US economist Ellen Zentner expects the Fed to signal its intention to taper asset purchases at the September FOMC meeting, to announce it in March 2022 and to start tapering from April 2022 . On our forecasts, rate hikes begin in 3Q23, after inflation remains at or above 2%Y for some time and the labour market reaches maximum employment.

What are the risks to this story? Most obvious is the emergence of new COVID-19 variants that resist vaccines. However, I have argued that the biggest threat to this cycle is an overshoot in US core PCE inflation beyond the Fed's implicit 2.5%Y threshold – a serious concern, in my view, which could emerge from mid-2022 onwards .


Portal 4 hours ago

LMFAO!!!

You sent manufacturing and industry to China.

There is no "red hot recovery.". Just a long descent into fascism and communist poverty.

Newpuritan 4 hours ago

The "red hot recovery." they are hoping for is replacing all efficient energy production with inefficient "green" energy. The costs will be astronomical but are hoped to offset the Boomer generation retirement period.

Iskiab 2 hours ago (Edited)

Yea, all these forecasting models are garbage. They're all based on a faulty assumption that trends continue so the growth we see now will continue, plus things will revert back to the trend line. Junk in, junk out.

A more realistic assessment would be there was a bump from reopening, but costs have increased. It will be impossible to get back to the old growth trend line, and expect the low growth of the last 20 years to continue from hereon out. The stimulus will help a bit but not much, most of the stimulus was misallocated.

JH2020 3 hours ago (Edited)

It's the sycophants of the Wall Street/government confidence game, dropping words that, hopefully, lead to buying securities, not selling, though, perversely, any negative truths result in the assumption there will be a new flood of free money, from the Fed, driving margin debt even more vertical, such that one needs a second page for the chart, or a more drastic log scale. (In this economy so red hot interests rates need to be kept near zero, for the remainder of the century, and near daily reassurance the Fed will accommodate anything and everything, whatsoever, anytime a sector gets some heartburn, or a red candlestick gets too large.)

Red hot = FOMO bait.

The "red not" verbiage is comical, reminds me of Hollywood sycophants, that write reviews of some pretend person, some degenerate nobody, "In an unparalleled display of performing brilliance, in this worthy sequel to A Couple Hours of Brains Splattered All Over the Wall, and which only proves his sheer genius, the way he flared his nostrils, while driving in the chase scene, that went two times around the entire city perimeter, in the ongoing lanes...".

ebworthen 4 hours ago

"Red hot global recovery"? ROFLMAO!

That isn't recovery, it is money printing, inflation, and rabid speculation.

hugin-o-munin 4 hours ago (Edited)

Who do these people think they can fool?

This was about the dumbest article by a bank in a long while. Pushing a contrarian lie too hard reveals it quicker than keeping quiet. Someone should remind Morgan Stanley of this age old truth. Real inflation is destroying the USD right now. Ignoring it and pretending otherwise will only accelerate the fall into hyper inflation.

J J Pettigrew 3 hours ago

A little inflation is good for you.

What's a little? 2.5%? For ten years....a flat chart of 2.5% each year... .looks like nothing happened....just 28% off the value of the dollar...thats all.

Sound of the Suburbs 2 hours ago

How does anything really work?

I don't know, I use neoclassical economics.

Everyone tries to kill growth by making the same mistakes as Japan.

Japan led the way and everyone followed.

At 25.30 mins you can see the super imposed private debt-to-GDP ratios.

https://www.youtube.com/watch?v=vAStZJCKmbU&list=PLmtuEaMvhDZZQLxg24CAiFgZYldtoCR-R&index=6

What Japan does in the 1980s; the US, the UK and Euro-zone do leading up to 2008 and China has done more recently.

The PBoC saw the financial crisis coming unlike the BoJ, ECB, BoE and the FED.

Oh dear, we did what you did in Japan.

Now we've had a financial crisis and are facing a Great Depression just like you.

Japan could study the Great Depression to avoid this fate.

(The US had done the same thing in the 1920s (see graph above), it always seems to happen with neoclassical economics)

https://www.youtube.com/watch?v=8YTyJzmiHGk

How did Japan avoid a Great Depression?

They saved the banks

How did Japan kill growth and inflation for the next thirty years?

They left the debt in place and the repayments on that debt killed growth and inflation (Japanification)

The Chinese did see the financial crisis coming, but they have reached the end of the line on the debt fuelled growth model of globalisation.

They just need to find out how an economy really works.

As if anyone has got the slightest idea what they are doing.

How does anything really work?

I don't know, I use neoclassical economics.

Sound of the Suburbs 2 hours ago

Everyone tries to kill growth by making the same mistakes as Japan.

European policymakers were successful.

What does Japanification look like?

https://tradingeconomics.com/japan/gdp

(Set scale to max. to get the full picture)

The EU economy hasn't been going anywhere since 2008.

https://tradingeconomics.com/european-union/gdp

(Set scale to max. to get the full picture)

It's Japanification

The UK economy has hasn't been going anywhere since 2008.

https://tradingeconomics.com/united-kingdom/gdp

(Set scale to max. to get the full picture)

It's Japanification

Well done, you dimwits.

How does anything really work?

I don't know, I use neoclassical economics.

Sound of the Suburbs 2 hours ago

Why did they think private debt wouldn't be a problem after 2008?

Probably the same reason they didn't notice it building up before 2008.

The economics of globalisation has always had an Achilles' heel.

The 1920s roared with debt based consumption and speculation until it all tipped over into the debt deflation of the Great Depression. No one realised the problems that were building up in the economy as they used an economics that doesn't look at debt, neoclassical economics.

Not considering private debt is the Achilles' heel of neoclassical economics.

That explains it.

"We cannot solve our problems with the same thinking we used when we created them." Albert Einstein.

Who do you think you are?

This is what we are going to do, whether you like it or not.

He must be one of those populists.

Einstein was right of course, but you know what neoliberals are like.

Anyone that doesn't go along with their ideas must be a populist.

Sound of the Suburbs 2 hours ago (Edited) remove link

Not considering private debt is the Achilles' heel of neoclassical economics.

https://www.youtube.com/watch?v=vAStZJCKmbU&list=PLmtuEaMvhDZZQLxg24CAiFgZYldtoCR-R&index=6

At 18 mins.

1929 and 2008 stick out like sore thumbs.

No one realised the problems that were building up in the economy as they used an economics that doesn't look at debt, neoclassical economics.

Einstein's definition of madness "Doing the same thing again and again and expecting to get a different result"

Einstein was right again.

He was a clever bloke.

[May 13, 2021] Investors brace for test of nerves as inflation worries mount

Weak analysis. The fundamental factor is the price for energy, not some trivia like used cars and trucks. Teh second dot com bubble will deflate but it is unclear when and whether this is a crash or gradual deplation of worthless junk stocks which enjoyed "profitless" IPOs.
With rising energy prices it is more difficult to keep interpreting high CPI numbers as temporary. But like in the past the USA will fight the rise in energy prices tools and nail. With the full power of their global neoliberal empire.
May 13, 2021 | www.ft.com

... prices for used cars and trucks jumped 10 per cent in April alone, accounting for a large slice of the gains in the overall index.

"It looks like Wall Street is climbing the wall of worry," said Gregory Perdon, co-chief investment officer at private bank Arbuthnot Latham. "The bears are constantly looking for signs that the world is going to end. They come up with all the potential excuses. The reality is that the only question that matters is whether the reopening is going OK or not.

... Notably, while 10-year US yields did rise on Wednesday after the inflation data release, they did not hit new highs.

[May 13, 2021] Inflation Doesn't Have to Mean High Interest Rates - WSJ

May 13, 2021 | www.wsj.com

Inflation is back. The U.S. consumer-price index surged to a 13-year high of 4.2% in April, official data showed Wednesday. The eurozone's figure is a weaker 1.6%, but still a two-year high. The global bond market isn't panicking yet. The pandemic led many distressed companies to slash prices in 2020. Investors always knew that, as the economy reopened, some year-over-year increases would be huge.

The prices of most products haven't changed much . CPI gyrations are mostly down to a few items particularly affected by lockdowns and travel restrictions, such as airfares and restaurant prices, as well as commodities. Excluding food and energy, U.S. inflation in April was just 3%.

... Over the past few decades, for example, CPI figures have mostly been the results of a concatenation of "temporary" trends in different sectors -- the costs of education and healthcare rose nonstop, while the prices of many goods continuously fell. It was different in the 1970s, when an idiosyncratic squeeze in the supply of oil fueled an inflationary spiral that pushed all costs up.

[May 12, 2021] What is the nature of current round of inflation in the USA; after all wages are stagnant

May 12, 2021 | www.moonofalabama.org

paulmeli , May 12 2021 18:50 utc | 21

"Inflation" in the US is mostly profit-taking and speculation (scalping)

[May 11, 2021] Jim Grant- The Fed Can't Control Inflation

May 11, 2021 | www.zerohedge.com

...As Peter Schiff put it, CPI is a lie . Grant used the evolution of the toothbrush into its electric form as an example. How do you measure the clear quality improvements in the toothbrush? The government uses hedonics to measure these changes, but as Grant pointed out, this is "inexact and not really a science."

Grant believes that the economy can only tolerate 2.5% real rates. If that is breached, he thinks the Fed will have to resort to yield-curve control. If it does actually try to shrink its balance sheet and sell bonds, it will drive bond yields even higher. Fed bond-buying is the only thing propping up the bond market right now.

In fact, the Fed is propping up the entire economy. There is a sense that the Fed will always step in and save the markets. As a result, we have bubbles everywhere, from the stock market, to real estate, to cryptocurrency.

"These are strange and oppressive markers of financial markets that have lost moorings of valuation," Grant said.

I think the astounding complacency toward, or indifference of, the evident excesses in our monetary and fiscal affairs I think the lack of concern about those things is perhaps the most striking inflationary augur I know of."

Meanwhile, the Fed continues to create money. M1 annual growth is 350%; M2 is growing at approximately 28%.

"Never before have we had monetary peacetime growth this fast," Grant said.

"Tell me who cares."

Grant said central bankers like Powell are guilty of hubris. They suffer from the delusion that they can actually control everything. Grant called the Fed "un-self-aware."

Despite Jay Powell's credentials, he knows nothing about the past and believes he knows everything about the future."

Grant talked about gold , saying it is an investment in "monetary disorder."

To me, gold isn't a hedge against monetary disorder. It's an investment in monetary disorder, which is what we have. We have floating-rate currencies. We have manipulated exchange rates. We have manipulated interest rates. When the cycle turns, people will want gold and silver, and they will want something tangible ."

[May 11, 2021] Consumers Expect Surging Inflation to Crush the Purchasing Power of their Labor- Fed's Survey - Wolf Street

May 11, 2021 | wolfstreet.com

Consumers are picking up on the rise of inflation, and the Fed, which has been trying to heat up inflation, is pleased. The Fed watches "inflation expectations" carefully. The minutes from the March FOMC meeting mention "inflation expectations" 12 times.

The New York Fed's Survey of Consumer Expectations for April, released today, showed that median inflation expectations for one year from now rose to 3.4%, matching the prior highs in 2013 (the surveys began in June 2013).

But wait the median earnings growth expectations 12 months from now was only 2.1%, and remains near the low end of the spectrum, a sign that consumers are grappling with consumer price inflation outrunning earnings growth. The whoppers were in the major specific categories.

[May 10, 2021] Many layers of leverage stacked on top of each other increase the probability of dollar collapse

Notable quotes:
"... "It's just unbelievable that central banks are actively encouraging this." ..."
"... Good point. Many times we look at charts and say WTF but once you normalize to inflation, maybe this is not as bad as originally it appeared ..."
"... reminds me of an abusive husband telling his beaten wife, "See what you made me do!" ..."
"... Hussman says the right way to do that is to look at margin debt to GDP ration, which is a record. GDP is doubling rate is about every 20 years now at nominal 3.5% ..."
"... That description applies to most Wall Streeters and banksters, whose titanic egos are amazing given the fact that most are parasites that contribute less than a woodlouse to society. Still, I dread the coming US debt collapse discussed in this website, which I would term a debt explosion as all of the bubbles start to pop and so many debtors and former creditors (like lessors, banks, etc.) become publicly known to be legally insolvent. ..."
"... I have invested carefully but we will all lose much or most of our savings. ..."
"... It is very irritating to think of the trillions that the banksters' deceptively named, "Federal" Reserve has been transferring to its ultra-rich owners for decades. They will probably even avoid most taxation again. ..."
Apr 26, 2021 | wolfstreet.com

YuShan Apr 18, 2021 at 3:13 am

Exactly. It is way more scary than even Wolf's charts suggest because there are so many layers of leverage stacked on top of each other.

People taking out margin debt on stock portfolios that they bought by re-mortgaging their bubbled houses to buy stocks with record corporate debt, collaterised (if at all) with bubble assets, at record valuations driven itself by leverage etc etc

It's just unbelievable that central banks are actively encouraging this.

historicus Apr 18, 2021 at 5:06 am

"It's just unbelievable that central banks are actively encouraging this."

Indeed. It's QUITE believable that the politicians love the free money and would never be bold enough to say .

"Hey Fed. Your mandates say you are to FIGHT inflation (stable prices) NOT PROMOTE inflation."

Moosy Apr 17, 2021 at 6:13 pm

The amount of margin debt is not a WTF amount if you use the prices-double each 11 year rule of thumb.

This 11 year period is strikingly accurate if you take the price of the New York Times since 1900 (I have a booklet with frontpages of each year and discovered this when looking at the selling prices). Having said that, the current 800B is the same as the previous inflation corrected peaks of 2009 and around 1999.

So yes, Wolf is 100% correct with the prediction on what is coming. It is just not a WTF amount but a history-repeats-itself moment

ru82 Apr 17, 2021 at 11:45 pm

Good point. Many times we look at charts and say WTF but once you normalize to inflation, maybe this is not as bad as originally it appeared

cas127 Apr 18, 2021 at 5:06 am

"normalize to inflationary, maybe not as bad as originally it appeared"

I know what you mean, but then the (major) problem is that the inflation itself shouldn't be viewed as "normal". Kinda reminds me of a gvt program defending doubled budget over 8 yrs because of "inflation" when in point of fact it is likely that G printing/policy has *created* the inflation in the first place (to help fund the program now pointing at inflation).

Also, reminds me of an abusive husband telling his beaten wife, "See what you made me do!"

Old School Apr 19, 2021 at 6:08 am

Hussman says the right way to do that is to look at margin debt to GDP ration, which is a record. GDP is doubling rate is about every 20 years now at nominal 3.5%

K Apr 17, 2021 at 9:10 pm

That description applies to most Wall Streeters and banksters, whose titanic egos are amazing given the fact that most are parasites that contribute less than a woodlouse to society. Still, I dread the coming US debt collapse discussed in this website, which I would term a debt explosion as all of the bubbles start to pop and so many debtors and former creditors (like lessors, banks, etc.) become publicly known to be legally insolvent.

It is unfortunate that it may happen at the worst possible time, when we face an adversary worse and more powerful than the Soviet Union or Nazi Germany ever was. I have invested carefully but we will all lose much or most of our savings.

It is very irritating to think of the trillions that the banksters' deceptively named, "Federal" Reserve has been transferring to its ultra-rich owners for decades. They will probably even avoid most taxation again.

I do not like to even think how many Americans will wind up. Remember the saying "There but for the grace of god, go I." Many of us will be saying that a lot in the coming years if we are very fortunate.

[May 09, 2021] CPI Is A Lie! We can't trust CPI to tell us the truth about inflation by Peter Schiff

Highly recommended!
Notable quotes:
"... The CPI is calculated by analyzing the price of a "basket of goods." The makeup of that basket has a big impact on the final CPI number. According to WolfStreet , 10.9% of the CPI is based on durable goods (computers, automobiles, appliances, etc.). Nondurable goods (primarily food and energy) make up 26.6% of CPI. Services account for the remaining 62.5% of the basket. This includes rent, healthcare, cellphone service etc.) ..."
"... The things the government includes and excludes from the basket can make a profound difference in that final CPI number. Back in 1998, the government significantly revised the CPI metrics. Even the Bureau of Labor Statistics (BLS) admitted the changes were "sweeping." ..."
"... In 1998, the BLS followed the recommendations of the Boskin Commission. It was appointed by the Senate in 1995. Initially called the "Advisory Commission to Study the Consumer Price Index," its job was to study possible bias in the computation of the CPI. Unsurprisingly, it determined that the index overstated inflation " by about 1.1% per year in 1996 and about 1.3% prior to 1996. The 1998 changes to CPI were meant to address this "issue." ..."
"... As Peter pointed out, there is a lot of geometric weighting, substitution and hedonics built into the calculation. The government can basically create an index that outputs whatever it wants. ..."
"... Peter said there is a bit of irony in government officials and central bankers constantly complaining about "not enough inflation." ..."
"... They're the ones that are cooking the books to pretend that inflation is lower than it really is. Because what they're really trying to do is get the go-ahead to produce more inflation, which is printing money." ..."
"... And there are other things that hide inflation. For instance, shrinking packaging so there is less product sold at the same price, or substituting lower quality ingredients, or requiring consumers to assemble items themselves. ..."
"... They find different ways to lower the quality and not increase the price, and I'm sure that the government is not picking up on any of that. If the quality improves, yeah, yeah, they calculate that. But they probably ignore all the circumstances where the quality is diminished." ..."
"... The bottom line is we can't trust CPI to tell us the truth about inflation. ..."
May 04, 2021 | www.zerohedge.com

Via SchiffGold.com,

We've been talking a lot about the specter of inflation. Despite the Fed's assurances not to worry because any price increases we're seeing are transitory, some people are indeed worried. A former JP Morgan managing director warned about inflation and echoed Peter Schiff's view that the central bank is powerless to fight it.

And we're seeing rising prices all over the place, from the grocery store to the gas station. Even the government numbers flash warning signs . But as Peter Schiff explains in this clip from an interview with Jay Martin, it's probably even worse than we realize because the government cooks the numbers when it calculates CPI.

The monthly rises in CPI through the first quarter show an upward trend. The CPI in January was up 0.3%. It was up 0.4% in February. And now it's up 0.6% in March. That totals a 1.013% increase in Q1 alone. The question is does this really reflect the truth about inflation? Peter doesn't think it does.

The government always makes changes to their methods of measuring things, whether it's GDP, or inflation, or unemployment. And they always tweak the numbers to produce a better result as a report card. "

https://www.youtube.com/embed/lnPrsBzIZsw

Imagine if students in a school had the ability to change the metrics by which they were graded or the methodology the teacher used to calculate their grades.

Would it surprise anybody that all of a sudden they started getting more As and Bs and fewer Cs and Ds? The government always wants to make the good stuff better, like economic growth, and the bad stuff better, like unemployment or inflation. So, they want to find ways to make those numbers little and the good numbers big."

The CPI is calculated by analyzing the price of a "basket of goods." The makeup of that basket has a big impact on the final CPI number. According to WolfStreet , 10.9% of the CPI is based on durable goods (computers, automobiles, appliances, etc.). Nondurable goods (primarily food and energy) make up 26.6% of CPI. Services account for the remaining 62.5% of the basket. This includes rent, healthcare, cellphone service etc.)

The things the government includes and excludes from the basket can make a profound difference in that final CPI number. Back in 1998, the government significantly revised the CPI metrics. Even the Bureau of Labor Statistics (BLS) admitted the changes were "sweeping."

According to the BLS, periodic changes to the CPI calculation are necessary because "consumers change their preferences or new products and services emerge. During these occasions, the Bureau reexamines the CPI item structure, which is the classification scheme of the CPI market basket. The item structure is a central feature of the CPI program and many CPI processes depend on it."

In 1998, the BLS followed the recommendations of the Boskin Commission. It was appointed by the Senate in 1995. Initially called the "Advisory Commission to Study the Consumer Price Index," its job was to study possible bias in the computation of the CPI. Unsurprisingly, it determined that the index overstated inflation " by about 1.1% per year in 1996 and about 1.3% prior to 1996. The 1998 changes to CPI were meant to address this "issue."

As Peter pointed out, there is a lot of geometric weighting, substitution and hedonics built into the calculation. The government can basically create an index that outputs whatever it wants.

I think this period of "˜Oh wow! We have low inflation!' It's not a coincidence that it followed this major revision into how we calculate it."

Peter said there is a bit of irony in government officials and central bankers constantly complaining about "not enough inflation."

They're the ones that are cooking the books to pretend that inflation is lower than it really is. Because what they're really trying to do is get the go-ahead to produce more inflation, which is printing money."

Peter said the CPI will never reveal the true extent of rising prices.

And there are other things that hide inflation. For instance, shrinking packaging so there is less product sold at the same price, or substituting lower quality ingredients, or requiring consumers to assemble items themselves.

They find different ways to lower the quality and not increase the price, and I'm sure that the government is not picking up on any of that. If the quality improves, yeah, yeah, they calculate that. But they probably ignore all the circumstances where the quality is diminished."

The bottom line is we can't trust CPI to tell us the truth about inflation.

[May 09, 2021] 4 surprising stocks Goldman Sachs thinks could triumph over inflation by Brian Sozzi

Notable quotes:
"... "In a highly inflationary environment, we like the auto parts space with its unique ability to pass-through higher costs to customers given the non-discretionary nature of the category," says Goldman Sachs analyst Kate McShane. "For instance, in 2019, telegraphed prices increases to offset cost pressures arising from tariffs provided an incremental benefit to same-store sales growth and most auto parts retailers cited between 150-300 basis points of tariff-related inflation." ..."
May 05, 2021 | finance.yahoo.com

If you are seeking stocks that could perform well during the inflationary environment the U.S. looks to be headed into as it recovers from the depths of the COVID-19 pandemic , Goldman Sachs suggests parking some money in auto parts retailers.

Yes, auto parts retailers.

The investment thesis is pretty straightforward. With mobility across the country picking up (see chart below) as people get vaccinated, cars will likely need more maintenance. That leaves auto parts retailers such as O'Reilly ( ORLY ), Genuine Parts Company ( GPC ), AutoZone ( AZO ) and Advance Auto Parts ( AAP ) in the enviable position of being able to pass inflation in everything from tires to car wax on to consumers and then post strong profits.

"In a highly inflationary environment, we like the auto parts space with its unique ability to pass-through higher costs to customers given the non-discretionary nature of the category," says Goldman Sachs analyst Kate McShane. "For instance, in 2019, telegraphed prices increases to offset cost pressures arising from tariffs provided an incremental benefit to same-store sales growth and most auto parts retailers cited between 150-300 basis points of tariff-related inflation."

McShane rounds out her bullish thesis on auto parts retailers by noting the main sector plays sport price-to-earnings multiples below historical averages. Of the four aforementioned auto parts retailers, AutoZone has the lowest forward price-to-earnings multiple of 18.7 times, according to Yahoo Finance Plus data .

Mobility is back on the move higher as people get vaccinated for COVID-19.

As for which name McShane is most bullish on, that award goes to Advance Auto Parts in the wake of a recent analyst day. McShane made the rare Wall Street move of upgrading her rating on Advance Auto Parts to Buy from Sell.

"Our double tier upgrade " from Sell to Buy " is predicated upon

McShane says.

[May 09, 2021] Inflation Risk Intensifies With Supply Shortages Multiplying

May 09, 2021 | finance.yahoo.com

Signs of inflation are picking up, with a mounting number of consumer-facing companies warning in recent days that supply shortages and logistical logjams may force them to raise prices.

Tight inventories of materials as varied as semiconductors, steel, lumber and cotton are showing up in survey data, with manufacturers in Europe and the U.S. this week flagging record backlogs and higher input prices as they scramble to replenish stockpiles and keep up with accelerating consumer demand.

As commodities become increasingly expensive, whether faster inflation proves transitory -- or not -- is the biggest question for policy makers and markets. Rising prices and the potential for a response from central banks topped the list of concerns for money managers surveyed by Bank of America Corp.

Many economists and central bankers, from the Federal Reserve on down, maintain that price gains are temporary and will be curbed by forces such as virus worries and unemployment. Investors remain skeptical, with businesses including Nestle SA and Colgate-Palmolive Co. already announcing they’ll need to raise prices.

U.S. Treasury Secretary Janet Yellen, a former Fed chair, entered the debate on Tuesday when she ruffled markets with the observation that rates will likely rise as government spending ramps up. She later clarified she was neither predicting nor recommending an increase.

The Bloomberg Commodity Spot Index, which tracks 23 raw materials, has risen to its highest level in almost a decade. That has pushed a gauge of global manufacturing output prices to its highest point since 2009, and U.S. producer prices to levels not seen since 2008, according to data from JPMorgan Chase & Co. and IHS Markit. JPMorgan analysts also estimate non-food and energy import prices in the biggest economies rose almost 4% in the first quarter, the most in three years.

“Risk clearly leans to the upside in the current environment,†said John Mothersole, pricing and purchasing research director at IHS Markit. “The surge in commodity prices over the past year now guarantees higher goods-price inflation this summer.â€

[May 09, 2021] Kolanovic Warns Most Money Managers at Risk of Inflation Shock

May 09, 2021 | finance.yahoo.com

Money managers who’ve spent the bulk of their careers profiting from deflationary trends need to quickly switch gears or risk an “inflation shock†to their portfolios, warns JPMorgan Chase & Co. chief global markets strategist Marko Kolanovic.

“Many of today’s investment managers have never experienced a rise in yields, commodities, value stocks, or inflation in any meaningful way,†Kolanovic wrote in a report Wednesday. “A significant shift of allocations towards growth, ESG and low volatility styles over the past decade, all of which have negative correlation to inflation, left most portfolios vulnerable.â€

After staging a powerful rally since November amid vaccine rollouts and government stimulus, bets tied to inflation -- rising Treasury yields, cyclical stocks and small-caps, to name a few -- have taken pause in recent weeks. While that has sparked debate over how long the trend will persist, Kolanovic urged clients to adjust to the new regime amid the reopening of the global economy.

“Given the still high unemployment, and a decade of inflation undershoot, central banks will likely tolerate higher inflation and see it as temporary,†he wrote. “The question that matters the most is if asset managers will make a significant change in allocations to express an increased probability of a more persistent inflation.â€

The way Kolanovic sees it, as data continue to point to higher prices of goods and services, investors will be forced to shift from low-volatility plays to value stocks, while increasing allocations to direct inflation hedges such as commodities. That trend is likely to persist in the second half of the year, he wrote.

Based on JPMorgan’s data, professional investors have yet to fully embrace the reflation trade. Take equities, for instance. Both computer-driven traders and hedge funds now hold stocks at levels below historical averages.

“Portfolio managers likely will not take chances and will reposition portfolios,†Kolanovic wrote. “The interplay of low market liquidity, systematic and macro/fundamental flows, the sheer size of financial assets that need to be rotated or hedges for inflation put on, may cause outsized impact on inflationary and reflationary themes over the next year.â€

Story

[May 08, 2021] What's Behind the WTF Spike in Used-Vehicle Prices- My Gut Says, it Can't Last. But if it Lasts, It's Scary-Crazy Inflation -

May 08, 2021 | wolfstreet.com

And if it doesn't last after the stimmies are gone, dealers will sit on massively overpriced collateral, which could get messy.
By Wolf Richter for WOLF STREET .

This has been going on for months: Used-vehicle prices spiking from jaw-dropper to jaw-dropper, and just when I thought prices couldn't possibly spike further, they do.

Prices of used vehicles that were sold at auctions around the US in April spiked by 8.3% from March, by 20% year-to-date, by 54% from April 2020, and by 40% from April 2019, according to the Used Vehicle Value Index released today by Manheim, the largest auto auction operator in the US and a unit of Cox Automotive. All heck has broken loose in the used vehicle market:

The price spike has now completely blown by the prior record spike over the 13-month period through September 2009, which included the cash-for-clunkers program that removed a whole generation of serviceable older vehicles from the market.


makruger May 8, 2021 at 1:31 am

Curiously, the St. Louis Fed says used car prices have been pretty much flat for the last 25 years. While the last year of data shows a notable jump in prices, it's apparently been bludgeoned a little with some old fashioned hedonic quality adjustments.

Wolf Richter May 8, 2021 at 8:55 am

makruger,

I'll help you out since I've been covering this for years. So here is the correct link that explains it all, new vehicle CPI and used vehicle CPI (which is what you cited), plus "hedonic quality adjustments."

https://wolfstreet.com/2021/04/13/yup-dollars-purchasing-power-dropped-to-record-low-again-but-more-sharply-and-its-worse-than-cpi-shows/

And some relevant charts from that article:

Reply
Scott May 8, 2021 at 1:34 am

I can see how the supply for these auctions will be tight for some time given that business travel and the resulting car rental usage is way down. In addition, I would expect a lot of corporate car purchasing is down considerably as many sales reps have worked remotely which stalled corporate car purchasing schedules.

[May 08, 2021] Inflation Is More of a Threat Than the Fed Says - WSJ

May 08, 2021 | www.wsj.com

Naples, Fla.

Messrs. Levy and Bordo allude to the sharp drop in the velocity of M2 after the 2007-09 crisis. The actual decline is startling. In the first quarter of 2007 M2 velocity was 1.99, by the first quarter of 2020 it had fallen almost continually to 1.38. In other words, the money stock went from turning over twice a year to under 1.4 times a year. This is the primary reason for the very low inflation over the period.

me title=

Because of the Covid lockdowns, M2 fell even further to 1.13 by the fourth quarter of 2020. As the authors point out, conditions are much different today than in 2007-20 because of boosted bank reserves, households with substantial savings ready to spend and commercial banks in good shape and eager to lend. Unless an economy-wide lockdown occurs, these are very good reasons to believe the velocity of money will increase significantly, just as the 27% surge in M2 since the outbreak of the pandemic works its way through the economy.

This is a prescription for major inflation, perhaps 4%-5% in the next two years. When people say "no way," I remind them that in the early 1980s hardly anyone believed that interest rates would ever return to 1950s levels. While many individuals prefer to trend forecast, never underestimate how inflation (and interest rates) can swing back and forth in ways that amaze.

Em. Prof. Stephen Happel

Arizona State University

Tempe, Ariz.

Messrs. Levy and Bordo might have made an equally compelling case about the Fed being in total denial about the more troubling risk: that its policies have been contributing to a global asset-price and credit-market bubble.

By maintaining ultralow interest rates and by continuing to expand its balance by $120 billion a month, even when the economy could soon be overheating and U.S. equity valuations are close to their all-time highs, the Fed risks further inflating the asset-price bubble. By so doing, it is heightening the chances of a hard economic landing when the Fed is eventually forced to slam on the monetary-policy brakes to meet its inflation objective.

Desmond Lachman

American Enterprise Institute

Washington

Why did the money supply hardly budge in 2008, whereas now it's steadily increasing? The answer is that during the financial crisis the Fed conducted a radical experiment: It paid banks not to lend. By design, quantitative easing shored up banks' balance sheets while interest on excess reserves prevented the newly created money from circulating.

In March 2020, the Fed slashed interest on excess reserves from 1.60% to 0.10%. The benefits of sitting on funds is much smaller, which is why lending has increased.

me title=

Messrs. Levy and Bordo emphasize structural factors in the U.S. economy, such as housing and trade. These matter, but not nearly so much as policy. Inflationary pressures will continue if the Fed's asset purchases increase the broader money supply. But this depends on whether the Fed raises interest on excess reserves to prepandemic levels.

For better or worse, interest on excess reserves is now a crucial policy tool. We can't understand inflation without it.

Assoc. Prof. Alexander William Salter

Texas Tech University

Lubbock, Texas

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Appeared in the May 5, 2021, print edition as 'Inflation Is More of a Threat Than Fed Says.'

[May 08, 2021] Yellen and the Fed are currently repeating one of the most disturbing episodes of U.S. economic history. It happened during the 1940s following the conclusion of WWII

May 08, 2021 | www.wsj.com

SUBSCRIBER 3 hours ago Yellen and the Fed are currently repeating one of the most disturbing episodes of U.S. economic history. It happened during the 1940s following the conclusion of WWII.

The Fed is riding a tiger by the tail and will likely have great difficulty extricating itself from a torrid monetary experiment that is reaching its limits. The U.S. M4 money supply rose an alarming 24% in March alone from a year earlier whereas M1 rose 37%. Notwithstanding these shocking numbers the Fed continues to buy $120bn of bonds each month and the total amount of money in circulation is exploding at an unprecedented 40% rate.

Professor William Barnett of the Center for Financial Stability in New York explained that today's financial collusion between the Fed and the Treasury is much like the 1940s when the Fed served as a fiscal agent for Democratic administrations. The chaotic aftermath? By mid-1947 the rate of inflation exceeded 17% per year - destroying low income households.

(Cont.)
Like thumb_up 5 Reply Share link Report D


Yellen and the Fed are currently repeating one of the most disturbing episodes of U.S. economic history. It happened during the 1940s following the conclusion of WWII

SUBSCRIBER 3 hours ago
Yellen and the Fed are currently repeating one of the most disturbing episodes of U.S. economic history. It happened during the 1940s following the conclusion of WWII.

The Fed is riding a tiger by the tail and will likely have great difficulty extricating itself from a torrid monetary experiment that is reaching its limits. The U.S. M4 money supply rose an alarming 24% in March alone from a year earlier whereas M1 rose 37%. Notwithstanding these shocking numbers the Fed continues to buy $120bn of bonds each month and the total amount of money in circulation is exploding at an unprecedented 40% rate.

Professor William Barnett of the Center for Financial Stability in New York explained that today's financial collusion between the Fed and the Treasury is much like the 1940s when the Fed served as a fiscal agent for Democratic administrations. The chaotic aftermath? By mid-1947 the rate of inflation exceeded 17% per year - destroying low income households.

(Cont.)

Yellen and the Fed are currently repeating one of the most disturbing episodes of U.S. economic history. It happened during the 1940s following the conclusion of WWII SUBSCRIBER 3 hours ago
Yellen and the Fed are currently repeating one of the most disturbing episodes of U.S. economic history. It happened during the 1940s following the conclusion of WWII.

The Fed is riding a tiger by the tail and will likely have great difficulty extricating itself from a torrid monetary experiment that is reaching its limits. The U.S. M4 money supply rose an alarming 24% in March alone from a year earlier whereas M1 rose 37%. Notwithstanding these shocking numbers the Fed continues to buy $120bn of bonds each month and the total amount of money in circulation is exploding at an unprecedented 40% rate.

Professor William Barnett of the Center for Financial Stability in New York explained that today's financial collusion between the Fed and the Treasury is much like the 1940s when the Fed served as a fiscal agent for Democratic administrations. The chaotic aftermath? By mid-1947 the rate of inflation exceeded 17% per year - destroying low income households.

(Cont.)

Yellen and the Fed are currently repeating one of the most disturbing episodes of U.S. economic history. It happened during the 1940s following the conclusion of WWII
Yellen and the Fed are currently repeating one of the most disturbing episodes of U.S. economic history. It happened during the 1940s following the conclusion of WWII.

The Fed is riding a tiger by the tail and will likely have great difficulty extricating itself from a torrid monetary experiment that is reaching its limits. The U.S. M4 money supply rose an alarming 24% in March alone from a year earlier whereas M1 rose 37%. Notwithstanding these shocking numbers the Fed continues to buy $120bn of bonds each month and the total amount of money in circulation is exploding at an unprecedented 40% rate.

Professor William Barnett of the Center for Financial Stability in New York explained that today's financial collusion between the Fed and the Treasury is much like the 1940s when the Fed served as a fiscal agent for Democratic administrations. The chaotic aftermath? By mid-1947 the rate of inflation exceeded 17% per year - destroying low income households.

(Cont.)

Yellen and the Fed are currently repeating one of the most disturbing episodes of U.S. economic history. It happened during the 1940s following the conclusion of WWII
Yellen and the Fed are currently repeating one of the most disturbing episodes of U.S. economic history. It happened during the 1940s following the conclusion of WWII.

The Fed is riding a tiger by the tail and will likely have great difficulty extricating itself from a torrid monetary experiment that is reaching its limits. The U.S. M4 money supply rose an alarming 24% in March alone from a year earlier whereas M1 rose 37%. Notwithstanding these shocking numbers the Fed continues to buy $120bn of bonds each month and the total amount of money in circulation is exploding at an unprecedented 40% rate.

Professor William Barnett of the Center for Financial Stability in New York explained that today's financial collusion between the Fed and the Treasury is much like the 1940s when the Fed served as a fiscal agent for Democratic administrations. The chaotic aftermath? By mid-1947 the rate of inflation exceeded 17% per year - destroying low income households.

(Cont.)

[May 08, 2021] President Biden and Secretary Yellen said this week there is no significant inflation

May 08, 2021 | www.wsj.com

President Biden and Secretary Yellen said this week there is no significant inflation

Carlos Lumpuy
President Biden and Secretary Yellen said this week there is no significant inflation.
On May 7 of last year, the metric standard of lumber, 1,000 board feet was $360 . Today it's $1,702 a record high. It broke $1,000 first time ever a month ago on April 7.
That's a 70% increase in lumber in just the last 30 days.
Copper was $2.33 on May 7 of last year. Today, $4.76 a record high.
Steel Rebar was $3,768 on May 7 of last year. Today: $5,483 , record high.
President Biden and Secretary Yellen said this week there is no significant inflation .
Tell that to a builder, his subcontractors, and the buyer of a newly built home this summer.
Food prices for Corn, Wheat, Soybeans, Rice, Milk, Coffee, Cocoa are up double digits in just the last two months.
Vice President Harris ignored a question about inflation with her regular everyday cackle laughing as she walked away.
We are in month four of this administration that prioritizes its war on the wind and the weather.
Figures are from Yahoo Finance
President Biden and Secretary Yellen said this week there is no significant inflation Carlos Lumpuy
President Biden and Secretary Yellen said this week there is no significant inflation.
On May 7 of last year, the metric standard of lumber, 1,000 board feet was $360 . Today it's $1,702 a record high. It broke $1,000 first time ever a month ago on April 7.
That's a 70% increase in lumber in just the last 30 days.
Copper was $2.33 on May 7 of last year. Today, $4.76 a record high.
Steel Rebar was $3,768 on May 7 of last year. Today: $5,483 , record high.
President Biden and Secretary Yellen said this week there is no significant inflation .
Tell that to a builder, his subcontractors, and the buyer of a newly built home this summer.
Food prices for Corn, Wheat, Soybeans, Rice, Milk, Coffee, Cocoa are up double digits in just the last two months.
Vice President Harris ignored a question about inflation with her regular everyday cackle laughing as she walked away.
We are in month four of this administration that prioritizes its war on the wind and the weather.
Figures are from Yahoo Finance

[May 08, 2021] Rising Bond Yields Threaten Financial Market Stability

The Fed Bankers lie every day to prevent panic and the lemmings believe it all.
May 08, 2021 | www.zerohedge.com

The 10-year US Treasury yield fell to only 0.48% in March 2020, when deflationary fears were mounting. The S&P 500 index had fallen by 32% in just five weeks as China's covid crisis was followed by the prospect of other jurisdictions going into pandemic lockdowns. Commodity prices were collapsing. The Fed then did what it always does in these conditions. It cut interest rates to the minimum possible (zero this time) and it flooded markets with money ($120bn in QE every month) along with some other market fixes to cap corporate bond yields from rising to reflect lending risks.

Fuelling it all is the expansion of base money by central banks. The St Louis Fed's FRED chart below showing the Fed's monetary base illustrates the point and is a proxy for the global picture, because the dollar is the reserve currency and the pricing medium for all commodities.

From the beginning of March 2020, which was the month the Fed announced virtually unlimited monetary expansion, base money has grown by 69%. It is this rapid growth in central bank money which is undoubtedly behind rising commodity prices, or put more accurately, is why the purchasing power of the dollar in international markets is falling.

When the outlook for the purchasing power of a fiat currency falls, all holders expect compensation in the form of higher interest rates. Partly, it is due to time preference -- the fact that an owner of the currency has parted with the use of it for a period of time. And partly it is due to the expectation that when returned, the currency will buy less than it does today. Official forecasts of the CPI state that the dollar's purchasing power will probably sink to 97.5 cents on the dollar, then the yield on the ten-year UST should be at least 2.56% (2.5%/0.97), otherwise new buyers face immediate losses. The official expectation that the rise in the rate of price inflation will be temporary is immaterial to an investment decision today, because the yield can be expected to evolve over time in the light of events.

This is before adding something to the yield for time preference (admittedly minimal in a freely traded bond), plus something for currency risk relative to an investor's base currency and plus something for creditor risk. Stripped of these other considerations, on the basis of expected inflation alone a current yield of 1.61 appears to be far too low, and a yield target of at minimum of 2.5% appears more appropriate.

ay_arrow

FinsterF 14 hours ago

Will increase??? Inflation is already much higher than 2% or whatever the latest government figures imply. Price inflation first shows up in real time data like stock and commodity prices. It only later shows up in broad consumer prices. Not to mention that year over year data already average six months late.

And this on top of tricks like homeowners equivalent rent and hedonic adjustments. So official inflation stats both systematically understate and lag actual inflation.

HorseBuggy 19 hours ago

As long as you print money you could keep this market going higher and higher regardless of any reality.

philipat 14 hours ago

As much as I enjoy reading Alasdair's work, he's wrong about Bond Yields because there IS NO RECOVERY. The latest BLS jobs report started to indicate that despite all the "stimulus" the underlying economy is very weak, and that isn't due to the excuse of Covid. From the data, the global economy started turning down in 4Q2108. This became more obvious in 3Q2019 with the REPO crisis. All before Covid.

The Bond markets almost always get it right and, as of now, Bond yields are falling as also are Eurodollar Futures, suggesting that for once Powell is right, any inflation is indeed transitory.

The good news for Alasdair is that for the last 3 years, Gold has been a precise mirror image of Bond REAL yields so as Real Yields now fall further negative again, Gold should respond to the upside - as already being seen.

Sound of the Suburbs 13 hours ago

Why is neoclassical economics so dangerous to the financial system?

We never did learn as much as we should have done from 1929.

Neoclassical economics produces ponzi schemes of inflated prices.

When they collapse it feeds back into the financial system.

Neoclassical economics still has its 1920's problems.

What's wrong with neoclassical economics?

  1. It makes you think you are creating wealth by inflating asset prices
  2. Bank credit flows into inflating asset prices, debt rises faster than GDP and you eventually get a financial crisis.
  3. No one notices the private debt building up in the economy as neoclassical economics doesn't consider debt.

What is the fundamental flaw in the free market theory of neoclassical economics?

The University of Chicago worked that out in the 1930s after last time.

Banks can inflate asset prices with the money they create from bank loans.

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf

Henry Simons and Irving Fisher supported the Chicago Plan to take away the bankers ability to create money.

"Simons envisioned banks that would have a choice of two types of holdings: long-term bonds and cash. Simultaneously, they would hold increased reserves, up to 100%. Simons saw this as beneficial in that its ultimate consequences would be the prevention of "bank-financed inflation of securities and real estate" through the leveraged creation of secondary forms of money."

https://www.newworldencyclopedia.org/entry/Henry_Calvert_Simons

Margin lending had inflated the US stock market to ridiculous levels.

Richard Vague had noticed real estate lending balloon from 5 trillion to 10 trillion from 2001 – 2007 and went back to look at the data before 1929.

Real estate lending was actually the biggest problem lending category leading to 1929.

The IMF re-visited the Chicago plan after 2008.

https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf

Existing financial assets, e.g. real estate, stocks and other financial assets, are traded and bank credit is used to fund the transfers. This inflates the price.

You end up with a ponzi scheme of inflated asset prices that will collapse and feed back into the financial system.

At the end of the 1920s, the US was a ponzi scheme of inflated asset prices.

The use of neoclassical economics and the belief in free markets, made them think that inflated asset prices represented real wealth.

1929 – Wakey, wakey time

Why did it cause the US financial system to collapse in 1929?

Bankers get to create money out of nothing, through bank loans, and get to charge interest on it.

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf

What could possibly go wrong?

Bankers do need to ensure the vast majority of that money gets paid back, and this is where they get into serious trouble.

Banking requires prudent lending.

If someone can't repay a loan, they need to repossess that asset and sell it to recoup that money. If they use bank loans to inflate asset prices they get into a world of trouble when those asset prices collapse.

As the real estate and stock market collapsed the banks became insolvent as their assets didn't cover their liabilities.

They could no longer repossess and sell those assets to cover the outstanding loans and they do need to get most of the money they lend out back again to balance their books.

The banks become insolvent and collapsed, along with the US economy.

When banks have been lending to inflate asset prices the financial system is in a precarious state and can easily collapse.

What was the ponzi scheme of inflated asset prices that collapsed in Japan in 1991?

Japanese real estate.

They avoided a Great Depression by saving the banks.

They killed growth for the next 30 years by leaving the debt in place.

https://www.youtube.com/watch?v=8YTyJzmiHGk

What was the ponzi scheme of inflated asset prices that collapsed in 2008?

"It's nearly $14 trillion pyramid of super leveraged toxic assets was built on the back of $1.4 trillion of US sub-prime loans, and dispersed throughout the world" All the Presidents Bankers, Nomi Prins.

They avoided a Great Depression by saving the banks.

They left Western economies struggling by leaving the debt in place, just like Japan.

It's not as bad as Japan as we didn't let asset prices crash in the West, but it is this problem has made our economies so sluggish since 2008.

The last lamb to the slaughter, India

They had created a ponzi scheme of inflated asset prices in real estate, but it collapsed.

https://www.wsj.com/articles/indias-ghost-towns-saddle-middle-class-with-debtand-broken-dreams-11579189678

Now they need to recapitalize their banks.

Their financial system is in a bad way, recovery isn't going to be easy.

Sound of the Suburbs 13 hours ago (Edited)

They did work out what went wrong the last time they used neoclassical economics.

They put regulations in place to ensure financial stability.

Financial stability arrived in the Keynesian era and was locked into the regulations of the time.

https://www.brettonwoodsproject.org/wp-content/uploads/2009/10/banking-crises.png

"This Time is Different" by Reinhart and Rogoff has a graph showing the same thing (Figure 13.1 - The proportion of countries with banking crises, 1900-2008).

Neoclassical economics came back and so did the financial crises.

The neoliberals removed the regulations that created financial stability in the Keynesian era and put independent central banks in charge of financial stability.

Why does it go so wrong?

Richard Vague had noticed real estate lending balloon from 5 trillion to 10 trillion from 2001 – 2007 and knew there was going to be a financial crisis.

Richard Vague has looked at the data for financial crises going back 200 years and found the cause was nearly always runaway bank lending.

We put central bankers in charge of financial stability, but they use an economics that ignores the main cause of financial crises, private debt.

Most of the problems are coming from private debt.

The technocrats use an economics that ignores private debt.

The poor old technocrats don't really stand a chance.

In 2008 the Queen visited the revered economists of the LSE and said "If these things were so large, how come everyone missed it?"

It's that neoclassical economics they use Ma'am, it doesn't consider private debt.

Here it is Ma'am, look it's obvious.

https://www.youtube.com/watch?v=vAStZJCKmbU&list=PLmtuEaMvhDZZQLxg24CAiFgZYldtoCR-R&index=6

At 18 mins.

Let's get our experts in neoclassical economics to have a look.

"It was a black swan"

Not considering private debt is the Achilles' heel of neoclassical economics.

It is a black swan to them.

That's the problem.

[May 07, 2021] Goldman, Pimco Detect Irrational Inflation Mania in Bonds

May 07, 2021 | finance.yahoo.com

Goldman Sachs Group Inc. and bond titan Pacific Investment Management Co. have a simple message for Treasuries traders fretting over inflation: Relax.

The firms estimate that bond traders who are pricing in annual inflation approaching 3% over the next handful of years are overstating the pressures bubbling up as the U.S. economy rebounds from the pandemic.

...the overshoot could be as large as 0.2-to-0.3 percentage point. That gap makes a difference with key market proxies of inflation expectations for the coming few years surging this week to the highest in more than a decade. The 10-year measure, perhaps the most closely followed, eclipsed 2.5% Friday for the first time since 2013, even after unexpectedly weak U.S. jobs data.

There's at least one market metric that backs up the view that the pressures, which have been building for months, aren't about to get out of hand and may even prove temporary. A swaps instrument that reflects the annual inflation rate for the second half of the next decade has been relatively stable in recent months.

...The Federal Reserve has been hammering home that it sees any spike in price pressures as likely short-lived, and that it's willing to let inflation run above target for a period as the economy revives.

... ... ...

... Inflation worries have been mounting against a backdrop of soaring commodities prices -- copper, for example, set a record high Friday. It's all happening as lawmakers in Washington debate another massive fiscal-stimulus package.

...

Korapaty calls the outlook for inflation "benign." His view is that the market is overly optimistic with its inflation assumptions, with the greatest mismatch to be found on the three- and five-year horizon. At roughly 2.75% and 2.7%, respectively, those rates are around 20 to 30 basis points higher than they should be, in his estimate.

... ... ...

...Treasury Secretary Janet Yellen stirred markets by saying interest rates will likely rise as government spending swells and the economy achieves faster growth. She walked back the remarks hours later.

... "Because we think front-end rates are pricing in a more aggressive Fed path than we believe, we do like shorter-dated nominal bonds, and think there's value there," she said.

[May 05, 2021] Mark Blyth " An Inflated Fear of Inflation ?

May 01, 2021 | www.nakedcapitalism.com

Yves here. Mark Blyth is such a treat. How can you not be a fan of the man who coined "The Hamptons are not a defensible position"? Even though he's not always right, he's so incisive and has such a strong point of view that his occasional questionable notions serve as fodder for thought. And I suspect he'll be proven correct on his topic today, the inflation bugaboo. Yves here. Mark Blyth is such a treat. How can you not be a fan of the man who coined "The Hamptons are not a defensible position"? Even though he's not always right, he's so incisive and has such a strong point of view that his occasional questionable notions serve as fodder for thought. And I suspect he'll be proven correct on his topic today, the inflation bugaboo. Even though he's not always right, he's so incisive and has such a strong point of view that his occasional questionable notions serve as fodder for thought. And I suspect he'll be proven correct on his topic today, the inflation bugaboo. Even though he's not always right, he's so incisive and has such a strong point of view that his occasional questionable notions serve as fodder for thought. And I suspect he'll be proven correct on his topic today, the inflation bugaboo. By Paul Jay.

... ... ...

Paul Jay
And is the idea that inflation is about to come roaring back one of the stupid ideas that you're talking about? And is the idea that inflation is about to come roaring back one of the stupid ideas that you're talking about?
Mark Blyth
I hope that it is, but I'm going to go with Larry on this one. He says it's about one third chance that it's going to do this. I'd probably give it about one in ten, so it's not impossible.

So, let's unpack why we're going to see this. Can you generate inflation? Yeah. I mean, dead easy. Imagine your Turkey. Why not be a kind of Turkish pseudo dictator?

Why not fire the head of your central bank in an economy that's basically dependent on other people valuing your assets and giving you money through capital flows? And then why don't you fire the central bank head and put in charge your brother-in-law? I think it was his brother-in-law. And then insist that low interest rates cure inflation. And then watch as the value of your currency, the lira collapses, which means all the stuff you import is massively expensive, which means that people will pay more, and the general level of all prices will go up, which is an inflation. So, can you generate an inflation in the modern world? Sure, yeah. Easy. Just be an idiot, right? Now, does this apply to the United States? No. That's where it gets entirely different. So, a couple of things to think about (first). So, you mentioned that huge number of 20 trillion dollars. Well, that's more or less about two thirds of what we threw into the global economy after the global financial crisis, and inflation singularly failed to show up. All those people in 2010 screaming about inflation and China dumping bonds and all that. Totally wrong. Completely wrong. No central bank that's got a brass nameplate worth a damn has managed to hit its inflation target of two percent in over a decade. All that would imply that there is a huge amount of what we call "˜slack' in the economy. (Also) think about the fact that we've had, since the 1990s, across the OECD, by any measure, full employment. That is to say, most people who want a job can actually find one, and at the same time, despite that, there has been almost no price pressure coming from wages, pushing on into prices, to push up inflation. So rather than the so-called vertical Phillips curve, which most of modern macro is based upon, whereby there's a kind of speed bump for the economy, and if the government spends money, it can't push this curve out, all it can do is push it up in terms of prices. What we seem to actually have is one whereby you can have a constant level of inflation, which is very low, and any amount of unemployment you want from 2 percent to 12 percent, depending on where you look and in which time-period.

All of which suggests that at least for big developed, open, globalized economies, where you've destroyed trade unions, busted up national product cartels, globally integrated your markets, and added 600 million people to the global labor supply, you just can't generate inflation very easily. Now, we're running, depending on how much actually passes, a two to five trillion-dollar experiment on which theory of inflation is right. This one, or is it this one? That's basically what we're doing just now. Larry's given it one in three that it's his one. I'd give it one in ten his one's right. Now, if I may just go on just for a seconds longer. This is where the politics of this gets interesting. Most people don't understand what inflation is. You get all this stuff talked by economists and central bankers about inflation and expectations and all that, but you go out and survey people and they have no idea what the damn thing is. Think about the fact that most people talk about house price inflation.

There is no such thing as house price inflation. Inflation is a general rise in the level of all prices. A sustained rise in the level of prices. The fact that house prices in Toronto have gone up is because Canada stopped building public housing in the 1980s and turned it into an asset class and let the 10 percent top earners buy it all and swap it with each other. That is singularly not an inflation. So, what's going to happen coming out of Covid is there will be a big pickup in spending, a pickup in employment. I think it's (going to be) less than people expect because the people with the money are not going to go out and spend it because they have all they want already. There are only so many Sub-Zero fridges you can buy. Meanwhile, the bottom 60 percent of the income distribution are too busy paying back debt from the past year to go on a spending spree, but there definitely will be a pickup. Now, does that mean that there's going to be what we used to call bottlenecks? Yeah, because basically firms run down inventory because they're in the middle of a bloody recession. Does it mean that there are going to be supply chain problems? Yes, we see this with computer chips. So, what's going to happen is that computer chips are going to go up in price.

So, lots of individual things are going to go up in price, and what's going to happen is people are going to go "there's the inflation, there's that terrible inflation," and it's not. It's just basically short-term factors that will dissipate after 18 months. That is my bet. For Larry to be right what would have to be true?

That we would have to have the institutions, agreements, labor markets and product markets of the 1970s. We don't.

... ... ...

So, I just don't actually see what the generator of inflation would be. We are not Turkey dependent on capital imports for our survival with a currency that's falling off a cliff. That is entirely different. That import mechanism, which is the way that most countries these days get a bit of inflation. That simply doesn't apply in the U.S. So, with my money on it, if I had to bet, it's one in 10 Larry's right, rather one in 3.

Paul Jay
The other point he raises, and we talked a little bit about this in a previous interview, but let's revisit it, is that the size of the American debt, even if it isn't inflationary at some point, creates some kind of crisis of confidence in the dollar being the reserve currency of the world, and so this big infrastructure spending is a problem because of that. That's part of, I believe, one of his arguments. The other point he raises, and we talked a little bit about this in a previous interview, but let's revisit it, is that the size of the American debt, even if it isn't inflationary at some point, creates some kind of crisis of confidence in the dollar being the reserve currency of the world, and so this big infrastructure spending is a problem because of that. That's part of, I believe, one of his arguments.
Mark Blyth
The way political economists look at the financial plumbing, I think, is different to the way that macro economists do. We see it rather differently. The first thing is, what's your alternative to the dollar unless you're basically going to go all-in on gold or bitcoin? And good luck with those. If we go into a crushing recession and our bond market collapses, don't think that Europe's going to be a safe haven given that they've got half the US growth rate. And we could talk about what Europe's got going on post-pandemic because it's not that good. So what's your alternative (to the Dollar)? Buy yen? No, not really. You're going to buy Chinese assets? Well, good luck, and given the way that their country is being run at the moment, if you ever want to take your capital out. I'm not sure that's going to work for you, even if you could. So you're kind of stuck with it. Mechanically there's another problem. All of the countries that make surpluses in the world make surpluses because we run deficits. One has to balance the other. So, when you're a Chinese firm selling to the United States, which is probably an American firm in China with Chinese subcontractors selling to the United States, what happens is they get paid in dollars. When they receive those dollars in China, they don't let them into the domestic banking system. They sterilize them and they turn them into the local currency, which is why China has all these (dollar) reserves. That's their national savings. Would you like to burn your reserves in a giant pile? Well, one way to do that would be to dump American debt, which would be equivalent to burning your national savings. If you're a firm, what do you do? Well, you basically have to use dollars for your invoicing. You have to use dollars for your purchasing, and you keep accumulating dollars, which you hand back to your central bank, which then hands you the domestic currency. The central bank then has a problem because it's got a liability " (foreign) cash rather than an asset. So, what's the easiest asset to buy? Buy another 10-year Treasury bill, rinse and repeat, rinse and repeat. So, if we were to actually have that type of crisis of confidence, the people who would actually suffer would be the Germans and the Chinese, because their export-driven models only makes sense in terms of the deficits that we run. Think of it as kind of monetarily assured destruction because the plumbing works this way. I just don't see how you can have that crisis of confidence because you've got nowhere else to take your confidence.
Paul Jay
If I understand it correctly, the majority of American government debt is held by Americans, so it's actually really the wealth is still inside the United States. I saw a number, this was done three or four years ago, maybe, but I think it was Brookings Institute, that assets after liabilities in private hands in the United States is something like 98 trillion dollars. So I don't get where this crisis of confidence is going to come any time soon. If I understand it correctly, the majority of American government debt is held by Americans, so it's actually really the wealth is still inside the United States. I saw a number, this was done three or four years ago, maybe, but I think it was Brookings Institute, that assets after liabilities in private hands in the United States is something like 98 trillion dollars. So I don't get where this crisis of confidence is going to come any time soon.
Mark Blyth
Basically, if your economy grows faster (than the rest of the world because you are) the technological leader, your stock markets grows faster than the others. If you're an international investor, you want access to that. (That ends) only if there were actual real deep economic problems (for the US), like, for example, China invents fusion energy and gives it free to the world. That would definitely screw up Texas. But short of that, it's hard to see exactly what would be these game-changers that would result in this. And of course, this is where the Bitcoin people come in. It's all about crypto, and nobody has any faith in the dollar, and all this sort of stuff. Well, I don't see why we have faith in something (like that instead . I think it was just last week. There wasn't much reporting on this, I don't know if you caught this, but there were some twenty-nine-year-old dude ran a crypto exchange. I can't remember where it was. Maybe somewhere like Turkey. But basically he had two billion in crypto and he just walked off with the cash. You don't walk off with the Fed, but you could walk off with a crypto exchange. So until those problems are basically sorted out, the notion that we can all jump into a digital currency, which at the end of the day, to buy anything, you need to turn back into a physical currency because you don't buy your coffee with crypto, we're back to that (old) problem. How do you get out of the dollar? That structural feature is incredibly important.
Paul Jay
So there's some critique of the Biden infrastructure plan and some of the other stimulus, coming from the left, because, one, the left more or less agrees with what you said about inflation, and the critique is that it's actually not big enough, and let me add to that. I'm kind of a little bit surprised, maybe not anymore, but Wall Street on the whole, not Larry Summers and a few others, but most of them actually seem quite in support of the Biden plan. You don't hear a lot of screaming about inflation from Wall Street. Maybe from the Republicans, but not from listening to Bloomberg Radio. So there's some critique of the Biden infrastructure plan and some of the other stimulus, coming from the left, because, one, the left more or less agrees with what you said about inflation, and the critique is that it's actually not big enough, and let me add to that. I'm kind of a little bit surprised, maybe not anymore, but Wall Street on the whole, not Larry Summers and a few others, but most of them actually seem quite in support of the Biden plan. You don't hear a lot of screaming about inflation from Wall Street. Maybe from the Republicans, but not from listening to Bloomberg Radio.
Mark Blyth
You don't even hear a lot of screaming about corporate taxes, which is fascinating, right? You'd think they'd be up in arms about this? I actually spoke to a business audience recently about this, and I kind of did an informal survey and I said, "why are you guys not up in arms about this?" And someone that was on the call said, "well, you know, the Warren Buffet line about you find out who's swimming naked when the tide goes out? What if a lot of firms that we think are great firms are just really good at tax optimization? What if those profits are really just contingent on that? That would be really nice to know this because then we could stop investing in them and invest in better stuff that actually does things." You don't even hear a lot of screaming about corporate taxes, which is fascinating, right? You'd think they'd be up in arms about this? I actually spoke to a business audience recently about this, and I kind of did an informal survey and I said, "why are you guys not up in arms about this?" And someone that was on the call said, "well, you know, the Warren Buffet line about you find out who's swimming naked when the tide goes out? What if a lot of firms that we think are great firms are just really good at tax optimization? What if those profits are really just contingent on that? That would be really nice to know this because then we could stop investing in them and invest in better stuff that actually does things."
Paul Jay
And pick up the pieces of what's left of them for a penny if they have to go down. And pick up the pieces of what's left of them for a penny if they have to go down.
Mark Blyth
Absolutely. Just one thought that we'll circle back, to the left does not think it's big enough, etc. Well, yes, of course they wouldn't, and this is one of those things whereby you kind of have to check yourself. I give the inflation problem a one in ten. But what I'm really dispassionately trying to do is to look at this as just a problem. My political preferences lie on the side of "˜the state should do more.' They lie on the side of "˜I think we should have higher real wages.' They lay on the side that says that "˜populism is something that can be fixed if the bottom 60 percent actually had some kind of growth.' So, therefore, I like programs that do that. Psychologically, I am predisposed therefore to discount inflation. I'm totally discounting that because that's my priors and I'm really deeply trying to check this. In this debate, it's always worth bearing in mind, no one's doing that. The Republicans and the right are absolutely going to be hell bent on inflation, not because they necessarily really believe in (inevitable) inflation, (but) because it's a useful way to stop things happening. And then for the left to turn around and say, well, it isn't big enough, (is because you might as well play double or quits because, you know, you've got Biden and that's the best that's going to get. So there's a way in which when we really are trying to figure out these things, we kind of have to check our partisan preferences because they basically multiply the errors in our thinking, I think.
Paul Jay
Now, earlier you said that one of the main factors why inflation is structurally low now, I don't know if you said exactly those words. Now, earlier you said that one of the main factors why inflation is structurally low now, I don't know if you said exactly those words.
Mark Blyth
I would say that yes. I would say that yes.
Paul Jay
Is the weakness of the unions, the weakness of workers in virtually all countries, but particularly in the U.S., because it matters so much. That organizing of workers is just, they're so unable to raise their wages over decades of essentially wages that barely keep up with inflation and don't grow in any way, certainly not in any relationship to the way productivity has grown. So we as progressives, well, we want workers to get better organized. We want stronger unions. We want higher wages, but we want it without inflation. Is the weakness of the unions, the weakness of workers in virtually all countries, but particularly in the U.S., because it matters so much. That organizing of workers is just, they're so unable to raise their wages over decades of essentially wages that barely keep up with inflation and don't grow in any way, certainly not in any relationship to the way productivity has grown. So we as progressives, well, we want workers to get better organized. We want stronger unions. We want higher wages, but we want it without inflation.
Mark Blyth
And it's a question of how much room you have to do that. I mean, essentially, if you quintuple the money supply, eventually prices will have to rise"¦but that depends upon the velocity of money which has actually been collapsing. So maybe you'd have to do it 10 times. There's interesting research out of London, which I saw a couple of weeks ago, that basically says you really can't correlate inflation with increases in the money supply. It's just not true. It's not the money that's doing it. It's the expectations. That then begs the question, well, who's actually paying attention if we all don't really understand what inflation is? So I tend to think of this as basically a kind of a physical process. It's very easy to understand if your currency goes down by 50 percent and you're heavily dependent on imports. You're import (prices) go up. All the prices in the shops are going to go up. That's a mechanism that I can clearly identify that will generate rising prices. If you have big unions, if you have kind of cartel-like vertically integrated firms that control the national market, if you have COLA contracts. If you have labor able to do what we used to call leapfrogging wage claims against other unions, if this is all institutionally and legally protected, I can see how that generates inflation, that is a mechanism I can point to. That doesn't exist just now. Let's unpack this for a minute. The sort of fundamental theoretical assumption on this is based is some kind of "˜marginal productivity theory of wages.' In a perfectly free market with free exchange, in which we don't live, what would happen is you would hire me up to the point that my marginal product is basically paying off for you, and once it produces zero profits, that's kind of where my wages end. I'm paid up to the point that my marginal product is useful to the firm. This is not really a useful way of thinking about it because if you're the employer and I'm the worker, and I walk up to you and say, hey, my marginal productivity is seven, so how about you pay me seven bucks? You just say, shut up or I'll fire you and get someone else. Now, the way that we used to deal with this was a kind of "˜higher than your outside option,' on wages. The way we used to think about this was "why would you pay somebody ten bucks at McDonald's?" Because then you might actually get them to and flip the burgers because they're outside option is probably seven bucks, and if you pay them seven bucks, they just won't show up. So we used to have to pay workers a bit more. So that was, in a sense, (workers) claiming (a bit of the surplus) from productivity. But now what we've done, Suresh Naidu the economist was talking about this the other day, is we have all these technologies for surveilling workers (instead of paying them more). So now what we can do is take that difference between seven and ten and just pocket it because we can actually pay workers at your outside option, because I monitor everything you do, and if you don't do exactly what I say I'll fire you, and get somebody else for seven bucks. So all the mechanisms for the sharing of sharing productivity, unions, technology, now lies in the hands of employers. It's all going against labor. So (as a result) we have this fiction that somehow when the economy grows, our productivity goes up, and workers share in that. Again, what's the mechanism? Once you take out unions and once you weaponize the ability of employers to extract surplus through mechanisms like technology, franchising, all the rest of it, then it just tilts the playing field so much that we just don't see any increase in wages. (Now) let's bring this back to inflation. Unless you see systematic (and sustained) increases in the real wage that increases costs for firms to the point that they need to push on prices, I just don't see the mechanism for generating inflation. It just isn't there. And we've underpaid the bottom 60 percent of the U.S. labor market so long it would take a hell of a lot of wage inflation to get there, with or without unions.
Paul Jay
Yeah, what's that number, that if the minimum wage was adjusted for inflation and it was what the minimum wage was, what, 30 years ago, the minimum wage would be somewhere between 25 and 30 bucks, and that wasn't causing raging inflation. Yeah, what's that number, that if the minimum wage was adjusted for inflation and it was what the minimum wage was, what, 30 years ago, the minimum wage would be somewhere between 25 and 30 bucks, and that wasn't causing raging inflation.
Mark Blyth
And there is that RAND study from November 2020 that was adeninely entitled, "˜Trends in Income 1979 to 2020,' and they calculated, and I think this is the number, but even if I'm off, the order of magnitude is there, that transfers, because of tax and regulatory changes, from the 90th percentile of the distribution to the 10 percentile, totalled something in the order of $34 trillion. That's how much was vacuumed up and practically nothing trickled down. So when you consider that as a mechanism of extraction, why are worrying about inflation (from wages)? The best story on inflation is actually Charles Goodhart's book that came out last year. We got a long period of low inflation because of global supply chains, and because of demographic trends. It's a combination of global supply chains, Chinese labor, and demographics all coming together to basically push down labor costs, and that's why you get this long period of deflation, which leads to rising profits and zero inflation. A perfectly reasonable way of explaining it. And his point is that, well, that's coming to an end. The demographics are shifting, or shrinking. We're going back to more closed economies. You're going to create this inflation problem again. OK, what's the timeline on that? About 20 years? A few years ago, we were told we had 12 years to fix the climate problem or we're in deep shit. If we have to face the climate problem versus single to double-digit inflation, I'm left wondering what is the real problem here? And there is that RAND study from November 2020 that was adeninely entitled, "˜Trends in Income 1979 to 2020,' and they calculated, and I think this is the number, but even if I'm off, the order of magnitude is there, that transfers, because of tax and regulatory changes, from the 90th percentile of the distribution to the 10 percentile, totalled something in the order of $34 trillion. That's how much was vacuumed up and practically nothing trickled down. So when you consider that as a mechanism of extraction, why are worrying about inflation (from wages)? The best story on inflation is actually Charles Goodhart's book that came out last year. We got a long period of low inflation because of global supply chains, and because of demographic trends. It's a combination of global supply chains, Chinese labor, and demographics all coming together to basically push down labor costs, and that's why you get this long period of deflation, which leads to rising profits and zero inflation. A perfectly reasonable way of explaining it. And his point is that, well, that's coming to an end. The demographics are shifting, or shrinking. We're going back to more closed economies. You're going to create this inflation problem again. OK, what's the timeline on that? About 20 years? A few years ago, we were told we had 12 years to fix the climate problem or we're in deep shit. If we have to face the climate problem versus single to double-digit inflation, I'm left wondering what is the real problem here? The best story on inflation is actually Charles Goodhart's book that came out last year. We got a long period of low inflation because of global supply chains, and because of demographic trends. It's a combination of global supply chains, Chinese labor, and demographics all coming together to basically push down labor costs, and that's why you get this long period of deflation, which leads to rising profits and zero inflation. A perfectly reasonable way of explaining it. And his point is that, well, that's coming to an end. The demographics are shifting, or shrinking. We're going back to more closed economies. You're going to create this inflation problem again. OK, what's the timeline on that? About 20 years? A few years ago, we were told we had 12 years to fix the climate problem or we're in deep shit. If we have to face the climate problem versus single to double-digit inflation, I'm left wondering what is the real problem here? The best story on inflation is actually Charles Goodhart's book that came out last year. We got a long period of low inflation because of global supply chains, and because of demographic trends. It's a combination of global supply chains, Chinese labor, and demographics all coming together to basically push down labor costs, and that's why you get this long period of deflation, which leads to rising profits and zero inflation. A perfectly reasonable way of explaining it. And his point is that, well, that's coming to an end. The demographics are shifting, or shrinking. We're going back to more closed economies. You're going to create this inflation problem again. OK, what's the timeline on that? About 20 years? A few years ago, we were told we had 12 years to fix the climate problem or we're in deep shit. If we have to face the climate problem versus single to double-digit inflation, I'm left wondering what is the real problem here? OK, what's the timeline on that? About 20 years? A few years ago, we were told we had 12 years to fix the climate problem or we're in deep shit. If we have to face the climate problem versus single to double-digit inflation, I'm left wondering what is the real problem here? OK, what's the timeline on that? About 20 years? A few years ago, we were told we had 12 years to fix the climate problem or we're in deep shit. If we have to face the climate problem versus single to double-digit inflation, I'm left wondering what is the real problem here? A few years ago, we were told we had 12 years to fix the climate problem or we're in deep shit. If we have to face the climate problem versus single to double-digit inflation, I'm left wondering what is the real problem here? A few years ago, we were told we had 12 years to fix the climate problem or we're in deep shit. If we have to face the climate problem versus single to double-digit inflation, I'm left wondering what is the real problem here?

cocomaan , , May 1, 2021 at 7:24 am

Great piece. He put to words something I've thought about but couldn't articulate: if wages are stagnant, how could you possibly get broad based inflation?

There is no upward pressure on labor costs anywhere in the economy. The pressures are all downward.

You would need government spending in the order of magnitudes to drive up wages. Or release from a lot of debt, like student loan forgiveness or what have you.

Left in Wisconsin , , May 1, 2021 at 2:06 pm

I'm not sure you need wage growth to get inflation. As Blyth notes, most of the time inflation is a currency or a monetary issue. In the 70s, it was initially an oil thing " and oil flows through a lot of products " and then really went crazy only when Volker started raising interest rates. I don't think there is an episode of "wage-push" inflation in history. (The union cost-of-living clauses don't "cause" inflation, they only adjust for past inflation. If unions can cause wage-push inflation, someone needs to explain how they did this in the late 70s, when they were much less powerful and unemployment was substantially higher, than in the 1950s.) One could argue that expansive fiscal policy might drive inflation but, even then, the mechanism is through price increases, not wage increases. You do need consumption but that can always come from the wealthy and further debt immiseration of the rest of us.

Adam Eran , , May 1, 2021 at 2:51 pm

Blythe is one of those guys who is *almost* correct. For example he declares that expectations drive inflation. What about genuine shortages? The most recent U.S. big inflation stemmed from OPEC withholding oil"a shortage we answered by increasing the price ($1.75/bbl in 1971 -> $42/bbl in 1982). In Germany, the hyperinflation was driven by the French invading the Ruhr, something roughly like shutting down Ohio in the U.S. A shortage of goods resulted. Inflation! In Zimbabwe, the Rhodesian (white) farmers left, and the natives who took over their farms were not producing enough food. A shortage of food, requiring imports, resulted. Inflation!

I guess you could say people in Zimbabwe "expected" food"¦but that's not standard English.

JFYI, Blythe is not a fan of MMT. He calls it "annoying." Yep, that's his well-reasoned argument about how to think about it.

As a *political* economist, he may have a point in saying MMT is a difficult political sell, but otherwise, I'd say the guy is clueless about it.

CH , , May 1, 2021 at 9:13 am

Inflation isn't caused by the amount of money in the economy but by the amount of *spending*.

Like the other commenter, I've wondered this too"if wages have been stagnant for a generation, then how are we going to get inflation? By what mechanism? It seems like almost all of the new money just adds a few zeros to the end of the bank account balances of the already rich (or else disappears offshore).

Still, you just cannot people to understand this because of houses, health care and education. One might even argue that inflated house and education prices are helping keep inflation down. If more and more of our meager income is going to pay for these fixed expenditures, then there's no money left over to pay increased prices for goods and services. So there's no room to increase the prices of those things. As Michael Hudson would point out, it's all sucked away for debt service, meaning a lot of the "money printing" is just subsidizing Wall Street.

But if you pay attention to the internet, for years there have been conspiracy theories all across the political spectrum that we were really in hyperinflation and the government just secretly "cooked the books" and manipulated the statistics to convince us all it wasn't happening. Of course, these conspiracy theories all pointed to the cost of housing, medicine and education as "proof" of this theory (three things which, ironically, didn't go up spectacularly during the Great Inflation of the 1970's). Or else they'd point to gas prices, but that strategy lost it's potency after 2012. Or else they'd complain that their peanut butter was secretly getting smaller, hiding the inflation (shrinkflation is real, or course, but it's not a vast conspiracy to hide price increases from the public).

I'm convinced that this was the ground zero for the kind of anti-government conspiratorial thinking that's taken over our politics today. These ideas was heavy promoted by libertarians like Ron Paul starting in the nineties, helped by tracts like "The Creature from Jekyll Island," which argued that the Fed itself was one big conspiracy. I've seen plenty of people across the political spectrum"including on the far Left"take all of this stuff as gospel.

So if the government is secretly hiding inflation and the Fed itself is a grand conspiracy to convince us that paper is money (rather than "real" money, aka gold), then is it that hard to believe they're manipulating Covid statistics and plotting to control us all by forcing us all to wear masks and get vaccinated? In my view, it all started with inflation paranoia.

Blyth explains why housing inflation isn't really a sign of hyperinflation. But the average "man on the street" just doesn't get it. To Joe Sixpack, not counting some of the things he has to pay for is cheating. So are "substitutions" like ground beef when steak gets too pricey, or a Honda Civic for a Toyota Camry, for example. The complexity of counting inflation is totally lost on them, making them vulnerable to conspiratorial thinking. Since Biden was elected, the ZOMG HyPeRiNfLaTiOn!!&%! articles are ubiquitous.

Does anyone have a good way of explaining this to ordinary (i.e. non-economically literate) people? I'd love to hear it! Thanks.

TomDority , , May 1, 2021 at 9:41 am

"There is no such thing as house price inflation. Inflation is a general rise in the level of all prices. A sustained rise in the level of prices. The fact that house prices in Toronto have gone up is because Canada stopped building public housing in the 1980s and turned it into an asset class and let the 10 percent top earners buy it all and swap it with each other. That is singularly not an inflation."
Maybe I am totally off but, I would say"¦. By your definition, inflation does not exist in the economic terminology as inflation only exists if generally all prices go up and a singularity of soaring house prices and education and healthcare do not constitute an inflation because the number of things inflating do not meet some unknown number of items needed for a general rise in all prices to create an inflation.
What I read you to say is that if Labor prices go up " that could lead to inflation " but if house prices go up (as they have) that is not inflation.
Hypothetically " if labor prices do not go up and the "˜nessesities of living' prices go up (Housing and Med) " would you not have an inflation in the cost of living? " I am convinced that economists and market experts try to claim that the economy and markets are seperate and distinct from humans as a science " and that Political science has nothing to do with what they present. Yet, humans are the only species to have formed the markets and money we all participate and, the only species, therefore, to have an exclusive asset ownership, indifferent to any other species " IE " if you can't pay you can't play and have no say.
I submit that one or a few asset price increases that are combined with labor price stasis(the actual money outlayed for those asset price increased products not moving up) " especially one that is a basic to living (shelter) and not mobile (like money) is inflation " Land prices going up will generally increase the prices of all products created thereon.

Chris , , May 1, 2021 at 9:55 am

Exactly my interpretation.

The "transitory" "food inflation" (but it's not inflation since TVs went down!) is no issue. Just eat 2 years from now or a TV instead.

Objective Ace , , May 1, 2021 at 10:23 am

I think there's two things going on here. There's different inflation indicators, and asset prices are by definition never a part of inflation

The main indicator of CPI has so many different things in it that the inflation of any one item is going to have little effect on it. But you can look up BEA's detailed GDP deflator to see inflation for more specific things like housing expenses (rent) or transportation.

So back to real estate/land: real estate and land are like the stock market. They aren't subject to inflation. They are subject to appreciation. There is somewhat of a feedback effect for sure though: Increased real estate prices can drive up inflation. Rent for sure gets driven up, but also any other good that's built domestically if the owners of capital need to pay more to rent their factories/farms etc.

As noted in the article though, capitalists can simply move their production overseas so there's a limit to how much US land appreciation can filter into inflation. Its definitely happening with rent as housing can't be outsourced. But rent is only one part of overall inflation

jsn , , May 1, 2021 at 10:23 am

The point he was making is that the price change in housing is the result of a policy restructuring of the market: no new public housing and financial deregulation.

The price of food is similarly a response to policy changes: industry consolidation and resulting price setting to juice financial profits.

The point is distinguishing between political forces and market forces. The former is socially/politically determined while the latter has to do with material realities within a more or less static market structure.

This is a distinction essential to making good policy but useless from a cost of living perspective.

Starry Gordon , , May 1, 2021 at 11:26 am

One could prevent crossover for awhile, but eventually certain policies are going to affect certain markets. The policy of giving the rich money drives up asset prices, real estate is a kind of asset, eventually rising real estate costs affect the market the proles enter when they have to buy or rent real estate.

If state institutions tell them there is no inflation, the proles learn that the state institutions lie because they know better from direct experience. Once that gap develops, it's as with personal relationships: when trust is broken, it is very hard to replace. Once belief in state institutions is lost, significant political effects ensue. Often they are rather unpleasant.

jsn , , May 1, 2021 at 1:06 pm

Yes. Discussing complexity in a low trust society makes definitions of terms within a discussion necessary.

The same words are used in different contexts to mean different things making a true statement in one place a lie in another.

Skip Intro , , May 1, 2021 at 2:22 pm

Blyth pointed to the lack of systemic drivers of price increases, and how the traditional ones have disappeared. I think one that he missed, that results in a disconnect with the evidence of price increases across multiple sectors, is the neoliberal infestation. Rent-sucking intermediaries have imposed themselves into growing swaths of the mechanisms of survival, hollowed out productive capacity, and crapified artifacts to the extent that their value is irredeemably reduced. This is a systemic cause for reduced buying power, i.e. inflation, but it is not a result of monetary or fiscal policy, but political and ideological power.

cnchal , , May 1, 2021 at 3:23 pm

> . . . The fact that house prices in Toronto have gone up is because Canada stopped building public housing in the 1980s and turned it into an asset class and let the 10 percent top earners buy it all and swap it with each other.

That is a total load of baloney. The eighties were a time when the Conservative government came up with the foreign investor program and it was people from Hong Kong getting out before the British hand over to China in 1997.

I was there, trying to save for a house and for every buck saved the houses went up twenty. I finally pulled the plug in 89 when someone subdivided a one car garage from their house and sold it for a small fortune. The stories of Hong Kongers coming up to people raking their yard and offering cash well above supposed market rates and the homeowner dropping their rakes and handing over the keys were legendary.

It's still that way except now they come from mainland China, CCP members laundering their loot.

Any government that makes domestic labor compete with foreign richies for housing is mendacious.

When a Canadian drug dealer "saves up" a million to buy a house and the RCMP get wind of it, they lose the house. When a foreigner show up at the border with a million, it's all clean.

Robert Hahl , , May 1, 2021 at 9:49 am

Many people who talk about avoiding inflation are speaking euphemistically about preventing wage growth, and only that; dog whistles, clearly heard by the intended audience. Yet they are rarely confronted directly on this point. Instead we hear that they don't understand what the word inflation means, and Mark seems to be saying these euphamists (eupahmites?) needn't be so concerned because wages will not go up anyway. If so, what we are talking about here is merely helping workers stay afloat without making any fundamental changes. Well, both sides can agree to that as usual. Guess I'm just worn out by this kind of thing.

Basil Pesto , , May 1, 2021 at 10:02 am

this is only related insofar as Mark Blyth is a treat, and I shared it last week, but icymi, an excellent interview with him on the European Super League debacle last week , which really was a huge story.

The Rev Kev , , May 1, 2021 at 10:28 am

The thing that I like about Mark Blyth is how he cuts to the chase and does not waffle. Must be his upbringing in Scotland I would say. The revelation that the US minimum wage should be about $25-30 is just mind-boggling in itself. But in that talk he unintentionally put a value on how much is at stake in making a fairer economic system and it works out to be about $34 trillion. That is how much has been stolen by the upper percentile and why workers have gone from having a job, car, family & annual vacation to crushing student debt, a job at an Amazon fulfillment center and a second job being an Uber driver while living out of car.

Skip Intro , , May 1, 2021 at 1:24 pm

That $25-30 wage was keeping up with inflation , if it were keeping up with productivity it would be, IIRC, nearly twice that. It is interesting to see a dollar figure put on the amount you can reap after a generation or two of growing a middle class, by impoverishing it.

cnchal , , May 1, 2021 at 3:41 pm

This is key.

But now what we've done, Suresh Naidu the economist was talking about this the other day, is we have all these technologies for surveilling workers (instead of paying them more) . So now what we can do is take that difference between seven and ten and just pocket it because we can actually pay workers at your outside option, because I monitor everything you do, and if you don't do exactly what I say I'll fire you, and get somebody else for seven bucks.

Praise be the STEM workers. Without them where would the criminal corporate class be?

Every time I listen to the news (without barfing) the story is, we need moar STEM workers, and I ask myself, what do they do for a living?

howard in nyc , , May 1, 2021 at 10:37 am

Blyth is a bass guitar player! The things you learn about people.

eg , , May 1, 2021 at 11:32 am

I think he also plays guitar and drums, in addition to the bass guitar.

Mikel , , May 1, 2021 at 2:02 pm

If that kind of tidbit excites you:
Before going into economics, Alan Greenspan was a sax and clarinet player who played with the likes of Stan Getz and Quincy Jones.

Go figure"¦.

The Rev Kev , , May 1, 2021 at 7:42 pm

Mark Blyth has a remarkable history as well as, well, I will let you read this article about him-

https://www.jhunewsletter.com/article/2006/10/things-ive-learned-prof-mark-blyth-26651

As a tidbit, he has released five or six albums when younger and is into gourmet Indian cuisine.

HotFlash , , May 1, 2021 at 9:04 pm

And Michael Hudson studied piano and conducting . Do failed musicians gravitate to economics? Perhaps for the same reason as my bank manager, a failed bass player (honors graduate from Classy Cdn U in double bass), they see the handwriting on the wall. He told me his epiphany came when he and his band-mates were trying to make cup-o-noodles with tap water in a room over the pub in Thunder Bay where they were playing.

Tex , , May 1, 2021 at 10:39 am

The mental gymnastics to get to "everything needed to survive costs more but wages have not gone up in decades so therefore its all transitory and inflation does not exist" must be painful. How high does the price for cat food have to get before we stop eating?

freebird , , May 1, 2021 at 10:11 pm

Thank you. Most things I buy or am forced to pay for are rising in price. The economists may enjoy the article, but here in Topeka, it's not flying.

KLG , , May 1, 2021 at 10:49 am

Yes! "The Hamptons are not a defensible position" ranks right up there with "It is easier to imagine the end of the world than the end of (neoliberal) capitalism" by Mark Fisher (and F. Jameson?).

Jeff W , , May 1, 2021 at 5:03 pm

"The Hamptons are not a defensible position"

From Mark Blyth's 2016 interview with AthensLive here .

Return of the Bride of Joe Biden , , May 1, 2021 at 12:12 pm

Does anybody here have knowledge of how much hedonic adjustments influence our official measures of inflation?

chuck roast , , May 1, 2021 at 12:30 pm

Very good, Mark. This leads to the next Q. How do we maintain aggregate demand? The rich guys increasingly Hoover everything up and pay no taxes. So, there is no T. Is the only way to get cash and avoid deflation deficit spending by the G? There is no I worth a damn. (X-M) is a total drain on everything since it's all M in the US and no X. The deficits will have to go out of sight in the future.

You say that there is no velocity of money. Is this because the more money pored into the economy by the G, the more money the rich guys steal? So, there is a general collapse in C. Maybe the work around for the rich guy theft is a $2,000 (sorry, $1,400) check every now and then to the great unwashed. The poors can circulate it a couple of times before the rich guys steal it. Seems like the macro-economists have a lot of "˜splainin' to do. Oh, right, they are busy right now measuring the output gap.

eg , , May 1, 2021 at 2:17 pm

Can someone please define the variables in this comment?

T
G
X
M
C

Also, is there an equation that goes with them?

chuck roast , , May 1, 2021 at 3:29 pm

GNP = Consumption + Investment + Government + (Exports " Imports)

I'd like to see Mark go into a discussion on the velocity of money. I remember the old timey Keynesians lecturing about it, and that's all I remember. I'm guessing that it's related to the marginal propensity to consume.

Ed S. , , May 1, 2021 at 4:35 pm

Chuck,

I may be getting a bit out over my skis, but the St. Louis Fed calculates the velocity of money ( https://fred.stlouisfed.org/series/M2V ). It is defined as

The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.

So as velocity slows, fewer transactions happen. Based on the linked chart, the peak velocity was 2.2 in mid-1997. In Q1 2021, it was 1.12. By my understanding, although the money supply continues to increase, the money isn't flowing through the economy in the way it was over the last 30 years (or even 10 years ago).

It's beyond my level of understanding to say with any certainty as to why the slowdown in velocity has occurred, but I speculate it's directly related to the ever-growing inequality in the US economy and the ongoing rentier-ism that Dr. Hudson discusses. [simplistically, if Jeff Bezos has $1.3 billion more on Monday than on Friday, that money will flow virtually nowhere. If each of Amazon's employees equally shared that $1.3 billion (about $1,000 each), the preponderance of the money would flow into the economy in short order].

I've always speculated that money velocity is one of the key indicators of the stagnant economy since 2008. It certainly has coincided with the dramatic increase in wealth in the top fraction (not the 1% but the 0.001%) of the US population.

flora , , May 1, 2021 at 1:03 pm

Thanks for this post. Blyth is always good at explaining in a way I can understand.

Mikel , , May 1, 2021 at 1:04 pm

What Blythe has laid out is not a tale about inflation or money, but a tale about power.

If money goes to the non-elite, you get inflation. If it goes to the elite, you don't get inflation.
If you are a country with little control of your resources (not lack of resources, but control) and/or loans (think IMF)/debt (think war reparations) that give people with little interest in whether you live or die control over your countries' finances, you can be prone to inflation or even hyperinflation.

Yeah, I figured out a long time ago that none of this is any "natural economic law" because there is no such thing as "nature" in economics. Inflation is all about political decisions and perceptions.

And I saw this on YouTube a couple of days ago"¦and I still can't think of anything around me that hasn't gone up on price.

politicaleconomist , , May 1, 2021 at 2:37 pm

This is a good response to Summers. But I have a quibble and a concern.
My quibble is that he offers no theory of inflation except implicitly aggregate supply exceeding aggregate demand and there is nothing but hand-waving regarding what he is referring to that he feels has a one chance in ten of happening versus Summers one in three. A second part of this quibble is: what does it mean for inflation to "come roaring back." I assume it means more than just a short-term adjustment to a shot of government spending and gifting. I believe if he thought this through he would have to conclude that without changes in the current structure of the global economy there is no way for this to happen. That really is the case he has made. With labor beaten down not only in the US but worldwide inflation will not come roaring back, period. That is unless there is a chance either that a labor renewal is a near-term possibility. I doubt he believes this. Or does he believe there is another way for inflation to roar back? If so, what is that way, what is the theory behind it?

A more fundamental concern is the part where he relies on marginal productivity theory when discussing employment and exploitation. Conceptually that far from Marx's fundamental distinction between labor and labor power.

Wukchumni , , May 1, 2021 at 2:45 pm

Hyperinflation doesn't seem to be possible in this age of digital money no matter how much you conjure up because nobody notices the extreme amount of monies around all of the sudden as the average joe isn't in the know.

Used houses are always appreciating in value, but none dare call it inflationary, more of a desired outcome in income advancement if you own a domicile.

There were no shortages of anything in the aftermath of the GFC, and now for want of a semiconductor, a car sale was lost. Everything got way too complex, and we'll be paying the price for that.

I think the inflation to come won't be caused by a lack of faith in a given country's money, but the products and services it enabled us to purchase.

Mikel , , May 1, 2021 at 3:47 pm

""¦and now for want of a semiconductor, a car sale was lost"¦."
Sometimes car sales are lost because the price of cars has gone up (new and used)"¦just don't call it inflation"¦

I'm going to let some more time pass, but stimulus or not, we went from all economic problems being laid at the feet of Covid to now moving on to "shortages" everywhere"¦

Just enought to make you go"¦hmmmm"¦.unti more time passes.

Ed S. , , May 1, 2021 at 8:34 pm

Used houses always appreciate " or is it that they appreciate due to a combination of inflation in income over time and the dramatic decrease in interest rates over the last 20 years?

A very quick back of the envelope calc (literally " and all number are approximate):

In June 2000, median US income was $40,500; 30 yr mortgage rate was 8.25%. 28% of monthly income = $945. That supports a mortgage (30 yr fixed, P&I only " no tax, insurance, etc) of roughly $125,000.

In June 2005, median US income was $44,000; 30 yr mortgage rate was 5.5%. 28% of monthly income = $1026. That supports a mortgage (30 yr fixed, P&I only " no tax, insurance, etc) of roughly $180,000.

In June 2010, median US income was $49,500; 30 yr mortgage rate was 4.69%. 28% of monthly income = $1155. That supports a mortgage (30 yr fixed, P&I only " no tax, insurance, etc) of roughly $225,000.

In June 2015, median US income was $53,600; 30 yr mortgage rate was 4.00%. 28% of monthly income = $1250. That supports a mortgage (30 yr fixed, P&I only " no tax, insurance, etc) of roughly $260,000.

Finally, In June 2020, median US income was $63,000; 30 yr mortgage rate was 3.25%. 28% of monthly income = $1470. That supports a mortgage (30 yr fixed, P&I only " no tax, insurance, etc) of roughly $340,000.

And for fun, if you went to 40% of income in 2020 (payment only), a $2100 monthly payment will cover nearly a $500,000 mortgage in 2020.

For the vast majority of home buyers, the price isn't the main consideration " it's how much will it cost per month. So a small increase in median income (roughly 2% per year) combined with dramatically lower interest rates can drive a HUGE increase in a mortgage " and ultimately the price that can be paid for a house.

Michael Ismoe , , May 1, 2021 at 3:24 pm

I find it amazing that when you give poor people money, it creates inflation. If you give rich people money, it creates jobs (LOL. Sure it does.).

As long as billionaires pay as little as possible, the world is fine.

Tom Bradford , , May 1, 2021 at 3:49 pm

Can't say I really understand this sort of thing but saying rocketing house-prices is "˜a singularity' rather than "˜house-price inflation' has to me echoes of the Bourbon's "Bread too expensive? Let them eat cake." And Versailles wasn't a defensive position either.

In my version of economics-for-the-under-tens you get inflation in two situations. First is where enough folk have enough cash in their pockets for producers/manufacturers/retailers to hike their prices without hitting their sales too much and secondly where there's a shortage of stuff people want and/or need which leads to a bidding war. However I'd agree with Blyth that neither condition exists now or seems likely to arise for a while, making a "˜spike' in inflation unlikely.

ArvidMartensen , , May 1, 2021 at 4:17 pm

I am a non-economist, and so my thoughts below may be wrong. However, here goes.
I would say we have had inflation. Roaring inflation. For the past 20 years of so.

Inflation in wages and ordinary costs of living? No, wages have been stagnant. Health care has led the charge in cost of living increases, but most other living expense increases have been low.

Inflation in asset prices? We have had massive inflation in the costs of residential housing where I live.
20 years ago I could buy a 5 br, 3 bath home on a decent block in a good area close to everything for $270,000 dollars. Sure it needed some renovation, but still"¦. Now to buy that home it would cost me around $1,250,000. So that home has gone up in value by 500%. Man, that is inflation.

As I understand it, asset inflation is not counted by governments in the GDP or CPI. It appears that those who have most of the assets don't want this to be counted, by the very fact that they control the politicians who control what is counted, and asset inflation isn't counted in the economic data that the politicians rely upon to prove how prudent they are.

So if you want a day to day example of where all this free money is going, look at housing. And also have a quick look at the insane increases in the worth of billionaires. They love all this government spending which magically? seems to end up, via asset purchase and asset price inflation, in their pockets.

cnchal , , May 1, 2021 at 7:02 pm

That home has gone up in price by 500%

Price is what one pays, value is what one gets. That house is roughly the same, so the value has not changed, but the price has gone up by a factor of 5

Same with stawks. One share of Amazon stawk is $3,467.42 as of yesterday.

What is its value? If Bezos can work his tools ever harder, monitor them down to the nanosecond and wring ever moar productivity out of them before throwing them in the tool dumpster behind every Amazon warehouse, the value proposition is that someone else will believe the stawk price should be even higher, at which point one can sell it at greater price for a profit.

Susan the other , , May 1, 2021 at 5:07 pm

What is inflation? Good question. I'd say inflation is fear of monetary devaluation. Not devaluation, just the fear of it. We'll never overcome this unease if we always deal in numbers. Dollars, digits, whatever. We need to deal in commodities " let's call just about everything we live with and use a "commodity". Including unpaid family help/care; and the more obvious things like transportation. If we simply took a summary of all the necessary things we need to live decent lives " but not translated into dollars because dollars have no sense " and then provided these necessities via some government agency so that they were not "inflated" in the process and thereby provided a stable society, then government could MMT this very easily. Our current approach is so audaciously stupid it will never make sense let alone balance any balance sheets. That's a feature, not a bug because it's the best way to steal a profit. The best way to stop demand inflation or some fake scarcity or whatever is to provide the necessary availability. That's where uncle Joe is gonna run headlong into a brick wall. He has spent his entire life doing the exact opposite.

William Neil , , May 1, 2021 at 6:59 pm

The figure for the upward transfer of wealth from the Rand Study was $50 trillion between 1975-2018. It was adjusted up by the authors from $47 trillion to bring it up to 2020 trends.

Here are the authors explaining what they found and their methodology: https://time.com/5888024/50-trillion-income-inequality-america/

Now the interesting thing to me is this " look at the date of the publication in Time magazine: Sept. 14, 2020, so right in the heart of campaign fever, and it never came up in the debates, in the press"¦I didn't hear about it until Blyth made one of his appearances on Jay's show with Rana Foroohar. Long after the election.

VietnamVet , , May 1, 2021 at 9:47 pm

As long as 80% of Americans are head over heels in debt and 52% of 18-to-29-year-olds are currently living with their parents, there never will be the wage inflation of the 1970s. A majority of the people arrested for the Capitol riot had a history of financial trouble. The elite blue zones in Washington State and Oregon that prospered from globalism are seeing a spike in coronavirus cases. North American neoliberal governments have failed dismally. It is intentional in order to exploit more wealth for the rich from the natural resources and workers. If the mRNA vaccines do not control coronavirus variants, and a workable national public health system is not implemented; succession and chaos will bring on Zimbabwe type inflation.

There is a reason why Portland Oregon has been a center of unrest for the past year. The Elite just do not want to see it. How can Janet Yellen deal with this? She can't. She is an Insider. She was paid 7.2 million dollars in speaker and seminar fees in the last two years not to.

[May 05, 2021] Flip flop: Yellen Says She Isn't Predicting Higher Interest Rates

Treasury as a PR operation ;-) Trying to stem inflating by talking it down.
May 05, 2021 | www.wsj.com
Treasury Secretary walks backs comments she made earlier suggesting that rates might rise

Treasury Secretary Janet Yellen said Tuesday she is neither predicting nor recommending that the Federal Reserve raise interest rates as a result of President Biden's spending plans, walking back her comments earlier in the day that rates might need to rise to keep the economy from overheating.

"I don't think there's going to be an inflationary problem, but if there is, the Fed can be counted on to address it," Ms. Yellen, a former Fed chairwoman, said Tuesday at The Wall Street Journal's CEO Council Summit.

Ms. Yellen suggested earlier Tuesday that the central bank might have to raise rates to keep the economy from overheating, if the Biden administration's roughly $4 trillion spending plans are enacted.

[May 03, 2021] The Price of the Stuff That Makes Everything Is Surging

May 03, 2021 | finance.yahoo.com

The prices of raw materials used to make almost everything are skyrocketing, and the upward trajectory looks set to continue as the world economy roars back to life.

From steel and copper to corn and lumber, commodities started 2021 with a bang, surging to levels not seen for years. The rally threatens to raise the cost of goods from the lunchtime sandwich to gleaming skyscrapers. It’s also lit the fuse on the massive reflation trade that’s gripped markets this year and pushed up inflation expectations. With the U.S. economy pumped up on fiscal stimulus, and Europe’s economy starting to reopen as its vaccination rollout gets into gear, there’s little reason to expect a change in direction.

JPMorgan Chase & Co. said this week it sees a continued rally in commodities and that the “reflation and reopening trade will continue.†On top of that, the Federal Reserve and other central banks seem calm about inflation, meaning economies could be left to run hot, which will rev up demand even more.

“The most important drivers supporting commodity prices are the global economic recovery and acceleration in the reopening phase,†said Giovanni Staunovo, commodity analyst at UBS Group AG. The bank expects commodities as a whole to rise about 10% in the next year.


[May 03, 2021] Bond Market's Inflation Bulls Get Powell Go-Ahead to Double Down

May 03, 2021 | finance.yahoo.com

The Treasury market's inflation bulls seem to have gotten a green light from Federal Reserve Chair Jerome Powell to double down on wagers that price pressures will only intensify in the months ahead.

The renewed mojo for the reflation trade follows Powell's reaffirmation this week of the central bank's intention to let the world's biggest economy run hot for some time as it recovers from the pandemic. The Fed's unwavering commitment to ultra-loose policy in the face of robust economic data is what caught traders' attention. It took on added significance as it coincided with signs infections are ebbing again in the U.S., and as President Joe Biden unveiled plans for trillions more in fiscal spending.

Investors eying all this aren't ready to give the Fed the benefit of the doubt in its assessment that inflationary pressures will prove temporary. A key bond-market proxy of inflation expectations for the next decade just hit the highest since 2013, and cash has been pouring into the largest exchange-traded fund for Treasury Inflation-Protected Securities. Globally, there's been a net inflow into mutual and exchange-traded inflation-linked debt funds for 23 straight weeks, EPFR Global data show.

The Fed is stressing that inflation's upswing "is transitory, but we likely won't have better clarity on this assertion until this initial economic wave from reopening has subsided," said Jake Remley, a senior portfolio manager at Income Research + Management, which oversees $89.5 billion. "Inflation is a very difficult macro-economic phenomenon to predict in normal times. The uncertainty of a global pandemic and a dramatic economic rebound" has made it even harder.

Ten-year TIPS provide a reasonably priced insurance policy against inflation risk over the coming decade, Remley said. The securities show traders are wagering annual consumer price inflation will average about 2.4% through April 2031. The measure has roared back from the depths of last year, when it dipped below 0.5% at one point in March.


[May 03, 2021] Warren Buffett- We are seeing substantial inflation and are raising prices

May 03, 2021 | finance.yahoo.com

Brian Sozzi · Editor-at-Large Sat, May 1, 2021, 6:05 PM

Billionaire Warren Buffett is joining the long list of executives saying serious levels of inflation are starting to take hold as the U.S. economy roars back from the COVID-19 downturn.

"We are seeing substantial inflation," Buffett said at the Berkshire Hathaway annual shareholder meeting broadcast exclusively by Yahoo Finance . "We are raising prices. People are raising prices to us, and it's being accepted."

Buffett called out much higher steel costs impacting Berkshire's housing and furniture businesses.

"People have money in their pocket, and they pay higher prices... it's almost a buying frenzy," Buffett said, noting that the economy is "red hot."

The Oracle of Omaha isn't alone in battling inflation at the moment from everything to higher steel prices to runaway copper prices.

The number of mentions of "inflation" during first quarter earnings calls this month have tripled year-over-year, the biggest jump dating back to 2004, according to fresh research from Bank of America strategist Savita Subramanian . Raw materials, transportation, and labor were cited as the main drivers of inflation .

Subramanian's research found that the number of inflation mentions has historically led the consumer price index by a quarter, with 52% correlation. In other words, Subramanian thinks investors could see a "robust" rebound in inflation in coming months in the wake of the latest round of C-suite commentary.

"Inflation is arguably the biggest topic during this earnings season, with a broad array of sectors (Consumer/Industrials/Materials, etc.) citing inflation pressures," Subramanian notes.

The world's biggest companies are taking action, just like Buffett at Berkshire.

Proctor & Gamble said recently it would begin to hike prices on baby care , feminine care and adult incontinence products in the United States. Price increases will range from mid- to high-single digit percentages. The hikes will go into effect in mid-September.


Whirlpool CFO Jim Peters recently told Yahoo Finance Live the appliance maker just jacked up prices by 5% to 12% to counteract rising steel costs.

Kleenex maker Kimberly-Clark said it will increase prices in the U.S. and Canada on the majority of its consumer products due to "significant" commodity cost inflation. The percentage increases will range from mid- to high-single digits and go into effect in June.

[May 03, 2021] Opinion- Former Vanguard CEO- 5 hurdles facing investors now and how to overcome them

Notable quotes:
"... Jack Brennan is the former chairman and CEO of Vanguard. He is the author of More Straight Talk on Investing: Lessons for a Lifetime ..."
May 03, 2021 | www.marketwatch.com

The threat of higher inflation: For the past three decades, U.S. inflation has been low, leading some investors to discount it as a threat. Yet veteran investors will remember that in the late 1970s inflation reached double-digit levels. For the 1973â€"1982 period, the annual inflation rate averaged 8.7%. At that rate, a car that cost $20,000 would be priced at $21,740 one year later. Five years later, the price of the same car would be $30,351. Of course, it’s not just big-ticket items that are affected by inflation. Virtually everything you buy costs more â€" from a gallon of milk to a pair of running shoes.

It’s safe to assume that inflation will be a factor to one degree or another during your investing lifetime. For this reason, it’s vital to consider inflation when you calculate how your investments will grow with time.

Inflation is also an important consideration in portfolio construction. The real returns (i.e., adjusted for inflation) of cash investments have not kept pace with inflation. Bonds are particularly vulnerable, too, because a considerable portion of their return consists of interest payments, which are worth a little less each year in an inflationary period. (At one point in the 1970s, bonds were facetiously known as “certificates of confiscation.â€) As such, most long-term investors need to hold a significant stake in stocks, which provide more stable dividends and the potential to increase substantially in value

... ... ...

Jack Brennan is the former chairman and CEO of Vanguard. He is the author of More Straight Talk on Investing: Lessons for a Lifetime (Wiley, 2021) .

Pius Twelvetrees 5 hours ago Excellent advice from someone who's seen a lot of ups and downs. Many of today's investors/traders have never experienced a truly bear market. There will be some hard lessons learned over the next few months/years. I predict inflation will come roaring back.

[May 03, 2021] Every one of those people who issued bonds in late March and April [2020] ought to send a thank you letter to the Fed

May 03, 2021 | finance.yahoo.com

...“The economy went off a cliff in March [2020],†Buffett said. “It was resurrected in an extraordinarily effective way by Federal Reserve actions and, later, on the fiscal front, by Congress.â€

Buffett added that the Fed’s actions helped companies brace for impact, as the initial spread of COVID sent companies scrambling to raise funds. Berkshire Hathaway was among the many companies that turned to debt issuance as the stock market tanked in late February and early March last year, issuing a $500 million 10-year bond on March 4, 2020.

The appetite for corporate debt dried up shortly after that, prompting the Fed weeks later to create several liquidity facilities that would take on commercial paper and medium-term investment grade debt.

[Read: A glossary of the Federal Reserve's full arsenal of 'bazookas' ]

By entering the debt market as its own counterparty (through separate vehicles with equity investment from the U.S. Treasury), the central bank hoped to not only backstop markets but give private players the confidence to provide their own liquidity.

“[The Fed] took a market where Berkshire couldn't sell bonds on the day before and turned it into one where Carnival Cruise Lines, a day or two later, had record issuance of corporate debt,†Buffett said. “Companies losing money, companies were closed. It was the most dramatic move that you could imagine.â€

The Fed had been buying individual corporate bonds and corporate bond ETFs until December 31, 2020, accumulating billions in debt as part of its effort to inspire confidence in corporate funding markets.

Those purchases included over $40 million in debt issued by Berkshire Hathaway, covering its insurance, finance, and energy businesses.

Buffett applauded Powell for his “speed and decisiveness†in backstopping the corporate debt market, adding that his persistence on getting more fiscal support was also helpful to the federal government’s relief efforts.

Buffett similarly said at Berkshire Hathaway’s meeting last year that “every one of those people that issued bonds in late March and April [2020] ought to send a thank you letter to the Fed.â€

The Oracle of Omaha added that the Fed and the government have helped the economic rebound, estimating that 85% of the U.S. economy now appears to be “running a super high gear.â€

[May 03, 2021] The Fed's -Base-Effect- Inflation Argument Is Nonsense - ZeroHedge

May 03, 2021 | www.zerohedge.com

By Joseph Carson , former chief economist of Alliance Bernstein

Federal Reserve Chairman Jerome Powell has played down the current runup in inflation, arguing it is associated with the reopening of the economy. And as the low inflation readings of one year ago drop out, the twelve-month calculation (i.e., the so-called base effect) of reported inflation is likely to move up in the coming months.

Yet, Mr. Powell's "base effect" inflation argument is nonsense. For the "base effect" argument to be correct, the twelve-month reading of reported inflation should be markedly lower when the economy was closed than what occurred before the pandemic. But that's not the case.

Last week, the Bureau of Economic Analysis reported that the twelve-month change ending in March 2021 in the core personal consumption index (the Fed's preferred price index) was 1.83%. That compares to the 1.87% reading for the year ending in February 2020 and 1.7% for the year before that.

The 1.83% reading for twelve months ending March 2021 essentially matches the average inflation rate of the two prior years. And that 12 month period includes the three months (April to June) when the economy was closed, and GDP plunged a record 31% annualized. How could there be a "base effect" on reported inflation when the base year has the same inflation rate as it did before the pandemic?

Mr. Powell's "base effect" inflation argument has not been questioned or challenged by analysts or reporters. Regardless of that, investors need to ignore the Fed's rhetoric and treat upcoming price increases as "new" inflation.

As nonsensical as the explanation for the uptick in inflation, so too is the remedy. Demand has always been the primary force behind broad inflation cycles. Yet, Mr. Powell argues that product price inflation will ease once manufacturers increase output and eliminate "supply bottlenecks," and home inflation will slow once builders build more homes.

It's hard to see how more supply (or growth) will slow inflation anytime soon. Federal Home Loan Mortgage Company (Freddie Mac) estimates that the US needs almost 4 million new homes to meet demand. That could take two to three years. Also, it's hard to see how increasing product output will solve the inflation problem. The supply-side argument solution; fight inflation with more demand and more commodity inflation.

The Fed's mantra has always been "inflation is everywhere and always a monetary phenomenon." But nowhere in Mr. Powell's statements or comments do you find any monetary policy role for increased inflation or any responsibility for containment. Investors forewarned.

[Apr 29, 2021] Surprisingly the 10-year yield retreatws from a recent peak of 1.749% reached in March to 1.554% while the fundamentals point to higher rates

Apr 27, 2021 | www.wsj.com

The recent calm in the Treasury market contrasts with early-year selling that pushed yields to their highest levels since the pandemic started.

... Foreign investors purchased around $135 billion worth of long-term Treasuries on a net basis in January and February, according to data recently compiled by Citiâ€"the best two-month start to a year since 2012.

...But buying from foreign investors and even pension funds may not be enough to quell a rise in yields, said Mr. Goldberg. His firm is forecasting the 10-year yield to rise to 2% by the end of the year, supported by improving economic data and passage of a fiscal package later this year.

[Apr 29, 2021] Federal Reserve isn't fooling anybody on inflation

Apr 29, 2021 | www.moonofalabama.org

vk , Apr 29 2021 15:19 utc | 7

Food for thought:

Federal Reserve isn't fooling anybody on inflation

I don't share David P. Goldman's ideology and convictions. They are almost the polar opposite of mine's.

But he has something I don't have, something that only a bourgeois specialist can give: insider information.

I once hypothesized here that, if the USA were to collapse suddenly (which I don't think it ever will, but if it do happen), then it would surely involve an uncontrolled growing spiral of inflation/hyperinflation. That's the logical conclusion of an hypothetical collapse of the USD standard.

So far, I can only see a mild rise in inflation. I don't think the USA will ever experience hyperinflation (four-digit) or even true high inflation (two-digit). Goldman is a rabid neoliberal, and anything above 2% is hyperinflation for him, so we should take these kind of analyses with a grain of salt.

--//--

Sugar rush:

US real GDP rose 6.4 per cent on an annualised basis in the first quarter

Fed Chair Jay Powell said that the Fed was not going to tighten monetary policy any time soon. So the US stock market hit yet another all-time high.

[Apr 29, 2021] On May 1, the inflation component on US Treasury I-Bonds will adjust to an annualized rate of 3.54%.

Apr 29, 2021 | finance.yahoo.com

Mary 5 days ago As an alternative to PTTRX, which is waning in the current interest rate environment...

A special deal is available and it's one of the few times you can lock in a great return with no risk. On May 1, the inflation component on US Treasury I-Bonds will adjust to an annualized rate of 3.54%. This is a tremendous jump due to inflation ramping up. I-Bonds, similar to TIPS combine the inflation rate with an interest rate component (currently 0% for I-Bonds) to get the overall yield. There is a $10k/person/year cap on the amount of I-Bonds that can be purchased through Treasury Direct. Between the folks living under your roof, that could amount to a good chunk.

In any case, you can easily set up an account on Treasury Direct and any money going in on/after May 1 will get the new 3.54% rate. You can't withdraw the funds for 5 years to avoid penalty. However, with a 3.54% yield, if you do need to withdraw early, the 6 months penalty still leaves you significantly better off than CDs or other alternatives.

The inflation component adjusts every 6 months, so the yield you get will vary. However, it's pretty well known that Powell/Treasury are looking to let the economy run hot for a while, basically committing not to raise interest rates until 2023.

Anyhow, have a look. There's a couple of good articles out there about this situation. I personally like the one on tipswatch. Mary 2 days ago @DOOGIE1 My pleasure. It's a tough environment for fixed income investors these days...I take what I can get. I think the I-Bonds are one of the best inflation hedges out there. TIPS should be good, but again, as a result of the crazy interest rate environment, the interest rate component on short-term TIPS is negative! I-Bonds never have negative interest component.

Lastly, re-reviewing terms, if you withdraw earlier than 5 years, penalty is last 3 months of interest, not 6 - so even better.

[Apr 27, 2021] To what extent is Fed support for markets taking asset prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals. by Julia-Ambra Verlaine

Yield curve is available from Statista See also Daily Treasury Yield Curve Rates < and Understanding The Treasury Yield Curve Rates
Notable quotes:
"... The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets. ..."
"... The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets. ..."
"... The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets. ..."
"... The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets. ..."
"... The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets. ..."
"... The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets. ..."
"... The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets. ..."
"... The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets. ..."
"... The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets. ..."
"... The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets. ..."
"... The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets. ..."
Feb 23, 2021 | www.wsj.com

The spread between the two-year Treasury yield and a key interest rate set by the Federal Reserve is the narrowest since the depths of the coronavirus market selloff, a potential sign of financial-system stress.

The two-year Treasury yield, which closed Tuesday at 0.115%, is 0.015 percentage point above the interest rate on excess reserves, or IOER. It traded as low as 0.105% earlier in February. The Fed pays banks on the reserves held above and beyond those required by central-bank regulatory policy as part of its effort to maintain liquidity in the financial system.

When the coronavirus sent markets and the economy into a tailspin in March, the Fed cut IOER by 1 percentage point to 0.10% -- alongside other interventions -- to shore up short-term lending markets and support economic activity. The spread between IOER and the two-year yield has typically been above 0.05 percentage point since the Fed cut the rate to its lowest level ever in March.

Yield on U.S. 10-year Treasury note Source: Tullett Prebon % March 2020 '21 0.4 0.6 0.8 1.0 1.2 1.4 1.6

Traders said the shrinking of this spread reflects appetite for short-term debt as investors gobble up safe assets and park their cash. It also highlights a key tension point in financial markets: to what extent is Fed support for markets taking asset prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals

...bond traders are concerned that inflation could rise in coming months and years as the government prints money to support the economy and cover future borrowing costs.

Traders contend that short-term yields would be higher if the central bank wasn't anchoring rates. The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets.

The idea is that low interest rates and bond buying boost spending by providing cheap credit to businesses and households. Some bond investors fear too much cheap credit will mean inflation.

... Another corner of U.S. markets is sending warning signals: the 10-year break-even rate, which tracks annual inflation expectations over the next decade, traded as high as 2.24% last week.

....The difference between the break-even rate and the Treasury yield recently widened to more than 1 percentage point. For some this is a sign that inflation isn't far off, and in the meantime that financial markets remain vulnerable to bubbles.

"I would characterize the phase we are in now as an era of hyperstimulation between fiscal and monetary policy," said Thomas Pluta, global head of linear rates trading at JPMorgan Chase & Co. "The byproduct is all this cash sloshing around the system chasing assets like crypto, commodities and meme stocks." (Traders on Reddit's WallStreetBets forum use memes such as a rocket emoji to accompany favorite stock picks like GameStop Corp.) SUBSCRIBER 1 month ago So every time the stock market wobbles the Fed is going to step up and say "don't worry, hang onto your stocks and bonds, we'll keep printing more money?"

How long does THIS go on....?


To what extent is Fed support for markets taking asset prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals.

Extracted from Key Short-Term Bond Spread Hits Lowest Level in Nearly a Year - WSJ By Julia-Ambra Verlaine
Yield curve is available from Statista See also Daily Treasury Yield Curve Rates and Understanding The Treasury Yield Curve Rates

Feb. 23, 2021

The spread between the two-year Treasury yield and a key interest rate set by the Federal Reserve is the narrowest since the depths of the coronavirus market selloff, a potential sign of financial-system stress.

The two-year Treasury yield, which closed Tuesday at 0.115%, is 0.015 percentage point above the interest rate on excess reserves, or IOER. It traded as low as 0.105% earlier in February. The Fed pays banks on the reserves held above and beyond those required by central-bank regulatory policy as part of its effort to maintain liquidity in the financial system.

When the coronavirus sent markets and the economy into a tailspin in March, the Fed cut IOER by 1 percentage point to 0.10% -- alongside other interventions -- to shore up short-term lending markets and support economic activity. The spread between IOER and the two-year yield has typically been above 0.05 percentage point since the Fed cut the rate to its lowest level ever in March.

Yield on U.S. 10-year Treasury note Source: Tullett Prebon % March 2020 '21 0.4 0.6 0.8 1.0 1.2 1.4 1.6

Traders said the shrinking of this spread reflects appetite for short-term debt as investors gobble up safe assets and park their cash. It also highlights a key tension point in financial markets: to what extent is Fed support for markets taking asset prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals

...bond traders are concerned that inflation could rise in coming months and years as the government prints money to support the economy and cover future borrowing costs.

Traders contend that short-term yields would be higher if the central bank wasn't anchoring rates. The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets.

The idea is that low interest rates and bond buying boost spending by providing cheap credit to businesses and households. Some bond investors fear too much cheap credit will mean inflation.

... Another corner of U.S. markets is sending warning signals: the 10-year break-even rate, which tracks annual inflation expectations over the next decade, traded as high as 2.24% last week.

....The difference between the break-even rate and the Treasury yield recently widened to more than 1 percentage point. For some this is a sign that inflation isn't far off, and in the meantime that financial markets remain vulnerable to bubbles.

"I would characterize the phase we are in now as an era of hyperstimulation between fiscal and monetary policy," said Thomas Pluta, global head of linear rates trading at JPMorgan Chase & Co. "The byproduct is all this cash sloshing around the system chasing assets like crypto, commodities and meme stocks." (Traders on Reddit's WallStreetBets forum use memes such as a rocket emoji to accompany favorite stock picks like GameStop Corp.) SUBSCRIBER 1 month ago

So every time the stock market wobbles the Fed is going to step up and say "don't worry, hang onto your stocks and bonds, we'll keep printing more money?"

How long does THIS go on....?

To what extent is Fed support for markets taking asset prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals.
Extracted from Key Short-Term Bond Spread Hits Lowest Level in Nearly a Year - WSJ By Julia-Ambra Verlaine
Yield curve is available from Statista See also Daily Treasury Yield Curve Rates and Understanding The Treasury Yield Curve Rates

Feb. 23, 2021

The spread between the two-year Treasury yield and a key interest rate set by the Federal Reserve is the narrowest since the depths of the coronavirus market selloff, a potential sign of financial-system stress.

The two-year Treasury yield, which closed Tuesday at 0.115%, is 0.015 percentage point above the interest rate on excess reserves, or IOER. It traded as low as 0.105% earlier in February. The Fed pays banks on the reserves held above and beyond those required by central-bank regulatory policy as part of its effort to maintain liquidity in the financial system.

When the coronavirus sent markets and the economy into a tailspin in March, the Fed cut IOER by 1 percentage point to 0.10% -- alongside other interventions -- to shore up short-term lending markets and support economic activity. The spread between IOER and the two-year yield has typically been above 0.05 percentage point since the Fed cut the rate to its lowest level ever in March.

Yield on U.S. 10-year Treasury note Source: Tullett Prebon % March 2020 '21 0.4 0.6 0.8 1.0 1.2 1.4 1.6

Traders said the shrinking of this spread reflects appetite for short-term debt as investors gobble up safe assets and park their cash. It also highlights a key tension point in financial markets: to what extent is Fed support for markets taking asset prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals

...bond traders are concerned that inflation could rise in coming months and years as the government prints money to support the economy and cover future borrowing costs.

Traders contend that short-term yields would be higher if the central bank wasn't anchoring rates. The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets.

The idea is that low interest rates and bond buying boost spending by providing cheap credit to businesses and households. Some bond investors fear too much cheap credit will mean inflation.

... Another corner of U.S. markets is sending warning signals: the 10-year break-even rate, which tracks annual inflation expectations over the next decade, traded as high as 2.24% last week.

....The difference between the break-even rate and the Treasury yield recently widened to more than 1 percentage point. For some this is a sign that inflation isn't far off, and in the meantime that financial markets remain vulnerable to bubbles.

"I would characterize the phase we are in now as an era of hyperstimulation between fiscal and monetary policy," said Thomas Pluta, global head of linear rates trading at JPMorgan Chase & Co. "The byproduct is all this cash sloshing around the system chasing assets like crypto, commodities and meme stocks." (Traders on Reddit's WallStreetBets forum use memes such as a rocket emoji to accompany favorite stock picks like GameStop Corp.) SUBSCRIBER 1 month ago

So every time the stock market wobbles the Fed is going to step up and say "don't worry, hang onto your stocks and bonds, we'll keep printing more money?"

How long does THIS go on....?

To what extent is Fed support for markets taking asset prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals.
Extracted from Key Short-Term Bond Spread Hits Lowest Level in Nearly a Year - WSJ By Julia-Ambra Verlaine
Yield curve is available from Statista See also Daily Treasury Yield Curve Rates and Understanding The Treasury Yield Curve Rates

Feb. 23, 2021

The spread between the two-year Treasury yield and a key interest rate set by the Federal Reserve is the narrowest since the depths of the coronavirus market selloff, a potential sign of financial-system stress.

The two-year Treasury yield, which closed Tuesday at 0.115%, is 0.015 percentage point above the interest rate on excess reserves, or IOER. It traded as low as 0.105% earlier in February. The Fed pays banks on the reserves held above and beyond those required by central-bank regulatory policy as part of its effort to maintain liquidity in the financial system.

When the coronavirus sent markets and the economy into a tailspin in March, the Fed cut IOER by 1 percentage point to 0.10% -- alongside other interventions -- to shore up short-term lending markets and support economic activity. The spread between IOER and the two-year yield has typically been above 0.05 percentage point since the Fed cut the rate to its lowest level ever in March.

Yield on U.S. 10-year Treasury note Source: Tullett Prebon % March 2020 '21 0.4 0.6 0.8 1.0 1.2 1.4 1.6

Traders said the shrinking of this spread reflects appetite for short-term debt as investors gobble up safe assets and park their cash. It also highlights a key tension point in financial markets: to what extent is Fed support for markets taking asset prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals

...bond traders are concerned that inflation could rise in coming months and years as the government prints money to support the economy and cover future borrowing costs.

Traders contend that short-term yields would be higher if the central bank wasn't anchoring rates. The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets.

The idea is that low interest rates and bond buying boost spending by providing cheap credit to businesses and households. Some bond investors fear too much cheap credit will mean inflation.

... Another corner of U.S. markets is sending warning signals: the 10-year break-even rate, which tracks annual inflation expectations over the next decade, traded as high as 2.24% last week.

....The difference between the break-even rate and the Treasury yield recently widened to more than 1 percentage point. For some this is a sign that inflation isn't far off, and in the meantime that financial markets remain vulnerable to bubbles.

"I would characterize the phase we are in now as an era of hyperstimulation between fiscal and monetary policy," said Thomas Pluta, global head of linear rates trading at JPMorgan Chase & Co. "The byproduct is all this cash sloshing around the system chasing assets like crypto, commodities and meme stocks." (Traders on Reddit's WallStreetBets forum use memes such as a rocket emoji to accompany favorite stock picks like GameStop Corp.) SUBSCRIBER 1 month ago

So every time the stock market wobbles the Fed is going to step up and say "don't worry, hang onto your stocks and bonds, we'll keep printing more money?"

How long does THIS go on....?

To what extent is Fed support for markets taking asset prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals.
Extracted from Key Short-Term Bond Spread Hits Lowest Level in Nearly a Year - WSJ By Julia-Ambra Verlaine
Yield curve is available from Statista See also Daily Treasury Yield Curve Rates and Understanding The Treasury Yield Curve Rates

Feb. 23, 2021

The spread between the two-year Treasury yield and a key interest rate set by the Federal Reserve is the narrowest since the depths of the coronavirus market selloff, a potential sign of financial-system stress.

The two-year Treasury yield, which closed Tuesday at 0.115%, is 0.015 percentage point above the interest rate on excess reserves, or IOER. It traded as low as 0.105% earlier in February. The Fed pays banks on the reserves held above and beyond those required by central-bank regulatory policy as part of its effort to maintain liquidity in the financial system.

When the coronavirus sent markets and the economy into a tailspin in March, the Fed cut IOER by 1 percentage point to 0.10% -- alongside other interventions -- to shore up short-term lending markets and support economic activity. The spread between IOER and the two-year yield has typically been above 0.05 percentage point since the Fed cut the rate to its lowest level ever in March.

Yield on U.S. 10-year Treasury note Source: Tullett Prebon % March 2020 '21 0.4 0.6 0.8 1.0 1.2 1.4 1.6

Traders said the shrinking of this spread reflects appetite for short-term debt as investors gobble up safe assets and park their cash. It also highlights a key tension point in financial markets: to what extent is Fed support for markets taking asset prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals

...bond traders are concerned that inflation could rise in coming months and years as the government prints money to support the economy and cover future borrowing costs.

Traders contend that short-term yields would be higher if the central bank wasn't anchoring rates. The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets.

The idea is that low interest rates and bond buying boost spending by providing cheap credit to businesses and households. Some bond investors fear too much cheap credit will mean inflation.

... Another corner of U.S. markets is sending warning signals: the 10-year break-even rate, which tracks annual inflation expectations over the next decade, traded as high as 2.24% last week.

....The difference between the break-even rate and the Treasury yield recently widened to more than 1 percentage point. For some this is a sign that inflation isn't far off, and in the meantime that financial markets remain vulnerable to bubbles.

"I would characterize the phase we are in now as an era of hyperstimulation between fiscal and monetary policy," said Thomas Pluta, global head of linear rates trading at JPMorgan Chase & Co. "The byproduct is all this cash sloshing around the system chasing assets like crypto, commodities and meme stocks." (Traders on Reddit's WallStreetBets forum use memes such as a rocket emoji to accompany favorite stock picks like GameStop Corp.) SUBSCRIBER 1 month ago

So every time the stock market wobbles the Fed is going to step up and say "don't worry, hang onto your stocks and bonds, we'll keep printing more money?"

How long does THIS go on....?

To what extent is Fed support for markets taking asset prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals.
Extracted from Key Short-Term Bond Spread Hits Lowest Level in Nearly a Year - WSJ By Julia-Ambra Verlaine
Yield curve is available from Statista See also Daily Treasury Yield Curve Rates and Understanding The Treasury Yield Curve Rates

Feb. 23, 2021

The spread between the two-year Treasury yield and a key interest rate set by the Federal Reserve is the narrowest since the depths of the coronavirus market selloff, a potential sign of financial-system stress.

The two-year Treasury yield, which closed Tuesday at 0.115%, is 0.015 percentage point above the interest rate on excess reserves, or IOER. It traded as low as 0.105% earlier in February. The Fed pays banks on the reserves held above and beyond those required by central-bank regulatory policy as part of its effort to maintain liquidity in the financial system.

When the coronavirus sent markets and the economy into a tailspin in March, the Fed cut IOER by 1 percentage point to 0.10% -- alongside other interventions -- to shore up short-term lending markets and support economic activity. The spread between IOER and the two-year yield has typically been above 0.05 percentage point since the Fed cut the rate to its lowest level ever in March.

Yield on U.S. 10-year Treasury note Source: Tullett Prebon % March 2020 '21 0.4 0.6 0.8 1.0 1.2 1.4 1.6

Traders said the shrinking of this spread reflects appetite for short-term debt as investors gobble up safe assets and park their cash. It also highlights a key tension point in financial markets: to what extent is Fed support for markets taking asset prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals

...bond traders are concerned that inflation could rise in coming months and years as the government prints money to support the economy and cover future borrowing costs.

Traders contend that short-term yields would be higher if the central bank wasn't anchoring rates. The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets.

The idea is that low interest rates and bond buying boost spending by providing cheap credit to businesses and households. Some bond investors fear too much cheap credit will mean inflation.

... Another corner of U.S. markets is sending warning signals: the 10-year break-even rate, which tracks annual inflation expectations over the next decade, traded as high as 2.24% last week.

....The difference between the break-even rate and the Treasury yield recently widened to more than 1 percentage point. For some this is a sign that inflation isn't far off, and in the meantime that financial markets remain vulnerable to bubbles.

"I would characterize the phase we are in now as an era of hyperstimulation between fiscal and monetary policy," said Thomas Pluta, global head of linear rates trading at JPMorgan Chase & Co. "The byproduct is all this cash sloshing around the system chasing assets like crypto, commodities and meme stocks." (Traders on Reddit's WallStreetBets forum use memes such as a rocket emoji to accompany favorite stock picks like GameStop Corp.) SUBSCRIBER 1 month ago

So every time the stock market wobbles the Fed is going to step up and say "don't worry, hang onto your stocks and bonds, we'll keep printing more money?"

How long does THIS go on....?

To what extent is Fed support for markets taking asset prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals.
Extracted from Key Short-Term Bond Spread Hits Lowest Level in Nearly a Year - WSJ By Julia-Ambra Verlaine
Yield curve is available from Statista See also Daily Treasury Yield Curve Rates and Understanding The Treasury Yield Curve Rates

Feb. 23, 2021

The spread between the two-year Treasury yield and a key interest rate set by the Federal Reserve is the narrowest since the depths of the coronavirus market selloff, a potential sign of financial-system stress.

The two-year Treasury yield, which closed Tuesday at 0.115%, is 0.015 percentage point above the interest rate on excess reserves, or IOER. It traded as low as 0.105% earlier in February. The Fed pays banks on the reserves held above and beyond those required by central-bank regulatory policy as part of its effort to maintain liquidity in the financial system.

When the coronavirus sent markets and the economy into a tailspin in March, the Fed cut IOER by 1 percentage point to 0.10% -- alongside other interventions -- to shore up short-term lending markets and support economic activity. The spread between IOER and the two-year yield has typically been above 0.05 percentage point since the Fed cut the rate to its lowest level ever in March.

Yield on U.S. 10-year Treasury note Source: Tullett Prebon % March 2020 '21 0.4 0.6 0.8 1.0 1.2 1.4 1.6

Traders said the shrinking of this spread reflects appetite for short-term debt as investors gobble up safe assets and park their cash. It also highlights a key tension point in financial markets: to what extent is Fed support for markets taking asset prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals

...bond traders are concerned that inflation could rise in coming months and years as the government prints money to support the economy and cover future borrowing costs.

Traders contend that short-term yields would be higher if the central bank wasn't anchoring rates. The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets.

The idea is that low interest rates and bond buying boost spending by providing cheap credit to businesses and households. Some bond investors fear too much cheap credit will mean inflation.

... Another corner of U.S. markets is sending warning signals: the 10-year break-even rate, which tracks annual inflation expectations over the next decade, traded as high as 2.24% last week.

....The difference between the break-even rate and the Treasury yield recently widened to more than 1 percentage point. For some this is a sign that inflation isn't far off, and in the meantime that financial markets remain vulnerable to bubbles.

"I would characterize the phase we are in now as an era of hyperstimulation between fiscal and monetary policy," said Thomas Pluta, global head of linear rates trading at JPMorgan Chase & Co. "The byproduct is all this cash sloshing around the system chasing assets like crypto, commodities and meme stocks." (Traders on Reddit's WallStreetBets forum use memes such as a rocket emoji to accompany favorite stock picks like GameStop Corp.) SUBSCRIBER 1 month ago

So every time the stock market wobbles the Fed is going to step up and say "don't worry, hang onto your stocks and bonds, we'll keep printing more money?"

How long does THIS go on....?

To what extent is Fed support for markets taking asset prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals.
Extracted from Key Short-Term Bond Spread Hits Lowest Level in Nearly a Year - WSJ By Julia-Ambra Verlaine
Yield curve is available from Statista See also Daily Treasury Yield Curve Rates and Understanding The Treasury Yield Curve Rates

Feb. 23, 2021

The spread between the two-year Treasury yield and a key interest rate set by the Federal Reserve is the narrowest since the depths of the coronavirus market selloff, a potential sign of financial-system stress.

The two-year Treasury yield, which closed Tuesday at 0.115%, is 0.015 percentage point above the interest rate on excess reserves, or IOER. It traded as low as 0.105% earlier in February. The Fed pays banks on the reserves held above and beyond those required by central-bank regulatory policy as part of its effort to maintain liquidity in the financial system.

When the coronavirus sent markets and the economy into a tailspin in March, the Fed cut IOER by 1 percentage point to 0.10% -- alongside other interventions -- to shore up short-term lending markets and support economic activity. The spread between IOER and the two-year yield has typically been above 0.05 percentage point since the Fed cut the rate to its lowest level ever in March.

Yield on U.S. 10-year Treasury note Source: Tullett Prebon % March 2020 '21 0.4 0.6 0.8 1.0 1.2 1.4 1.6

Traders said the shrinking of this spread reflects appetite for short-term debt as investors gobble up safe assets and park their cash. It also highlights a key tension point in financial markets: to what extent is Fed support for markets taking asset prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals

...bond traders are concerned that inflation could rise in coming months and years as the government prints money to support the economy and cover future borrowing costs.

Traders contend that short-term yields would be higher if the central bank wasn't anchoring rates. The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets.

The idea is that low interest rates and bond buying boost spending by providing cheap credit to businesses and households. Some bond investors fear too much cheap credit will mean inflation.

... Another corner of U.S. markets is sending warning signals: the 10-year break-even rate, which tracks annual inflation expectations over the next decade, traded as high as 2.24% last week.

....The difference between the break-even rate and the Treasury yield recently widened to more than 1 percentage point. For some this is a sign that inflation isn't far off, and in the meantime that financial markets remain vulnerable to bubbles.

"I would characterize the phase we are in now as an era of hyperstimulation between fiscal and monetary policy," said Thomas Pluta, global head of linear rates trading at JPMorgan Chase & Co. "The byproduct is all this cash sloshing around the system chasing assets like crypto, commodities and meme stocks." (Traders on Reddit's WallStreetBets forum use memes such as a rocket emoji to accompany favorite stock picks like GameStop Corp.) SUBSCRIBER 1 month ago

So every time the stock market wobbles the Fed is going to step up and say "don't worry, hang onto your stocks and bonds, we'll keep printing more money?"

How long does THIS go on....?

To what extent is Fed support for markets taking asset prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals.
Extracted from Key Short-Term Bond Spread Hits Lowest Level in Nearly a Year - WSJ By Julia-Ambra Verlaine
Yield curve is available from Statista See also Daily Treasury Yield Curve Rates and Understanding The Treasury Yield Curve Rates

Feb. 23, 2021

The spread between the two-year Treasury yield and a key interest rate set by the Federal Reserve is the narrowest since the depths of the coronavirus market selloff, a potential sign of financial-system stress.

The two-year Treasury yield, which closed Tuesday at 0.115%, is 0.015 percentage point above the interest rate on excess reserves, or IOER. It traded as low as 0.105% earlier in February. The Fed pays banks on the reserves held above and beyond those required by central-bank regulatory policy as part of its effort to maintain liquidity in the financial system.

When the coronavirus sent markets and the economy into a tailspin in March, the Fed cut IOER by 1 percentage point to 0.10% -- alongside other interventions -- to shore up short-term lending markets and support economic activity. The spread between IOER and the two-year yield has typically been above 0.05 percentage point since the Fed cut the rate to its lowest level ever in March.

Yield on U.S. 10-year Treasury note Source: Tullett Prebon % March 2020 '21 0.4 0.6 0.8 1.0 1.2 1.4 1.6

Traders said the shrinking of this spread reflects appetite for short-term debt as investors gobble up safe assets and park their cash. It also highlights a key tension point in financial markets: to what extent is Fed support for markets taking asset prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals

...bond traders are concerned that inflation could rise in coming months and years as the government prints money to support the economy and cover future borrowing costs.

Traders contend that short-term yields would be higher if the central bank wasn't anchoring rates. The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets.

The idea is that low interest rates and bond buying boost spending by providing cheap credit to businesses and households. Some bond investors fear too much cheap credit will mean inflation.

... Another corner of U.S. markets is sending warning signals: the 10-year break-even rate, which tracks annual inflation expectations over the next decade, traded as high as 2.24% last week.

....The difference between the break-even rate and the Treasury yield recently widened to more than 1 percentage point. For some this is a sign that inflation isn't far off, and in the meantime that financial markets remain vulnerable to bubbles.

"I would characterize the phase we are in now as an era of hyperstimulation between fiscal and monetary policy," said Thomas Pluta, global head of linear rates trading at JPMorgan Chase & Co. "The byproduct is all this cash sloshing around the system chasing assets like crypto, commodities and meme stocks." (Traders on Reddit's WallStreetBets forum use memes such as a rocket emoji to accompany favorite stock picks like GameStop Corp.) SUBSCRIBER 1 month ago

So every time the stock market wobbles the Fed is going to step up and say "don't worry, hang onto your stocks and bonds, we'll keep printing more money?"

How long does THIS go on....?

To what extent is Fed support for markets taking asset prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals.
Extracted from Key Short-Term Bond Spread Hits Lowest Level in Nearly a Year - WSJ By Julia-Ambra Verlaine
Yield curve is available from Statista See also Daily Treasury Yield Curve Rates and Understanding The Treasury Yield Curve Rates

Feb. 23, 2021

The spread between the two-year Treasury yield and a key interest rate set by the Federal Reserve is the narrowest since the depths of the coronavirus market selloff, a potential sign of financial-system stress.

The two-year Treasury yield, which closed Tuesday at 0.115%, is 0.015 percentage point above the interest rate on excess reserves, or IOER. It traded as low as 0.105% earlier in February. The Fed pays banks on the reserves held above and beyond those required by central-bank regulatory policy as part of its effort to maintain liquidity in the financial system.

When the coronavirus sent markets and the economy into a tailspin in March, the Fed cut IOER by 1 percentage point to 0.10% -- alongside other interventions -- to shore up short-term lending markets and support economic activity. The spread between IOER and the two-year yield has typically been above 0.05 percentage point since the Fed cut the rate to its lowest level ever in March.

Yield on U.S. 10-year Treasury note Source: Tullett Prebon % March 2020 '21 0.4 0.6 0.8 1.0 1.2 1.4 1.6

Traders said the shrinking of this spread reflects appetite for short-term debt as investors gobble up safe assets and park their cash. It also highlights a key tension point in financial markets: to what extent is Fed support for markets taking asset prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals

...bond traders are concerned that inflation could rise in coming months and years as the government prints money to support the economy and cover future borrowing costs.

Traders contend that short-term yields would be higher if the central bank wasn't anchoring rates. The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets.

The idea is that low interest rates and bond buying boost spending by providing cheap credit to businesses and households. Some bond investors fear too much cheap credit will mean inflation.

... Another corner of U.S. markets is sending warning signals: the 10-year break-even rate, which tracks annual inflation expectations over the next decade, traded as high as 2.24% last week.

....The difference between the break-even rate and the Treasury yield recently widened to more than 1 percentage point. For some this is a sign that inflation isn't far off, and in the meantime that financial markets remain vulnerable to bubbles.

"I would characterize the phase we are in now as an era of hyperstimulation between fiscal and monetary policy," said Thomas Pluta, global head of linear rates trading at JPMorgan Chase & Co. "The byproduct is all this cash sloshing around the system chasing assets like crypto, commodities and meme stocks." (Traders on Reddit's WallStreetBets forum use memes such as a rocket emoji to accompany favorite stock picks like GameStop Corp.) SUBSCRIBER 1 month ago

So every time the stock market wobbles the Fed is going to step up and say "don't worry, hang onto your stocks and bonds, we'll keep printing more money?"

How long does THIS go on....?

To what extent is Fed support for markets taking asset prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals.
Extracted from Key Short-Term Bond Spread Hits Lowest Level in Nearly a Year - WSJ By Julia-Ambra Verlaine
Yield curve is available from Statista See also Daily Treasury Yield Curve Rates and Understanding The Treasury Yield Curve Rates

Feb. 23, 2021

The spread between the two-year Treasury yield and a key interest rate set by the Federal Reserve is the narrowest since the depths of the coronavirus market selloff, a potential sign of financial-system stress.

The two-year Treasury yield, which closed Tuesday at 0.115%, is 0.015 percentage point above the interest rate on excess reserves, or IOER. It traded as low as 0.105% earlier in February. The Fed pays banks on the reserves held above and beyond those required by central-bank regulatory policy as part of its effort to maintain liquidity in the financial system.

When the coronavirus sent markets and the economy into a tailspin in March, the Fed cut IOER by 1 percentage point to 0.10% -- alongside other interventions -- to shore up short-term lending markets and support economic activity. The spread between IOER and the two-year yield has typically been above 0.05 percentage point since the Fed cut the rate to its lowest level ever in March.

Yield on U.S. 10-year Treasury note Source: Tullett Prebon % March 2020 '21 0.4 0.6 0.8 1.0 1.2 1.4 1.6

Traders said the shrinking of this spread reflects appetite for short-term debt as investors gobble up safe assets and park their cash. It also highlights a key tension point in financial markets: to what extent is Fed support for markets taking asset prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals

...bond traders are concerned that inflation could rise in coming months and years as the government prints money to support the economy and cover future borrowing costs.

Traders contend that short-term yields would be higher if the central bank wasn't anchoring rates. The Fed has been buying $80 billion in Treasurys each month since June and slashed rates to near zero in March to stabilize financial markets.

The idea is that low interest rates and bond buying boost spending by providing cheap credit to businesses and households. Some bond investors fear too much cheap credit will mean inflation.

... Another corner of U.S. markets is sending warning signals: the 10-year break-even rate, which tracks annual inflation expectations over the next decade, traded as high as 2.24% last week.

....The difference between the break-even rate and the Treasury yield recently widened to more than 1 percentage point. For some this is a sign that inflation isn't far off, and in the meantime that financial markets remain vulnerable to bubbles.

"I would characterize the phase we are in now as an era of hyperstimulation between fiscal and monetary policy," said Thomas Pluta, global head of linear rates trading at JPMorgan Chase & Co. "The byproduct is all this cash sloshing around the system chasing assets like crypto, commodities and meme stocks." (Traders on Reddit's WallStreetBets forum use memes such as a rocket emoji to accompany favorite stock picks like GameStop Corp.) SUBSCRIBER 1 month ago

So every time the stock market wobbles the Fed is going to step up and say "don't worry, hang onto your stocks and bonds, we'll keep printing more money?"

How long does THIS go on....?

[Apr 27, 2021] The biggest lesson for the leveraged finance market from the late 1990s is that no amount of equity can salvage a bad business model and by extension issued junk bonds

Highly recommended!
Notable quotes:
"... Still, credit risk has been rising in the $1.2 trillion market of below-investment-grade loans, like those Cyxtera took on for its 2017 acquisition by private-equity firms. Issuers of such "leveraged loans" are also being acquired by SPACs. That will likely lead to higher levels of distress among such companies in the next economic downturn, according to Mr. Daigle. ..."
Apr 27, 2021 | www.wsj.com

... Conditions are significantly different now than in 1999, when speculative telecommunications companies raised capital by issuing stock and high-yield bonds, Mr. Daigle said. That bubble enabled companies like Global Crossing Ltd., Iridium LLC and WorldCom Inc., to raise billions of dollars before they went bankrupt .

"The biggest lesson for the leveraged finance market from the late 1990s is that no amount of equity can salvage a bad business model," Mr. Daigle said.

In contrast, the average credit quality of high-yield bond issuers today is relatively strong. More than half of high-yield bonds are rated double-B, the highest below-investment-grade rating, compared with a historical average of 35%, Citigroup's Mr. Anderson said.

Still, credit risk has been rising in the $1.2 trillion market of below-investment-grade loans, like those Cyxtera took on for its 2017 acquisition by private-equity firms. Issuers of such "leveraged loans" are also being acquired by SPACs. That will likely lead to higher levels of distress among such companies in the next economic downturn, according to Mr. Daigle.

"It's the opposite of what we saw in the 1990s when the speculative lending was happening in the high-yield bond market," he said.

... .... ...

Write to Matt Wirz at matthieu.wirz@wsj.com

[Apr 27, 2021] SPAC Surge Pumps Up Junk-Bond Market by Matt Wirz

Apr 23, 2021 | www.wsj.com
Money from stock offerings is flowing into below-investment-grade companies at a pace not seen since the dot.com boom of the 1990s

The wave of cash raised by special-purpose acquisition companies is rolling into the junk debt market, aiding distressed companies and rewarding investors who own their bonds and loans.

SPACs, also known as blank-check companies, have issued roughly $100 billion of stock this year, a record, to buy private companies and take them public. Some SPACs are targeting companies with below-investment-grade credit ratings, hoping to use their cash piles to pay down debt and grow the businesses.

Not since the dot.com-boom two decades ago has stock-market enthusiasm been hot enough to fuel such activity in debt markets , bond investors and analysts say.

Mutual funds managers that owned WeWork bonds booked paper gains of 25% after the ailing shared-office provider started merger talks in January with a SPAC, according to MarketAxess. Companies with junk credit ratings are typically required to buy back their debt, often at a premium, when a change of control occurs via a merger. Loans of Cyxtera Technologies Inc.â€"which credit-rating companies recently warned was in danger of defaultâ€"jumped 16% in February when the data-center operator agreed to merge with one of the blank-check companies , according to AdvantageData Inc.

“There’s a lot of deja-vu of the late 1990s happening in the high-yield market right now,†said Michael Anderson, a managing director for credit research at Citigroup Inc.

[Apr 27, 2021] What Happens to Stocks When HOT Inflation Hits- - ZeroHedge

Apr 27, 2021 | www.zerohedge.com

We've been outlining how the Fed and other central banks have unleashed an inflationary bubble in all assets truly an Everything Bubble.

We've already assessed the impact this is having on commodities, bonds and other asset classes. Today I want to assess the impact this will have on stocks.

To do that, we need to look at emerging markets.

Inflation is a common occurrence for emerging markets, primarily because more often than not they devalue their currencies, whether by choice or because the markets lose faith in their ability to pay off their debts.

Because of this, emerging markets can provide a glimpse into how inflation affects stocks. So, let's dig in.

Here is a chart of South Africa's stock market since 2003. As you can see, the stock market rallied significantly until 2010, but has effectively gone nowhere ever since then.

The reason this chart looks so lackluster is because it is priced in U.S. dollars. The $USD has been strengthening against the South African currency (the Rand) since 2010.

Watch what happens we price the South Africa stock market in its domestic currency (blue line). Suddenly, this stock market has been ROARING, rising some 750% since 2003. That means average annual gains of 41%!!!

Let's use another example.

Below is a chart of the Mexican stock market priced in $USD. Once again, we see a stock market that has done nothing of note for years.

Now let's price it in pesos (actually the exchange rate of pesos to $USD, but close enough).

You get the general idea. So if hot inflation is in the U.S. financial system, it would make perfect sense for stocks (denominated in the $USD which is losing value due to inflation) to ERUPT higher.

Something like I don't know what's happened since mid-2020?

Look, we all know what's going on here. The stock market is erupting higher as inflation rips into the financial system based on Fed NUCLEAR money printing. And we all know what comes when this bubble bursts.

On that note, we just published a Special Investment Report concerning FIVE secret investments you can use to make inflation pay you as it rips through the financial system in the months ahead.

The report is titled Survive the Inflationary Storm. And it explains in very simply terms how to make inflation PAY YOU.

We are making just 100 copies available to the public.

To pick up yours, swing by:

https://phoenixcapitalmarketing.com/inflationstorm.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

[Apr 27, 2021] -They're Guessing- - Gundlach Rejects The Fed's -Inflation Is Transitory- Narrative - ZeroHedge

Apr 27, 2021 | www.zerohedge.com

Don't believe your lying eyes, will be the message tomorrow from The Fed's Jay Powell as he hypnotizes investors to believe that "inflation is transitory" and they have "the tools" to manage it.

'Bond King' Jeff Gundlach is not buying that line and told BNN Bloomberg in an interview this morning.

"...more importantly, I'm not sure why they think they know it's transitory... how do they know that?"

"...there's plenty of money-printing that's been going on, and we've seen commodity prices going up massively... home prices in the US are inflating very substantially... so there's a lot of inflation that's already baked in to input prices ."

Gundlach does admit that Powell has a point in the very near term as the prints were about to see "which could be as high as 4% [for CPI]" are off of year-ago, very depressed levels. "...what he means by transitory is that the base effect will lead to problems in the next few months but then the base effect will become less problematic."

But, Gundlach adds, "it's not clear to me that inflation is going to go back down to around 2 to 2.5%... we don't know, nobody knows... but we're most concerned with the fact that The Fed thinks they know."

This is worrisome because The Fed's track record is anything but inspiring...

"when I go back to the global financial crisis, when we almost had a complete meltdown of the financial system, Ben Bernanke completely missed all of the problems that led to the crisis."

Bernanke's infamous "contained to subprime... and subprime is only a sliver of the market" comments could be about to be trumped by Powell's "inflation is transitory" comments as Gundlach warns "there's plenty of indicators that suggest inflation is going to go higher and not just on a transitory basis."

The Fed is "trying to paint the picture" of control, but Gundlach tries to make clear: "they're guessing."

So, what does that mean for markets?

While some fear "we ain't seen nothing yet" in terms of yields rising (and multiple contraction), Gundlach notes that "it really depends on just how much manipulation the authorities are willing to do."

The billionaire fund manager notes that yields are "still very low... well below the current inflation rate... so we have negative yields everywhere on the yield curve."

It's also "hard to figure out who's going to buy the bonds," he notes, "as we are about to see issuance like we have never seen before." Foreigners have been selling bonds for years and domestically there is little demand, so Gundlach notes the only one left to soak up all this extra supply is The Federal Reserve, which has already expanded its balance sheet massively in the last 12 months.

"Who's going to buy all these many trillions of dollars of bonds? Foreigners have been selling for years and they've accelerated their selling in the last several quarters, domestic buyers are not exactly selling, but they're not adding to their holdings. So what's left to absorb all of the spawn supply is the Federal Reserve ."

"Left to true, free markets, bond yields at the long-end would obviously be higher than they are now."

And so who will buy all these bonds with negative real yields - The Fed... "and they have been transparent about their willingness and ability to buy bonds and expand their balance sheet with no ceiling."

Gundlach is talking about Yield Curve Control, reminding viewers that "The Fed can set the long-end wherever they want it... there's a precedent for this from back in the 1940s into the 50s," in order to ease the pain of the debt from World War II.

Of course, Gundlach warns ominously, "once they stopped the yield curve control, we went into a 27 year massive bear market in bonds, because of 'guns-n'butter' policies... which look like our policies today."

Simply put, he sees "an echo [in current markets and policies] of what happened in the late 1970s into the early 1980s."

His forecast is that "The Fed will allow the market forces to take yields to higher levels [10Y 2.25%] before stepping in."

The Bond King also note that the US stock market is very overvalued by virtually every important metric , and especially so versus foreign markets such as Asia and even Europe.

"I bought European equities a couple of weeks ago, literally for the first time in many years. I can't remember the last time I did it. And that's largely because I think the U.S. dollar is almost certain to decline over the intermediate to long term."

There's a lot more in the interview on the impact of Biden's stimmies and potential tax hikes...

https://webapps.9c9media.com/vidi-player/1.9.19/share/iframe.html?currentId=2189621&config=bnn/share.json&kruxId=&rsid=bellmediabnnbprod,bellmediaglobalprod&siteName=bnnb&cid=%5B%7B%22contentId%22%3A2189621%2C%22ad%22%3A%7B%22adsite%22%3A%22ctv.bnn%22%2C%22adzone%22%3A%22ctv.bnn%22%7D%7D%5D 10,571 48 NEVER


Sound of the Suburbs 26 minutes ago

We are going to train you in this Mickey Mouse economics that doesn't consider private debt and put you in charge of financial stability at the FED.

They don't stand a chance.

Financial stability arrived in the Keynesian era and was locked into the regulations of the time.

https://www.brettonwoodsproject.org/wp-content/uploads/2009/10/banking-crises.png

"This Time is Different" by Reinhart and Rogoff has a graph showing the same thing (Figure 13.1 - The proportion of countries with banking crises, 1900-2008).

Neoclassical economics came back and so did the financial crises.

The neoliberals removed the regulations that created financial stability in the Keynesian era and put independent central banks in charge of financial stability.

Why does it go so wrong?

Richard Vague had noticed real estate lending balloon from 5 trillion to 10 trillion from 2001 – 2007 and knew there was going to be a financial crisis.

Richard Vague has looked at the data for financial crises going back 200 years and found the cause was nearly always runaway bank lending.

We put central bankers in charge of financial stability, but they use an economics that ignores the main cause of financial crises, private debt.

Most of the problems are coming from private debt.

The technocrats use an economics that ignores private debt.

The poor old technocrats don't stand a chance.

WITCH PELOSI 39 minutes ago

42" entry level lawnmower @ Home Depot, spring 2014, $999. Spring 2021 $1549. That's what I call inflation! And maybe a little greed to boot!

atomp 34 minutes ago

$30 is the new $10.

Sound of the Suburbs 25 minutes ago remove link

In 2008 the Queen visited the revered economists of the LSE and said "If these things were so large, how come everyone missed it?"

It's that neoclassical economics they use Ma'am, it doesn't consider private debt.

Here it is Ma'am, look it's obvious.

https://www.youtube.com/watch?v=vAStZJCKmbU&list=PLmtuEaMvhDZZQLxg24CAiFgZYldtoCR-R&index=6

At 18 mins.

Let's get our experts in neoclassical economics to have a look.

"It was a black swan"

Not considering private debt is the Achilles' heel of neoclassical economics.

It is a black swan to them.

That's the problem.

[Apr 22, 2021] Economic growth is 'peaking'- Goldman Sachs

Apr 22, 2021 | finance.yahoo.com

Brian Sozzi · Editor-at-Large Thu, April 22, 2021, 4:32 PM

If you believe the market is a forward looking mechanism -- and most investors would agree that it is -- then you may want to prepare your portfolios for a sharp slowdown in economic growth later this year and into 2022 as fiscal stimulus wanes.

U.S. economic growth for this year is "peaking," Goldman Sachs strategists led by Ben Snider warned in a new note on Thursday. Snider said Goldman's economists predict 10.5% GDP growth for the second quarter, the strongest quarterly growth rate since 1978. The projection is also near the high-end of most economists on Wall Street.

From there, well, it's all downhill for GDP growth.

Goldman estimates growth in the third and fourth quarters of this year will clock in at 7.5% and 6.5%, respectively. Growth is then seen slowing in each quarter of 2022 -- by the fourth quarter Goldman is modeling a mere 1.5% GDP increase.

Economic growth is peaking, warns Goldman Sachs.

"Although our economists expect U.S. GDP growth will remain both above trend and above consensus forecasts through the next few quarters, they believe the pace of growth will peak within the next 1-2 months as the tailwinds from fiscal stimulus and economic reopening reach their maximum impact and then begin to fade," Snider said.

The economic growth peak could have major implications for investor returns, Snider thinks.

Goldman's research shows decelerating economic growth usually leads to weaker -- though still positive -- equity returns and greater volatility. Since 1980, the S&P 500 has averaged a monthly return of 0.6% when economic growth was positive but decelerating. That is half the 1.2% average gain when economic growth was positive and accelerating, points out Snider.

"Decelerating economic growth is also typically accompanied by sector rotations within the equity market,' Snider added. "Cyclical industries tend to lead the market in environments of positive and accelerating economic growth, but as growth peaks and decelerates more defensive industries typically outperform."


[Apr 20, 2021] US government bond investors left bewildered by 'bonkers' market move

Is this move reflect rising fear of stock bubble burst?
Apr 20, 2021 | finance.yahoo.com

Bond investors are bewildered after last week's stellar US economic data sparked a rally in haven US Treasuries -- a market reaction that breaks the typical dynamic for fund managers. The price of highly rated government bonds tends to jump in response to bad news, pushing down yields. Mike Riddell, a portfolio manager at Allianz Global Investors, described the market move as "bonkers".

[Apr 19, 2021] Revival of bonds as buffer for market shocks

Apr 19, 2021 | finance.yahoo.com

Katie Martin Sun, April 18, 2021, 8:00 PM

The recent run-up in government bond yields is a gift to any fund manager fretting over market risks ranging from geopolitics to leverage. It is true that the first quarter of this year was no fun for holders of government bonds, which dropped in price on the largest scale in four decades. The pullback means that, just as Russia and the US once again lock horns, and as the Archegos implosion stirs concerns over potentially systemic risks stemming from plentiful global leverage, government bonds again offer something of a safety net.

[Apr 19, 2021] Central Bank Will Begin Reducing Bond Purchases 'Well Before' Raising Interest Rates, Powell Says

At least $120 billion a month of Treasury debt and mortgage-backed securities bought by FED since last June is around trillion dollars now. This is just putting money from one pocket to another not a real buy or sell. Essentially the naked emission of dollars -- attempt to export inflation.
So FED seeks to increase inflation to somewhere between 2 and 3 percent a year. Which means payment to the forign owners of the US national debt will increase accordingly. And payments to foreign owners is a real thing as central banks are now reluctant to recirculate supruss dollars into treasuries and China cuts it purchases of dollar denominated debt.
Apr 19, 2021 | www.wsj.com

The Fed has been buying at least $120 billion a month of Treasury debt and mortgage-backed securities since last June to hold down long-term borrowing costs. Since December, the central bank has said the economy must make "substantial further progress" toward its goals of maximum employment and 2% inflation before it scales back those purchases.

"We will taper asset purchases when we've made substantial further progress toward our goals, from last December when we announced that guidance," Mr. Powell said in a virtual event held by the Economic Club of Washington, D.C. "That would in all likelihood be before -- well before -- the time we consider raising interest rates."

The Fed has said it will hold rates near zero until it sees the labor market return to full employment and inflation rise to 2% and is forecast to moderately exceed that level for some time. Mr. Powell reiterated that he thinks it is highly unlikely that the Fed would raise interest rates this year and noted that most central-bank officials see rates remaining near zero through 2023.

Tuesday's report fueled concerns that inflation, dormant through the record-long economic expansion from 2009 to 2020, could soon become a challenge for policy makers. Mr. Powell acknowledged those worries while reiterating that the Fed seeks inflation "that is moderately above 2% for some time" to make up for the past decade's shortfalls.

Both the Biden administration and the Fed acknowledge the possibility of prices rising faster than usual in coming months as the economic recovery strengthens and demand for goods and services temporarily outruns supply. But both expect the acceleration in inflation to prove temporary.

[Apr 19, 2021] U.S. Treasury Yields Fell Sharply

What has driven bonds lower from 10 year interest around 1.7% to around 1.5%? Which means around 2% difference in the price of the bonds. This is the question.
Is this about the concerns about the status of dollar as global reserve currency, that were eased? Or that Biden administration is paralyzed and will not be able to extend the USA debt as it planed to do.
Apr 15, 2021 | www.wsj.com

Treasury yields still remain much higher than where they started the year.

The 10-year finished last year at 0.913%. The yield on the 30-year bond settled Thursday at 2.210%, down from 2.325% Wednesday but up from 1.642% at the end of last year.

[Apr 17, 2021] For investors unfamiliar with the municipal space, "high-yield" is a different animal than in the corporate sector: much safer, with very infrequent defaults

Apr 17, 2021 | www.marketwatch.com

Instead, the muni market "yawned" when the bill was passed, said Eric Kazatsky, Bloomberg Intelligence head municipal strategist, a signal that the aid money had already been priced in. But muni ETFs are still worth a look, he thinks.

Kazatsky is a fan of the "gorillas" in the marketplace for all the usual reasons -- what he calls "solid" management, low fees, liquidity and robust inflows. He mentions the $21 billion iShares National Muni Bond ETF MUB, -0.06% , which tracks investment-grade bonds. For investors willing to take on a little more risk, there's the VanEck Vectors High Yield Muni ETF HYD, -0.02% , which has $3.3 billion under management. For taxable munis, the Invesco Taxable Municipal Bond ETF BAB, -0.21% is one of the bigger funds.

For investors unfamiliar with the municipal space, "high-yield" is a different animal than in the corporate sector: much safer, with very infrequent defaults. The space "could actually offer a much bigger reward because there are a lot of bargains to be had from the market dislocation last year, if you don't think they've run their course," Kazatsky told MarketWatch.

With slightly less risk comes a bit less reward: HYD has a 30-day SEC yield of 2.82% as of March 5 while the largest corporate junk-bond ETF, the iShares iBoxx $ High Yield Corporate Bond ETF HYG, -0.21% , has yielded 3.42%.

[Apr 14, 2021] Energy Price Surge Continues to Drive Everyday Prices Higher - Seeking Alpha

Apr 14, 2021 | seekingalpha.com

Summary

[Apr 14, 2021] How To Estimate -Rational- Market Expectations Of Future Inflation

Apr 14, 2021 | angrybearblog.com

For a given time-horizon, it has been conventional for those estimating such a "rational" market forecast of expected inflation to take the appropriate Treasury security nominal yield of that time horizon (say 5 years) and simply subtract from it the yield on the same time horizon TIPS, which covers security holders for inflation. So it has long looked like this difference is a pretty good estimate of this market expectation of inflation, given that TIPS covers for it while the same time horizon Treasury security does not.

Well, it turns out that there are some other things involved here that need to be taken account, one for each of these securities. On the Treasury side, it turns out that the proper measure of the expected real yield must take into account the expected time path of shorter term yields up to that time horizon. This time path has associated with it a risk regarding the path of interest rates throughout the time period. This is called the Treasury risk premium, or trp. It can be either positive or negative, with it apparently having been quite high during the inflationary 1979s.

The element that needs to be taken into account with respect to the TIPS is that these securities are apparently not as liquid in general as regular Treasury securities, and the measure of this gap is the Liquidity premium, or lp. This was apparently quite high when these were first issues and also saw a surge during the 2008-09 financial crisis. In principle this can also be of either sign, although has apparently been positive.

Anyway, the difference between the nominal T security yield and the appropriate TIPS yield is called the "inflation breakeven," the number that used to be focused on as the measure of market inflation expectations. But the new view is that this must be adjusted by adding (tpr – lp).

In a post just put up on Econbrowser by Menzie the current inflation breakeven for five years out is 2.52%. But according to Menzie the current (tpr – lp) adjustment factor is -0.64%. So adding these two together gives as the market expected inflation rate five years from now of 1.88%, although Menzie rounded it out to 1.9%.

If indeed this is what we should be looking at it says the market is not expecting all that much of an increase in the rate of inflation from its current 1.7% five years from now. The Fed and others are looking at a short term spike in prices this year, but the market seems to agree with their apparent nonchalance (shared by Janet Yellen) that this will wain later on, with that expected 5 year rate of inflation still below the Fed's target of 2%.

Certainly this contrasts with the scary talk coming from Larry Summers and Olivier Blanchard, not to mention most GOP commentators, regarding what the impact of current fiscal policies passed and proposed by Biden will do to the future rate of inflation. Not a whole lot, although, of course, rational expectations is not something that always forecasts all that well, so the pessimists might still prove to be right.

Barkley Rosser

Likbez , April 14, 2021 6:27 pm

Larry Summers is a puppet of financial oligarchy. Everything that he writes should be viewed via this prism. He also is highly overrated.
IMHO rates are no longer are determined by only domestic factors.

I think that the size of foreign holdings of the USA debt and their dynamics is another important factor. FED will do everything to keep inflation less then 2% but this is possible only as long as they can export inflation.

BTW realistically inflation in the USA is probably 30%-60% higher than the official figure. Look at http://www.shadowstats.com/ :

March 2021 annual Consumer Price Index inflation hit an unadjusted three-year high of 2.62%, as gasoline prices soared to multi-year highs, not seen since well before the 2020 Oil Price War. -- March Producer Price Index exploded, with respective record annualized First-Quarter PPI inflation levels of 9.0% in Aggregate, 16.0% in Goods and 5.6% in Services.

L A T E S T .. N U M B E R S .. March 2021 unadjusted year-to-year March 2021 CPI-U Inflation jumped 2.62% -- a one-year high -- as gasoline prices soared, not only fully recovering pre-Oil Price War levels of a year ago, but also hitting the highest unadjusted levels since May of 2019 (April 13th, Bureau of Labor Statistics – BLS). Headline March 2021 CPI-U gained 0.62% in the month, 2.62% year-to-year, against monthly and annual gains of 0.35% and 1.68% in February.

That inflation pickup reflected more than a full recovery in gasoline prices, which had been severely depressed by the Oil Price War of one year ago. Such had had the effect of depressing headline U.S. inflation up through February 2021, including suppressing the 2021 Cost of Living Adjustment (COLA) for Social Security by about one-percentage point to the headline 1.3%. By major sector, March Food prices gained 0.11% in the month, 3.47% year-to-year (vs. 0.17% and 3.62% in February); "Core" (ex-Food and Energy) prices gained 0.34% in March, 1.65% year-to-year (vs. 0.35% and 1.28% in February); Energy prices gained 5.00% in March, 13.17% year-to-year (vs. 3.85% and 2.36% in February), with underlying Gasoline prices gaining 9.10% in the month, 22.48% year-to-year (vs. 6.41% and 1.52% in February).

The March 2021 ShadowStats Alternate CPI (1980 Base) rose to 10.4% year-to-year, up from 9.4% in February 2021 and against 9.1% in January 2021. The ShadowStats Alternate CPI-U estimate restates current headline inflation so as to reverse the government's inflation-reducing gimmicks of the last four decades, which were designed specifically to reduce/ understate COLAs.

Related graphs and methodology are available to all on the updated ALTERNATE DATA tab above. Subscriber-only data downloads and an Inflation Calculator are available there, with extended details in pending No. 1460 .

In this sense China and Japanese policies will influence the USA rates. If they cut buying the US debt the writing for higher rates is on the wall. In a way, recent events might signal that FED can lose the control over rate if and when foreign actors cut holding of the USA debt.

Behavior of foreign actors is probably the key factor that will determine the rates in the future.

[Apr 13, 2021] U.S. Treasury yields slip despite surge in inflation to 2½-year high by very small number of companies.

Treasury yields slipped Tuesday after bond investors shrugged off an increase in U.S. consumer prices in March that sent yearly inflation measures to the highest level in two and a half years. Treasury yields slipped Tuesday after bond investors shrugged off an increase in U.S. consumer prices in March that sent yearly inflation measures to the highest level in two and a half years.
economistsview.typepad.com

The 10-year Treasury note yield TMUBMUSD10Y, 1.653% fell to 1.659%, down from 1.675% at the end of Monday, while the 2-year note TMUBMUSD02Y, 0.168% was steady at 0.169%. The 30-year bond yield TMUBMUSD30Y, 2.339% slid 0.9 basis point to 2.336%.

What's driving Treasurys?

The U.S. consumer price index rose 0.6% in March, while the core gauge that strips out for energy and food prices came in at an 0.3% increase.

The annual rate of inflation climbed to 2.6% from 1.7% in the prior month, marking the highest level since the fall of 2018.

[Apr 12, 2021] The markets are not designed to make the majority succeed

Apr 12, 2021 | finance.yahoo.com


More content below More content below More content below More content below More content below More content below Jared Blikre Sat, April 10, 2021, 8:22 AM

Warren Buffett's Berkshire Hathaway should scale back its passive investment in the S&P 500 ( ^GSPC ) and plow it right back into Berkshire stock ( BRK-A , BRK-B) . That's because the environment for stock picking is ripe for a shift away from passive investing, which could suffer a decade of low or nonexistent returns.

"This is the single worst time to be a passive investor in since they started passive investments... The [S&P 500] index is highly likely to not make money over the next 10 years," said Bill Smead, chief investment officer of Smead Capital Management, during the most recent Yahoo Finance Plus webinar on Wednesday. "Whether you look at historical price earnings ratios, whether you look at the normalization of interest rates, whether you look at ridiculously high levels of participation by individual investors -- compared to household network going back for decades, it all points to the same thing. The markets are not designed to make the majority succeed."

'You have to be a deviant to outperform'

In investing parlance, alpha is the return above and beyond a benchmark, such as the S&P 500 -- in other words, a trader's edge. By definition, an investor in an ETF that tracks the index, such as the SPDR S&P 500 ETF ( SPY ), will see no alpha. But an active trader needs to find alpha by thinking differently.

"Alpha comes from deviation. You have to be a deviant to outperform -- not a non-deviant," said Smead.

Not all stock pickers are alike. Cathie Wood 's ARK Innovation ETF quickly became the world's largest actively managed ETF, with $28 billion in assets under management at its February peak. Over the last year, the fund loaded up on high growth names like Tesla ( TSLA ), Square ( SQ ) and the Grayscale Bitcoin Trust ( GBTC ).

Smead prefers a more value-focused approach that also incorporates growth strategies. He uses a few recent examples to warn how quickly momentum trades can reverse. "[W]hen money comes out of popular growth stocks, it's like a fire hose. And the companies that it's going into are a teacup. You're pouring water from a fire hose into a teacup. And that's also part of what happened with Reddit and Archegos," he said.


[Apr 09, 2021] Inflation is different for different income stratas of the US population with poor hit much harder then the rich

Apr 09, 2021 | www.zerohedge.com

For low-income Americans, it has been a double-whammy of job losses (the total number of Americans receiving jobless benefits from the government has basically stagnated for the last four months)...

Source: Bloomberg

...and significant increases in the costs of living.

As Bloomberg reports , while the headline consumer inflation rate in the U.S. remains subdued, at 1.7% - but it masks large differences in what people actually buy .

If you like to eat, food-price inflation is running at more than double the headline rate , and staples like household cleaning products have also climbed.

Source: Bloomberg

if you drive a car, gas prices have soared in recent months...

Source: Bloomberg

All of which might explain why confidence among the lowest income Americans is lagging significantly (because groceries or gas take up a bigger share of their monthly shopping basket than is the case for wealthier households, and they're items that can't easily be deferred or substituted )...

Source: Bloomberg

An analysis by Bloomberg Economics , which reweighted consumer-price baskets based on the spending habits of different income groups, found that the richest Americans are experiencing the lowest level of inflation .

As Bloomberg 's Andrew Husby points out:

"On average, higher-income households spend a smaller fraction of their budgets on food, medical care, and rent, all categories that have seen faster inflation than the headline in recent years, and 2020 in particular."

The question of who exactly gets hurt most by higher prices could become more urgently concerning as most economists - and even The Fed itself - expect inflation to accelerate in the next 12 months.

"The food price story and inflation story are important to the issue of equality," says Carmen Reinhart, the World Bank's chief economist.

"It's a shock that has very uneven effects."

So, in summary, The Fed is telling Americans - ignore "transitory" spikes in non-core inflation (such as food and energy), it's just temporary and base-effect-driven (oh and we have the "tools" to manage it). However, despite all The Fed's pandering and virtue-signaling about "equity" and "fairness", it is precisely this segment of the costs of living that is crushing most of the long-suffering low-income population ($1400 checks or not) .

And now all eyes will be on this morning's PPI print which is expected to surge to +3.8% YoY.

[Apr 09, 2021] Inflation might be the way out of the debt crisis

Highly recommended!
An interesting headline from Financial Times
Apr 09, 2021 | finance.yahoo.com
Pascal Blanqué Wed, April 7, 2021, 8:00 PM

Bond markets are firmly in the driving seat. For too long, inflation has disappeared from investors' radar. The key ones include a hostile environment for trade and globalisation, business and labour support public programmes and the extraordinary debt burden fuelled by the pandemic. These are set to create a turning point in the current market regime before long.

[Apr 09, 2021] US Bonds Aren't Giving Investors The Returns They Once Did. Here's Why by Jack Pitcher and Christopher Cannon

Apr 09, 2021 | www.bloomberg.com
American savers could once count on bonds to provide meaningful returns with modest risk. Not anymore.

More than a decade of easy money has kept the U.S. economy afloat in times of crisis and fueled an unprecedented boom in financial markets.

But it's also created a whole new series of risks, especially for savers.

Where there was once a vast pool of safe debt in which they could park their cash and count on annual payouts of 5% or more -- comfortably above inflation -- today there's little more than a puddle, and a shrinking one at that. In fact, never has the amount of new government and corporate debt paying even modest yields been so minuscule.

Institutional investors and savers looking for a 5% annual interest rate had plenty of new bond and loan offerings rated BB and above to choose from prior to the 2008 financial crisis. These included debt from government-sponsored mortgage-loan companies like Fannie Mae and Freddie Mac.

$932.6B

580 parent issuers

Rating:

BB

BBB

A

AA

AAA

$84.0B

Federal National Mortgage

Association

(Fannie Mae)

$179.4B

Federal Home Loan Banks

$85.2B

Federal Home Loan Mortgage Corp

(Freddie Mac)

By 2019, after a decade in which the Federal Reserve kept benchmark rates near zero, the pool had shrunk dramatically, despite the fact that issuance of new debt was near record levels. Debt rated A or above paying 5% virtually disappeared, leaving the vast majority of such offerings rated in the lowest tier of investment-grade, or worse.

$333.0B

301 parent issuers

$7.5B

Altice USA Inc

$11.7B

◀ The Walt Disney Company

Now, after the Fed's unprecedented intervention in bond markets drove rates down even further in the pandemic, finding anything paying more than 5% has become difficult, except for investors willing to dip into the riskiest parts of the junk-bond market. While cheap borrowing costs have been a boon for corporate America, the same can't be said for money managers that need to generate returns that match their long-term obligations.

$131.7B

138 parent issuers

$23.9B

Petroleos Mexicanos

The repercussions -- for pension managers, endowments, insurance companies and 70 million baby boomers starting their retirements -- are vast. Sure, yields aren't negative like in much of Europe, but many are nonetheless being forced to, as legendary investor Warren Buffett recently put it , "juice the pathetic returns now available by shifting their purchases to obligations backed by shaky borrowers."

Others may choose to heed the advice of Ray Dalio, the founder of hedge fund giant Bridgewater Associates, who now recommends avoiding the U.S. bond market entirely and focusing on higher-returning, non-debt investments.

Junk's Rock-Bottom Rates
The average yield on bonds rated BB and lower recently fell to a record low.

Average yield

12%

Covid-19

Recession

10

8

6

3.89%

4

2011

2013

2015

2017

2019

2021

While the potential payout is greater, such moves also carry significant risk, especially for groups previously accustomed to holding only the safest assets.

It's possible that as savers push deeper into lower-rated debt, equities and more esoteric markets, the reckoning never comes.

But most know that's ultimately unlikely.

"It's a struggle that all of the public pension plans have been facing for a number of years -- there are some solutions, and there are some hope and pray trades," said Steve Willer, who helps manage $21 billion as deputy chief investment officer at the Kentucky Public Pensions Authority, which has lowered certain return targets amid the changing investment environment. "People are having to be more creative in looking at different segments of the debt market. That comes with different risks."

Source: Bloomberg compilation of government and corporate dollar-denominated bond and loan offerings with a yield of 5% or more at issue and at least one BB- or higher rating from S&P Global Ratings, Moody's Investors Service or Fitch Ratings. Issuance is for the six months ended March 31. Debt amounts are aggregated by issuer and ratings tier. Data includes debt issued in exchange for older bonds and notes linked to currencies that may yield more than traditional securities.

Editors: Boris Korby, Natalie Harrison and Alex Tribou

[Apr 03, 2021] Inflation Is Coming. Why it Could Be Here to Stay by Jacob Sonenshine

Apr 01, 2021 | www.marketwatch.com

...Economists do expect inflation to rise to above 2% as more states reopen and then stay there. And the St. Louis Fed is forecasting a 2.35% rate for the next 10 years.

...China's economy has dynamics that could raise the U.S. inflation rate over time. Key to the argument are China's aging population and the value of the country's currency, the Yuan. First, age. Today, the average age in China is 38, the same as in the U.S. By 2040, though, the number skyrockets to 47 in China and dips to 37 here.

The shift means fewer Chinese workers and upward pressure on pay. Higher wages probably would cause Chinese manufacturers to raise prices of exports, which could be passed onto American consumers.

Now, the Yuan. The currency bottomed at 7.12 per dollar in late 2019 after a more than five-year down-trend. China wants a weaker currency so its exports are more competitive -- cheaper -- for global buyers. Since the end of 2019, the Yuan has risen to 6.50 per dollar. If the trend continues, U.S. importers might raise prices because the cost of their imports are higher.

"Over the next decade, Asia's growth will slow dramatically, its wages will rise, its factories will close, its surpluses will melt and its currencies will rise sharply," wrote Vincent Deluard, global macro strategist at StoneX in a note. "For the rest of the world, this will be a massive and unexpected inflationary shock."

[Apr 02, 2021] Yield on the benchmark note rose to 1.72% in a holiday-shortened session

Bill Gross expect that it will end the year at 2.5% Gross said he bet against the 10-year Treasury through the futures market and remains short, anticipating a combination of rising commodity prices, a weaker dollar and stimulus-driven demand will spark inflation. "Inflation, currently below 2%, is not going to be below 2% in the next few months," Gross said. "I see a 3% to 4% number ahead of us." Bloomberg
Apr 02, 2021 | www.marketwatch.com
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  • [Apr 01, 2021] Riskiest U.S. Junk Bonds Are Outperforming Just About Everything - Bloomberg

    Apr 01, 2021 | www.bloomberg.com

    ...High-yield bonds rated in the CCC tier, usually the lowest-graded bonds that trade, gained 3.58% year-to-date, according to Bloomberg Barclays index total return data. They performed better than leveraged loans, which saw returns of 1.78%, and high-grade bonds, which posted a 4.65% loss. They outperformed mortgage bonds and Treasuries too.

    The higher coupons that the securities pay can offer insulation against the sting of rising yields. CCC notes average coupons of 7.7%, compared with 5.9% for high yield debt overall and 3.7% for investment-grade corporate notes, according to Bloomberg Barclays index data.

    "The lower quality trade still has some legs," said Scott Kimball, co-head of U.S. fixed income at BMO Global Asset Management. "Investors typically look to high-yield securities, particularly CCCs, when yields are on the rise. Now, we see record positive revisions for U.S. growth by economists being further boosted by record fiscal stimulus expectations."

    [Mar 31, 2021] Treasuries Suffer Biggest Loss In Over 40 Years

    Mar 31, 2021 | www.zerohedge.com

    S&P gained over 6% as Treasury's total return fell over 4%...

    Energy stocks soared 30% in Q1 (after rising 26% in Q4) and Tech underwhelmed (but was still higher in Q1...

    brian91145 4 hours ago

    TOTAL FRAUD FUELED BY DEBT!

    [Mar 28, 2021] Seconding Paul Krugman- inflationary pressures will be a transient phenomenon in 2021 (will they cause a recession in 2022)

    Krugman is is barking on the wrong tree. The question right now is not wage inflation but the inflation due to weakening dollar as purchases of Treasuries by foreign buyers weakened. That what probably caused the spike on 10 year Treasuries yield.
    Without foreign buyers of the US debt the deficit spending does not work. So it is quite possible that this time inflationary pressures will come from the weakening of the status of the dollar as the world reserve currency. As along the this status is unchallenged the USA will be OK. If dollar is challenged the USA will experience the Seneca cliff.
    Paul Krugman argues once's again this morning that any increase in inflation this year as part of a post-pandemic boom will be transitory:
    Mar 28, 2021 | angrybearblog.com

    Paul Krugman

    A few months of rising prices won't mean the 70s are back

    I agree. I want to elaborate on one point he hasn't emphasized; namely, you can't have a wage-price inflationary spiral if wages don't participate!

    To make my point, let me show you three graphs below, covering wages and prices in three different periods: (l) the inflationary 1960s and '70's, (2) the disinflationary
    Reagan-era 1980s and early '90's, and (3) the low inflation period of the late 1990s to the present.

    In addition to the YoY% change in CPI, I also show CPI less energy (gold), better to show oil shocks, and also that it takes about a year for inflation in energy prices to filter through to inflation in other items.

    Also, hourly wages were greatly affected (depressed) by the entry of 10,000,000's of women into the workforce between the 1960s and mid-1990s. This increased median household income, which would be the better metric, but since that statistic is only released once a year, I've approximated its impact by adding 1% to the YoY% change in average hourly wages (light blue).

    Here are the three graphs:

    ... ... ...

    [Mar 28, 2021] Krugman Dismisses 1970s-Style Inflation, With Faith in Fed by Julia Fanzeres

    Are FED pushing on the string?
    Mar 19, 2021 | finance.yahoo.com

    "It took really more than a decade of screwing things up -- year after year -- to get to that pass, and I don't think we're going to do that again," Krugman said of the inflation scourge of the 1970s to early 1980s. He spoke in an interview with David Westin for Bloomberg Television's "Wall Street Week" to be broadcast Friday.

    ...The worst-case scenario out of the fiscal stimulus package would be a transitory spike in consumer prices as was seen early in the Korean War, Krugman said. The relief bill is "definitely significant stimulus but not wildly inflationary stimulus," he said.

    ...Economists predict that the core inflation measure tied to consumer spending that the Fed uses in its forecasts will remain under 2% this year and next, a Bloomberg survey shows. A different gauge, the consumer price index is seen at 2.4% in 2021 and 2.2% next year. The CPI peaked at over 13% in 1980.

    The risk is that policy makers are "fighting the last war" -- countering the undershooting of the 2% inflation target and limited fiscal measures taken after the 2007-09 financial crisis, the economists said.

    Even so, he argued that "redistributionist" aspects of the pandemic-relief package will reduce the need for the Fed to keep monetary stimulus too strong for too long in order to address pockets of high unemployment. Fed Chair Jerome Powell has repeatedly said the central bank wants to see very broad strengthening in the labor market, not just a drop in the national jobless rate.

    "It's not silly to think that there might be some inflationary pressure" from the fiscal package, Krugman said. But it was designed less as stimulus than as a relief plan, he said.

    [Mar 27, 2021] As 30-year yield rises foreigners shun new US debt

    The Asia times article did it connect the dots for me. china especially is not buying US bonds anymore. Hence low demand for it , causing the yields to ride to attract buyers.
    Mar 27, 2021 | asiatimes.com

    The 30-year Treasury yield has climbed all the way back to its 2019 level, mainly because inflation expectations built into the yield have risen to the highest level since 2014. A US government deficit equal to 20% of GDP, a falling dollar and rising commodity prices mean more inflation in the future.

    The Federal Reserve bought most of the Treasury debt issued in the past year, and will have to buy most of the Treasury debt issued during the coming year, as Bridgewater's Ray Dalio told the China Economic Forum on Sunday.

    Unlike the period after the 2009 crash, when foreigners financed roughly half of the US government deficit, foreigners haven't increased their holdings of US debt during the past twelve months.

    Dalio, one of the world's most successful investors, warns that they might start to sell the debt they already own. "The situation is bearish for the dollar," Dalio concluded.

    As the late Herbert Stein said, anything that can't go on forever won't.

    Budan University Professor Bai Gang told China's Observer website last week: "For the past year, the US has continued to issue more currency to ease its internal situation. The pressure will eventually seriously damage the status of the US dollar as the core currency in the international payment system."

    [Mar 26, 2021] S P 500 And US Economy Face Seismic Shifts From Joe Biden And The Federal Reserve

    The UBS economics team holds the out-of-consensus view that annual core PCE inflation won't exceed the Fed's 2% target until 2024. And what will happen with S&P500 if inflation brakes 3% barrier in late 2021 or 2022. Pumping money into stock market is a Ponzi scheme by definition so at one point mistki moment might arrive.
    Mar 26, 2021 | www.investors.com

    Biden hailed the new law's focus on growing the economy "from the bottom up and the middle out," after decades of supply-side, or "trickle down" tax policies. It "changes the paradigm" for the first time since President Johnson's Great Society programs, he said.

    But the last time free-spending, inflation-permissive "regime shifts for fiscal and monetary policymakers" coincided, wrote Deutsche Bank economists David Folkerts-Landau and Peter Hooper, "such shifts touched off a sustained surge in inflation in the U.S.," beginning in 1966.

    Growth in core prices, which exclude food and energy, jumped from well under 2% in 1965 to nearly 3.5% in 1966 and approached 5% by late 1968, Deutsche Bank noted. Inflation remained elevated into the early 1970s, even before an oil shock hit in 1973. The pickup was broad-based, but health care inflation played a key role, going from less than 3% to nearly 7% by early 1967.

    The S&P 500 suffered through a bear market in 1966. Another 19-month bear market began in late 1968. The Dow Jones made a major top in January 1966. It would take the Dow Jones until 1982 to finally break through that ceiling for good.


    What Is Inflation And Why Does It Matter To The Fed -- And You?


    Outlook For Inflation, Federal Reserve Policy

    Almost everyone expects a notable pickup in inflation this year -- including the Fed. Monetary policymakers expect the personal consumption expenditures (PCE) price index to rise 2.4% this year. That's vs. 1.5% in the 12 months through January.

    Fed Chair Jerome Powell said March 17 that the Fed will discount this year's jump in prices as a transitory bounce from pandemic-induced weakness. What happens in 2022 will be key. Fed projections show inflation easing back to 2%. But if pressures don't ease, the Fed will have to reassess its 2024 timetable for the cycle's first rate hike.

    It's easy to see how Fed projections might understate next year's inflation. Policymakers likely are not factoring in any impact from the Democrats' next massive spending package.

    Subdued health care prices might help keep inflation in check, depending on what Congress does. A 2% hike in Medicare reimbursements is scheduled to lapse in April, but lawmakers appear set to extend it. A 3.75% increase in Medicare fees for physicians could end in January, Deutsche Bank said.

    Democrats also are eyeing spending curbs to help pay for their infrastructure package. Letting Medicare negotiate prescription drug prices is high on the list of options.

    Longer term, the inflation outlook may depend on whether a post-pandemic productivity boom offsets upward price pressure as globalization backslides.

    10-Year Treasury Yield Surges On U.S. Economy Growth Outlook

    This week, the 10-year Treasury yield has eased to 1.66%, after hitting 1.75% last week, the highest of the Covid era. Still, the 10-year yield is up 66 basis points since Jan. 5.

    Financial market pricing now indicates an expectation that inflation will average 2.35% over the coming decade. That's the difference between the 10-year Treasury yield and the -0.69% yield on 10-year Treasury Inflation-Protected Securities, or TIPS.

    "Negative real yields seem highly incongruous with the robust economic growth in train," Moody's Analytics chief economist Mark Zandi wrote. As real yields rebound, Zandi sees the 10-year Treasury yield reaching 2% by year end, 2.5% in 2022 and 3% by late 2023.

    What Do Taxes, Interest Rates Mean For S&P 500?

    As the new fiscal and monetary policy regime takes hold, investors will have a lot to process. If the era of too-little inflation and ultralow interest rates is drawing to an end, but earnings growth surges as the economy catches fire, what will that mean for the S&P 500? And how might tax hikes affect stock prices?

    ... ... ...

    The UBS economics team holds the out-of-consensus view that annual core PCE inflation won't exceed the Fed's 2% target until 2024. Chief U.S. economist Seth Carpenter expects the new stimulus checks to be largely saved. The next fiscal package might likewise have a "muted" bang for the buck, while adding just $600 billion to the federal deficit.

    ... ... ...

    Interest Rates: Parker finds that a 50-basis-point rise in the 10-year Treasury yield compresses price-earnings multiples by six-tenths of a point. Based on the S&P 500's current forward earnings multiple of about 21.5, that would equate to about a 3% decline in the S&P 500.

    Capital Gains Taxes: Biden has proposed hiking the capital gains tax rate from 20% to 39.6% for high earners. Parker figures that could slice 1.5 points off the S&P 500 P/E multiple, potentially a 7% hit. However, UBS expects that not quite half the tax plan will become law.

    Parker arrives at a 19.5 forward earnings multiple for the S&P 500. That also factors in some compression because the fiscal boost to earnings is bound to slacken...

    [Mar 26, 2021] A Structurally Deficient US Economy Will Soon Implode Again

    Feb 23, 2021 | maalamalama.com

    ... On December 7, 2009, I sent out a warning from our Managing Director, J. Kim, to thousands of people via email about the deterioration of the global economy...

    ...J. Kim: "Despite the weapons of mass financial destruction that bankers have created and governments worldwide have coddled and shielded from proper regulation, the majority of people still incredibly do not understand the crime syndicate-like relationships among governments, corporations and banks. The public sees that the US markets are up a little over 10% this year and many are duped into believing that that the stock market performance means that the economy is recovering. And this belief is reinforced by idiot talking heads on TV like Jim Cramer that do nothing but misinform people. Sure, US markets have now risen by more than 36.79% since they crashed in 2008, a figure that sounds impressive on the surface level. Then combine this impressive sounding figure with US Fed Reserve Chairman Ben Bernanke's national appearance on 60 Minutes, when he lies to the nation about inflation rates and about continuing to create more money out of thin air, and you have millions more that are converted into sheeple. How do I know? Because I talk almost every month to people in the US that tell me they believe the economy is recovering. So when people believe that inflation is still less than 2% because the Fed tells them to believe this, they look at a near 37% gain in the US markets in the last two years and believe that they have made substantial recovery in their pensions and IRAs and consequently believe the economy must be recovering as well! (by comparison, J. Kim's Crisis Investment Opportunities newsletter(that he published back then) has returned more than 105.25% over the same time period, clobbering the S&P 500's 36.79% return, and yielding very substantial REAL gains, even after the inflationary monetary effects of the US Federal Reserve's schemes)."

    James C : "So besides the government and bankers deliberately keeping people in the dark, why else do you think some, or even many, people believe the economy is recovering?"

    J. Kim: "First of all, the Federal Reserve's insane POMO (Permanent Open Market Operation) schemes this year (2010) are largely responsible for propping up the US market this year. In 2009, when I stated that the US would experience significant economic shocks in 2010 and 2011, I did not yet know the duration of the Fed's POMO operations and how insane they were going to be. Although daily POMOs had already reached upwards of $6 billion and $7 billion per day as of mid-2009 (just for US Treasuries, but up to multiples of these figures when including US Treasuries and other debt-related financial products), many had speculated that the POMOs would soon end. Obviously, with projected cumulative POMOs of nearly $1,000,000,000,000 just between November 2010 and June 2011 (again just for US Treasuries), the Fed Reserve POMO scheme not only did not end, but it received an injection of steroids in 2010. So POMOs that were used to buy future contracts of US market indexes is a major factor that has kept the US market afloat at this juncture and may continue to keep it afloat for several more months. Rising stock markets have no correlation to a strong economy anymore due to scams run by Central Banks and due to gains that largely occur due to the devaluing currencies that these markets are denominated in . The best performing stock market of the past decade has been the Zimbabwe stock market. Still, it's irrelevant if you made a quadrillion Zimbabwe dollar profit investing in the Zimbabwe stock market, as by 2008, a loaf of bread would have cost you 1.6 trillion Zimbabwe dollars."

    James C: "If the economy is really not recovering, then can you explain what is really going on?"

    J. Kim: "Let me explain what is really going on with the economy with the following disaster analogy. In June of 1995, the Sampoong department store, a five-story building with four basement levels, suddenly collapsed in Seoul, South Korea, tragically killing 501 people and injuring 937 others. When the Sampoong department store was constructed, the owners, due to a desire to cut costs, made several fatal decisions. First, they decided to cut away a number of support columns in the original blueprint in order to install escalators. Secondly, in order to cut costs, the owners shrunk the original width of the support columns from the required 80cms to only 60 cms, an inadequate width to support the load of the building. In addition, the original blueprint called for only a four-story building but the owners built an additional fifth story that housed a restaurant with a very heavy heated concrete base that quadrupled the load of the original building design.

    Two months before the building collapsed, worrisome cracks appeared in the ceiling of the south wing's floor. On the day of the collapse, cracks as wide as 10 centimeters appeared in the top floors of the building five hours before the building collapsed, but the owners hid this information from its patrons and refused to shut down and/or evacuate the building as they did not want to lose its daily revenue. When it became clear that the building was going to collapse, senior executives of the department store fled without warning any of the patrons still inside the building. An alarm to evacuate the building was only sounded when the building started to make loud cracking sounds, just 7 minutes before its collapse at 5:57 PM despite signs of an imminent collapse being clearly visible more than five hours prior. City officials Lee Chung-Woo and Hwang Chol-Min, in charge of overseeing the construction of the building, were responsible with concealing the illegal changes to the original blueprint designs and were later charged with and convicted of bribery."

    "Amazingly, the above story serves as nearly a perfect analogy for the US economy. The government and bankers laud a rising stock market as proof that the economy is recovering. They go on record stating that inflation is less than 2% when in reality it is more than four times higher. They state unemployment is less than 10% when it is nearly 23% [Editor's Note: These statistics all apply to the year in which this original interview was conducted, 2010]. Thus, to many people, the economy appears as the Sampoong department store's exterior appeared to the public right before its collapse, structurally sound and with a solid exterior. This is the reason why 40,000 people a day visited the department store despite its fatal structural integrity problems. The government and bankers are just like the Sampoong department store owners, actively concealing all warning signs from the public and selling them an illusion that all is okay when instead, the economy is heading for collapse. Just as the Sampoong department store owners constructed a crappy building destined to collapse due to excessive greed, bankers with the help of government officials, constructed dozens of financial derivative products destined to collapse due to their excessive greed as well."

    "The US regulators that also see the impending cracks in the economy, are just like Lee Chung-Woo and Hwang Chol-Min. They receive inordinate pressure and bribes from the bankers to look the other way and keep the public in the dark about the impending doom that is coming. In the case of the Sampoong disaster, when the contractors refused to continue work on the building when the owners changed structural regulations that endangered the integrity of the building, the owners fired the contractors and hired ones that would cut corners. US regulators that are honest and that try to protect the American public, like Brooksley Born, received the same fate as the original Sampoong contractors and are also fired or forced to resign. When the entire system is corrupt, even the rare good person can't save disasters from happening. Thus, the public is none-the-better-off despite the presence of regulators that are supposed to protect the public's interests and safety, but in reality, protect the greed and profits of companies that exploit the public's interests."

    "And finally, the economy itself is like Sampoong's interior. It is replete with cracks and fractures that warn us of the disaster ahead. But even so, a large percentage of the masses still remains ignorant because the banker/corporate/government three-headed monster keeps the people's vision in a tunnel by pummeling the public with a constant stream of propaganda on MSNBC, newspapers, and financial talk shows. In Seoul, Sampoong's owners distracted the public's attention away from the developing disaster with stores fully of luxury goods. So when the US economy finally experiences shocks in the future more disastrous than those in 2008, as was the case with the Sampoong department store collapse, many will believe that now warning signs had existed despite the evidence that exists to the contrary today. And I'm quite certain the media, just as they did in 2008, will stupidly ask the same questions they did back then, such as "How did this happen?" when in fact, all the answers stare them in the face right now. With the Fed's POMO schemes, regulators that aid and abet fraud, and governments and bankers that conceal truth from the public, the combined effect of these actions is just to delay disaster for another year or two. So that is why I say now that disaster will visit the US sometime between 2011-2013."

    [Mar 26, 2021] The Most Important Thing to Understand About the Ongoing Global Economic Crisis

    Mar 26, 2021 | maalamalama.com

    ... As I already stated above, anyone that has a rudimentary understanding of real finance (meaning finance as it operates in the real world, not finance as taught in MBA programs) already understood that Central Bankers' massive provisions of liquidity in the overnight repo market pointed to US banks being undercapitalized in cash

    ... in my referenced April 2020 article above, I only explained why it was necessary for Central Bankers to keep interest rates extremely low, and I had not yet realized, as we were only a few weeks into a global economic lockdown that was promised to last only a few weeks, that the global economic destruction caused by lockdowns would be the mechanism used to achieve this goal of keeping interest rates extremely low. In other words, only in hindsight, a few months into the lockdown, did I connect the dots myself and understand why it was necessary to keep the economic lockdowns going forever, which is also why I stated at the end of 2020 that only the extremely naïve and foolish believe that the bankers and politicians would end the lockdowns in the New Year, as the problem I explained in April 2020 that needs to be managed to avoid meltdown of the global financial system still very much exists in March of 2021.

    [Mar 26, 2021] US Corporate Junk Bond Yields Warning of Trouble Ahead

    Mar 22, 2021 | maalamalama.com

    I often look at rising US corporate junk bond yields after long periods of decline as the proverbial "canary in the coal mine" to predict major trouble ahead in global stock markets.

    As you can see, US corporate junk bond yields have just started to rise after nearly a full year of plunging yields. Is the rise enough to spark concern? In my opinion, the rise in yields is not significant enough to yet spark major concern, but if they break 5.0% then at this point, I will dive deeper into the muck to see what I can find.

    So stay tuned, and if you have not yet subscribed to my free newsletter, please do so at the link at the top of this page.

    [Mar 26, 2021] Treasury Markets Calm, but Investors Anticipate a Rate Rise Soon by Paul J. Davies

    Higher inflation in any country is typically currency negative. Fears of rampant inflation in the US have gone unfulfilled for years. the current level of deficit spending raises the question whether some sort of existential crisis for the dollar is in the books. In 2020 the US budget deficit hit 14.9% of GDP , the highest level since 1945. FEd now owns around 22% of the US beft -- in essence, one branch of the government buys debt from the another part of government. This might be a bad news for stocks, bonds and the dollar. The demand for Treasuries from private investors, including foreign buyers, appears to have weakened recently.
    Trust in government statistics, especially such measures as inflation and unemployment hit new low (see comnets below) and that also spell troble in the long run.
    Under neoliberalism financial oligarchy dominates and labor reduced to the role of "debt slaves" and lacks any wage bargaining power. So the main danger is deficits and eroding trust in the US economy which supports the role of dollar as world reserve currency. US foreign policy and sanctions encourages "flight from dollar" for Russia and China.
    Notable quotes:
    "... the difference between longer-term and shorter-term yields remains far greater in real yields than in nominal yields. This difference over time, known as the yield curve, illustrates how much investors expect interest rates to rise in the future: A steep curve equals more rate rises. ..."
    "... For normal Treasury yields, that five-year to 10-year gap was 0.798 percentage points, up from 0.550 percentage points at the end of 2020 ..."
    "... Seems like a very effective way to "tax" 401k money indirectly. ..."
    Mar 25, 2021 | www.wsj.com
    ...

    The Fed reiterated last week that its rate-setting committee doesn't expect to increase interest rates until after 2023. However, investors predict that it will, according to Sebastien Galy, senior macro strategist at Nordea Asset Management.

    ... the difference between longer-term and shorter-term yields remains far greater in real yields than in nominal yields. This difference over time, known as the yield curve, illustrates how much investors expect interest rates to rise in the future: A steep curve equals more rate rises.

    ... For normal Treasury yields, that five-year to 10-year gap was 0.798 percentage points, up from 0.550 percentage points at the end of 2020 .

    ... ... ...

    Some investors also fear that a sharper rise in interest rates later will be more destabilizing for other assets such as stocks or riskier corporate debt...

    ... ... ...

    Harold Begzos Harold Begzos SUBSCRIBER 1 week ago The value of fiat currency is only as good as the government that prints the paper. We are managing the dollar like a Caudillo running a banana republic. The U.S. is experiencing a sugar high. When the sugar runs out the crash will cause harm for the next decade. A Andy Kives SUBSCRIBER 1 week ago One of my many price increases this year was this morning from my metal and plastic container wholesaler, who I buy a few hundred thousand pieces from annually. Prices are only going up 10-26% in April.

    What inflation? Like thumb_up 3 Share link Report S Susan Croxton SUBSCRIBER 1 week ago (Edited) The dollar tanked under Trump, like he wanted Like thumb_up Share link Report G Gerald Garibaldi SUBSCRIBER 1 week ago (Edited) My grandmother was a deft investor, and her credo when investing was always "Don't ignore what's around you." I'm not her equal, but what's around me doesn't seem to be middle/working class families and people gearing up to shoot their stimulus wad on new TV sets and sunglasses. I think growth will after a short spirt, disappoint. And inflation will hit like a tsunami. EU is not following our example, by the way. Most inflation will be imported. 1 Share link Report J John Harris SUBSCRIBER 1 week ago (Edited) An included modest understatement of the year:

    "The flip side of this exceptionalism is a growing fear of higher inflation that could eventually reverse the dollar's fortunes, according to some investors."
    J
    John Harris SUBSCRIBER 1 week ago (Edited) Duh --
    Did anybody look at M2 ?? Austin Lowrie Austin Lowrie SUBSCRIBER 1 week ago The currency debasement will continue, until morale improves.... Like thumb_up 5 Share link Report I Ivaylo Ivanov SUBSCRIBER 1 week ago The article misses an important component of the equation. Various estimates suggest about half of all US cash in circulation, about $700-800 billion, circulates outside US borders. The trigger of a run on the dollar (a collapse, really) might be these holders, not foreign governments. The moment they realize they are holding increasingly worthless money they will try to dump it. Often ordinary people figure out the worthlessness of a currency much faster than governments.

    M1 (hot money) has increased by 70% in 12 months. The question is how fast people realize what that means.
    Like thumb_up Share link Report Frank Mostek Frank Mostek SUBSCRIBER 1 week ago If you drive car, own a home, require healthcare, have kids and eat - you have noticed plenty of inflation... L Lester Brown SUBSCRIBER 1 week ago Makes you realize how slanted the CPI measurement is. 1.4% in 2020 - my a $$!! B Brett M SUBSCRIBER 1 week ago go through the exercise of reconstructing the CPI with research online. I did. It won't take you long to see that there is no component less than 2%. you will find edu costs +5% annully for years, medical costs +4% annually for years. 2 Share link Report B bruce strong SUBSCRIBER 1 week ago So the Federal debt as a percentage of GDP was about 30% in 2001 and it's now around 100%. Seems we are living way beyond our means and this can only lead to trouble in the coming years. The only question is will Congress do anything to stop the spending? Forget about worrying about inflation as it;s the least of our concerns. p 5 Share link Report Frank Mostek Frank Mostek SUBSCRIBER 1 week ago I think it around 130% now...
    T
    Ted Terry SUBSCRIBER 1 week ago Apparently the Business Kids are surprised at the strength of the dollar but knowledgeable readers are not that surprised. The Dollar competes against the Euro and look at where the EU is. They are squabbling at each other over their ineffective response to the virus and their economies are struggling to break back to normal. I'm not sure where the Dollar is with respect to the Pound but the Brits too are still more virus bound than we are.
    B
    bruce strong SUBSCRIBER 1 week ago Japan's been running with a debt load of over 200% and the Yen has held up quite well. 2 Share link Report S Stephen S S Hyde SUBSCRIBER 1 week ago "The U.S. has a big advantage because the dollar is the world's most commonly used currency."

    This both understates and buries the lede on this seemingly granitic foundation of a fiscal/monetary system that has allowed us to get away with simultaneously lowering taxes, explosively expanding borrowings, creating the money to cover it, and then lending it to ourselves. (Eat your heart out, Argentina.)

    Unfortunately, having the world's reserve currency is not a skyhook, as our British cousins learned with their once indomitable Sterling. Like thumb_up 23 Share link Report I Ivaylo Ivanov SUBSCRIBER 1 week ago If you do everything in your power to debase your currency foreigners eventually notice. It will take one big player noticing to bring down the house (of cards). In the 60-s and the gold backed dollar it was de Gaulle. It will be interesting to see who will jump the gun this time around. 3 Share link Report S Stephen S S Hyde SUBSCRIBER 1 week ago You obviously have an informed sense of history. The dollar's gold backing had been increasingly precarious but relatively stable until de Gaulle pulled the fatal trigger. David Van Wie David Van Wie SUBSCRIBER 1 week ago

    Fears of rampant inflation have gone unfulfilled for years. The U.S. has had low and stable inflation for nearly three decades.
    Indeed. That point can't be emphasized enough. Said differently: for all of our research, economic theories and modeling, we still don't understand what causes inflation in our economy.

    Is it caused by massive amounts of deficit spending? Nope. We've had lots of that and no serious inflation. Higher taxes? Lower taxes? No and no. What about high or low trade deficits? Sorry, try again. No correlations here.

    I could go on, but you get my point. All of the things forecasters such as myself rely on to model inflation all sound like they should be predictive, but they aren't. Intuition creates cognitive bias, which in turn leads to bad trades that don't work.

    We won't figure out what's going on until about 6-12 months after inflation restarts, unfortunately. Then, everyone will have known it all along! Just don't ask to see their old forecasts. Like thumb_up 15 Share link Report S Stephen S S Hyde SUBSCRIBER 1 week ago Great comment, Mr. Van Wie. On top of your point (or underneath it) is the tendency for complex systems to fail not gradually, but suddenly and catastrophically. Think the Great Depression, the Soviet Union, the Great Credit Crunch, and Long Term Capital Management (talk about a moniker to challenge the gods!). I don't know when, how, or why, but I think our lifetimes will witness the opportunity to dig through the ruins of a once magnificent edifice built on sand. Like thumb_up 10 Share link Report B Brett M SUBSCRIBER 1 week ago Yes but your whole basis is on the government orgs giving your inflation information [% year over year ] are telling the truth. They are not. Like thumb_up Share link Report J Domingo J Domingo SUBSCRIBER 1 week ago Everyone is worried about inflation except the Fed.

    Which is why everyone is worried about inflation except the Fed. Like thumb_up 21 Share link Report I Ivaylo Ivanov SUBSCRIBER 1 week ago

    Everyone is worried about inflation except the Fed.
    Which is why everyone should be very worried about inflation. The seeming carelessness of the Fed is the best indication inflation will get out of hand. Like thumb_up 3 Share link Report Stuart Young Stuart Young SUBSCRIBER 1 week ago With the government pumping trillions of dollars into the economy, anyone who chooses to ignore serious inflation problems is just fooling themselves. Like thumb_up 11 Share link Report A Anne T SUBSCRIBER 1 week ago Not an investment expert here at all.

    But anyone with a mind knows where the Biden-Harris Administration is going and it's worse than route Obama-Biden took us on.

    Seems Democrats still refuse to stop themselves from getting in the way of a budding recovery.

    And learned nothing between 2009-2020. Like thumb_up 6 Share link Report P Paul Kaufmann SUBSCRIBER 1 week ago Did you happen to notice the debt/gdp graph in the article? The slope in the past 4 years is so great that it is almost uncalculable...infinite. Like thumb_up Share link Report A Anne T SUBSCRIBER 1 week ago Yes I did.
    From 2008-1016 it soared from 40% to 76% where it pretty much stayed until the Covid stimulus of 2020. Like thumb_up Share link Report H H S Howell SUBSCRIBER 1 week ago We are already in an inflationary spiral. Don't rely on gov figures, just take a trip to the local hardware or grocery store. In the past the danger of big socialist government was Tax and Spend, today it is Print and Spend resulting in an enormous escalation of Debt (the largest in the world).

    China officially holds $1.1 trillion of our debt, but actually much more when counting Hong Kong, other regions of China. Should China sell (debt dump) their US bonds, it would have the destabilizing effect of lower bond prices and higher yields, devaluation of the dollar, higher cost of servicing our debt and a stock market crash. J Jeffrey Cunningham SUBSCRIBER 1 week ago Seems like a very effective way to "tax" 401k money indirectly. thumb_up Share link Report P Peter Sherman SUBSCRIBER 1 week ago Bond investors are selling.
    The Unholy Marriage of the Federal Reserve and Treasury allowing for the implementation of MMT ( Magic Money Tree ) probably create high inflation .

    Given the rotten value in bonds now ( negative real yield) and rising odds of higher inflation, expect to see more selling.
    B
    Brett M SUBSCRIBER 1 week ago (Edited) I read a quote in an article one time

    "until the bond market rebels"

    It means people become like me - refusing to own US treasuries nor USA bonds. The only exception is a 529 account I have which limits choices.

    If people became like me relatively fast, investors sell bonds off, interest rates shoot through the roof as the USA gov loses control of their puppet show. Then the government defaults - and rather quickly, say within a year after.

    I personally believe that USA government debt is worthless. I am a big fan of gold right now.
    If China ever moved toward being a reformed country that didn't have George Orwell cameras in every alley, field and wooded grove, then the dollar would plummet. If there was another country that was not pathetic financially I would move my money there.

    [Mar 24, 2021] VTIP - Vanguard Short-Term Inflation-Protected Securities Index Fund ETF Shares

    Mar 24, 2021 | finance.yahoo.com

    The investment seeks to track the performance of the Bloomberg Barclays U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Year Index. The index is a market-capitalization-weighted index that includes all inflation-protected public obligations issued by the U.S. Treasury with remaining maturities of less than 5 years. The manager attempts to replicate the target index by investing all, or substantially all, of its assets in the securities that make up the index, holding each security in approximately the same proportion as its weighting in the index.

    Vanguard Short-Term Inflation-Protected Securities Index Fund ETF Shares (VTIP) NasdaqGS - NasdaqGS Real Time Price. Currency in USD Add to watchlist
    51.69 +0.13 (+0.25%) At close: 4:00PM EDT

    51.66 -0.03 (-0.06%)

    After hours: 4:21PM EDT

    [Mar 24, 2021] Fed's Bullard sees inflation at 2.5% this year, easing only slightly in 2022

    Mar 24, 2021 | www.reuters.com

    WASHINGTON (Reuters) - Inflation will hit 2.5% this year and not fall much in 2022, which the Federal Reserve should welcome as a way to reaffirm the central bank's inflation target, St. Louis Federal Reserve Bank President James Bullard said on Tuesday.

    " I am not seeing the inflation rate come down very much in 2022 ... maybe just slightly, " Bullard said in comments that placed him among the more aggressive Fed officials in terms of willingness to see inflation move higher this year and remain there without raising interest rates.

    "Part of the goal is to take the increase in inflation that we have this year penciled in and allow some of that to move through to inflation expectations," and keep them cemented at the Fed's 2% inflation target.

    [Mar 24, 2021] US Inflation Rate by Year- 1929 - 2023

    The real inflation for the past 20 years was probably around 5%: that buypoer of$100 dinimisnes by 50% in 20 years. In some areas like education and healthcare much faster that that. In some areas slower then that. Official inflation was around half of that (and this discrepancy is systemic -- due to the desire of any regime based of fiat currency to underestimate inflation and thus diminish additional payment to Social Security and other linked to inflation budget items) . Thanks to a massive federal deficit inflation might pick up.
    Higher inflation in 2021-2023 is now the consensus,
    Mar 24, 2021 | www.thebalance.com
    Year Inflation Rate YOY Fed Funds Rate* Business Cycle (GDP Growth) Events Affecting Inflation
    ... ... ... ... ...
    2000 3.4% 6.50% Expansion (4.1%) Tech bubble burst
    2001 1.6% 1.75% March peak, Nov. trough (1.0%) Bush tax cut, 9/11 attacks
    2002 2.4% 1.25% Expansion (1.7%) War on Terror
    2003 1.9% 1.00% Expansion (2.9%) JGTRRA
    2004 3.3% 2.25% Expansion (3.8%)
    2005 3.4% 4.25% Expansion (3.5%) Katrina, Bankruptcy Act
    2006 2.5% 5.25% Expansion (2.9%) Bernanke became Fed Chair
    2007 4.1% 4.25% Dec peak (1.9%) Bank crisis
    2008 0.1% 0.25% Contraction (-0.1%) Financial crisis
    2009 2.7% 0.25% June trough (-2.5%) ARRA
    2010 1.5% 0.25% Expansion (2.6%) ACA, Dodd-Frank Act
    2011 3.0% 0.25% Expansion (1.6%) Debt ceiling crisis
    2012 1.7% 0.25% Expansion (2.2%)
    2013 1.5% 0.25% Expansion (1.8%) Government shutdown. Sequestration
    2014 0.8% 0.25% Expansion (2.5%) QE ends
    2015 0.7% 0.50% Expansion (3.1%) Deflation in oil and gas prices
    2016 2.1% 0.75% Expansion (1.7%)
    2017 2.1% 1.50% Expansion (2.3%) Core inflation rate 1.7%
    2018 1.9% 2.50% Expansion (3.0%) Core rate 2.2%
    2019 2.3% 1.75% Expansion (2.2%) Core rate 2.3%
    2020 1.2% 0.25% Contraction (-2.4%) Forecast: Core rate 1.4%
    Impact of COVID
    2021 1.8% 0.25% Expansion (4.2%) Forecast: Core rate is 1.8%
    2022 1.9% 0.25% Expansion
    (3.2%)
    Forecast: Core rate is 1.9%
    2023 2.0% 0.25% Expansion (2.4%) Forecast: Core rate is 2.0%

    [Mar 24, 2021] Powell Says Rise in Long-Term Bond Yields Reflects Economic Optimism

    Higher interest rates means higher interest payment of the new government debt. The USA can't afford this so FED probably will try to suppress rate.
    Mar 24, 2021 | www.wsj.com

    "The Fed has signaled that its dovish monetary policy is here indefinitely," Mr. Toomey said, noting a recent uptick in commodity prices and a brightening outlook for economic growth. "I worry that the Fed will be behind the curve when inflation picks up."

    Mr. Powell, however, reiterated that he doesn't expect supply-chain bottlenecks or an expected surge in consumer demand later this year as the economy reopens to change in long-term price trends. The Fed generally doesn't alter its policies in response to temporary price pressures.

    "In the near term, we do expect, as many forecasters do, that there will be some upward pressure on prices," Mr. Powell said. "Long term we think that the inflation dynamics that we've seen around the world for a quarter of a century are essentially intact. We've got a world that's short of demand with very low inflation and we think that those dynamics haven't gone away overnight and won't."

    Sen. Richard Shelby (R., Ala.) pressed Ms. Yellen on her changing views on the risks of high and rising federal debt. Government red ink has swelled over the past year as economic activity stalled and Congress ramped up spending to combat the pandemic.

    [Mar 24, 2021] No Inflation Panic Yet, but There Is Concern

    Mar 24, 2021 | www.wsj.com

    John Gimmy Chesapeake City, Md

    . Alan S. Blinder is correct that with the slack in the economy and high unemployment there is no risk of wage inflation (" There's No Need to Panic About a Little Inflation ," op-ed, March 16).

    ... ... ...

    Lloyd B. Thomas, Ph.D. University of Missouri Columbia, Mo.

    The Federal Reserve is capable of nipping any surge of inflation, but it has made clear it will be behind the curve as inflation rises. It has announced that it will not boost interest rates until it is confident we have reached full employment and until inflation substantially exceeds 2% annually for a considerable period.

    Ed Kah, l Woodside , Calif,

    The Fed's "foresight" in the 1970s sleepwalked us over 10 years into 14.5% inflation, 18.5% mortgage rates, 7.5% unemployment and a severe recession in 1980. The Fed's repression of interest rates has already inflated asset prices. It is now favoring spending that will move the national debt held by the public toward 150% of GDP if the Democrats keep passing multitrillion-dollar stimulus spending bills in a fast recovering economy.

    The big risk comes when interest rates regress to higher historic averages that increase the cost of government debt. Even a very small rise in short-term rates shook the markets recently. The Fed should at the very least hedge this risk by lengthening the maturity of most government debt. They should also caution Congress about the sorry history of countries whose debt exceeds GDP.

    Jacob R. Borden , P.E. Trine University, Angola, Ind.

    Prof. Blinder uses macroeconomic anecdotes to argue that upward of 4% inflation is no big deal. But it is a big deal when you recognize that inflation is a tax on the accumulation of wealth. Sen. Elizabeth Warren must be smiling.

    Even worse, inflation is a regressive tax on wealth. The professional class is already shifting assets to protect against inflationary headwinds. Mary B. Flyover, on the other hand, has few such assets and instead spends relatively more of her money on fuel and groceries, the very elements missing from Mr. Blinder's preferred measure of inflation.

    Every year, inflation saps the spending power of a dollar earned, putting future savings further out of reach for people already being left behind. What little savings is available is largely in checking and savings accounts that don't even keep up with current inflation, let alone just a little more. Then add the compounding impact of inflated incomes on inflated tax bills. Once 4% inflation is baked in, Ms. Flyover's tax bill will be forever higher, while her purchasing power will trend ever lower.

    Thomas Porth, Hockessin, Del.

    The facts that Prof. Blinder doesn't cite are what worry me. When I studied economics at Princeton in 1981 (using Prof. Blinder's textbook), the yield on the 10-year Treasury stood at 14% as of the end of December, while the CPI-U inflation rate stood at 8.9%. The real risk-free rate of return was therefore a positive 5.1% or so. In contrast, today the CPI-U stands at 1.7% (March 10), while the yield on the 10-year Treasury stands at 1.71% (March 18), for a real risk-free rate of return of what is effectively zero.

    me title=

    Even relying on current measures of inflation, the real rate of return has dropped from positive 5.1% in 1981 to zero or, let's be serious, less than zero today (when I am retired). Sorry, Prof. Blinder, but I'm starting to panic.

    Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

    Appeared in the March 23, 2021, print edition.

    [Mar 24, 2021] If we look back at the last four recessions the yield curve steepened every time- Citi U.S. Wealth Mngt-

    Mar 24, 2021 | finance.yahoo.com

    [Mar 21, 2021] How inflation's bite makes bonds riskier than stocks by MarkHulbert

    Mar 13, 2021 | www.marketwatch.com

    Last Updated: March 20,2021 at 12:33 p.m. ET
    First Published: March 13,2021 at 7:08 a.m. ET

    You'd have to hold U.S. Treasury bonds for 57 years to not lose to inflation

    [Mar 20, 2021] Wall Street Pros From Goldman to JPMorgan on New Inflation Era

    So far damage to intermediate bonds was so far medium in size. For example VFICX Vanguard Intermediate-Term Investment-Grade Fund Investor Shares lost 2% while yield is 2.41%. At the same time VWEHX (high yield bond fun) did not lost any money so far because the stock market is still holding.
    But if FED lost control think can became really break soon. Theoretically TIP bought directly from Treasury might be an escape for misery but currently they are not as their yield right now is just 0.125% while inflation is somewhere probably between 2 and 6 percent per year. CPI Inflation Calculator shown that $1K in 200 is equivalent to $1558 now so the official annual inflation is around 2.5%
    Mar 20, 2021 | finance.yahoo.com

    ...The economics of trading from stocks and real estate to interest rates would be turned upside down if projections of runaway prices are to be believed.

    Yet there are clear divisions. Goldman Sachs Group Inc. says commodities have proven their mettle over a century while JPMorgan Asset Management is skeptical -- preferring to hide in alternative assets like infrastructure.

    Pimco, meanwhile, warns the market's inflation obsession is misplaced with central banks potentially still set to undershoot targets over the next 18 months.

    ... There will be rotation into real-economy assets such as small caps, financials and energy stocks instead of rates and credit, and that will generate a lot of volatility.

    ... TIPS (only if bought directly from the treasury) offer reasonable insurance for an inflation overshoot. Commodities and assets linked to real estate should also benefit in an environment of rising inflation.

    [Mar 20, 2021] Bond Vigilantes Are Unlikely to Cause a New Black Monday for Stocks

    Bind vigilanties is a myth... Concerned speculators are real. They would "sell first and ask questions later", pushing up interest rates and battering bonds and stocks...
    Mar 20, 2021 | finance.yahoo.com

    The bond vigilantes appear to have returned, punishing not only the Treasury market but also exacting a toll on the Nasdaq Composite's highfliers. What's different this time is that the bond vigilantes are fighting the Fed, to mix two market aphorisms. The Federal Reserve just reiterated its intention to maintain its ultra-accommodative policy until it sees what it deems as maximum employment and inflation steadily above 2%.

    [Mar 18, 2021] 10-year treasury yields briefly touched 1.75%

    This is the first tine the benchmark 10-year note trades up above 1.7% since Covid-19 pandemic began. Though much higher than last year, when it spent months between 0.6% and 0.9%, the 10-year yield also remains low on a historical basis, It have been above 3% as recently as 2018.
    The key problem is that the S&P500 level is in the bubble territory using Shiller metric and that means that a large correction is a possibility.
    Mar 18, 2021 | www.zerohedge.com

    As 10-year TSY yields briefly touched 1.75% this morning in the wake of Wednesday's FOMC, an overnight note from Zoltan Pozsar predicting the end of SLR relief , and a report by the Nikkei noting that the BOJ would allow long-term interest rates to move in a slightly larger range of about 0.25%, versus 0.2% now...

    Bank of America warned that ... 10-year yields above that level could become a headwind for the equity complex. As BofA strategist Savita Subramanian wrote "history suggests that 1.75% on the 10-yr (the house forecast and ~25bp above current levels) is the tipping point at which asset allocators begin to shift back to bonds" and thus sell stocks in the next wave of aggressive liquidations.

    Why 1.75%? Because that yield on the 10Y is decisively above the S&P's dividend yield, and where according to BofA "there is an alternative to stocks", or TIAA.

    Separately, in its fund manager survey, Bank of America found that while few believed that rates at 1.5% would cause an equity correction (which they did as Nomura originally predicted one month ago ), the move from 1.5% to 2% is critical as 43% of investors now think 2% is the level of reckoning in the 10-year Treasury that will cause a 10% correction in stocks .


    Ajax_USB_Port_Repair_Service_ 7 hours ago

    2.0 is the new 1.75

    paid_attention 4 hours ago (Edited)

    I've noticed that there hasn't been any down days over 2% in months...

    Globalistsaretrash 7 hours ago remove link

    Just last week an article said 1.54% would trigger Armageddon.

    Boxed Merlot 7 hours ago

    ...last week...1.54% would trigger Armageddon...

    I know this is getting old, but being cursed with a "boomer memory", I still remember when interest only real estate purchases at 1% of purchase price per month to service one's "note" was considered a steal. Home loans at 16-18% were common and t-bills were paying a mere 10-12% a year.

    What's more, me and mine are still here after all those years, albeit a bit longer in the tooth, but that's life.

    I know, I know, this time is different.

    Seasmoke 7 hours ago

    So no Ponzi Collapse at 1.65 ?? Because I read that somewhere last week.

    Globalistsaretrash 7 hours ago

    Me too.

    radical-extremist 7 hours ago (Edited) remove link

    OMG! I can't decide whether I want a 1.75% yield in treasuries or SPY dividends....just so I can keep pace with 2.2% inflation of the DXY...of my $1400 stimmie.

    nope-1004 7 hours ago remove link

    1.75.... lmao. The rigged casino is THAT weak?

    mtl4 7 hours ago (Edited) remove link

    Everyone was a genius back in the Dot Com era too.......works until it doesn't.

    drjd 6 hours ago

    Because life is all about the pursuit of profits?

    I woke up 7 hours ago

    How much more fake money needs to be printed to cover the debt when yields go to 1.75

    gcjohns1971 6 hours ago

    When everyone is a finacialized zombie, a rotation from stocks bankrupts everyone. If corporates are deprived of their financial casino takes, then you have until quarterlies to see that as a GDP bloodbath.

    Then the only place to go will be commodities. The inflation the Fed has been searching for lives there. PPI will go wild, up double and some times triple digits in a matter of days, spooking everyone.

    itstippy 7 hours ago

    Does the Fed have some sort of tool in their toolbox they could use to suppress market yields on the 10 year if needed?

    JZimmerman901 7 hours ago

    They only have one "tool" and that's to print money. And sure, if they print money to buy 10 years, that would suppress yields.

    Chutney ferret Harris 7 hours ago

    Correction to the article - "Then again, Goldman has been wrong about virtually everything it has said publicly in recent years so take the bank's optimism with a metric ton of salt."

    We know privately Goldman knows what is going on and happily collecting its vig from the taxpayers.

    ReadyForHillary 6 hours ago

    Why would anyone assume that what GS states publicly is their true opinion?

    silverredux 7 hours ago

    Goldman has been correct because they've invested in the other side of the argument every time

    Goldman up 152% in 12 months.

    Rising rates keep metals in check too. Just a bonus

    MrNoItAll 7 hours ago

    Goldman Sach bank's optimism is fabricated hope-filled messaging to the "investors" their mega-bonuses are dependent on.

    QE4MeASAP 7 hours ago

    Maybe we'll get to see if "Not in my Lifetime" Bernanke was correct.

    Everybody All American 7 hours ago remove link

    We are now over the 100% debt to GDP ratio barrier and if rates rise from here to any even small degree it is game, set, match. Since the market top of the 10yr in price there has been a 7% loss for those who bought as it stands right now. We are talking some big losses. Remember, no one is buying this stuff for the yield.

    incalescent 7 hours ago

    While I like to disagree with Goldman on principle. I think there is a better argument than the dividend yield of S&P500 stocks to account for the upcoming shift. The 2% and 3% inflections points have more weight with the general trends. This 1.5% number feels like an exercise in finding a reason to pick the number, not a sharp pin to prick the bubble.

    Bubble though, it is, and we live in cactus times.

    Calvinharrison 1 hour ago

    I put all my pension into government bond funds.. it will drop the least compared to stocks. And I could enter stocks again later. 30% up on the year is ridiculous and there are some funds that went up close to 50%.

    AUD 3 hours ago

    I think it's the volatility of the move which concerns the Fed. If interest rate spreads stay tight as rates move higher, the casino can stay afloat. If rates move to fast, things get out of control.

    Ozarkian 7 hours ago

    Does this mean you can't have your cake and eat it too?

    [Mar 15, 2021] A worry for retirees- Inflation forecasts hit 8-year high

    Mar 15, 2021 | finance.yahoo.com

    A worry for retirees: Inflation forecasts hit 8-year high

    A worry for retirees: Inflation forecasts hit 8-year high
    Brett Arends Mon, March 15, 2021, 10:01 AM

    Nobody suffers more from high inflation than retirees. Back in the 1970s, it was those in retirement living on fixed income that got hit the hardest as prices rose year after year. The investment returns from their bonds and cash fell way behind.

    [Mar 14, 2021] Inflation Isn't Happening, and It Likely Won't. Here Are 7 Charts Showing This. - Barron's

    Real inflation in the USA is probably close to 3-4% a year judging from the dynamic of rental payments and prices on on food. Annual Food inflation was between 3.93%, to 3.78% in December to February timeframe.
    The February 2021 ShadowStats Alternate CPI (1980 Base) increased 9.4% year-to-year, up from 9.1% in January 2021, 9.0% in December 2020 and against 8.8% in November. The ShadowStats Alternate CPI-U estimate restates current headline inflation so as to reverse the government's inflation-reducing gimmicks of the last four decades, which were designed specifically to reduce/ understate COLAs.
    Mar 14, 2021 | www.barrons.com

    Inflation may be on many investors' minds, but it has yet to show up in the numbers. Moreover, a close reading of the data suggests that inflation won't be a problem for some time, if ever.

    The latest reading of the consumer price index shows that Americans' cost of living was only 1.7% higher in February 2021 than a year earlier. That's the fastest inflation reading since the pandemic began, but still substantially slower than the pre-pandemic average. Exclude volatile food and energy prices, and inflation is running at 1.3%...

    [Mar 14, 2021] Fact vs. Fiction: Understatement Of Housing Inflation Exceeds Bubble Levels

    Mar 14, 2021 | www.zerohedge.com

    Submitted by Joseph Carson, former chief economist of AllianceBernstein

    The understatement of housing inflation in the consumer price index has reached a new milestone. As reported, the gap between the actual change in house prices and owners' rent, published by the Bureau of Labor Statistics (BLS), exceeds the "bubble" levels.

    In February, BLS reported owner's rent increased 2% over the last 12 months. House price inflation, as reported by the Federal Housing Finance Agency (FHFA), increased 11.4%. That gap over 900 basis points exceeds the 800 basis point gap recorded during the housing bubble peak.

    The consumer price index was created and designed to measure prices paid for purchases of specific goods and services by consumers. The CPI was often referred to as a buyers' index since it only measured prices "paid" by consumers.

    The CPI has lost that designation. It is no longer measures actual prices. For the past two decades, BLS imputes the owners' rent series, using data from the rental market, no longer using price data from the larger single-family market.

    Imputing prices for the cost of housing services make the CPI a hybrid index or a cross between a price index and a cost of living index. A hybrid index is not appropriate as a gauge to ascertain price stability, especially when the hypothetical measure of owner's rent accounts for 30% of the core CPI.

    The CPI missed the price "bubble" of the mid-2000s, and the economic and financial fallout was historic. History sometimes repeats itself in economics and finance. Policymakers forewarned.

    [Mar 14, 2021] Some thought on the current money bubble from ZeroHedge crowd

    Mar 14, 2021 | www.zerohedge.com

    USAllDay 3 hours ago

    The FED has been inflating a cheap money bubble for 40 years. The response to every recession is to cut rates. But the Fed never returns rates to pre-recession levels so the economy ultimately enters one recession after the next at lower and lower rates. Now at near zero, the gig is up. Dropping rates by nearly 50 basis points per year for four decades has created the mother of all bubbles.

    Greed is King 1 hour ago remove link

    USA, the new Roman Empire and just like the old Roman Empire was, the scourge of the planet.

    A Sovereign debt ridden nation, that only survives due to its enormous military that enables the USA to pillage the resources of other countries via a foreign policy of threat, intimidation, invasion and occupation; exactly the same tactics used by the original Roman Empire.

    Unfortunately for the USA, the MIC and American armed forces, are the biggest consumer of all of the income and resources obtained from pillaging and debt, they are a greedy insatiable monster that continues to grow and demands more and more to be fed.

    We`re now in the ludicrous, unsustainable and unacceptable situation of, all of the countries who are having their resources stolen by the USA, and all of the American tax payers who are underwriting the debt incurred by the USA are in fact paying for the MIC and armed forces to repress them.

    Here`s a radical idea; why not stop borrowing to feed the MIC monster, and try treating the rest of planet Earth with respect and cooperation.

    Make peace, not war.

    Utopia Planitia 2 hours ago

    It's a positive feedback loop...

    [Mar 14, 2021] CPI Rose 0.4% in February on Higher Prices for Energy and Medical Services

    Mar 14, 2021 | angrybearblog.com

    CPI Rose 0.4% in February on Higher Prices for Energy and Medical Services

    run75441 | March 10, 2021 9:59 pm

    US ECONOMICS

    Commenter R.J.S. Discuses CPI Rising led by Food, Energy, and Medical

    The consumer price index rose 0.4% in February , as higher prices for fuel, groceries, utilities, and medical services were only partly offset by lower prices for clothing, used vehicles, and airline fares the Consumer Price Index Summary from the Bureau of Labor Statistics indicated that seasonally adjusted prices averaged 0.4% higher in February, after rising by 0.3% in January, 0.2% in December, 0.2% in November, 0.1% in October, 0.2% in September, 0.4% in August, by 0.5% in July and by 0.5% in June, after falling by 0.1% in May, falling by 0.7% in April and by 0.3% in March, but after rising by 0.1% in February of last year .the unadjusted CPI-U index, which was set with prices of the 1982 to 1984 period equal to 100, rose from 261.582 in January to 263.014 in February , which left it statistically 1.6762% higher than the 258.678 reading of February of last year, which is reported as a 1.7% year over year increase, up from the 1.4% year over year increase reported a month ago .with higher prices for energy and foods both factors in the overall index increase, seasonally adjusted core prices, which exclude food and energy, were up just 0.1% for the month, as the unadjusted core price index rose from 269.755 to 270.696, which left the core index 1.2826% ahead of its year ago reading of 267.268, which is reported as a 1.3% year over year increase, down from the 1.4% year over year core price increase that was reported for January and the 1.6% the year over year core price increase that was reported for December

    The volatile seasonally adjusted energy price index rose 3.9% in February , after rising by 3.5% in January, 2.6% in December, 0.7% in November, 0.6% in October, 1.4% in September, 0.9% in August, 2.1% in July, and by 4.4% in June, but after falling by 2.3% in May, by 9.5% in April, 5.8% in March, and by 2.5% last February, and hence is only 2.4% higher than in February a year ago the price index for energy commodities was 6.6% higher in February, while the index for energy services was 0.9% higher, after falling 0.3% in January .the energy commodity index was up 6.6% on a 6.4% increase in the price of gasoline and a 9.9% increase in the index for fuel oil, while prices for other energy commodities, including propane, kerosene, and firewood, were on average 7.3% higher within energy services, the price index for utility gas service rose 1.6% after falling 0.4% in January and is now 6.7% higher than it was a year ago, while the electricity price index rose 0.7% after falling 0.2% in January .energy commodities are now averaging 1.6% higher than their year ago levels, with gasoline price averaging 1.5% higher than they were a year ago, while the energy services price index is now up 3.2% from last February, as electricity prices are also 2.3% higher than a year ago

    The seasonally adjusted food price index rose 0.2% in February, after rising by 0.1% in January and 0.3% in December, after being unchanged in November, rising 0.2% in October, rising 0.1% in August and in September, after falling 0.3% in July, rising 0.5% in June, 0.7% in May, 1.4% in April, 0.3% in March, and by 0.3% last February, as the price index for food purchased for use at home was 0.3% higher in January, after falling 0.1% in January, while the index for food bought to eat away from home was 0.1% higher, as average prices at fast food outlets rose 0.4% and prices at full service restaurants rose 0.3%, while food prices at employee sites and schools averaged 12.2% lower notably, the price index for food at elementary and secondary schools was down 13.7% and is now down 32.5% from a year ago

    [Mar 14, 2021] Goldman expects the 10-year yield will rise to 1.8% by mid-year and 1.9% by year-end

    Mar 14, 2021 | www.zerohedge.com

    Goldman's Clients Are Asking Is There Are Any Cheap Stocks Left - ZeroHedge

    Yet anyone hoping for a quick and painless reprieve from surging rates will be disappointed. In his latest Weekly Kickstart, Goldman's David Kostin writes that the bank's economists expect that rates will continue to rise in coming months and forecast 11% real US GDP growth in 2Q with core PCE inflation rising to 2.3% "suggesting that investors will have to continually grapple with the anxiety about economic overheating and Fed tightening that has gripped markets in recent weeks." Goldman also expects the 10-year yield will rise to 1.8% by mid-year and 1.9% by year-end. At the rate it is going, it may get there next week.

    [Mar 14, 2021] I would say that when 10-years were at 0.75%, that was the wrong price

    Looks like ZH croud expects higher 10 year bond rates at the end of the year...
    Mar 14, 2021 | www.zerohedge.com

    HARLEY BASSMAN: Well, that's a good question. I would say that this notion that rates are exploding higher and bad things are happening, it's not quite the case. I would say that when 10-years were at 0.75, that was the wrong price. All we're doing now is going to the right price as opposed to where we were before , which is the wrong price. I would push back at you. We've seen a significant curve steepening. I'm quite certain we're going to talk about that today quite a bit.

    ... ... ...

    The banking system, maybe there's bad guys in there and certainly there were villains 10 years ago who should have gone to jail, and didn't, but the banking system is the plumbing of our financial economy, and we need to maintain it. Therefore steeper curve helps that plumbing system, so the government can do it. The Fed and fiscal policy can be more efficient.

    ... ... ...

    HARLEY BASSMAN: Circling back to our first two sentences here, it's never different this time. That's my mantra. It's never different this time. I can't explain why or how but I just do not think that we've reinvented human tragedy. Hubris, greed, ego. We wrote about it, the Greeks wrote about it, Shakespeare wrote about it. It just hasn't changed, and it's this idea that we've invented a new paradigm I just don't believe it. It's a different song, but it's still music and I think that we'll find some way to go and cause trouble, which is why I believe in inflation ultimately.

    Is it next year? No. Is it in 20 years? I don't know. What I do think, it's going to happen in two to four years when the demographic bubble rolls over. We could do that later on. I think we're going to get it because I don't think you could print the coin of the realm at a faster pace than the overall growth of the economy without inflation at some point. Now, could it take 20 years? Why not? It took 400 years for the Roman Empire collapsed, so in the grand scheme of things, maybe not.

    This policy of money printing is not going to end well. That doesn't mean it was a bad public policy, by the way, because having the economy totally collapse either in 2009 or last year is certainly a bad idea, so maybe deferring the pain or spreading the pain out. I think that inflation is the ultimate solution. Because inflation is a beautiful tax. It taxes, everybody. It taxes them silently, and the politicians dumped a vote on it. As a tax, everyone -- well, I wasn't happy, but it's the easiest one to live with in a democracy.


    ebworthen 1 hour ago remove link

    " They purchase a Rembrandt for a sandwich and our souls for a glass of whisky. Krupp and Stinnes get rid of their debts, we of our savings. The profiteers dance in the palace hotels." -- Klaus Mann, 1923; Weimar, Germany.

    The more things change, the more they stay the same.

    YuriTheClown 1 hour ago

    And the Weimar Republic was run by who? Very similar make up to that of the Bolsheviks.

    85% non members of the Royal Church of Scotland.

    Creamaster 1 hour ago

    Covid timing was sure convenient for a lot of things to occur

    You decide, was it naturally occurring, or released intentionally?

    Son of Loki 1 hour ago (Edited)

    The 10-years will hit 2% soon, and 3% by end of year.

    Given the sad state of the economy and leadership (Yellen, Bribem, etc), no way of stopping it.

    Son of Loki 1 hour ago (Edited)

    The 10-years will hit 2% soon, and 3% by end of year.

    Given the sad state of the economy and leadership (Yellen, Bribem, etc), no way of stopping it.

    Jalmar Shockt 14 minutes ago

    It doesn't work that way and it's not about inflation the way one usually thinks of it.

    Hyperinflation is not the same as the ultimate inflation of the money supply. It is the ultimate depreciation of the currency unit. The two concepts are far from being the same. When the populace eventually figures out what's going on the bonds, notes, bills, and other obligations of the United States government that are all irredeemable will be repudiated.

    aeslong 48 minutes ago (Edited) remove link

    "I would say that when 10-years were at 0.75, that was the wrong priceI would say that when 10-years were at 0.75, that was the wrong price. All we're doing now is going to the right price as opposed to where we were before , ....."

    yea, only bond was mispriced, right? other assets, including public debts don't have to be priced to where they were before.

    Ted Baker 1 hour ago

    more market manipulation...

    Bank_sters 1 hour ago (Edited)

    Central banksters print money and give most to the wealthy and connected, foreign govts, the war machine and then send a few crumbs to the serfs. Meanwhile destroy their currency, savings and future.

    Yields? what a joke. CPI- pure fiction.

    Finance so easy a psychopathic child can do it.

    overbet 1 hour ago

    Wall Street adage:

    The most dangerous words on Wall Street are, this time its different.

    YuriTheClown 1 hour ago (Edited)

    Bassman's outlook for rates and markets. Unsurprisingly, he sees more volatility, and higher convexity, ahead.

    I've tried searching for the definition of "convexity" in this context and had no luck. Anyone care to enlighten?

    Oops. I guess the internet had some additions since then. Convexity

    Ron_Paul_Was_Right 46 minutes ago remove link

    "A steeper curve helps the baking system."

    Did you mean like, a more steeply curved cookie sheet? To help the baking of brownies? I don't follow.

    vote_libertarian_party 1 hour ago remove link

    Something will trigger the stock and bond bubble to pop...

    [Mar 12, 2021] Higher Gas, Energy Prices Boost Consumer Inflation

    Mar 12, 2021 | www.wsj.com

    The consumer-price index rose 0.4% in February from the prior month, as the pace of the economic recovery increased following a winter lull, buoyed by higher gasoline and energy costs.

    [Mar 12, 2021] 'No peace' for markets until 10-year Treasury yield hits 2%, strategist says

    Mar 12, 2021 | www.marketwatch.com

    A bond market selloff is calling the tune across financial markets. Equilibrium is unlikely to return until the yield on the benchmark 10-year U.S. Treasury note hits 2%, a well-known macro strategist argued Friday.

    "There will be no peace until U.S. 10s reach 2%," said Kit Juckes, global macro strategist at Société Générale, in a note.

    ... ... ...

    "The pattern seems clear enough: The equity market is seeing a sector rotation but not a correction; the bond market is seeking a new equilibrium in the light of a vastly improved economic outlook in both the U.S. and elsewhere; some policy makers are pushing back against the bond moves, with little success," Juckes wrote.

    As yields rise, the dollar rallies, but when yields settle at a new level, the dollar drops back. The pattern probably goes on until bonds find an equilibrium, unlikely before 10-year note yields have a 2-handle, judging by taper tantrums and past cycles," he said.

    [Mar 11, 2021] Inflation rebound means '40-year bull market in bonds is over,' says Bofa by Sunny Oh

    Mar 11, 2021 | www.marketwatch.com

    ... ... ...

    "2020 marked the secular low point for inflation and interest rates," warned Michael Hartnett, chief investment strategist for Bofa Global Research, in a Thursday note. "The 40-year bull market in bonds is over."

    His cautionary words come as investors contend with the sudden surge in long-term Treasury yields this year which has surprised even the bond bears.

    The 10-year note yield TMUBMUSD10Y, 1.540% was at 1.532% on Thursday, over 60 basis points from where it traded at the beginning of the year.

    That rise has, in turn, heightened concerns around stretched valuations in equities, briefly sending the Nasdaq Composite COMP, +2.52% into correction territory this week, defined as a 10% fall from its intraday peak. Stocks have recently found their footing again, with the S&P 500 SPX, +1.04% up nearly 3% this week.

    Investors throughout the multidecade long bull market in bonds have sometimes bet against a continued slide in long-term Treasury yields, but as inflation has struggled to break above the Federal Reserve's 2% target for any sustained stretch, forecasts for higher yields have often proved a losing proposition.

    Still, Hartnett suggested any complacency is dangerous as undercurrents in the economy and policymaking pointed towards a tidal wave of inflationary pressures that could overwhelm buyers of Treasurys.

    [Mar 10, 2021] Real bond yields are negative, except for junk and forign bonds funds

    Mar 10, 2021 | www.zerohedge.com

    Dishonest Inflation Reporting

    The blunt answer is that the Fed, in sync with the fiction writers at the Bureau of Labor Statistics (BLS), reports consumer inflation as honestly as Al Capone reported taxable income.

    In short: The Fed has been lying about (i.e. downplaying) inflation for years.

    As we've shown in many prior reports, the Consumer Price Index (CPI) scale used by the BLS to measure U.S. consumer price inflation is an open charade, allowing the BLS, and hence the Fed, to basically "report" inflation however they see fit -- at least for now.

    If, for example, the weighting methodologies hitherto used by the Fed to measure CPI inflation in the 1980's were used today, then US, CPI-measured inflation would be closer to 10% not the reported 2%.

    Concerned about by rising consumer costs, the Fed simply tweaked its CPI scale for measuring the same, effectively downplaying rising costs like a fat-camp scale which downplayed the significance of say beer, chocolate or pizza.

    In short, the Fed didn't like the old CPI scale for measuring inflation, and so they simply replaced it with one in which 2+2 =2.

    But why all the mathematical gymnastics and creative writing at the current BLS and Fed?

    What explains the ongoing double-speak wherein the Fed wishes to target higher inflation yet simultaneously and deliberately mis-reports it at far lower levels?

    Necessity: The Mother of Invention .

    The Fed, in deep need of keeping its IOU-driven (i.e debt-driven) façade of "recovery" in motion, has no choice but to invent a respectably controlled (i.e. LOW) CPI inflation rate in order to make US Treasury bonds look even moderately attractive to others.

    After all, the US lives on those IOU's. They need to look pretty.

    If, however, the more honest and much higher 10% inflation rate were honestly reported on an honest CPI scale, the inflation-adjusted yield on the US 10-Year Treasury would be negative 8%–which hardly makes it a pretty bond for the world to either admire or buy.

    That's a problem for Uncle Sam.

    And so the Fed invents a CPI inflation number that is less embarrassing than reality. It's just that simple.

    By the way, if real yields on the US 10-Year were honestly reported at -8%, gold would be ripping to the moon right now (it skyrocketed in the 1970's when real yields were -4%).

    This is because gold rises fastest the faster real yields go negative .

    We all know, however, that the Fed (and the bullion banks it serves) are terrified of rising gold prices, as a rising gold price confirms the absolute failure of their monetary policies and the open, and ongoing, debasement of the US Dollar.

    This further explains why the world's central and bullion banks openly manipulate the paper gold price in the COMEX markets on a daily basis.

    Furthermore, given that the only thing that seems to be "healthy" in the US today is the biggest stock and bond market bubble in its history, the Fed wants to keep that bubble growing rather than naturally popping.

    And toward this end, the Fed may be desperate, dishonest and delusional, but they aren't completely stupid.

    They know, for example, that for the last 140 years, ALL (and I mean ALL) of the stock market's gains came during disinflationary periods, not inflationary periods -- which is all the more reason for the Fed to lie about inflation and keep the bubble rising.

    So, please don't fall for Powell's double-speak that he's more concerned about focusing on employment than inflation.

    The unspoken truth is that Powell (as well as Yellen, Bernanke et al) have been absolutely obsessed with inflation for years. They simply mis-report it (i.e. lie), as the dollar's purchasing power continues its slow fall toward the floor of history.

    Having Your Cake and Eating it Too.

    What the Fed has been doing ever since Greenspan (the veritable "Patient Zero" of the current global $280T debt disaster) is very clever yet extremely toxic, as well as openly duplicitous.

    Specifically, the Fed now prints over $120B per month (to buy $80B in unwanted Treasury bonds and another $40B in unwanted, toxic MBS paper) with no apparent inflationary effect (despite the fact that inflation is defined by money supply) beyond its 2% "allowance."

    Such extreme money creation openly dilutes the USD to inflate away US debt with increasingly diluted dollars, now a desperate as well as deliberate Fed policy.

    But by simultaneously and dishonestly mis-reporting CPI inflation as they dilute the dollar, the Fed can inflate away US debt without having to make the inflation-adjusted yields on Treasury bonds appear too embarrassingly ugly (i.e. grotesquely negative ) for circulation and consumption.

    Such open fraud, of course, allows the Fed to have its cake (debased currencies to inflate away debt) and eat it too (by under-reporting the otherwise disastrous CPI inflationary consequences of such a desperate policy.)

    In short, by putting lipstick on the pig of what would otherwise by highly negative real yields on an openly bogus Treasury bonds if the CPI inflation rate were accurately reported, the Fed can continue to live on more debt, more IOU's and more dishonesty.

    Such veiled inflationary dishonesty allows the U.S. to effectively extend and pretend as the US credit market marches forward like a veritable Frankenstein -- that is dead, yet still marching, arms outstretched and moaning like a beast.


    QuiteShocking 4 hours ago

    Gas was around $2 a gallon on Election Day (Nov 3rd 2020)... and now over $2.70 a gallon for a 35% increase and we're just getting started... So much for the 2% fantasy...

    PodissNM PREMIUM 3 hours ago

    The price of practically everything has doubled in the past 20 years. Other than a few outliers like TVs, which have seemingly never been cheaper.

    Now they're reducing package quantities in consumer staples to obfuscate further price increases.

    philipat 3 hours ago (Edited)

    It's all a confidence game. The Fed CANNOT let rates rise (USG can't afford to pay higher rates on interest on the ever increasing debt, let alone paying down principal - that can never happen) but on the other hand it needs inflation to inflate away some of the debt. And it cannot allow Equity markets to crash (they have become the surrogate US economy) so as the debt grows the equity markets must continue to grow. Just a smallish sustained drop would cripple GDP.

    Which means the USD should collapse.

    BUT it's like keeping all the plates spinning together. All three are manipulated. EVERYTHING is manipulated, there are NO free markets. The ESF and Central Banks (Why does the Fed need trading floors?) intervene daily in everything. And so far they are getting away with it.

    Which brings us back to confidence......

    buzzsaw99 4 hours ago (Edited) remove link

    The principal value of TIPS rises as inflation rises. Inflation is the pace at which prices increase throughout the U.S. economy, as measured by the Consumer Price Index (CPI)...

    real yields all negative baybee, except the 30y is a whopping +0.010%

    https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield

    thezone 3 hours ago

    NBL = Nothing But Lies.

    Let it Go 3 hours ago

    The purpose of the consumer price index (CPI) is to reflect just how much inflation is eating into both our incomes and our savings. Currently, the government understates inflation by using a formula based on the concept of a "constant level of satisfaction" that evolved during the first half of the 20th century in academia. More on this subject in the article below.

    https://The CPI Understates Inflation Skewing Our Expectations.html

    Give Me Some Truth 43 minutes ago

    There are many reasons the stock market HAS to keep rising. One of the main ones is that all of the city and state pension funds are heavily invested in the stock market. If the stock market wasn't rising, tax-payers would have to pick up a greater share of pensions. Simply put, this can't happen.

    MrBoompi 1 hour ago remove link

    Come on. The only jobs Fed employees care about are their own jobs. They supervised the dismantling of our manufacturing jobs, without lifting a finger, since 1971. They are not screaming to end the lockdowns either.

    Just like minimum wage, Seniors have been denied the true COL increases, which are the law, for Social Security. These payments should at least be double what they are today.

    They are globalists and as such could care less about common folk. A must-have skill if you want to be Fed Chair is the ability to lie. This skill will be needed much more than your business, law, and accounting degrees.

    Give Me Some Truth 1 hour ago remove link

    Thanks to the author for pointing out the elephant in the room that "officials" and the mainstream media are not allowed to discuss. Namely (from this article):

    "We all know, however, t hat the Fed (and the bullion banks it serves) are terrified of rising gold prices, as a rising gold price confirms the absolute failure of their monetary policies and the open, and ongoing, debasement of the US Dollar.

    This further explains why the world's central and bullion banks openly manipulate the paper gold price in the COMEX markets on a daily basis."

    In short, EVERYTHING the "Powers that Be" do is designed to keep gold and silver prices contained, which thus protects the all-important fiat printing press.

    Inflation numbers are rigged to help achieve this result and so too are precious metal markets rigged.

    I'd also add that the "unemployment" numbers are equally bogus. So too are many of the COVID numbers and metrics.

    If numbers can be rigged - if definitions can be changed - to support a specious narrative, they will be ... All for the same purpose.

    [Mar 07, 2021] Pimco income fund

    Mar 07, 2021 | finance.yahoo.com

    PIMIX 11.98 -0.02 -0.17% - PIMCO Income Fund Institutional Class - Yahoo Finance

    Top 10 Holdings AS OF 12/31/2020; 47.15% of Total Portfolio

    10 Year Treasury Note Future Mar 211                         2.37%
    Federal National Mortgage Association 2.5% 03/11/2051        6.76%
    Federal National Mortgage Association 2.5% 02/11/2051        5.93%
    Federal National Mortgage Association 2% 03/11/2051          5.41%
    Pimco Fds                                                    5.38%
    Federal National Mortgage Association 3%                     2.97%
    FTSE Bursa Malaysia KLCI Future Mar 21                       2.60%
    Federal National Mortgage Association 2% 02/11/2051          2.18%
    CSMC TRUST 3.32183%                                          1.86%
    Fin Fut Us Ultra 30yr Cbt 03/22/21                           1.69%
    7706 holdings as of 12/31/2020
    

    [Mar 07, 2021] JPMorgan Estimates Up To $316 Billion In Forced Month-End Selling - ZeroHedge

    Mar 07, 2021 | www.zerohedge.com

    In one of his latest Flows and Liquidity reports, JPM quant Nick Panigirtzoglou writes that as we approach quarter-end, the equity rebalancing flow question is resurfacing in client conversations. As we notes, "the equity rally and the bond sell-off during the current quarter is naturally creating a pending rebalancing flow for multi-asset investors away from equities into bonds for pension funds and balanced mutual funds. How much of equity/bond rebalancing flow should we expect into current quarter-end?"

    To answer this question, the Greek strategist applies a familiar framework and looks at the four key multi-asset investors that have either fixed allocation targets or tend to exhibit strong mean reversion in their asset allocation. These are balanced mutual funds, such as 60:40 funds, US defined benefit pension plans, Norges Bank, i.e. the Norwegian oil fund, and the Japanese government pension plan, GPIF.

    For those curious about the details, below is a more detailed summary of the considerations behind the four key investor classes ahead of month and quarter-end.

    1. Balanced mutual funds including 60:40 funds , a close to $7.5tr AUM universe globally, tend to rebalance over 1-2 months or so. The lesson from last Nov/Dec is that balanced mutual funds exhibit flexibility and they do not necessarily rebalance every single month. During the previous quarter, they appear to have postponed rebalancing for Nov-end or Dec-end and to have waited until January to de-risk/rebalance. JPM believes that funds de-risked in January, as a result of the tumble in balanced MFs equity beta...

    .. and since it would have been too soon to rebalance again in February, the quant believes that they have likely postponed any pending rebalancing to March. Assuming they were fully rebalanced at the end of January, which is a reasonable hypothesis given the reduction in their betas in January and by taking into account the performance of global equities and bonds since then, JPMorgan estimates around $107bn of equity selling by balanced mutual funds globally into the end of March in order to revert to their 60:40 target allocation.

    lay_arrow

    HankMFRearden PREMIUM 18 hours ago

    Reconcile this with previous post about off the hook equity inflows. Would not passive mostly be rebalancing by targeted direction of new flows vs. selling of existing positions, particulalry in tech which has declined?

    BandGap 1 hour ago

    It's all good.

    Janet weighs in.

    https://finance.yahoo.com/news/yellen-says-higher-treasury-yields-015420252.html

    The lies get bigger and bigger. We, the peons, are expected to believe the unbelieveable.

    [Mar 07, 2021] When Yields Rise, Narratives Fall

    Mar 07, 2021 | www.zerohedge.com

    Americans aren't spending but saving, by paying down debt at an enormous rate, the nightmare of Keynesians the world over.

    They are unleashing trillions in new spending but cutting back, in the stimulus bill, support for actual Americans whose lives they've ruined with lockdowns and public health terrorism.

    They have held interest rates at or below zero for so long that when the market makes the slightest move to go somewhere else, it precipitates massive market dislocation in fundamental markets.

    We're no longer talking about the sub-prime mortgage market or Turkish corporate debt loads . We're talking about massive short bets against the U.S. 10 year Treasury Note.

    Eventually reality always reasserts itself. The central banks are running out of maneuvering space before he entire system collapses. Maybe that's what they want.

    Maybe they think they can maintain their narrative of competence long enough to shift the blame to incompetent governments who have incurred the wrath of their people through inhuman COVID-19 lockdowns and endless psychological torture.

    I don't know at this point. But I can tell you that debt first extends and then destroys all illusions about who is and who isn't truly solvent.

    And over the past few weeks it's clear there are an increasing number of people who command real amounts of money who don't buy the narratives the central banks are selling.

    * * *

    play_arrow

    Hickory Dickory Dock 21 hours ago

    Inflation expectations are rising because of fiscal and monetary stimulus and the "re-opening" of the economy.

    Those rising inflation expectations cause nominal interest rates to rise.

    If nominal interest rates rise more than inflation rises, real interest rates rise.

    Rising real interest rates cause stocks, bonds and gold/silver to fall.

    Falling 'markets' cause the Fed to step in and save the day by capping nominal interest rates.

    Capped nominal interest rates cause real rates of interest to fall (assuming no change in inflation rates).

    Falling real rates of interest mean higher gold and silver prices.

    conraddobler 21 hours ago (Edited)

    Interest rates were near 15% in 1979, what did gold and silver do back then?

    Hickory Dickory Dock 21 hours ago

    Incorrect. Real interest rates were below zero in 1979-1980.

    https://www.longtermtrends.net/real-interest-rate/

    BarneyFife714 20 hours ago

    Real rates not interest rates.

    Hickory Dickory Dock 17 hours ago

    Real rates are interest rates (just not nominal interest rates).

    hisnamewas 7 hours ago

    I assume by "real" you mean an imaginary number called the "inflation" which they can set arbitrarily low by choosing what is included in the calculation.

    Hickory Dickory Dock 17 hours ago

    Since real interest rates are calculated as being equal to nominal interest rates minus the rate of inflation, understating inflation (whether intentionally or simply through mis-measurement) will have the effect of overstating real interest rates, not understating them. E.g., if the nominal interest rate is 10% and the inflation rate is 7%, the real interest rate is 3%. However, if the inflation rate is understated in this example as being 4% instead of 7%, the real interest rate (10% nominal interest rate minus 4% inflation rate) will appear as 6% rather than 3% (thus overstating the real inflation rate).

    I do believe that the inflation data on Shadowstats is more accurate than the CPI or other government-supplied figures, which are heavily gamed.

    I believe it's only a matter of time before yield curve control will be implemented. Keep in mind it may not be called that, but the net effect will be to suppress longer term interest rates. Assuming the policy is effective at doing that, you can expect gold and silver to resume their bull runs, virtually overnight.

    George Bayou 21 hours ago remove link

    It is obvious what the Fed is doing, they want to devalue the dollar so the gov't can continue to service the debt. YCC will keep the debt serviceable and devalues the dollar at the same time. The Fed is on board with any spending the democrats can dream up now because they know the dollar will be devalued in the future. That is the only way they can get out of this mess.

    The problem with devauling the dollar is it will transfer real wealth to the wealthy elites in the process. That is something that the democrats fail to tell their base.

    itstippy 22 hours ago remove link

    Today's Central Bankers never stop jawboning. They think it's their job to somehow "justify" the way they support banks and the financial sector at the expense of the working and middle classes. They're no longer economists, but just more politicians.

    Central Banker: "Please stop yawning when I'm talking."

    Real Economist: "I'm not yawning, I'm trying to say something."

    dead hobo 22 hours ago

    Long yields have about 3/4% to rise to reach recent historical levels. The world didn't end a couple of years ago at these rates. It won't end now. No YCC for you.

    zorrosgato 19 hours ago

    Since September 21,1981 the yield on the US 10yr treasury has been falling. A 40 year descent to where we are at today, at times easing off from the fall but seemingly never to take back over 3%. If the powerful bond market and/or the Fed decided that inflation, yields or interest rates were either too high or too low they most likely wouldn't have waited until today to fix the problem. A day when insurmountable debt has pretty much taken that option out of the equation. Lets not forget, as always, no market goes straight down or straight up.

    https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart

    [Mar 07, 2021] 10 Year Treasury Rate - 54 Year Historical Chart - MacroTrends

    Mar 07, 2021 | www.macrotrends.net

    Interactive chart showing the daily 10 year treasury yield back to 1962. The 10 year treasury is the benchmark used to decide mortgage rates across the U.S. and is the most liquid and widely traded bond in the world. The current 10 year treasury yield as of March 04, 2021 is 1.54% .

    [Mar 06, 2021] Wall Street strategists think the USD will strengthen in 2021, so who knows ...

    Mar 06, 2021 | www.moonofalabama.org

    Canadian Cents , Mar 5 2021 6:08 utc | 81

    Passer by @21 and @26, had a thought related to your mention that "the US dollar still remains 62% of world currency reserves" , or "nearly two thirds of world currency reserves" . That seems to correspond to the IMF figure of 61.5% from December 2019. The IMF figure from December 2020, however, is now down to 60.4% .

    A few months ago I read that Goldman Sachs had suggested the USD could drop 6% in 2021, while Citigroup suggested that it could drop as much as 20%.

    Assuming no other changes to reserves, a 6% drop in the USD seems to imply the 60.4% percentage would become less than 58%. And a 20% drop in the USD seems to imply that US dollar holdings could fall to around 50% of world currency reserves.

    And if it gets to around 50%, does a tipping point, as William Gruff @28 mentioned, kick in?

    On the other hand, other Wall Street strategists think the USD will strengthen in 2021, so who knows ...

    [Sep 14, 2020] Gundlach Says High-Yield Bond Defaults May Almost Double - Bloomberg

    Sep 14, 2020 | www.bloomberg.com

    High-yield bond default rates may double as companies struggle with a protracted economic downturn even as the Federal Reserve props up valuations, said Jeffrey Gundlach.

    The investment grade corporate debt market has skewed toward lower quality BBB- rated debt, but if just 50% of that were to be downgraded it could fuel a near doubling of the high-yield market, Gundlach said Tuesday on a webcast for his firm's flagship DoubleLine Total Return Bond Fund .

    Gundlach's views reflect broad skepticism about the market's connection to economic realities. He criticized the Fed's emergency actions as buoying asset prices and spurring unsustainable corporate borrowing binges.

    Risk assets such as equities and high yield credit markets are responding to this support, and government stimulus, disproportionately as the Covid-19 pandemic remains a threat to the recovery, he said.

    "It's foolhardy to believe that one can have this kind of a shock to an economy and it just gets healed through a one-shot deal" from the Treasury, he said.

    Gundlach pointed out that the global GDP forecast is -3.9%, whereas the U.S. lags at -5% despite the country's response to the Covid-19 crisis being "one of the highest in the world."

    Highlighting the effect of the weekly $600 stimulus checks, he called it a distortion of the personal-income spending picture akin to the Fed's effect on the markets.

    "This is a large incentive to stay on public assistance," Gundlach said, noting that benefit payments have exceeded many workers' regular income.

    Gundlach also snubbed one of the market's favorite trades on a U.S. recovery, saying he's "betting against" the inflation-linked bond market. TIPS products have seen some of the strongest monthly inflows in four years, and market-implied expectations for inflation have touched a 2020 high. Gundlach repeated that the impact of the pandemic is deflationary.

    [Sep 11, 2020] Are Junk Bonds Suggesting A Stock Market Top Is Near by kimblecharting

    The stock market now is completely disconnected from the economy. Stein's Law, which he expressed in 1976 states: "If something cannot go on forever, it will stop."
    Notable quotes:
    "... Junk Bonds play a critical role in highlighted investor sentiment. When junk bonds (lower-rated debt) is performing well, then that means investors are taking more risks. When junk bonds struggle, that means investors are taking on less risk. ..."
    "... At the same time, there is a divergence between the stock market (the S&P 500 made new all-time highs) and Junk Bonds (well below all-time highs and 5 percent off 2019 highs). ..."
    Sep 10, 2020 | www.zerohedge.com

    As investors, we have several tools and indicators at our disposal.

    Whether it is technical indicators such as Fibonacci levels, moving averages, or price supports, or fundamental indicators such as corporate earnings or economic data, we have a lot of information to use when making decisions.

    Today's chart incorporates both. Junk Bonds play a critical role in highlighted investor sentiment. When junk bonds (lower-rated debt) is performing well, then that means investors are taking more risks. When junk bonds struggle, that means investors are taking on less risk.

    So today, we highlight the Junk Bonds ETF (JNK). Using technical analysis, we can see that JNK is trading near line (A), a price level that has served as support and resistance over the past several years. It is currently serving as price resistance.

    At the same time, there is a divergence between the stock market (the S&P 500 made new all-time highs) and Junk Bonds (well below all-time highs and 5 percent off 2019 highs).

    So this is an important resistance test for junk bonds. Will Junk Bonds (JNK) break down from here (bearish) or break out (bullish).

    What happens here will send an important message to stocks (and investors)!

    [Jan 08, 2020] Where to Invest 2020

    Jan 08, 2020 | www.kiplinger.com

    High-yield bonds (avoid the oil patch), emerging-markets bonds and dividend-paying stocks such as real estate investment trusts and utilities are good places to hunt for yield. Funds to consider include Vanguard High Yield Corporate ( VWEHX ), yielding 4.5%, and TCW Emerging Markets Bond ( TGEIX ), yielding 5.1%. Schwab US Dividend Equity ( SCHD , $56), a member of the Kiplinger ETF 20 list of our favorite ETFs, invests in high-quality dividend payers and yields just over 3%. Spath, at Sierra Funds, is bullish on preferred stocks. IShares Preferred and Income Securities ETF ( PFF , $37) yields 5.5%. (For more ideas, see Income Investing .)

    [Jan 08, 2020] The 7 Best Bond Funds for Retirement Savers in 2020

    Jan 08, 2020 | www.kiplinger.com

    Market value: $71.3 billion

    SEC yield: 1.6%

    Expense ratio: 0.17%

    Suppose my outlook for the bond market is either wrong, or at best, premature. Bond yields could fall next year, or just stay relatively flat. That's why it usually makes sense to own more than one bond fund.

    Vanguard Intermediate-Term Tax-Exempt Investor ( VWITX , $14.41) should hold up pretty well if rates rise only a small amount in 2020, and it could trounce the other funds in this article if rates fall.

    VWITX's duration is 4.9 years. That means if bond yields rise by one percentage point, the fund's price should decline by 4.9%. That wouldn't be fun for investors, but it would hardly be catastrophic, especially when you factor in the yield.

    Like most Vanguard bond offerings, Vanguard Intermediate-Term Tax-Exempt Investor is plain vanilla, and that's OK. It sticks almost entirely to high-quality municipal bonds. Its weighted average credit quality is a sterling AA.

    VWITX also has been a decent performer, at an annualized 3.1% total return over the past five years.

    Learn more about VWITX at the Vanguard provider site.

    [Dec 21, 2019] Keep an eye on 10 year US treasuries. If they become just a little less liquid and yields rise as i believe they will

    Dec 21, 2019 | peakoilbarrel.com

    HHH x Ignored says: 12/12/2019 at 11:27 pm

    Price of oil does have problem that will play out over next 6-8 months. Without a trade war and Brexit hanging over markets. There isn't a whole lot of reason to be holding government bonds which yield next to nothing or less than nothing in some cases. Fed is buying bills so Repo market won't implode into another 2008. Only problem is they need to be buying coupons or treasuries also. They are buying some treasuries but it's not near enough to hold interest rates down. Yields on debt are going to rise without something like a trade war holding them down. That is a problem if your long oil.

    Keep an eye on 10 year US treasuries. If they become just a little less liquid and yields rise as i believe they will. These OPEC cuts aren't going to mean as much as some might think.

    [Dec 07, 2019] An unprecedented frenzy of debt sales around the world is threatening to cool this year's hot returns on corporate bonds.

    Dec 07, 2019 | economistsview.typepad.com

    Joe -> Joe... , November 30, 2019 at 09:53 PM

    https://www.bloomberg.com/news/articles/2019-11-30/record-2-4-trillion-bond-binge-is-threatening-investor-returns

    An unprecedented frenzy of debt sales around the world is threatening to cool this year's hot returns on corporate bonds.

    Companies have sold a record $2.43 trillion so far this year across currencies, surpassing previous full-year records. Investors rushed to snap up all this debt because they were desperate for yield as central banks cut rates. That has pushed up valuations.

    Now, some troubling signs for the direction of those valuations are converging. Recent data suggest that the worst may be over for the global economy, which means many central banks could have less reason next year to guide down borrowing costs. That will all make it harder to top the double-digit returns that some investors scored on corporate bonds this year.
    ---
    Wealthy made some real money betting on our government bailouts, in Europe an the US. Now the yields are gone, where to? China, the only rational central banker left means, park your money in China.

    Joe -> Joe... , November 30, 2019 at 10:03 PM
    https://finance.yahoo.com/news/while-the-us-chilled-this-thanksgiving-week-china-moved-forward-125657666.html

    What this means now is that things will only get more complicated for Beijing from here on out. Chinese President Xi Jinping bet on letting the people of Hong Kong decide, and they did. Only it was against him.

    We'll return to the political situation in Hong Kong momentarily, but before we do, another major development, this time on the business front.

    On Tuesday, Alibaba executed a slam-dunk secondary offering in Hong Kong, raising $12.9 billion. That easily surpassed Uber's $8.1 billion IPO in May, making it the biggest public offering of 2019. For those who were predicting the death of Hong Kong -- and they've been doing that for decades, (and Kyle Bass and others are still at it) -- that again appears to be premature.
    ---
    Clueless reporting. Xi came out of this looking great. He has one country three systems, he now has a sound central banking, investment is flowing in, not out. They are immune from sanctions, and even the trade tariffs are expanding Chinese influence in Asia, Iran, Russia and China can look forward to a new global banking system, absent the dollar. Belt and suspenders is moving forward.

    I like it, I have no priors, I can point this fact without contradiction. Go Xi.

    Paine -> Joe... , December 01, 2019 at 06:22 AM
    This in fact is poisonous
    Bourgeois think heresy

    The struggle inside the party continues

    Policy

    Zero real sovereign note
    Intetest rates

    up and down the term structure

    A Lerner mark up cap and trade net
    For the big corporate players


    A huge expansion
    of the social payments system


    transition to a 100 percent George tax on land lots

    Immediately begin a three staged
    Liberation
    Of Tibet Hong Kong
    and
    Sinkiang

    Cut North Korea loose
    to unite with the south


    Allow open elections at the neighborhood level

    [Oct 26, 2019] Mish Pondering The Collapse Of The Entire Shadow Banking System

    Oct 26, 2019 | www.zerohedge.com

    Authored by Mike Shedlock via MishTalk,

    What's behind the ever-increasing need for emergency repos? A couple of correspondents have an eye on shadow banking.

    Shadow Banking

    The above from Investopedia .

    Image courtesy of my friend Chris Temple.

    Hey It's Not QE, Not Even Monetary

    Yesterday, I commented Fed to Increase Emergency Repos to $120 Billion, But Hey, It's Not Monetary .

    Let's recap before reviewing excellent comments from a couple of valued sources.

    The Fed keeps increasing the size and duration of "overnight" funding. It's now up $120 billion a day, every day, extended for weeks. That is on top of new additions.

    Three Fed Statements
    1. Emergency repos were needed for " end-of-quarter funding ".
    2. Balance sheet expansion is " not QE ". Rather, it's " organic growth ".
    3. This is "not monetary policy ".
    Three Mish Comments
    1. Hmm. A quick check of my calendar says the quarter ended on September 30 and today is October 23.
    2. Hmm. Historically "organic" growth was about $2 to $3 billion.
    3. Hmm. Somehow it takes an emergency (but let's no longer call it that), $120 billion " at least " in repetitive " overnight " repos to control interest rates, but that does not constitute "monetary policy"

    I made this statement: I claim these "non-emergency", "non-QE", "non-monetary policy" operations suggest we may already be at the effective lower bound for the Fed's current balance sheet holding .

    Shadow Banking Suggestion by David Collum

    Pater Tenebrarum at the Acting Man blog pinged me with these comments on my article, emphasis mine.

    While there is too much collateral and not enough reserves to fund it, we don't know anything about the distribution [or quality] of this collateral . It could well be that some market participants do not have sufficient high quality collateral and were told to bugger off when they tried to repo it in the private markets.

    Such market participants would become unable to fund their leveraged positions in CLOs or whatever else they hold.

    Mind, I'm not saying that's the case, but the entire shadow banking system is opaque and we usually only find out what's what when someone keels over or is forced to report a huge loss.

    Reader Comments
    1. Axiom7: Euro banks are starving for dollar funding and if there is a hard Brexit both UK and German banks are in big trouble. I wonder if this implies that the EU will crack in negotiations knowing that a DB fail is too-big-to-bail?
    2. Cheesie: How do you do repos with a negative interest rate?
    3. Harry-Ireland: [sarcastically], Of course, it's not QE. How can it be, it's the greatest economy ever and there's absolutely nobody over-leveraged and the system is as healthy as can be!
    4. Ian: Taking bad collateral to keep banks solvent is not QE.

    In regards to point number four, I commented:

    This is not TARP 2009. [The Fed is not swapping money for dodgy collateral] Someone or someones is caught in some sort of borrow-short lend-long scheme and the Fed is giving them reserves for nothing in return. Where's the collateral?

    Pater Tenebrarum partially agrees.

    Yes, this is not "TARP" - the Fed is not taking shoddy collateral, only treasury and agency bonds are accepted. The primary dealers hold a huge inventory of treasuries that needs to be funded every day in order to provide them with the cash needed for day-to-day operations - they are one of the main sources of the "collateral surplus".

    Guessing Game

    We are all guessing here, so I am submitting possible ideas for discussion.

    Rehypothecation

    I am not convinced the Fed isn't bailing out a US major bank, foreign bank, or some other financial institution by taking rehypothecated , essentially non-existent, as collateral.

    Rehypothecation is the practice by banks and brokers of using, for their own purposes, assets that have been posted as collateral by their clients.

    In a typical example of rehypothecation, securities that have been posted with a prime brokerage as collateral by a hedge fund are used by the brokerage to back its own transactions and trades.

    Current Primary Dealers
    1. Amherst Pierpont Securities LLC
    2. Bank of Nova Scotia, New York Agency
    3. BMO Capital Markets Corp.
    4. BNP Paribas Securities Corp.
    5. Barclays Capital Inc.
    6. Cantor Fitzgerald & Co.
    7. Citigroup Global Markets Inc.
    8. Credit Suisse AG, New York Branch
    9. Daiwa Capital Markets America Inc.
    10. Deutsche Bank Securities Inc.
    11. Goldman Sachs & Co. LLC
    12. HSBC Securities (USA) Inc.
    13. Jefferies LLC
    14. J.P. Morgan Securities LLC
    15. Merrill Lynch, Pierce, Fenner & Smith Incorporated
    16. Mizuho Securities USA LLC
    17. Morgan Stanley & Co. LLC
    18. NatWest Markets Securities Inc.
    19. Nomura Securities International, Inc.
    20. RBC Capital Markets, LLC
    21. Societe Generale, New York Branch
    22. TD Securities (USA) LLC
    23. UBS Securities LLC.
    24. Wells Fargo Securities LLC.

    The above Primary Dealer List from Wikipedia as of May 6, 2019.

    Anyone spot any candidates?

    My gosh, how many are foreign entities?

    It's important to note those are not "shadow banking" institutions, while also noting that derivative messes within those banks would be considered "shadow banking".

    Tenebrarum Reply

    In this case the problem is specifically that the primary dealers are holding huge inventories of treasuries and bank reserves are apparently not sufficient to both pre-fund the daily liquidity requirements of banks and leave them with enough leeway to lend reserves to repo market participants.

    The Fed itself does not accept anything except treasuries and agency MBS in its repo operations, and only organizations authorized to access the federal funds market can participate by offering collateral in exchange for Fed liquidity (mainly the primary dealers, banks, money market funds,...).

    Since most of the repo lending is overnight - i.e., is reversed within a 24 hour period (except for term repos) - I don't think re-hypothecated securities play a big role in this.

    But private repo markets are broader and have far more participants, so possibly there is a problem elsewhere that is propagating into the slice of the market the Fed is connected with. Note though, since the Treasury is borrowing like crazy and is at the same time rebuilding its deposits with the Fed (which lowers bank reserves, ceteris paribus), there is a several-pronged push underway that is making short term funding of treasury collateral more difficult at the moment.

    So I'm not sure a case can really be made that there is anything going on beyond what meets the eye - which is already bad enough if you ask me.

    Preparation for End of LIBOR

    What about all the LIBOR-based derivatives with the end of LIBOR coming up?

    The Wall Street Journal reports U.S. Companies Advised to Prepare for Multiple Benchmark Rates in Transition from Libor

    Libor is a scandal-plagued benchmark that is used to set the price of trillions of dollars of loans and derivatives globally. A group of banks and regulators in 2017 settled on a replacement created by the Federal Reserve known as the secured overnight financing rate, or SOFR. Companies must move away from Libor by the end of 2021, when banks will no longer be required to publish rates used to calculate it.

    "We don't expect that 100% of the Libor-based positions today will migrate 100% to SOFR," Jeff Vitali, a partner at Ernst & Young, said this week during a panel at an Association for Financial Professionals conference in Boston. "It is going to be a scenario where entities are going to have to prepare and be flexible and build flexibility into their systems and models and processes that can handle multiple pricing environments in the same jurisdiction."

    Repro Quake

    ​I invite readers to consider Tenebrarum's " Repro Quake - A Primer " but caution that it is complicated.

    He informs me "a credit analyst at the largest bank in my neck of the woods sent me a mail to tell me this was by far the best article on the topic he has come across".

    Note: That was supposed to be a private comment to me. I placed it in as an endorsement.

    Tenebrarum live in Europe. Here are his conclusions.

    What Else is the Fed Missing? Effective Lower Bound

    Finally, Tenebrarum commented: " I agree on your effective lower bound comment, since obviously, the 'dearth' of excess reserves was pushing up all overnight rates, including the FF rate ."

    For discussion of why the effective lower bound of interest rates may be much higher than zero, please see In Search of the Effective Lower Bound .


    argento3 , 4 hours ago link

    my gut tells me (I have no tangible evidence)

    that some of this money is leaking out to continue to prop up the stock market. I've been trading for 46 years and current valuations are beyond ridiculous. for example, Tesla made a buck a share in the last quarter. woop di do. and the stock zooms to $300++ a share with a market cap of $58 bil. 60% more than Ford???!!! We know that Porsche and BMW and Mercedes and Audi are going to build a much better EV. another one, Cintas. They rent uniforms. what a sexy business! valued at a p/e of 32 with a $28 bil. market cap. Book value of $29 a share. the stock is at $270 !!! the list goes on and on and on Carvana, etc.

    personally, I have 5% bitcoin 5% gold and have a nice chunk in a very high quality diversified commodity mutual fund. Commodities (relative to stocks) are at multi decade lows. a deep value trade. very best wishes to you. Argento

    Doge , 4 hours ago link

    Can you name the commodity fund you own?

    argento3 , 4 hours ago link

    i like both DCMSX and PCRAX (DFA and Pimco)

    this sector has under performed stocks as written above. so the returns have been negative (for now)

    Let it Go , 6 hours ago link

    On occasion, it is important to revisit issues that have been swept under the rug or simply overlooked. For most people, the derivatives market falls into this category, partly because they don't understand exactly what derivatives are or why this market is so important.

    Anyone paying attention knows that the size of the derivatives market dwarfs the global economy. Paul Wilmott who holds a doctorate in applied mathematics from Oxford University has written several books on derivatives. Wilmott estimates the derivatives market at $1.2 quadrillion, to put that in perspective it is about 20 times the size of the world economy.

    http://Derivatives Could Explode Like A bomb!html

    namrider , 6 hours ago link

    That is an OLD guess... today it is estimated that derivatives exceeds $2 quadrillion, and that just commodity derivatives approaches the old figure. Interest rate based derivatives still dominate, my guess is much higher.

    [Sep 17, 2019] Amid the settlement of Treasury coupon auctions and the influx of quarterly corporate tax payments, the rate on overnight repurchase agreements soared by 153 basis points to 3.80%, the largest daily increase since December, based on ICAP pricing.

    Sep 17, 2019 | economistsview.typepad.com

    Joe , September 16, 2019 at 12:11 PM


    https://www.bloomberg.com/markets/rates-bonds/government-bonds/us

    One of the key U.S. borrowing markets saw a massive surge Monday, a sign the Federal Reserve is having trouble controlling short-term interest rates.

    Amid the settlement of Treasury coupon auctions and the influx of quarterly corporate tax payments, the rate on overnight repurchase agreements soared by 153 basis points to 3.80%, the largest daily increase since December, based on ICAP pricing.

    ---------
    The would be Treasury trying to tilt the curve, deposit short borrow long. Finance, in general, is rescaling to accommodate the next 2 trillion in debt while rolling over trillions of 'Uncle can do it later' debt. A quick downturn, readjustment, and the 'Uncle do it later' payments to the wealthy will continue.

    This is common, our progressive tribe has moles who suddenly rush off and do a deal with the wealthy leaving the rest of us in the dark.

    Paine -> Joe... , September 16, 2019 at 02:01 PM
    The end time nears
    Joe , September 17, 2019 at 06:08 AM
    https://thehill.com/blogs/blog-briefing-room/news/461692-cost-for-recent-government-shutdowns-estimated-at-4b

    Repo Squeeze Threatens to Spill Over Into Funding Markets
    By Stephen Spratt
    September 17, 2019, 3:19 AM PDT Updated on September 17, 2019, 5:24 AM PDT
    Cross-currency basis, FX forwards, eurodollar futures shift
    Sale of $78 billion in Treasuries led to sudden cash squeeze
    ----------------

    Treasury is ahead of finance in paying for the 'Uncle do it later' trick. The short rate has jumped 10 basis points, not much but there was a reading on the overnight market of 7%. This may mean nothing, but more likely means higher consumer credit charges. W have to pay for 'Uncles later'.

    [Sep 04, 2019] BlackRock Sees Supply and Demand Driving Municipal Bond Rally [Video]

    Sep 04, 2019 | finance.yahoo.com

    Sep.04 -- Sean Carney, head of municipal strategy at BlackRock, discusses the municipal bond market posting its best returns since 2014. He speaks with Bloomberg's Taylor Riggs in this week's "Muni Moment" on "Bloomberg Markets."

    [Aug 17, 2019] If the bond market is any indication, Donald Trump's escalating belligerence on trade is creating seriously increased risks of recession.

    Aug 17, 2019 | economistsview.typepad.com

    anne , August 07, 2019 at 09:17 AM

    https://www.nytimes.com/2019/08/07/opinion/tariff-tantrums-and-recession-risks.html

    August 7, 2019

    Tariff Tantrums and Recession Risks
    Why trade war scares the market so much
    By Paul Krugman

    If the bond market is any indication, Donald Trump's escalating belligerence on trade is creating seriously increased risks of recession. But I haven't seen many clear explanations of why that might be so. The problem isn't just, or even mainly, that he really does seem to be a Tariff Man. What's more important is that he's a capricious, unpredictable Tariff Man. And that capriciousness is really bad for business investment.

    First things first: why do I emphasize the bond market, not the stock market? Not because bond investors are cooler and more rational than stock investors, although that may be true. No, the point is that expected economic growth has a much clearer effect on bonds than on stocks.

    Suppose the market becomes pessimistic about growth over the next year, or even beyond. In that case, it will expect the Fed to respond by cutting short-term interest rates, and these expectations will be reflected in falling long-term rates. That's why the inversion of the yield curve -- the spread between long-term and short-term rates -- is so troubling. In the past, this has always signaled an imminent recession:

    [That scary yield curve]

    And the market seems in effect to be predicting that it will happen again.

    But what about stocks? Lower growth means lower profits, which is bad for stocks. But it also, as we've just seen, means lower interest rates, which are good for stocks. In fact, sometimes bad news is good news: a bad economic number causes stocks to rise, because investors think it will induce the Fed to cut. So stock prices aren't a good indicator of growth expectations.

    O.K., preliminaries out of the way. Now let's talk about tariffs and recession.

    You often see assertions that protectionism causes recessions -- Smoot-Hawley caused the Great Depression, and all that. But this is far from clear, and often represents a category error.

    Yes, Econ 101 says that protectionism hurts the economy. But it does its damage via the supply side, making the world economy less efficient. Recessions, however, are usually caused by inadequate demand, and it's not at all clear that protectionism necessarily has a negative effect on demand.

    Put it this way: a global trade war would induce everyone to switch spending away from imports toward domestically produced goods and services. This will reduce everyone's exports, causing job losses in export sectors; but it will simultaneously increase spending on and employment in import-competing industries. It's not at all obvious which way the net effect would go.

    To give a concrete example, think about the world economy in the 1950s, before the creation of the Common Market and long before the creation of the World Trade Organization. There was a lot more protectionism and vastly less international trade then than there would be later (the containerization revolution was still decades in the future.) But Western Europe and North America generally had more or less full employment.

    So why do Trump's tariff tantrums seem to be having a pronounced negative effect on near-term economic prospects? The answer, I'd submit, is that he isn't just raising tariffs, he's doing so in an unpredictable fashion.

    People are often sloppy when they talk about the adverse effects of economic uncertainty, frequently using "uncertainty" to mean "an increased probability of something bad happening." That's not really about uncertainty: it means that average expectations of what's going to happen are worse, so it's a fall in the mean, not a rise in the variance.

    But uncertainty properly understood can have serious adverse effects, especially on investment.

    Let me offer a hypothetical example. Suppose there are two companies, Cronycorp and Globalshmobal, that would be affected in opposite ways if Trump imposes a new set of tariffs. Cronycorp would like to sell stuff we're currently importing, and would build a new factory to make that stuff if assured that it would be protected by high tariffs. Globalshmobal has already been considering whether to build a new factory, but it relies heavily on imported inputs, and wouldn't build that factory if those imports will face high tariffs.

    Suppose Trump went ahead and did the deed, imposing high tariffs and making them permanent. In that case Cronycorp would go ahead, while Globalshmobal would call off its investment. The overall effect on spending would be more or less a wash.

    On the other hand, suppose that Trump were to announce that we've reached a trade deal: all tariffs on China are called off, permanently, in return for Beijing's purchase of 100 million memberships at Mar-a-Lago. In that case Cronycorp will cancel its investment plans, but Globalshmobal will go ahead. Again, the overall effect on spending is a wash.

    But now introduce a third possibility, in which nobody knows what Trump will do -- probably not even Trump himself, since it will depend on what he sees on Fox News on any given night. In that case both Cronycorp and Globalshmobal will put their investments on hold: Cronycorp because it's not sure that Trump will make good on his tariff threats, Globalshmobal because it's not sure that he won't.

    Technically speaking, both companies will see an option value to delaying their investments until the situation is clearer. That option value is basically a cost to investment, and the more unpredictable Trump's policy, the higher that cost. And that's why trade tantrums are exerting a depressing effect on demand.

    Furthermore, it's hard to see what can reduce this uncertainty. U.S. trade law gives the president huge discretionary authority to impose tariffs; the law was never designed to deal with a chief executive who has poor impulse control. A couple of years ago many analysts expected Trump to be restrained by his advisers, but he's driven many of the cooler heads out, many of those who remain are idiots, and in any case he's reportedly paying ever less attention to other people's advice.

    None of this guarantees a recession. The U.S. economy is huge, there are a lot of other things going on besides trade policy, and other policy areas don't offer as much scope for presidential capriciousness. But now you understand why Trump's tariff tantrums are having such a negative effect.

    [Jun 05, 2019] Gentleman Prefer Bonds

    Jun 05, 2019 | www.nakedcapitalism.com

    djrichard , June 5, 2019 at 6:32 pm

    I just assume the 10Y yield is reverting to trend – the trend downward it has had since 1982. The counter trend move upward in 2018 assumed the fiscal spigots were going to be turned on, that the deficit was no longer a dirty word and therefore inflation was no longer a dirty word. It's just taken til now to capitulate that none of that's going to happen.

    Seems the Federal Reserve was caught by surprise by this too. Otherwise I don't think they would have raised their Fed Funds rate to where it is. Because now that the 10Y yield has capitulated, it's actually lower than the Fed Funds rate, creating an inverted yield curve. Which is unusual because normally an inverted yield curve is created on purpose by the Federal Reserve – they raise their rate above the 10Y yield rather than wait for the 10Y yield to drop below their rate. Still, every good trader knows an inverted yield curve is bad juju. So what's the Fed Reserve to do? Sit on its hands and let the inverted yield curve work its magic and create a recession?

    Seems to me that the Federal Reserve doesn't want the market to crash on Trump's watch. At least not until after the 2020 election. So the Fed Reserve is signaling to the traders, "we feel your pain", they'll lower their rate to bring it back below the 10Y yield. They just need a pretext on why they're doing so, something that doesn't simply smack of the Fed Reserve propping up the stock market. "It's the PMI, it's the employment report, it's trade, it's one of those, yeah that's the ticket."

    Anyways, even if the fiscal spigots get turned on, I don't see the 10Y yield reversing trend until spiraling wage inflation is a thing again. I.e. when people aren't worried about their exposure to inflating prices as long as their wages are increasing / tracking with inflation. Making it safe for them to take on debt at increasing interest rates – i.e. generating inflation. And I don't see that happening anytime soon unless there's some kind of JG program.

    Until then, the trend line of the 10Y yield is downwards. Giving the Federal Reserve less and less room for their Fed Funds rate to operate in without inverting the yield curve. Seems like that won't be able to continue at some point. Interesting years ahead.

    [May 16, 2019] Boom in Dodgy Wall Street Deals Points to Market Trouble Ahead

    May 16, 2019 | www.bloomberg.com

    The fourth-quarter stock market rout that wiped out $12 trillion in shareholder value and sparked a bout of Christmas Eve panic may have quickly been forgotten by most Americans, but not by the salespeople and financial engineers of Wall Street.

    No, the selloff, it would appear, wound up triggering fears that time was running out on the longest bull market in history. And so, when early 2019 delivered a miraculous rebound, they wasted no time in peddling all sorts of deals and arrangements that test the limits of risk tolerance: from health-food makers fast-tracked into public hands to stretched retailers wrung for billions by private equity owners in the debt market.

    Junk bonds are flying out the door once again. Deeply indebted companies are borrowing even more to pay equity holders . And while you can't say the megadeal IPOs got rushed to market, two that were held up as heralding a return to IPO glory days have been flops. It's quickly turning Uber and Lyft into poster children for Wall Street eagerness amid an equity-market bounce that has all but banished memories of the worst fourth quarter in a decade.

    "At some point, people are going to get burned," said Marshall Front, the chief investment officer at Front Barnett Associates and 56-year Wall Street veteran. "People want to take their companies public because they don't know what the next years hold, and there are people who think we're close to the end of the cycle. If you're an investment banker, what do you do? You keep dancing until the music stops."

    [May 14, 2019] 33 Ways to Get Higher Yields by John Waggoner

    May 03, 2019 | www.kiplinger.com
    For more than a decade, income investors have been plagued by paucity wrapped in misery. The bellwether 10-year Treasury note has doled out an average 2.6% interest since 2008. Although the Federal Reserve has nudged its target interest rate range to 2.25% to 2.50%, it has signaled that it's done raising rates for now. Even worse, the yield on the 10-year T-note briefly sank below the yield on the three-month T-bill -- an unusual inversion that can sometimes herald a recession and lower yields ahead. The takeaway: Locking your money up for longer periods is rarely worth the negligible increase in yield. What could increase your yield these days? Being a little more adventurous when it comes to credit quality. When you're a bond investor, you're also a lender, and borrowers with questionable credit must pay higher yields. Similarly, stocks with above-average yields probably have some skeletons in their balance sheets.

    You can ameliorate credit risk -- but not eliminate it -- through diversification. Invest in a mutual fund, say, rather than a single issue. And invest in several different types of high-yielding investments -- for example, investment-grade bonds, preferred stocks and real estate investment trusts -- rather than just one category. Despite such caveats, income investing is not as bad as it was in 2015, when it was hard to milk even a penny's interest out of a money market. Now you can get 3.3% or more from no-risk certificates of deposit at a bank. We'll show you 33 ways to find the best yields for the risk you're willing to take, ranging from 2% all the way up to 12%. Just remember that the higher the payout, the greater the potential for some rough waters.

    SEE ALSO: 20 of Wall Street's Newest Dividend Stocks Prices, yields and other data are as of April 19.

    Check Out Kiplinger's Latest Online Broker Rankings

    Short-term interest rates largely follow the Fed's interest rate policy. Most observers in 2018 thought that would mean higher rates in 2019. But slowing economic growth in the fourth quarter of 2018 and the near-death experience of the bull market in stocks changed that. The Fed's rate-hiking campaign is likely on hold for 2019. Still, money markets are good bets for money you can't stand to lose. Money market funds are mutual funds that invest in very-short-term, interest-bearing securities. They pay out what they earn, less expenses. A bank money market account's yield depends on the Fed's benchmark rate and the bank's need for deposits.

    The risks: Money market mutual funds aren't insured, but they have a solid track record. The funds are designed to maintain a $1 share value; only two have allowed their shares to slip below $1 since 1994. The biggest risk with a bank money market deposit account is that your bank won't raise rates quickly when market interest rates rise but will be quick on the draw when rates fall. MMDAs are insured up to $250,000 by the federal government. How to invest: The best MMDA yields are from online banks, which don't have to pay to maintain brick-and-mortar branches. Currently, a top-yielding MMDA is from Investors eAccess , which is run by Investors Bank in New Jersey. The account has no minimum, has an annual percentage yield of 2.5% and allows six withdrawals per month. You'll get a bump from a short-term CD, provided you can keep your money locked up for a year. Merrick Bank , in Springfield, Mo., offers a one-year CD yielding 2.9%, with a $25,000 minimum. The early-withdrawal penalty is 2% of the account balance or seven days' interest, whichever is larger. The top five-year CD yield was recently 3.4%, from First National Bank of America in East Lansing, Mich.

    SEE ALSO: 7 Best Ways to Earn More on Your Savings

    Your primary concern in a money fund should be how much it charges in expenses. Vanguard Prime Money Market Fund (symbol VMMXX , yield 2.5%) charges an ultralow 0.16% a year and consistently sports above-average yields. Investors in high tax brackets might consider a tax-free money fund, whose interest is free from federal (and some state) income taxes, such as Vanguard Municipal Money Market Fund ( VMSXX 1.6%). To someone paying the maximum 40.8% federal tax rate, which includes the 3.8% net investment income tax, the fund has the equivalent of a 2.7% taxable yield. (To compute a muni's taxable-equivalent yield, subtract your tax bracket from 1, and divide the muni's yield by that. In this case, divide 1.6% by 1 minus 40.8%, or 59.2%). The fund's expense ratio is 0.15%.

    SEE ALSO: 12 Bank Stocks That Wall Street Loves the Most //www.dianomi.com/smartads.epl?id=4908

    Muni bonds are IOUs issued by states, municipalities and counties. At first glance, muni yields look as exciting as a month in traction. A 10-year, AAA-rated national muni yields 2.0%, on average, compared with 2.6% for a 10-year Treasury note. But the charm of a muni bond isn't its yield; it's that the interest is free from federal taxes -- and, if the bond is issued by the state where you live, from state and local taxes as well. As with tax-free money funds, investors should consider a muni fund's taxable equivalent yield; in the case above, it would be 3.4% for someone paying the top 40.8% federal rate.

    Yields get better as you go down in credit quality. An A-rated 10-year muni -- two notches down from AAA but still good -- yields 2.3%, on average, or 3.9% for someone paying the top rate. The risks: Munis are remarkably safe from a credit perspective, even considering that defaults have inched up in recent years. But like all bonds, munis are subject to interest rate risk. If rates rise, your bond's value will drop (and vice versa), because interest rates and bond prices typically move in opposite directions. If you own an individual bond and hold it until it matures, you'll most likely get your full principal and interest. The value of muni funds, however, will vary every day.

    SEE ALSO: 9 Municipal Bond Funds for Tax-Free Income

    How to invest: Most investors should use a mutual fund or ETF, rather than pick their own individual bonds. Look for funds with rock-bottom expenses, such as Vanguard Limited-Term Tax-Exempt ( VMLTX , 1.8%). The fund charges just 0.17%, and yields the equivalent of 3% for someone paying the highest federal tax rate. It's a short-term fund, which means it's less sensitive to interest rate swings. That means its share price would fall less than longer-term funds' prices if rates were to rise. The average credit quality of the fund's holdings is a solid AA–. Fidelity Intermediate Municipal Income ( FLTMX , 2.0%), a member of the Kiplinger 25 , the list of our favorite no-load funds, gains a bit of yield (a taxable equivalent of 3.4% for those at the top rate) by investing in slightly longer-term bonds. The fund's expense ratio is 0.37%; the largest percentage of assets, 39%, is in AA bonds. Vanguard High-Yield Tax-Exempt Fund Investor Shares ( VWAHX , 2.9%) also charges just 0.17% in fees and yields 4.9% on a taxable-equivalent basis for someone at the highest rate. The extra yield comes from investing in a sampling of riskier bonds. But the fund's average BBB+ credit rating is still pretty good, and its return has beaten 96% of high-yield muni funds over the past 15 years.

    SEE ALSO: How Smart a Bond Investor Are You? //www.dianomi.com/smartads.epl?id=4908

    You get higher yields from corporate bonds than you do from government bonds because corporations are more likely to default. But that risk is slim. The one-year average default rate for investment-grade bonds (those rated BBB– or higher), is just 0.09%, going back to 1981, says Standard & Poor's. And corporate bonds rated AAA and maturing in 20 or more years recently yielded 3.7%, on average, while 20-year Treasury bonds yielded 2.8% and 30-year T-bonds, 3.0%. You can earn even more with bonds from firms with lightly dinged credit ratings. Bonds rated BBB yield an average 4.0%. The risks: The longer-term bond market moves independently of the Fed and could nudge yields higher (and prices lower) if inflation worries pick up. Though corporate defaults are rare, they can be devastating. Lehman Brothers, the brokerage firm whose bankruptcy helped fuel the Great Recession, once boasted an investment-grade credit rating.

    How to invest: Active managers select the bonds at Dodge & Cox Income ( DODIX , 3.5%). This fund has beaten 84% of its peers over the past 15 years, using a value-oriented approach. It holds relatively short-term bonds, giving its portfolio a duration of 4.4 years, which means its share price would fall roughly 4.4% if interest rates rose by one percentage point over 12 months. The fund's average credit quality is A, and it charges 0.42% in expenses. If you prefer to own a sampling of the corporate bond market for a super-low fee, Vanguard Intermediate-Term Corporate Bond Index Fund Admiral Shares ( VICSX , 3.6%) is a good choice. Vanguard recently lowered the minimum investment to $3,000, and the fund charges just 0.07%. Interest-rate risk is high with Vanguard Long-Term Bond ETF ( BLV , $91, 3.8%). The exchange-traded fund has a duration of 15, which means fund shares would fall 15% if interest rates moved up by one percentage point in a year's time. Still, the yield on this long-term bond offering is enticing, and the fund's expense ratio is just 0.07%. SEE ALSO: The 7 Best Bond Funds for Retirement Savers in 2019 //www.dianomi.com/smartads.epl?id=4908

    Dividend stocks have one advantage that bonds don't: They can, and often do, raise their payout. For example, Procter & Gamble ( PG , $106, 2.7%), a member of the Kiplinger Dividend 15 , the list of our favorite dividend-paying stocks, raised its dividend from $2.53 a share in 2014 to $2.84 in 2018, a 2.3% annualized increase. Preferred stocks, like bonds, pay a fixed dividend and typically offer higher yields than common stocks. Banks and other financial services firms are the typical issuers, and, like most high-dividend investments, they are sensitive to changes in interest rates. Yields for preferreds are in the 6% range, and a generous crop of new issues offers plenty of choices.

    The risks: Dividend stocks are still stocks, and they will fall when the stock market does. Furthermore, Wall Street clobbers companies that cut their dividend. General Electric slashed its dividend to a penny per share on December 7, 2018, and the stock fell 4.7% that day. How to invest: Some slower-growing industries, such as utilities or telecommunications firms, tend to pay above-average dividends. Verizon Communications ( VZ , $58, 4.2%), a Kip 15 dividend stock, is the largest wireless carrier in the U.S. Its investment in Fios fiber-optic cable should pay off in coming years. SPDR Portfolio S&P 500 High Dividend ETF ( SPYD , $39, 4.3%) tracks the highest-yielding stocks in the S&P 500 index. The fund has 80 holdings and is sufficiently diversified to handle a clunker or two. Utility PPL Corp. ( PPL , $31, 5.3%) derives more than 50% of its earnings from the United Kingdom. Worries that the U.K.'s departure from the European Union will pressure PPL's earnings have weighed on the stock's price, boosting its yield. Nevertheless, PPL's U.S. operations provide strong support for the company's generous payout. Ma Bell is a Dividend Aristocrat , meaning that AT&T ( T , $32, 6.4%) has raised its dividend for at least 25 consecutive years (35 straight years, in AT&T's case). The company has plenty of free cash flow to keep raising its payout. SEE ALSO: 9 High-Yield Dividend Stocks That Deserve Your Attention //www.dianomi.com/smartads.epl?id=4908

    You can invest in two types of REITs: those that invest in property and those that invest in mortgages. Both types must pass on at least 90% of their revenue to investors, which is partly why they have such excellent yields. Typically, REITs that invest in income-producing real estate have lower yields than those that invest in mortgages. The average property REIT yields 4.1%, compared with the average mortgage REIT yield of 10.6%, according to the National Association of Real Estate Investment Trusts. Why the big difference? Property REITs rack up expenses when they buy and sell income properties or lease them out as landlords. Mortgage REITs either buy mortgages or originate them, using borrowed money or money raised through selling shares as their capital.

    The risks: When the economy slows down, so does the real estate market, and most REITs will take a hit in a recession. Mortgage REITs are exceptionally sensitive to interest rate increases, which squeeze their profit margins, and to recessions, which increase the likelihood of loan defaults. REIT dividends are not qualified dividends for tax purposes and are taxed at your ordinary income tax rate. How to invest: Realty Income Corp. ( O , $69, 4.0%) invests in property and rents it to large, dependable corporations, such as Walgreens, 7-Eleven and Fed-Ex. It's a Kiplinger 15 dividend stalwart and pays dividends monthly. Fidelity Real Estate Income ( FRIFX , 4.0%) isn't a REIT, although it invests in them (among other things). The fund puts income first. It has 43% of its assets in bonds, most of them issued by REITs. The fund lost 0.6% in 2018, compared with a 6% loss for other real estate funds. Investors will forgive a lot in exchange for a high yield. In the case of iShares Mortgage Real Estate Capped ETF ( REM , $44, 8.2%), they're choosing to accept a high degree of concentration: The top four holdings account for 44% of the ETF's portfolio. Although concentration can increase risk, in this instance the fund's huge position in mortgage REITs has helped returns. Falling interest rates late in 2018 pushed up mortgage REITs, limiting the fund's losses to just 3% in 2018. Annaly Capital Management ( NLY , $10, 12%) is a REIT that borrows cheaply to buy government-guaranteed mortgage securities. Most of those holdings are rated AA+ or better. Annaly boosts its yield by investing in and originating commercial real estate loans and by making loans to private equity firms. Its 2018 purchase of MTGE Investment, a mortgage REIT that specializes in skilled nursing and senior living facilities, will help diversify the firm's portfolio. Annaly is the largest holding of iShares Mortgage Real Estate Capped ETF.

    SEE ALSO: A Dozen Great REITs for Income AND Diversification

    If you think interest rates are low in the U.S., note that most developed foreign countries have even lower rates because their economies are growing slowly and inflation is low. The U.K.'s 10-year bond pays just 1.2%; Germany's 10-year bond yields 0.1%; Japan's yields –0.03%. There's no reason to accept those yields for a day, much less a decade. You can, by contrast, find decent yields in some emerging countries. Emerging-markets bonds typically yield roughly four to five percentage points more than comparable U.S. Treasury bonds, which would put yields on some 10-year EM debt at about 7%, says Pramol Dhawan, emerging-markets portfolio manager at bond fund giant Pimco.

    The risks: You need a healthy tolerance for risk to invest in emerging-markets bonds. U.S. investors tend to be leery of them because they remember massive defaults and currency devaluations, such as those that occurred in Asia in the late 1990s. But in the wake of such debacles, many emerging countries have learned to manage their debt and their currencies better than in the past. But currency is still a key consideration. When the U.S. dollar rises in value, overseas gains translate into fewer greenbacks. When the dollar falls, however, you'll get a boost in your return. A higher dollar can also put pressure on foreign debt denominated in dollars -- because as the dollar rises, so do interest payments. How to invest: Dodge & Cox Global Bond ( DODLX , 4.5%) can invest anywhere, but lately it has favored U.S. bonds, which were recently 48% of the portfolio. The fund's major international holdings show that it isn't afraid to invest in dicey areas -- it has 11% of its assets in Mexican bonds and 7% in United Kingdom bonds. Fidelity New Markets Income ( FNMIX , 5.6%), a Kip 25 fund, has been run by John Carlson since 1995. That makes him one of the few emerging-markets debt managers who ran a portfolio during the currency-triggered meltdown in 1997-98. He prefers debt denominated in dollars, which accounts for 94% of the portfolio. But he can be adventurous: About 6.5% of the fund's assets are in Turkey, which is currently struggling with a 19% inflation rate and a 14.7% unemployment rate. IShares Emerging Markets High Yield Bond ETF ( EMHY , $46, 6.2%) tracks emerging-markets corporate and government bonds with above-average yields. The holdings are denominated in dollars, so there's less currency risk. But this is not a low-risk holding. It's more than twice as volatile as the U.S. bond market, although still only half as volatile as emerging-markets stocks. SEE ALSO: 39 European Dividend Aristocrats for International Income Growth

    Junk bonds -- or high-yield bonds, in Wall Street parlance -- aren't trash to income investors. Such bonds, which are rated BB+ or below, yield, on average, about 4.7 percentage points more than the 10-year T-note, says John Lonski, managing director for Moody's Capital Markets Research Group. What makes a junk bond junky? Typical high-yield bond issuers are companies that have fallen on hard times, or newer companies with problematic balance sheets. In good times, these companies can often make their payments in full and on time and can even see their credit ratings improve. The risks: You're taking an above-average risk that your bond's issuer will default. The median annual default rate for junk bonds since 1984 is 3.8%, according to Lonksi. In a recession, you could take a big hit. In 2008, the average junk bond fund fell 26%, even with reinvested interest.

    How to invest: RiverPark Strategic Income ( RSIVX , 4.8%) is a mix of cash and short-term high-yield and investment-grade bonds. Managers choose bonds with a very low duration, to cut interest rate risk, and a relatively low chance of default. Vanguard High-Yield Corporate ( VWEHX , 5.5%), a Kip 25 fund, charges just 0.23% in expenses and invests mainly in the just-below-investment-grade arena, in issues from companies such as Sprint and Univision Communications. SPDR Bloomberg Barclays High Yield Bond ETF ( JNK , $36, 5.8%) charges 0.40% in expenses and tracks the Barclays High Yield Very Liquid index -- meaning that it invests only in easily traded bonds. That's a comfort in a down market because when the junk market turns down, buyers tend to dry up. The fund may lag its peers in a hot market, however, as some of the highest-yielding issues can also be the least liquid. Investors who are bullish on the economy might consider Northern High Yield Fixed Income Fund ( NHFIX , 7.0%). The fund owns a significant slice of the junkier corner of the bond market, with about 23% of its holdings rated below B by Standard & Poor's. These bonds are especially vulnerable to economic downturns but compensate investors willing to take that risk with a generous yield.

    SEE ALSO: 12 Dividend Stocks That May Be Income Traps //www.dianomi.com/smartads.epl?id=4908

    You might be surprised to learn how much income you can generate from moving hydrocarbons from one place to another. Most MLPs are spin-offs from energy firms and typically operate gas or oil pipelines. MLPs pay out most of their income to investors and don't pay corporate income taxes on that income. Those who buy individual MLPs will receive a K-1 tax form, which spells out the income, losses, deductions and credits that the business earned and your share of each. Most MLP ETFs and mutual funds don't have to issue a K-1; you'll get a 1099 form reporting the income you received from the fund.

    The risks: In theory, energy MLPs should be somewhat immune to changes in oil prices; they collect fees on the amount they move, no matter what the price. In practice, when oil gets clobbered, so do MLPs -- as investors learned in 2015, when the price of West Texas intermediate crude fell from $53 a barrel to a low of $35 and MLPs slid an average 35%. Oil prices should be relatively stable this year, and high production levels should mean a good year for pipeline firms. How to invest: Magellan Midstream Partners ( MMP , $62, 6.5%) has a 9,700-mile pipeline system for refined products, such as gasoline, and 2,200 miles of oil pipelines. The MLP has a solid history of raising its payout (called a distribution) and expects a 5% annual increase in 2019. The giant of MLP ETFs, Alerian MLP ETF ( AMLP , $10, 7.2%), boasts $9 billion in assets and delivers a high yield with reasonable expenses of 0.85% a year. Structured as a C corporation, the fund must pay taxes on its income and gains. That can be a drag on yields compared with MLPs that operate under the traditional partnership structure. EQM Midstream Partners ( EQM , $46, 10.1%) is active in the Appalachian Basin and has about 950 miles of interstate pipelines. The firm paid $4.40 in distributions per unit last year and expects to boost that to $4.58 in 2019.

    SEE ALSO: 7 High-Yield MLPs to Buy as Oil Prices Climb

    Closed-end funds (CEFs) are the forebears of mutual funds and ETFs. A closed-end fund raises money through an initial stock offering and invests that money in stocks, bonds and other types of securities, says John Cole Scott, chief investment officer, Closed-End Fund Advisors. The fund's share price depends on investors' opinion of how its picks will fare. Typically, the fund's share price is less than the current, per-share value of its holdings -- meaning that the fund trades at a discount. In the best outcome, investors will drive the price up to or beyond the market value of the fund's holdings. In the worst case, the fund's discount will steepen.

    The risks: Many closed-end income funds borrow to invest, which can amplify their yields but increase their price sensitivity to changes in interest rates. Most CEFs have higher expense ratios than mutual funds or ETFs, too.

    How to invest: Ares Dynamic Credit Allocation Fund ( ARDC , $15, 8.5%) invests in a mix of senior bank loans and corporate bonds, almost all of which are rated below investment grade. Borrowed money as a percentage of assets -- an important indicator for closed-end funds known as the leverage ratio -- is 29.6%, which is a tad lower than the average of 33% for closed-end funds overall. The fund's discount to the value of its holdings has been narrowing of late but still stands at 12.1%, compared with 11.2%, on average, for the past three years.

    Advent Claymore Convertible Securities and Income Fund ( AVK , $15, 9.4%), run by Guggenheim Investments, specializes in convertible bonds, which can be exchanged for common stock under some conditions. The fund also holds some high-yield bonds. Currently, it's goosing returns with 40% leverage, which means there's above-average risk if rates rise. For intrepid investors, the fund is a bargain, selling at a discount of 10.6%, about average for the past three years.

    Clearbridge Energy Midstream Opportunity ( EMO , $9, 9.7%) invests in energy master limited partnerships. It sells at a 12.1% discount, compared with a 6.6% average discount for the past three years. Its leverage ratio is 33% -- about average for similar closed-end funds.

    SEE ALSO: The 10 Best Closed-End Funds (CEFs) for 2019

    [Mar 31, 2019] The Bond Market Shadow Over Donald Trump's Re-Election

    Mar 31, 2019 | medium.com

    While the president celebrated the end of the Mueller inquiry this week, the risk of a recession is rising

    [Mar 31, 2019] Global Bond-Market Revelers Cast Sober Eye Toward Cycle's End

    Mar 31, 2019 | www.bloomberg.com

    The global bond market's soaring performance has left investors queasy about the ride ahead.

    The Bloomberg Barclays Global Aggregate index has earned 2.3 percent through March 28, its best quarter since mid-2017. But with yields sinking across major sovereign markets, investors now face a dilemma. Buying government bonds at these levels is perilous because economic data may improve, while taking more risk could leave investors nastily exposed to a global downturn.

    [Mar 26, 2019] New Fed stance is a life saver for shale

    Notable quotes:
    "... In the ongoing desire on their part to be transparent they have, until Wed., projected their expectations for increases to short-term rates over the next two years to be 4 increases this year and 4 next year. ..."
    "... As of Wednesday, that's all gone. The new dot chart says zero increases this year and at most 1 next year. The 10-year treasury immediately cratered its yield to 2.5something percent. ..."
    Mar 26, 2019 | peakoilbarrel.com

    Watcher 03/24/2019 at 10:25 am

    Re shale financing . . . Folks should go and read financial articles from Wednesday afternoon of this week.

    The Fed basically took a sledgehammer to their dot charts. In the ongoing desire on their part to be transparent they have, until Wed., projected their expectations for increases to short-term rates over the next two years to be 4 increases this year and 4 next year.

    As of Wednesday, that's all gone. The new dot chart says zero increases this year and at most 1 next year. The 10-year treasury immediately cratered its yield to 2.5something percent. Still falling. Overseas we see Germany tracking, and Japan, and more and more maturities on their yield curves return to negative. Not just real negative. Outright nominal negative.

    This is something that Financial media does not talk about. Negative nominal interest rates from major country government bonds. How could they talk about it? It is utterly obvious that this specific reality demonstrates that the entirety of all analyses has no meaning. Their only defense is silence. Shale would prefer that it stay that way.

    The Fed also announced an end to balance sheet normalization, which is euphemism for trying to get rid of all of those bonds and MBS that were purchased as part of QE. They are ending their purchases late this year. They dare not continue the move towards normal. I believe that leaves their balance sheet still holding in excess of 3 trillion. That's not normalization, sports fans. And it has been TEN YEARS.They havent been able to get to "normal" in ten years, and as of Wed, they will stop trying.

    The Treasury notes are the underlying basis for what shale companies have to pay to borrow money. Thoughts by folks here that the monetary gravy train will shut off shale drilling need rethinking. Bernanke changed everything. Forever.

    These Fed actions are indistinguishable from whimsy. Imagining that Powell is Peak Oil cognizant and is focused on shale is a tad extreme, but only a tad.

    I recall a Bernanke quote during the crisis that made clear he knew what Peak would mean -- at any price.

    [Mar 25, 2019] Global Bond Markets Are Flashing the Same Warning

    Mar 25, 2019 | www.bloomberg.com

    "Bond markets globally, along with dovish central banks, have been telling us a slowdown is on the way," said Jeffrey Halley, senior market analyst at Oanda Corp. in Singapore. "Some parts of the world will be better equipped than others to handle this. The U.S. can at least cut rates and apply monetary tools, while things could be worse for Europe and Japan, where they cannot."

    [Mar 22, 2019] It Feels Eerily Like 2007 - DoubleLine's Gundlach Blasts Fed's Unprecedented Reversal

    It does feel like in 2017. But that does not means much as economy changed substantially and probably nor in the right direction... Purchasing power of population probably was eroded despite growth of absolute numbers of customers because of decimation of well paying jobs. Also the market now is dominated by HFT which serves as an amplifier of pre-existing trend and can by itself course a crash or mini crash. Another factor is oil prices.
    But the idea of disconnect if a very useful idea and many other analysts predicted negative year for S&P500. I see dot-com bubble No.2 here, not so much subprime mortgages problem of 2008. Subprime exists now in junk bond produced by shale oil players, but it is much less in size.
    Mar 22, 2019 | www.zerohedge.com

    He said the stock market, for now, "likes the fact that they (the Fed) aren't going to give them any problems."

    But things could change quickly and dramatically, he said, with his final comment, the most ominous:

    "It feels eerily like '07," he said.

    " The stock market is near its high and the economy is noticeably weaker - and yet everyone is saying 'Everything is Great! '"

    And just in case you wondered how bad the underlying is - despite equity market's enthusiasm - Citi's Economic Data Change index as its worst level since 2009...

    [Mar 13, 2019] Jeff Gundlach Says We Are In A Bear Market, S P Will Take Out December Lows In 2019

    Mar 12, 2019 | www.zerohedge.com

    Today at 4:15pm EDT, DoubleLine founder Jeff Gundlach is holding his latest live webcast open to investors and casual listeners, titled enticingly 'Highway to Hell', and which we assume will discuss either Brexit, the US-China trade deal, the long-term US debt picture or how this, latest asset bubble finally ends.

    Readers can register and follow it live at this address , or clicking on the image below

    As usual, we will grab and highlight the most interesting charts from Gundlach's presentation as they come in.

    * * *

    Gundlach, as usual, starts with one of his favorite charts, the one showing the global central bank balance sheet level juxtaposed to the global market, as the background for the Fed's "180 degree turn" in the stock market's recent rebound, which is understandable since the "S&P was and is in a bear market."

    ... ... ...

    If that wasn't bad enough, Gundlach also said that stocks will take out the December low during the course of 2019 and markets will roll over earlier than they did last year.

    Shifting from the market to the economy, Gundlach shows that global economic momentum is getting worse across the globe... Gundlach then highlights the sudden collapse in global trade, which would suggest the world is in a global recession.

    And yet at the same time, US economic data, at least in the labor market, has never been stronger as Gundlach shows:

    Of course, another big red flag is the collapse in December retail sales, and despite the sharp rebound in the January print as we saw yesterday, Gundlach highlights the sharp drop in the 6 month average and highlights it as another potential recessionary risk factor.

    Going back to one of his favorite topics, the relentless growth of US debt, Gundlach shows the following chart of debt by sector. Needless to say, it is troubling, and as Gundlach said.

    And tied to that, the following new warning on the US interest expense: "The US interest expense is projected by the CBO to explode higher starting yesterday"

    Gundlach then went on a rant against MMT, calling it a "crackpot" theory, which is based on a "completely fallacious argument", and adds that "People who have PhDs in economics actually are buying the complete nonsense of MMT which is used to justify a massive socialist program."

    Gundlach also discusses the US trade deficit, which recently soared, saying that "the trade deficit is not shrinking but expanding," and the goods deficit is at "an all-time record", which according to Gundlach may hurt Trump's re-election chances.

    Having predicted president Trump early, when everyone else was still mocking him, Gundlach admits that he is "not really sure what's going to happen,'' when it comes to the next election. "If you ran on promising a lesser trade deficit'' and elimination of national debt, and both have "exploded" higher, Gundlach thinks it's hard to say that you're winning.

    And speaking of the next president, Gundlach suggests that if the economy falls into recession and Trump gets thrown out, we might get the chance to see how MMT, i.e. helicopter money, really works with the next, socialist, president.

    Perhaps this is also why to Gundlach "the next big move for the dollar is lower."

    Looking ahead, Gundlach also touches on the future of monetary policy, and once again highlights the discrepancy between the bond market, which expects half a rate cut, and the Fed's dot plot which expects three hikes in 2019-2020.

    What happens? To Gundlach, "Fed expectations are likely to show capitulation to the Fed this time...the bond market is having none of the Fed's two dots that they revealed in December." He then adds that the Fed "will absolutely drop the 2019 dot," suggesting it may be dropped to 1/2 a hike.


    Let it Go , 41 minutes ago link

    Optimism that a new trade deal will occur between America and China has driven stock markets higher even as data continues to emerge confirming economies across the world continue to slow. It seems much of the current market fervor is based on optimism and hope falls into the category of "irrational exuberance" a term that Allen Greenspan has in the past used to describe unbridled enthusiasm. More on the realities being ignored in the following article.

    https://Unbridled Market Euphoria Rooted In Optimism And Hope

    themarketear , 1 hour ago link

    SPX versus US 10 year continues widening. https://themarketear.com/posts/cFmMM1H8UE

    GUS100CORRINA , 2 hours ago link

    I think with the increasing number of DOOM scenarios issued lately, I may need to go see a therapist.

    THE SKY TRULY MAY INDEED BE FALLING!! PROBABLY NOT!!! FEAR promotion is truly running wild!

    cowdiddly , 2 hours ago link

    Hmm....Kinda strange call there Jeffy Jeff on those higher interest rates.

    Especially considering just today where the 1yr yield is higher than...get this, the 2yr, the 3yr, the 5yr aaaaand the 7year bond. Kinda strange setup for rates exploding higher isn't it? Or if you like to think of it as a belly that sumbuck is getting one BIG pot gut.

    NOT BUYING IT BUDDY.

    ElTerco , 2 hours ago link

    When the BBBs start toppling like dominoes, you'll understand better.

    https://www.zerohedge.com/news/2018-11-22/64-trillion-question-how-many-bbb-bonds-are-about-be-downgraded

    Bam_Man , 3 hours ago link

    This guy just REFUSES to give up with his "higher interest rates" schtick.

    He was DEAD WRONG with his call for 4.00%-4.50% on the 10-year UST last year.

    He simply refuses to acknowledge that short-tern interest rates will be NEGATIVE in the US within the next 18 months.

    Keter , 2 hours ago link

    Politicians are imbeciles and have no remedies. The US is the least ugly pig of the bunch. The EU needs major structural tax and regulatory reform; open borders with a pervasive social welfare state has proven a recipe for disaster. The US is in similar circumstances, but its tax and regulatory environment are at least rational. It requires massive entitlement and spending reforms with some minor tax hikes on the top end marginal income and capital gains brackets.

    [Mar 12, 2019] Jeff Gundlach Says We Are In A Bear Market, S P Will Take Out December Lows In 2019

    Mar 12, 2019 | www.zerohedge.com

    Today at 4:15pm EDT, DoubleLine founder Jeff Gundlach is holding his latest live webcast open to investors and casual listeners, titled enticingly 'Highway to Hell', and which we assume will discuss either Brexit, the US-China trade deal, the long-term US debt picture or how this, latest asset bubble finally ends.

    Readers can register and follow it live at this address , or clicking on the image below

    As usual, we will grab and highlight the most interesting charts from Gundlach's presentation as they come in.

    * * *

    Gundlach, as usual, starts with one of his favorite charts, the one showing the global central bank balance sheet level juxtaposed to the global market, as the background for the Fed's "180 degree turn" in the stock market's recent rebound, which is understandable since the "S&P was and is in a bear market."

    [Mar 10, 2019] Bond-Market Inflation Skeptics See Little to Fear in Coming Data by Emily Barrett

    Mar 10, 2019 | finance.yahoo.com

    "At this point in the cycle, a pickup in inflation will generally lead to corporate margin compression, which is potentially more supportive of maintaining a long duration stance," Bartolini, lead portfolio manager for U.S. core bond strategies, said after the jobs figures. He sees annual CPI remaining around this report's consensus of 1.6 percent -- the slowest since 2016 -- for a while.

    Benchmark 10-year yields enter the week at 2.63 percent, close to the lowest level in two months. In the interest-rate options market, traders have been ramping up positions that target lower yields in five- and 10-year notes.

    DougDoug,

    The Fed is pretty much DONE with rate hikes, as paying the INTEREST on, 22 Trillion in Debt will get,.. UGLIER and UGLIER ! Especially with, all the new,.. Tax and SPEND Demo'Rat Liberals, coming into, Congress ! "We the People", will be,.. TOAST !!

    I'm HOLDING, my "Floating Rate" senior secured, Bond CEF's and my Utility and Tech, CEF's, too ! Drawing NICE Dividends,.. Monthly !

    The World is NOT ending for, the USA,.. THANKS,.. to Trump !

    [Jan 21, 2019] U.S. fund investors put most cash in 'junk' since late 2016 by Trevor Hunnicutt

    Jan 17, 2019 | www.nasdaq.com
    NEW YORK, Jan 17 (Reuters) - U.S. fund investors charged into high-yield "junk" bonds during the latest week, pouring in $3.3 billion, the most cash flowing into that market since late 2016, Lipper said on Thursday, boosted by soothing words by Federal Reserve Chairman Jerome Powell.

    Underscoring investors' appetite for some risk-taking, investors pulled $15 billion net cash from U.S.-based money market funds, according to the Refinitiv research service. For their part, U.S.-based equity mutual funds - which exclude exchange-traded funds - posted inflows of $4.8 billion, Lipper data showed.

    [Jan 20, 2019] Cohan has been on a rant for years about how high risk corporate bonds are going to default in large numbers. Never happened

    Jan 20, 2019 | economistsview.typepad.com

    anne , January 17, 2019 at 09:35 AM

    http://cepr.net/blogs/beat-the-press/does-william-cohan-s-nyt-tirade-against-low-interest-rates-make-any-sense

    January 17, 2019

    Does William Cohan's New York Times Tirade Against Low Interest Rates Make Any Sense?
    By Dean Baker

    It doesn't as far as I can tell. Cohan has been on a rant * for years about how high risk corporate bonds are going to default in large numbers and then ... something. It's not clear why most of us should care if some greedy investors get burned as a result of not properly evaluating the risk of corporate bonds. No, there is not a plausible story of a chain of defaults leading to a collapse of the financial system.

    But even the basic proposition is largely incoherent. Cohan is upset that the Federal Reserve has maintained relatively low, by historical standards,interest rates through the recovery. He seems to want the Fed to raise interest rates. But then he tells readers:

    "After the fifth straight quarterly rate increase, Mr. Trump, worried that the hikes might slow growth or even tip the economy into recession, complained that Mr. Powell would 'turn me into Hoover.' On January 3, the president of the Federal Reserve Bank of Dallas said the Fed should assess the economic outlook before raising short-term interest rates again, a signal that the Fed has hit pause on the rate hikes. Even Mr. Powell has signaled he may be turning more cautious."

    It's not clear whether Cohan is disagreeing with the assessment of the impact of higher interest rates, not only by Donald Trump, but also the president of the Dallas Fed, Jerome Powell, and dozens of other economists.

    Higher interest rates will slow growth and keep people from getting jobs. The people who would be excluded from jobs are disproportionately African American, Hispanic, and other disadvantaged groups in the labor market. Higher unemployment will also reduce the bargaining power of tens of millions of workers who are currently in a situation to secure real wage increases for the first time since the recession in 2001.

    If Cohan had some story of how bad things would happen to the economy if the Fed doesn't raise rates then perhaps it would be worth the harm done by raising rates, but investors losing money on corporate bonds doesn't fit the bill.

    * https://www.nytimes.com/2019/01/17/opinion/shutdown-recession.html

    [Jan 13, 2019] Goldman Sachs has rolled back its call for much higher rates in U.S. government bonds in the U.S., though it still expects a gradual climb from the current muted levels in the Treasury market

    Jan 13, 2019 | economistsview.typepad.com

    im1dc , January 08, 2019 at 08:44 AM

    Goldman's Bond Desk just called for a slower and lower US GDP in 2019

    https://www.marketwatch.com/story/goldman-cuts-10-year-treasury-yield-target-for-2019-to-3-2019-01-08

    "Goldman cuts 10-year Treasury yield target for 2019 to 3%"

    By Sunny Oh...Jan 8, 2019...10:45 a.m. ET

    "Goldman Sachs has rolled back its call for much higher rates in U.S. government bonds in the U.S., though it still expects a gradual climb from the current muted levels in the Treasury market.

    In a Tuesday note, Goldman Sachs said they expect the 10-year yield TMUBMUSD10Y, +0.06% to hit 3% by year-end, a 50 basis point cut from their forecast of 3.5%. Since last week, the benchmark bond yield has steadily risen to 2.710% Tuesday, after hitting an 11-month low of 2.553% last Thursday, according to Tradeweb data.

    Bond prices fall as yields climb."...

    [Jan 13, 2019] Goldman Sachs Says Markets Indicate a 50% Chance of a Recession

    Notable quotes:
    "... However, despite the signs, Goldman Sachs assumes the indicators are wrong and that "recession risk remains fairly low, in the neighborhood of 15% over the next year." The bank has predicted that the S&P 500 will finish 2019 at 3,000, up from the current value just below 2,600. ..."
    Jan 13, 2019 | finance.yahoo.com

    Confidence in continued economic growth has been waning. A huge majority of chief financial officers around the world say a recession will happen by the end of 2020. Most voters think one will hit by the end of this year.

    Now the Goldman Sachs economic research team says that the market shows a roughly 50% chance of a recession over the next year, according to Axios.

    Goldman Sachs looked at two different measures: the yield curve slope and credit spreads. The former refers to a graph of government bond interest rates versus the years attaining maturity requires. In a growing economy, interest rates are higher the longer the investment because investors have confidence in the future. A frequent sign of a recession is the inversion of the slope, when investors are uncertain about the future, so are less willing to bet on it.

    Credit spreads compare the interest paid by government bonds, which are considered the safest. Corporate bonds, which are riskier, of the same maturity have to offer higher interest rates. As a recession approaches, credit spreads tend to expand, as investors are more worried about companies defaulting on their debt.

    However, despite the signs, Goldman Sachs assumes the indicators are wrong and that "recession risk remains fairly low, in the neighborhood of 15% over the next year." The bank has predicted that the S&P 500 will finish 2019 at 3,000, up from the current value just below 2,600.

    [Jan 12, 2019] Gundlach Warns U.S. Economy Is Floating on 'an Ocean of Debt'

    Jan 12, 2019 | finance.yahoo.com

    (Bloomberg) -- Jeffrey Gundlach said yet again that the U.S. economy is gorging on debt.

    Echoing many of the themes from his annual "Just Markets" webcast on Tuesday, Gundlach took part in a round-table of 10 of Wall Street's smartest investors for Barron's. He highlighted the dangers especially posed by the U.S. corporate bond market.

    Prolific sales of junk bonds and significant growth in investment grade corporate debt, coupled with the Federal Reserve weaning the market off quantitative easing, have resulted in what the DoubleLine Capital LP boss called "an ocean of debt."

    The investment manager countered President Donald Trump's claim that he's presiding over the strongest economy ever. The growth is debt-based, he said.

    Gundlach's forecast for real GDP expansion this year is just 0.5 percent. Citing numbers spinning out of the USDebtClock.org website, he pointed out that the U.S.'s unfunded liabilities are $122 trillion -- or six times GDP.

    "I'm not looking for a terrible economy, but an artificially strong one, due to stimulus spending," Gundlach told the panel. "We have floated incremental debt when we should be doing the opposite if the economy is so strong."

    Stock Bear

    Gundlach is coming off another year in which his Total Return Bond Fund outperformed its fixed-income peers. It returned 1.8 percent in 2018, the best performance among the 10 largest actively managed U.S. bond funds, according to data compiled by Bloomberg.

    Gundlach expects further declines in the U.S. stock market, which recently have steadied after reeling for most of December since the Great Depression. Equities will be weak early in the year and strengthen later in 2019, effectively a reversal of what happened last year, he said.

    "So now we are in a bear market, which isn't defined by me as stocks being down 20 percent. A bear market is determined by the way stocks are acting," he said.

    Rupal Bhansali, chief investment officer of International & Global Equities at Ariel Investments, picked up on Gundlach's debt theme in the Barron's cover story. Citing General Electric's woes, she urged investors to focus more on balance-sheet risk rather than whether a company could beat or miss earnings. Companies with net cash are worth looking at, she said.

    To contact the reporters on this story: James Ludden in New York at jludden@bloomberg.net;Hailey Waller in New York at hwaller@bloomberg.net

    To contact the editors responsible for this story: Matthew G. Miller at mmiller144@bloomberg.net, Ros Krasny

    For more articles like this, please visit us at bloomberg.com

    [Jan 12, 2019] The Biggest Emerging Market Debt Problem Is in America by Carmen M. Reinhart

    Notable quotes:
    "... In what is still a low-interest-rate environment globally, the perpetual search for yield has found a comparatively new and attractive source in the guise of collateralized loan obligations (CLOs) within the USEM world. According to the Securities Industry and Financial Markets Association, new issues of "conventional" high-yield corporate bonds peaked in 2017 ..."
    "... These CLOs share many similarities with the mortgage-backed securities that set the stage for the subprime crisis a decade ago. During that boom, banks bundled together loans and shed risk from their balance sheets. Over time, this fueled a surge in low-quality lending, as banks did not have to live with the consequences. ..."
    "... A world economy geared toward increasing the supply of financial assets has hooked us into a global game of waiting for the next bubble to emerge somewhere. ..."
    Dec 20, 2018 | www.project-syndicate.org

    A decade after the subprime bubble burst, a new one seems to be taking its place in the market for corporate collateralized loan obligations. A world economy geared toward increasing the supply of financial assets has hooked market participants and policymakers alike into a global game of Whac-A-Mole.

    A recurrent topic in the financial press for much of 2018 has been the rising risks in the emerging market (EM) asset class. Emerging economies are, of course, a very diverse group. But the yields on their sovereign bonds have climbed markedly, as capital inflows to these markets have dwindled amid a general perception of deteriorating conditions . 1

    Historically, there has been a tight positive relationship between high-yield US corporate debt instruments and high-yield EM sovereigns. In effect, high-yield US corporate debt is the emerging market that exists within the US economy (let's call it USEM debt). In the course of this year, however, their paths have diverged (see Figure 1). Notably, US corporate yields have failed to rise in tandem with their EM counterparts.

    What's driving this divergence? Are financial markets overestimating the risks in EM fixed income (EM yields are "too high")? Or are they underestimating risks in lower-grade US corporates (USEM yields are too low)?

    Taking together the current trends and cycles in global factors (US interest rates, the US dollar's strength, and world commodity prices) plus a variety of adverse country-specific economic and political developments that have recently plagued some of the larger EMs, I am inclined to the second interpretation.

    In what is still a low-interest-rate environment globally, the perpetual search for yield has found a comparatively new and attractive source in the guise of collateralized loan obligations (CLOs) within the USEM world. According to the Securities Industry and Financial Markets Association, new issues of "conventional" high-yield corporate bonds peaked in 2017 and are off significantly this year (about 35% through November). New issuance activity has shifted to the CLO market, where the amounts outstanding have soared, hitting new peaks almost daily. The S&P/LSTA US Leveraged Loan 100 Index shows an increase of about 70% in early December from its 2012 lows (see Figure 2), with issuance hitting record highs in 2018. In the language of emerging markets, the USEM is attracting large capital inflows.

    These CLOs share many similarities with the mortgage-backed securities that set the stage for the subprime crisis a decade ago. During that boom, banks bundled together loans and shed risk from their balance sheets. Over time, this fueled a surge in low-quality lending, as banks did not have to live with the consequences.

    Likewise, for those procuring corporate borrowers and bundling corporate CLOs, volume is its own reward, even if this means lowering standards for borrowers' creditworthiness. The share of "Weakest Links" – corporates rated B- or lower (with a negative outlook) – in overall activity has risen markedly since 2013-2015. Furthermore, not only are the newer issues coming from a lower-quality borrower, the covenants on these instruments – provisions designed to ensure compliance with their terms and thus minimize default risk – have also become lax. Covenant-lite issues are on the rise and now account for about 80% of the outstanding volume.

    As was the case during the heyday of mortgage-backed securities, there is great investor demand for this debt, reminiscent of the "capital inflow problem" or the " bonanza " phase of the capital flow cycle. A recurring pattern across time and place is that the seeds of financial crises are sown during good times (when bad loans are made). These are good times, as the US economy is at or near full employment.

    The record shows that capital-inflow surges often end badly. Any number of factors can shift the cycle from boom to bust. In the case of corporates, the odds of default rise with mounting debt levels, erosion in the value of collateral (for example, oil prices in the case of the US shale industry), and falling equity prices. All three sources of default risk are now salient, and, lacking credible guarantees, the CLO market (like many others) is vulnerable to runs, because the main players are lightly regulated shadow banking institutions.

    And then there are the old and well-known concerns about shadow banking in general, which stress both its growing importance and the opaqueness of its links with other parts of the financial sector. Of course, we also hear that a virtue of financing debt through capital markets rather than banks is that the shock of an abrupt re-pricing or write-off will not impair the credit channel to the real economy to the degree that it did in 2008-2009. Moreover, compared to mortgage-backed securities (and the housing market in general), the scale of household balance sheets' exposure to the corporate-debt market is a different order of magnitude.

    A decade after the subprime bubble burst, a new one seems to be taking its place – a phenomenon aptly characterized by Ricardo Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas as " Financial 'Whac-a-Mole .'" A world economy geared toward increasing the supply of financial assets has hooked us into a global game of waiting for the next bubble to emerge somewhere.

    Like the synchronous boom in residential housing prior to 2007 across several advanced markets, CLOs have also gained in popularity in Europe. Higher investor appetite for European CLOs has predictably led to a surge in issuance (up almost 40% in 2018). Japanese banks, desperately seeking higher yields, have swelled the ranks of buyers. The networks for financial contagion, should things turn ugly, are already in place. 1

    Carmen M. Reinhart is Professor of the International Financial System at Harvard University's Kennedy School of Government. Douglas Leyendecker Dec 23, 2018 The most important questions isn't when or why this bubble will burst but how we got here in the first place. It all starts with BAD economic and social policies. Now we require more and more "money" to keep the wheels on. Bubble to bubble...this is where we are in the developed world today. When the reboot finally hits there won't be any cryptocurrency because there won't be any internet. This is what happens in a fiat currency system. Read More
  • Paul Daley Dec 23, 2018 Good article. But -- do I dare say it -- this time may be different. As Reinhart points out, CLOs do not have heavily engaged public institutions, as was the case with mortgage backed securities and sovereign debt. A collapse in CLO prices would fall largely on private shoulders. And, after their first experiments with QE, central banks should have a better grip on the risks and consequences of asset price support programs in encouraging and sustaining asset price bubbles, and be prepared this time to employ income support measures to sustain real economic activity, if necessary.
  • nigel southway Dec 22, 2018 The best course of action is stop the easy movement of capital across borders that way it stops the phoney wealth transactions caused by a foolish focus on the global economy start more national centered wealth funds Jacob Alhadeff Dec 20, 2018 I had no idea any of this was going on. This was very informative, but I don't know yet exactly what to do with this information. I'm cynical about our ability to avoid such bubbles, but we can prepare for them. In terms of how low/middle income Americans can prepare what would anyone suggest? Also, I'm not looking for advice on investing decisions Read less

    [Jan 03, 2019] Is Warren Buffett Sending a Signal About the Bond Market

    Notable quotes:
    "... The 30-year U.S. yield fell to 2.91 percent on Thursday, the lowest since January 2018 ..."
    "... The other interpretation is that the company chose to refinance with long-term fixed-rate debt because it sees the big drop in 30-year yields as unsustainable ..."
    Jan 03, 2019 | finance.yahoo.com

    Berkshire, with the third-highest credit rating from both Moody's Investors Service and S&P Global Ratings, is expected to price the debt on Thursday with a spread of 150 to 155 basis points above benchmark Treasuries. The 30-year U.S. yield fell to 2.91 percent on Thursday, the lowest since January 2018.

    The other interpretation is that the company chose to refinance with long-term fixed-rate debt because it sees the big drop in 30-year yields as unsustainable. After all, if a borrower expects interest rates to rise in the future, it would prefer to lock in a fixed rate now rather than face higher payments down the road.

    [Dec 05, 2018] Contra Tim Duy, The Lack of Federal Reserve Maneuvering Room Is Very Worrisome...

    Dec 05, 2018 | www.bradford-delong.com

    Contra Tim Duy, The Lack of Federal Reserve Maneuvering Room Is Very Worrisome...

    This , by the every sharp Tim Duy, strikes me as simply wrong: Contrary to what he says, the Fed has room to combat the next crisis only if the next crisis is not really a crisis, but only a small liquidity hiccup in the financial markets. Anything bigger, and the Federal Reserve will be helpless, and hapless.

    Look at the track of the interest rate the Federal Reserve controls -- the short safe nominal interest rate:

    Month Treasury Bill Secondary Market Rate (FRED St Louis Fed)

    In the past third of a century, by my count the Federal Reserve has decided six times that it needs to reduce interest rates in order to raise asset prices and try to lift contractionary pressure off of the economy -- that is, once every five and a half years. Call these: 1985, 1987, 1991, 1998, 2000, and 2007.

    Continue reading "Contra Tim Duy, The Lack of Federal Reserve Maneuvering Room Is Very Worrisome..." "

    [Nov 19, 2018] New AI Virtual Assistant Gives Traders An Edge

    Nov 19, 2018 | safehaven.com

    Three things are certain: death, taxes, and that the already thin gap between human trader and algo is narrowing ever further.

    AllianceBernstein's new virtual assistant can now suggest to fixed income portfolio managers what the best bonds may be to purchase using parameters such as pricing, liquidity and risk, according to Bloomberg . The machine has numerous advantages to humans: "she" can scan millions of data points and identify potential trades in seconds. Plus she never needs to take a cigarette or a bathroom break.

    The new virtual assistant, dubbed Skynet 2.0 "Abbie 2.0", specializes in identifying bonds that human portfolio managers have missed. She can also help spot human errors and communicate with similar bots like herself at other firms to arrange trades, making humans redundant. This is the second iteration of AllianceBernstein's electronic assistant which debuted in January of this year, but could only build orders for bonds following precise input from humans.

    Sourcing bonds that are easy to trade is done by Abbie 2.0 reaching out to another AB system called ALFA, which stands for Automated Liquidity Filtering and Analytics. The AFLA system gathers bids and asks from dealers and electronic trading venues to work out the best possible trades.

    For now, humans are still required: Jeff Skoglund, chief operating officer of fixed income at AB told Bloomberg that "humans and machines will need to work closer than ever to find liquidity, trade faster and handle risks. Our hope is that we grow and use people in ways that are more efficient and better leverage their skills."

    What he really means is that his hope is to fire as many expensive traders and PMs as possible to fatten the company's profit margins. Which is why the virtual assistant already helps support a majority, or more than 60 percent of AllianceBernstein's fixed income trades. The "upgrades" that are coming for the new assistant will help it include high-yielding investment grade bonds, before expanding to other more complex markets in the coming months. AB says that they will still rely on humans to make the final decisions on trades. For now. Related: IBM Launchs Global Payments System With New Stablecoin

    While the original version of the assistant had to be told how much a portfolio manager wanted of a specific bond, the new version now mines data pools to be proactive, making sizing suggestions to portfolio managers. Among other things, the assistant looks at ratings of companies, capital structure and macro data such as social and geopolitical risks.

    This is just another step in the industry becoming machine oriented in order to help cut costs, save time and avoid errors, especially in relatively illiquid bond markets. Liquidity could become even more of a factor if the economy slips into recession over the next couple of years.

    Electronic trading in general is becoming more pronounced in fixed income as banks act more like exchanges instead of holding bonds on their balance sheet. All the while, regulations have encouraged the shifting of bond trading to exchanges. More than 80 percent of investors in high-grade bonds use electronic platforms, accounting for 20 percent of volume, according to Bloomberg.

    Skoglund concluded, "We expect to be faster to market and capture opportunities we otherwise would not have caught by using this system. There's a liquidity problem right now that could become significantly more challenging in a risk-off environment."

    By Zerohedge

    [Nov 15, 2018] Our new Vanguard Global Credit Bond Fund puts our experts to work for you

    Notable quotes:
    "... An actively managed bond fund that focuses on U.S., nongovernment exposure. ..."
    Nov 15, 2018 | investornews.vanguard

    Fund news

    link to comment section

    We're introducing a new active bond fund that allows you to take advantage of Vanguard's extensive global investment management capabilities and expertise. Vanguard Global Credit Bond Fund ( Admiral™ Shares: VGCAX ; Investor Shares: VGCIX ) gives you unique access to the global credit market, which includes both U.S. and international investments. The fund will be managed by the Vanguard Fixed Income Group, which has more than 35 years of experience managing active bond portfolios.

    Key potential benefits of the fund include:

    Which bond fund is right for you?

    We've recently expanded our bond offerings to provide more options for diversification and income. While more choices can help you build a better portfolio, they can also make it tricky to decide which funds are right for you.

    Here's a chart that shows, at a glance, the main differences between 3 similar bond funds:

    Global or U.S.-only Investment type Bond issuer types It might be right for you if you want:
    Vanguard Global Credit Bond Fund Global Actively managed mutual fund Investment-grade corporate and government-related entities An actively managed bond fund that provides global exposure to nongovernment bonds.
    Vanguard Total World Bond ETF Global Index ETF (exchange-traded fund) Broad investment-grade market coverage of Treasuries and government-related, securitized, and corporate debt An all-in-one, low-cost global bond ETF.
    Vanguard Intermediate-Term Investment-Grade Fund U.S. Actively managed mutual fund Investment-grade corporate and government-related entities An actively managed bond fund that focuses on U.S., nongovernment exposure.
    Making the most of Vanguard's management resources

    Vanguard Global Credit Bond Fund will complement Vanguard's existing suite of 25 actively managed fixed income funds, not including Vanguard's actively managed money market funds.

    Vanguard launched its first internally managed active fixed income fund in 1982 and the world's first bond index fund in 1986. Vanguard is one of the world's largest fixed income fund managers with approximately $1.3 trillion in assets under management.** Over $600 billion of those assets are in actively managed fixed income funds (including money markets).

    The Vanguard Fixed Income Group has more than 175 global fixed income professionals, 90 of whom are part of the active taxable fixed income team, including over 30 global credit research analysts around the world.

    Vanguard Global Credit Bond Fund is the first Vanguard fund of its kind. This globally diversified, actively managed bond product capitalizes on Vanguard's extensive global investment capabilities and global credit expertise.

    *Source: Morningstar, Inc., as of September 30, 2018.
    **Data as of September 30, 2018.

    [Oct 12, 2018] Jim Rickards The Bull Market In Bonds Still Has Legs

    Oct 12, 2018 | www.zerohedge.com

    Yields to maturity on 10-year U.S. Treasury notes are now at their highest level since April 2011. The current yield to maturity is 3.21%, a significant rise from 1.387% which the market touched on July 7, 2016 in the immediate aftermath of Brexit and a flight to quality in U.S. dollars and U.S. Treasury notes.

    The Treasury market is volatile with lots of rallies and reversals, but the overall trend since 2016 has been higher yields and lower prices.

    The consensus of opinion is that the bull market that began in 1981 is finally over and a new bear market with higher yields and losses for bondholders has begun. Everyone from bond guru Bill Gross to bond king Jeff Gundlach is warning that the bear has finally arrived.

    I disagree.

    It's true that bond yields have backed up sharply and prices have come down in recent months. Yet, we've seen this movie before. Yields went from 2.4% to 3.6% between October 2010 and February 2011 before falling to 1.5% in June 2012.

    Yields also rose from 1.67% in April 2013 to 3.0% in December 2013 before falling again to 1.67% by January 2015. In short, numerous bond market routs have been followed by major bond market rallies in the past ten years.

    To paraphrase Mark Twain, reports of the death of the bond market rally have been "greatly exaggerated." The bull market still has legs. The key is to spot the inflection points in each bear move and buy the bonds in time to reap huge gains in the next rally.

    That's where the market is now, at an inflection point. Investors who ignore the bear market mantra and buy bonds at these levels stand to make enormous gains in the coming rally.

    The opportunity is illustrated in the chart below. This chart shows relative long and short positions in ten major trading instruments based on futures trading data. The 10-year U.S. Treasury note is listed as "10Y US."

    As is shown, this is the most extreme short position in markets today. It is even more short than gold and soybeans, which are heavily out of favor. It takes a brave investor to go long when the rest of the market is so heavily short.

    [Jul 09, 2018] As the Yield Curve Flattens, Threatens to Invert, the Fed Discards it as Recession Indicator

    From comments "Tough to ween an entire community off its generational addiction to financial heroin"
    Notable quotes:
    "... The Feds behaviour over the last decade has demonstrated institutional capture in its' purest form. Everything for the financial sector and nothing for the "Main Street" sector. ..."
    Jul 09, 2018 | www.nakedcapitalism.com

    So this has become a popular recession indicator that has cropped up a lot in the discussions of various Fed governors since last year. Today, the two-year yield closed at 2.55% and the 10-year yield at 2.84%. The spread between them was just 29 basis points, the lowest since before the Financial Crisis.

    The chart below shows the yield curves on December 14, 2016, when the Fed got serious about raising rates (black line); and today (red line). Note how the red line has "flattened" between the two-year and the 10-year markers, and how the spread has narrowed to just 29 basis points:

    ... ... ...

    So just in the nick of time, with the spread between the two-year and the 10-year yields approaching zero, the Fed begins the process of throwing out that indicator and replacing it with a new indicator it came up with that doesn't suffer from these distortions.

    And I have to agree that the Fed's gyrations over the past 10 years have distorted the markets, have muddled the calculations, have surgically removed "fundamentals" as a consideration for the markets, and have brainwashed the markets into believing that the Fed will always bail them out at the smallest dip. And the yield curve, reflecting all those distortions to some extent, might have become worthless as an indicator of anything other than those distortions.


    ambrit , July 7, 2018 at 5:22 am

    Isn't the Fed theoretically independent? Why then should they take cognizance of what the President, or, for that matter, any politician wants? The Feds behaviour over the last decade has demonstrated institutional capture in its' purest form. Everything for the financial sector and nothing for the "Main Street" sector.

    The Fed is carrying out a grand experiment. Do these 'Quaint Quant Quotients' have a measurable relationship to the 'Real World' or do they not? My criteria for how well this 'realignment' amongst the 'Financial Stars' works out is going to be the severity of the next "Recession."

    Skip Intro , July 8, 2018 at 1:32 am

    To be fair, Obama himself was provided by Citigroup.

    jrs , July 8, 2018 at 1:53 am

    I guess a possibility is the Fed let's the economy get really bad (not that we haven't seen that recently even but it could be worse) in order to punish Trump. Yea but people are going to suffer and die in the next recession, they not only already do in recessions anyway, but there is literally no economic slack in most people's lives anymore. Yea this whole economic system is screwy as can be, but if they produce mass unemployment we need a guaranteed income at that point just to keep people from dying.

    skippy , July 8, 2018 at 2:33 am

    Please jrs read about the broader ideological opinions of those that forwarded a UBI or GI, same mob wrt the Chicago plan.

    Jim Haygood , July 7, 2018 at 9:08 am

    "(Don't Fear) the Yield Curve" is the title of the staff paper, riffing on "(Don't Fear) the Reaper" by Blue Oyster Cult which evidently still exerts a powerful sway on the Fed's balding eggheads 42 years on.

    What distinguishes this model is its use of an interest rate dear to the hearts of economists but absent from bond market quotes: the forward rate . Or as the Blue Oyster Cult fanboys explain:

    The current level of the forward rate 6 quarters ahead is inferred from the yields to maturity on Treasury notes maturing 6 quarters from now and 7 quarters from now. In particular, it is the rate that would have to be earned on a 3-month Treasury bill purchased six quarters from now that would equate the results from two investment strategies: simply investing in a Treasury note that matures 7 quarters from now versus investing in a Treasury note that matures 6 quarters from now and reinvesting proceeds in that 3-month Treasury bill.

    Not a big deal to calculate -- so voracious is Big Gov's appetite for borrowing as we approach the promised land of "trillion dollar deficits forever" that 2-year T-notes are auctioned monthly, meaning there's always a handy pair of notes with maturities 18 and 21 months ahead whose yields can be used to derive the 6q7q forward rate for the long end of the spread.

    The joke is likely to be on the Fed, though. As their chart shows, the 0-6q forward spread is volatile, and could well lurch down to meet the 2y10y spread any time. Moreover, despite the June 28th date on the staff paper, the chart is stale, showing a 0.5%-plus value for the 2y10y spread which last existed several months ago.

    In other words, prepare to hoist the Fedsters on their own forward-rate petard.

    And they ran to us
    Then they started to fly
    They looked backward and said goodbye
    They had become like we are

    -- (Don't Fear) the Reaper

    Jim Haygood , July 7, 2018 at 9:38 am

    From the WSJ's Treasury page, the yield on a note due 12/31/2019 is 2.470%, while the 3/31/2020 note yields 2.511%. Yield on the current 3mo T-bill is 1.951%.

    http://wsj.com/mdc/public/page/mdc_bonds.html?mod=topnav_2_3020

    Doing a little exponential maff, we can derive a 6q7q forward rate of 2.76%, for a spread of 0.81% over the current 3mo T-bill. This compares to a 2y10y spread of only 0.28%.

    So according to the Fed's shiny new moved goalpost, there's room for three more rate hikes, whereas the old goalpost would've allowed just one.

    Carry on, lads

    Synoia , July 7, 2018 at 1:31 pm

    If the policy is not supported by the understanding of the evidence, change the understanding.

    Seems very reasonable. For witchcraft.

    See -- she floats = A Witch! Kill her.
    See– she sinks = Not a witch. Dies.

    Outcome -- as desired.

    aka: Tell the Boss what he wants to hear.

    Jim Haygood , July 7, 2018 at 2:14 pm

    We're gonna hold the Boss responsible with our own data. Here are the traditional 2y10y and new 6q7q fwd yield curves for 2018:

    https://ibb.co/iNtXNT

    First one to hit the x-axis is the crack of doom.

    Note that the two curves almost coincided on Feb 9th, and could do again one day soon. :-)

    Chauncey Gardiner , July 7, 2018 at 3:04 pm

    It is well within the Fed's capabilities to sell Treasury and Agency bonds with maturities concentrated in the long end of the yield curve. Were the Fed to do that, particularly against a backdrop of deep corporate tax cuts and the resultant increased supply of Treasury debt, what is likely to happen to mortgage rates, real estate and collateral values?

    I suspect the people complaining loudest about this emergent Fed policy are those who have benefited most from both longtime negative real interest rates and a positively sloping yield curve. Those were lucrative monetary policy features for them over the past nine years.

    Jim Haygood , July 7, 2018 at 4:13 pm

    One more note in the Fed's chart, the new 6q7q fwd spread dips below zero during the Russia/LTCM crisis in 1998, whereas the 2y10y spread didn't.

    So it's not quite as reliable. When both go negative, it's " game ovahhhhh "

    bruce wilder , July 7, 2018 at 10:49 am

    I have long been annoyed by the way Fed staff / hobbyists blithely treat the yield curve as just another "indicator", as if they were forecasting the weather from changes in barometric pressure or temperature.

    Seeking a forecasting crystal in a calculated "forward" rate, supposedly mirroring "expectations" of (a representative?) investors reflects a world view that imagines economic actors confidently act on expectations that they believe will be fulfilled. It is not taking uncertainty seriously.

    The yield curve has worked not thru magic, but because it reflects a fundamental mechanism of sorts that drives credit and the transformation of maturities: that some key institutions borrow short and lend long, to coin a phrase, in the creation of credit that typically drives the expansion of business activity. Inverting the yield curve forces the contraction of credit by institutions that hedge a borrow short, lend long strategy with Treasuries.

    It probably is not lost on those with a memory of past cycles that speculation about whether things will be different this time with regard to the yield curve qua indicator emerges regularly from Fed hobbyshops near the end of very long expansions. If memory serves the Cleveland Fed research shop circulated such speculation in the 2005-7 period.

    Blue Pilgrim , July 7, 2018 at 12:12 pm

    Admittedly, I haven't had my coffee yet, but I think I may have reached a conclusion: a country whose economic system can't be understood in an hour is doomed to failure.

    [Nov 29, 2017] Some> Fed officials fear that the persistence of sluggish inflation could damage the economy, by permanently eroding public expectations about the future pace of inflation

    Nov 29, 2017 | economistsview.typepad.com

    Christopher H. , November 25, 2017 at 12:54 PM

    https://www.nytimes.com/2017/11/22/business/economy/fed-interest-rates.html

    Fed gonna raise rates:

    "A minority of Fed officials, however, have become increasingly forceful in registering their concerns. Those officials are more worried about moving too fast than too slow. They fear that the persistence of sluggish inflation could damage the economy, for example, by permanently eroding public expectations about the future pace of inflation.

    The minutes said that some of those officials are reluctant to vote for additional rate increases until they are convinced that inflation is indeed gaining strength.

    The officials "indicated that their decision about whether to increase the target range in the near term would depend importantly on whether the upcoming economic data boosted their confidence that inflation was headed toward the Committee's objective.""

    Some dissents? I hope so.

    Gibbon1 -> Christopher H.... , November 26, 2017 at 04:12 AM
    [sluggish inflation could damage the economy, for example, by permanently eroding public expectations about the future pace of inflation.]

    Low inflation means no way to get out from under debt via refinancing. If people won't take debt how will late stage capitalists make money?

    RC AKA Darryl, Ron said in reply to Christopher H.... , November 26, 2017 at 11:04 AM
    "... permanently eroding public expectations about the future pace of inflation..."

    [The public, being voting age people at large and all working people and so on, really would rather not expect any inflation at all. It usually does not work out for them all that well since food prices and other headline inflation goods often rise ahead of wages and core inflation goods. The public is not going to bail us out of this one. Poor and lower middle income people do not even have mortgages to refinance. Economic illiteracy among the public is not our friend. The establishment however cannot afford to make the public more economically literate for fear they will understand how the balance of trade over the last forty year has ripped them off.]

    Christopher H. said in reply to RC AKA Darryl, Ron... , November 26, 2017 at 12:27 PM
    "It usually does not work out for them all that well since food prices and other headline inflation goods often rise ahead of wages and core inflation goods."

    People also don't like being taxed to pay for infrastructure and public services.

    Except for older voters, most people in advanced nations have never experienced moderate inflation.

    If macro policy was done entirely by fiscal policy/better trade policy and interest rates were left alone, we'd still see higher inflation after years of running the economy hot.

    Christopher H. said in reply to RC AKA Darryl, Ron... , November 26, 2017 at 12:34 PM
    I just think that had the government did more fiscal/monetary policy after the financial crisis and allowed inflation to run over target instead of being paranoid about accelerating inflation, the recovery would have been much quicker and people would have been much happier even with a little inflation. Hillary would have won and inflation expectations would be higher among people who think about such things.
    RC AKA Darryl, Ron said in reply to Christopher H.... , November 26, 2017 at 01:44 PM
    OH, I totally agree with you. But getting the public aroused about inflation that is too low is entirely a different thing.
    ilsm -> Christopher H.... , November 26, 2017 at 02:08 PM
    Inflation means you pay the "loan*" with ever "cheaper" dollars from your fixed labor input receiving higher wages, more dollars.

    Also inflation means your "collateral" is worth more dollars than the original note.

    That went awry post 2000 for whatever reasons, longer run root causes than we know.

    *makes sense not to add to the loan, aka the "American dream"+.

    +need post mortem and eulogy!*

    *'make America great again' is a eulogy of sorts.

    Julio -> ilsm... , November 26, 2017 at 09:05 PM
    "*'make America great again' is a eulogy of sorts."
    [Classic.]
    cm -> RC AKA Darryl, Ron... , November 26, 2017 at 06:32 PM
    When sellers of groceries, household goods, utility services, etc. can successfully raise prices, then shouldn't one think there is still untapped consumer surplus? People with "extra money" will probably pay more, what do people with no extra money do? Buy less, substitute down, forgo other more discretionary expenses? Shift other expenses to loaned money? Furniture and appliances have always had financing programs, not obvious that more is bought on loan.
    cm -> cm... , November 26, 2017 at 06:34 PM
    OTOH where I'm currently shopping, it seems grocery prices were stable over the last year. OTOH "sales" and other frequent short term price variations are of a larger magnitude than inflation, so it's hard to tell. But a number of years ago I have definitely noticed YOY price moves - not so now.
    RC AKA Darryl, Ron said in reply to cm... , November 27, 2017 at 05:02 AM
    Grocery stores operate with very thing margins. Retail prices rise when wholesale prices rise. Rising transportation fuel costs can push wholesale grocery prices, but a lot of food prices has to do with supply variances due to weather. Demand is not very price elastic on staples, but luxury demand can fall severely with rising prices. Chuck roast is more of a staple for many people. Filet mignon is a luxury for most people. Or maybe milk is a staple and candy is a luxury most of the time.
    RC AKA Darryl, Ron said in reply to RC AKA Darryl, Ron... , November 27, 2017 at 05:02 AM
    "...THIN margins..."

    [Dec 27, 2015] This Junk Bond Derivative Index Is Saying Something Scary About Defaults

    Bloomberg Business

    Citigroup analysts led by Anindya Basu point out that spreads on the CDX HY, as the index is known, are currently pricing in an expected loss of 21.2 percent, which translates into something like 22 defaults over the next five years if one assumes zero recovery for investors. That is a pretty big number once you consider that a total of 41 CDX HY constituents have defaulted since the index really began trading in 2005, equating to about 3.72 defaults per year. A big chunk of those defaults (17) occurred in 2009 in the aftermath of the financial crisis.

    What to make of it all? Actual recoveries during corporate default cycles tend to be higher than the worst-case scenario of zero percent. In fact, they average somewhere in the 26 percent range, which would imply 29 defaults over the next five years instead of 41.

    So what? you might say. The CDX HY includes but one default cycle, and those types of analyses tend to underestimate the peril of tail risk scenarios (hello, subprime crisis). Citi has an answer for that, too. Using spreads from the cash bond market going back to 1991, they forecast the default rate over the next 12 months to be something more like 5 percent to 5.5 percent. (For comparison, the rating agency Moody's is currently forecasting a 3.77 percent default rate.)

    [Dec 22, 2015] A Milestone For Vanguard: New Fund Could Include Junk Bonds

    blogs.barrons.com

    ,,,,The Vanguard Core Bond Fund, unveiled in a filing with regulators on Monday, is being billed as an actively managed alternative to index funds like the Total Bond Market fund (VBMFX, VBTLX, BND). Its launch, slated for the first three months of 2016, would coincide with a period of great uncertainty in the bond markets. The Fed could mull its next interest-rate hike as soon as March.

    ... ... ...

    Daniel Wiener, editor of the Independent Adviser for Vanguard Investors newsletter and a close watcher of all things Vanguard, was quick to note that the fund could invest in bonds of "any quality." The new fund's fine print shows leeway for Vanguard's portfolio managers to plunk up to 5% of the portfolio in junk bonds. Some 30% of the fund could fall into "medium-quality" bonds.

    Vanguard's existing offering in junk debt, the Vanguard High-Yield Corporate Fund (VWEHX, VWEAX), is managed by Wellington Management Company.

    Says Wiener: "Vanguard has never offered lesser-quality bond funds run by its internal group. The junk portion of the Core Bond product will be a first."

    [Dec 17, 2015] The Vanguard Ba rated high yield corporate bond fund, with a maturity of 5.4 years and a duration of 4.4 years, is yielding 6.11%.

    [Dec 13, 2015] While redemptions are elevated, particularly in high-yield bond funds, there doesn't seem to be a rush to for the exits

    For the last several year buying "junkest junk" was a profitable strategy. Now it came to abrupt end.
    Notable quotes:
    "... The rest of the industry has been quick to say that while redemptions are elevated, particularly in high-yield bond funds, there doesn't seem to be a rush to for the exits. ..."
    "... Goldman Sachs, for one, put out a note Friday warning Franklin Resources "is most at risk" given the large high-yield holdings of its funds, poor performance and large outflows. On Friday, its shares fell sharply. Meanwhile, there were unusually large declines Friday in the value of exchange-traded funds that track high-yield debt. ..."
    "... The idea of a "run" on mutual funds might sound strange. Typically, runs are associated with highly leveraged banks engaged in maturity transformation, funding long-term loans with short-term debt. Nearly all the programs designed to avoid destabilizing runs-from deposit insurance to the Fed's discount window to liquidity requirements-are built for banks. But unleveraged investors, including mutual funds, can also give rise to runs. That is because there is a liquidity mismatch in mutual funds that hold relatively illiquid assets funded by investors entitled to daily redemptions. ..."
    peakoilbarrel.com
    Jeffrey J. Brown, 12/13/2015 at 4:06 pm
    Interesting WSJ article (do a Google Search for the title, for access). Last week, the Journal noted that Chesapeake bonds that traded at 80¢ on the dollar a few months ago were currently trading at 30¢ to 40¢ on the dollar. I suspect that there are some huge losses on the books of a lot of pension funds.

    WSJ: The Liquidity Trap That's Spooking Bond Funds
    The specter of a destabilizing run on debt is haunting markets

    The debt world is haunted by a specter-of a destabilizing run on markets.

    Last week, this took on more form even if there weren't concrete signs of panic. Only one mutual fund manager, Third Avenue Management, has said it would halt redemptions to forestall having to dispose of assets in a fire sale. The rest of the industry has been quick to say that while redemptions are elevated, particularly in high-yield bond funds, there doesn't seem to be a rush to for the exits.

    Still, growing angst comes as the oil-price rout continues and the U.S. Federal Reserve appears ready to raise rates. This has investors worried-and starting to ask the fearful question: "Who's next?"

    Goldman Sachs, for one, put out a note Friday warning Franklin Resources "is most at risk" given the large high-yield holdings of its funds, poor performance and large outflows. On Friday, its shares fell sharply. Meanwhile, there were unusually large declines Friday in the value of exchange-traded funds that track high-yield debt.

    The idea of a "run" on mutual funds might sound strange. Typically, runs are associated with highly leveraged banks engaged in maturity transformation, funding long-term loans with short-term debt. Nearly all the programs designed to avoid destabilizing runs-from deposit insurance to the Fed's discount window to liquidity requirements-are built for banks. But unleveraged investors, including mutual funds, can also give rise to runs. That is because there is a liquidity mismatch in mutual funds that hold relatively illiquid assets funded by investors entitled to daily redemptions.

    [Dec 12, 2015] David Dayen Is This The Beginning of the Crackup in High-Yield Corporate Debt

    Notable quotes:
    "... It cuts two ways. Junk ETFs such as JNK and HYG have badly underperformed their benchmarks, owing to buying and selling in an illiquid market to replicate an index. Whereas actively managed junk mutual funds have the flexibility to deviate from index holdings in ways that can add a couple of hundred basis points a year. ..."
    "... Your apology is flawed because it assumes equal access to information among investors as well as assuming all investors have the same objective. Institutional investors have different goals than hedge funds for example. The people you refer to have been fleeced that's just ok with you. As to tea leaves the people have been steeped in recovery stories for years. ..."
    "... Wait, so speculators are shorting big bond positions of distressed funds? No way, hope they aren't doing this to ETF's. Jeez, didn't see this coming. I guess having the positions of big ETF's published daily might assist the speculators. ..."
    "... What I do remember (and I can't remember whether it was Spring of 2008 or earlier), was that HY spreads had gapped out at least a couple of hundred bps, and equities were still at or near all-time highs. I remember sitting in a meeting with a couple I-bankers, who chuckled ruefully "equities haven't a clue". ..."
    "... The received wisdom on the Street is that the bond market is smarter than the equity market. And, at last in my career, it was true, at least as far as downturns went. ..."
    naked capitalism
    MikeNY December 12, 2015 at 6:41 am

    Yes, junk is usually the canary in the coal mine. The HY market melted in the Summer of 2008, months before equities noticed what was going on. The question really is how much contagion there will be: how many CDS have been written on the distressed names, who holds them, etc. My instinct tells me that there are considerably less CDS on junk than were written on MBS, due to the smaller market, the lower liquidity and (supposed) credit quality. But how much has that changed since 2008? I dunno.

    One thing I do know: it's like the movie "Groundhog Day". The Fed always overstimulates, and there always follows a crash. Are there any bubbles left to blow, to 'reflate' assets next time?

    timmy December 12, 2015 at 9:39 am

    Your remark on written CDS is important. While it may be difficult to get liquidity on distressed names, it is less so on credit tiers above that or on indices. I'm sure there is some on junk, yes, but the real opportunity for spec CDS is (perhaps, was) on the BBB space which is the largest category in the investment grade market and is more liquid. While it may take awhile for distressed trading to creep up the credit ratings to the larger and more liquid names (specifically, since the definition of liquidity seems to be important on NC: the size of the specific issues' float, approximated with average daily volume), they will also have larger moves because potential fallen angels are repriced aggressively in an unstable market. The other thing about CDS is that they are most often delta-hedged which requires dealers to sell proxy's as the CDS go deeper into the money. The one restraining factor is that once a crisis is in motion, I think its going to be difficult for specs to get more CDS on their books. This strategy is purely directional (this is not an ETF NAV arb), essentially owning out of the money puts with minimal cost of carry.

    Jim Haygood December 12, 2015 at 1:39 pm

    'Their investing strategy – putting high-risk investments into a mutual fund – seems like exactly what not to do.'

    It cuts two ways. Junk ETFs such as JNK and HYG have badly underperformed their benchmarks, owing to buying and selling in an illiquid market to replicate an index. Whereas actively managed junk mutual funds have the flexibility to deviate from index holdings in ways that can add a couple of hundred basis points a year.

    That said, both junk ETFs and junk mutual funds are offering daily liquidity, while holding underlying securities that may trade once a week, or have no bids at all. As David Dayen observes, this sets up the risk of a bank run when investors get spooked.

    Take a look at the "power dive" chart of TFCIX (Third Avenue Focused Credit Fund) - Aiieeeeee!

    http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=tfcix&insttype=&freq=&show=

    Now the question is contagion. Morningstar shows that 48% of TFCIX's portfolio was below B rating, and 41% had no bond rating. Most junk funds don't have THAT ugly a portfolio. But when the herd starts to stampede, fine distinctions can get lost in the dust cloud from the thundering hooves.

    Over to you, J-Yel. Do you feel lucky, cherie? Well, do you?

    Mike Sparrow December 12, 2015 at 3:48 pm

    There is no CDS. There just isn't less, there is none. The stock market has pretty much ignored it as well except that its move from 13000 to 18000 has temporarily stalled. I suspect by the spring, this will be old news.

    I think we make errors here, not understanding this particular type of financial speculation is "anti-growth" in general. This would probably blow most of the minds on this board.

    Keith December 12, 2015 at 7:27 am

    Many years ago when Alan Greenspan first proposed using monetary policy to control economies, the critics said this was far too broad a brush.

    After the dot.com crash Alan Greenspan loosened monetary policy to get the economy going again. The broad brush effect stoked a housing boom.

    When he tightened interest rates, to cool down the economy, the broad brush effect burst the housing bubble. The teaser rate mortgages unfortunately introduced enough of a delay so that cause and effect were too far apart to see the consequences of interest rate rises as they were occurring.

    The end result 2008.

    With this total failure of monetary policy to control an economy and a clear demonstration of the broad brush effect behind us, everyone decided to use the same idea after 2008.

    Interest rates are at rock bottom around the globe, with trillions of QE pumped into the global economy.

    The broad brush effect has blown bubbles everywhere.

    "9 August 2007 – BNP Paribas freeze three of their funds, indicating that they have no way of valuing the complex assets inside them known as collateralised debt obligations (CDOs), or packages of sub-prime loans. It is the first major bank to acknowledge the risk of exposure to sub-prime mortgage markets. Adam Applegarth (right), Northern Rock's chief executive, later says that it was "the day the world changed"

    10th December 2015 – "Moments ago, we learned courtesy of the head of Mutual Fund Research at Morningstar, Russ Kinnel, that the next leg of the junk bond crisis has officially arrived, after Third Avenue announced it has blocked investor redemptions from its high yield-heavy Focused Credit Fund, which according to the company has entered a "Plan of Liquidation" effective December 9."
    When investor's can't get their money out of funds they panic.

    Central Bank low interest rate policies encourage investors to look at risky environments to get a reasonable return

    Pre-2007 – Sub-prime based complex financial instruments
    Now – Junk bonds

    The ball is rolling and the second hedge fund has closed its doors, investors money is trapped in a world of loss.

    "Here Is "Gate" #2: $1.3 Billion Hedge Fund Founded By Ex-Bear Stearns Traders, Just Suspended Redemptions"

    We know the world is downing in debt and Greece is the best example I can think of that shows the reluctance to admit the debt is unsustainable.

    Housing booms and busts across the globe ……

    Those bankers have saturated the world with their debt products.

    Keith December 12, 2015 at 7:29 am

    Links (which will probably require moderation)

    Skippy December 12, 2015 at 7:41 am

    Quality of instruments impaired by corruption has a more deleterious effect than quantities of could ever imagine…

    David December 12, 2015 at 10:33 am

    "Those bankers have saturated the world with their debt products."

    I'm no apologist for Banksters but people bought this "stuff" as the Stuffies.

    whether you call it greed or desperation in the face of zero yield – at the end of the day the horizon was short since the last debacle.

    getting 2 & 20 or whatever the comp arrangement was for those who are motivated by greed – 2% of $2 Billion yields at least $40 million a year for 5 years or $200 million – not bad for ten guys or less – obviously not fiduciaries – bouncing from Bear to Tudor to Third Ave with no change in the model yields predictable results

    I put forth the proposition the "people" deserve their fate – the tea leaves were all there to see

    tegnost December 12, 2015 at 10:52 am

    Your apology is flawed because it assumes equal access to information among investors as well as assuming all investors have the same objective. Institutional investors have different goals than hedge funds for example. The people you refer to have been fleeced that's just ok with you. As to tea leaves the people have been steeped in recovery stories for years.

    Ian December 12, 2015 at 2:24 pm

    Also fails to recognize the collateral damage caused towards the people that did not directly participate. It is very hard to say that they deserve their fate in this context, in that they were largely powerless to stop it to begin with, at a reasonable level.

    Ian December 12, 2015 at 2:29 pm

    I guess you qualified that with focusing solely on the people who bought it. Did not read fully.

    Timmy December 12, 2015 at 8:34 am

    Wait, so speculators are shorting big bond positions of distressed funds? No way, hope they aren't doing this to ETF's. Jeez, didn't see this coming. I guess having the positions of big ETF's published daily might assist the speculators.

    Jim Haygood December 12, 2015 at 4:25 pm

    Yesterday HYG closed at a 0.76% discount to NAV, while JNK closed at a 0.68% discount (values from Morningstar). These are wider discounts than ETF managers like to see.

    The arbitrage mechanism of buying the discounted ETF shares, redeeming them for the underlying, and then selling the bonds at full value for an instant 0.76% gain is supposed to kick in now.

    But sell … to whom?

    Timmy December 12, 2015 at 4:51 pm

    The misperception is that the ETF junk trade is an arb right now. Its not, its directional. The discipline to bring NAV's in line with underlying value will only kick in at much wider levels because traders are still long (and putting on more of) the "widener" because they anticipate higher levels of vol going forward.

    tegnost December 12, 2015 at 9:15 am

    Actually have already been bracing myself as demand for labor fell off a cliff at the end of sept., and I'm guessing it's stories such as this that makes my customers tighten their belts....

    nat scientist December 12, 2015 at 9:55 am

    "Some say the world will end in fire
    Some say in ice
    From what I've tasted of desire
    I hold with those who favor (fire) INFLATION
    But if it had to (perish) REFINANCE twice,
    I think I know enough of (hate) ZIRP RATES
    To say that for destruction (ice) NO BID
    Is also great
    And would suffice."

    Marty Whitman now gets Robert Frost.

    craazyboy December 12, 2015 at 4:26 pm

    All those junk companies could just declare bankruptcy and start over. That's the way it's supposed to work. Just ask The Donald. Then it would be like that movie where Bruce Willis saved the earth from an asteroid strike. 'Course there was only one asteroid in that movie. Instead, we have World War Z with zombies all over the place!

    But maybe JYell will buy all the junk bonds, burn them, and then the dollar will crash and we can all get jobs?

    Christer Kamb December 12, 2015 at 1:44 pm

    MikeNY said;

    "The HY market melted in the Summer of 2008, months before equities noticed what was going on."

    Not really. HYG market were in a downtrend during summer of 2007, together with the stockmarket. Also in the 2008 summer both markets were in a severe meltdown. This time around the HYG´s started their downtrend from summer 2014 with the 1:st leg down to dec same year. 2:nd leg is now running in which the stockmarket joined.

    Your right, HYG´s seems to be the canaries here! But, from august this year they seems to go in different directions. Or are they?

    MikeNY December 12, 2015 at 4:25 pm

    You're right, it was earlier than Summer 2008, now I think about it.

    What I do remember (and I can't remember whether it was Spring of 2008 or earlier), was that HY spreads had gapped out at least a couple of hundred bps, and equities were still at or near all-time highs. I remember sitting in a meeting with a couple I-bankers, who chuckled ruefully "equities haven't a clue".

    The received wisdom on the Street is that the bond market is smarter than the equity market. And, at last in my career, it was true, at least as far as downturns went.

    [Jul 20, 2015] The Complete Guide To ETF Phantom Liquidity

    Jul 20, 2015 | Zero Hedge
    Two months ago, in "ETF Issuers Quietly Prepare For Meltdown With Billions In Emergency Liquidity," we outlined the rather disconcerting circumstances that have led some large fund managers to quietly line up emergency liquidity facilities that can be tapped in the event of a sudden retail exodus from bond funds.

    "The biggest providers of exchange-traded funds, which have been funneling billions of investor dollars into some little-traded corners of the bond market, are bolstering bank credit lines for cash to tap in the event of a market meltdown. Vanguard Group, Guggenheim Investments and First Trust are among U.S. fund companies that have lined up new bank guarantees or expanded ones they already had, recent company filings show," Reuters reported at the time, in a story we suspect did not get the attention it deserved.

    At a base level, these precautionary measures are the result of the interplay between central bank policy and the unintended consequences of the post-crisis regulatory regime. ZIRP creates a hunt a for yield and simultaneously incentivizes companies (especially cash strapped companies) to tap the bond market while borrowing costs remain artificially suppressed. Clearly, this is a self-fulfilling prophecy. The longer rates on risk free assets remain near, at, or even below zero, the more demand there is for new corporate issuance (the rationale being that at least corporate credit offers some semblance of yield). More demand means rates on corporate credit are driven still lower, and once yields on high grade issues get close to the lower limit, yield-starved investors are then herded into HY.

    All of this supply in the primary market comes at a time when liquidity in the secondary market for corporate credit is non-existent thanks to the shrinking dealer books that resulted from the government's (maybe) well-meaning attempt to crack down on prop trading. The result: a crowded theatre with a tiny exit.

    This situation has been exacerbated by the proliferation of bond ETFs which have allowed retail investors to pile into corners of the fixed income world where they might not belong.

    All of the above can be summarized as follows.

    "MF assets too large versus dealer inventories" (via Citi)...

    ... clear evidence of "structural damage in corporate bond trading liquidity" (via JP Morgan)...

    ... and the rapid growth of bond funds in the post-crisis world (via BIS)...

    So given the above, the question is this: if something were to spook the market - a rate hike cycle for instance, or an October revolver raid on HY energy names, or an exogenous geopolitical shock - causing an exodus from these funds, what would happen to prices if fund managers were suddenly forced to transact in size in an illiquid secondary market in order to meet redemptions?

    "Nothing good", is the answer.

    The solution is to avoid selling the underlying bonds - even when investors are selling their shares in the funds.

    But how is this possible?

    To a certain extent, outflows in one fund can be offset by inflows to another. These "diversifiable flows" are one happy byproduct of the great ETF proliferation. Here's a refresher on how this works courtesy of Barclays.

    * * *

    Portfolio Products Replace Dealer Inventory

    While diversifiable flows limit the risks to portfolio managers in principle, the reality of the high yield market is more complicated. Managers have specific views on tenor, callability, sectors, covenants, and, most importantly, individual credits, such that actually finding buyers for specific bonds can be quite difficult. In the pre-crisis period, dealers ran large inventories that effectively facilitated the netting of flows across funds (Figure 1). A fund with an outflow would sell bonds into the dealer community, and funds with outflows would buy bonds out of the dealer inventory. When inventory is large, the fact that the specific bonds bought and sold did not match was largely irrelevant. Funds with outflows could sell the bonds of their choice, and the funds with inflows could pick investments from the large variety of inventory held by dealers.

    The matching problem has become more acute as dealer inventories have declined. Even funds can net flows in principle, dealers are much less willing to warehouse bonds, and are much more likely to buy only when they believe they can quickly offload the risk. Under this scenario, the fact that flows can theoretically be netted is of little practical use to fund managers – actually netting individual bonds is extremely difficult, particularly in the short time frame required by funds offering daily liquidity to end investors.

    This is where portfolio products come in. Investors can use portfolio products to fund outflows/invest inflows immediately and execute the necessary single-name bond trades over time as liquidity in the underlying bond market allows (Figure 2). In this scenario, funds with inflows and outflows simply exchange portfolio products, sidestepping the immediate need to trade single-name corporate bonds.

    * * *

    Ok great, so ETFs provide a kind of "phantom" liquidity if you will. There are two problems with this:

    Here's how we put it last month in "How Fund Managers Use ETF Phantom Liquidity To Avert A Meltdown":

    In other words, if I'm a fund manager, the idea that ETFs provide liquidity rests on the assumption that when I experience outflows, someone else will be experiencing inflows and thus I can sell ETFs and avoid offloading my bonds into an illiquid corporate credit market. Put another way: I am depending on new money coming into the market to fund redemptions from previous investors who are exiting the market, all so that I can avoid liquidating assets that are declining in value and that I believe will be difficult to sell. There's a term for that kind of business. It's called a ponzi scheme and just like all other ponzi schemes, when the new money dries up (so, for example, when HY bond ETF flows are all headed in the wrong direction), the only way to meet redemptions is to get what I can for the assets I have and when the market for those assets is thin (as the secondary market for corporate credit most certainly is), I may incur substantial losses.

    Note also that the more often ETFs are used as a way of avoiding the underlying bond market, the more illiquid that market becomes, making the situation still more precarious in the event of a panic.

    So what is a fund manager to do?

    This is where we come full circle to the emergency liquidity lines mentioned at the outset. In order to avoid tapping the underlying illiquid bond market in a situation where flows are unidirectional, fund managers may instead pay out redemptions in borrowed cash.

    This is, to quote Citi's Matt King, "creative destruction destroyed."

    Only worse.

    That is, this represents the willful delay of a long overdue episode of creative destruction layered atop another delay of the much needed Schumpeterian endgame. Stripping out the metaphysics and philosophy references, that can be translated as follows: this strategy is yet another example of delaying the inevitable. If fund managers are forced to tap these liquidity lines it likely means investors have found a reason to sell en masse and if that reason turns out to be something that permanently impairs the value of the underlying bonds (as opposed to a transitory, irrational panic) then all the funds are doing by borrowing to meet redemptions is employing leverage to stave off the recognition of losses, which is ironically the same thing (in principle anyway) that the companies whose bonds they're holding have done to stay in business. It's a delay-and-pray scheme designed to avoid selling the debt of companies whose similar delay-and-pray schemes have run their course.

    In closing, it's important to note that no fund manager in the world will be able to line up enough emergency liquidity protection to avoid tapping the corporate credit market in the event of panic selling in the increasingly crowded market for bond funds.

    In other words, when the exodus comes, the illiquidity that's been chasing markets for the better part of seven years will finally catch up, and at that point, all bets are officially off.

    [May 12, 2015] An Open Letter to Bill McNabb, CEO of Vanguard Group

    Economist's View
    Stephen G. Cecchetti and Kermit L. Schoenholtz (sort of a follow up on the claim that financial reform is working -- perhaps -- but as noted in the post below this one there is more to do):
    An Open Letter to Bill McNabb, CEO of Vanguard Group: Dear Mr. McNabb,
    We find your WSJ op-ed (Wednesday, May 6) misleading, short-sighted, self-serving, and very disappointing.
    Vanguard has been in the forefront of providing low-cost, reliable access to U.S. and global capital markets to millions of customers, including ourselves. Following the financial crisis of 2007-2009, the firm naturally should be a leader in promoting a more resilient financial system. Your op-ed sadly goes in the opposite direction.
    Let's start with the most stunning example: your defense of money market mutual funds. MMMFs are simply banks masquerading as professionally managed investment products. Like banks, they engage in liquidity and maturity transformation. Like banks, they faced runs in 2008 that ended only when the federal government provided a guarantee that put taxpayers at risk. Even with that guarantee, the government still had to support many healthy U.S. corporations with household names that – having previously relied on MMMF purchases of their commercial paper – suddenly faced a severe credit crunch. And, to limit a fire sale amidst the crisis, the Federal Reserve had to provide special funding to buyers to help MMMFs unload their assets.
    Unsurprisingly, fund sponsors and their clients – both creditors and borrowers – want to keep these opaque federal subsidies (especially the implicit guarantees that only become explicit and transparent in a crisis). Like them, you make the false, but popular claim that power-hungry regulators (who wish to limit the subsidies that make future crises more likely) are attacking (taxing!) Main Street instead of Wall Street.
    In fact, the investment company industry captured its primary regulator long ago, and hasn't let go. The Securities and Exchange Commission's 2014 "reform" of MMMFs is exhibit A. It almost surely makes these funds more, not less, liable to runs (see here and here). And – what a surprise – Congress seems to find protecting U.S. taxpayers from contingent liabilities (like implicit financial guarantees to your industry) less attractive than the largesse of financial lobbyists. Even the voluminous Dodd-Frank Act didn't address MMMFs! :

    After quite a bit more, they conclude with:

    As the CEO of one of the largest mutual fund companies in the world that is dedicated to serving and protecting small investors, you should be in the vanguard of advocating reforms that enhance stability.
    Instead of complaining about regulation under the guise of protecting Main Street, you should highlight the vulnerabilities in our financial system and make the case for efficient regulation that treats all activities equally. You should also promote investment vehicles that are likely to prove robust in a crisis, while warning about existing products that probably won't be.
    Only greater resilience in the system can make investors confident that capital markets here and elsewhere will remain strong. That is in Vanguard's interest, too.
    Sincerely,
    Stephen G. Cecchetti and Kermit L. Schoenholtz
    anne -> anne:

    Stephen Cecchetti and Kermit Schoenholtz are intent on undermining the most important stock and bond investment vehicle for moderately wealthy investors. Vanguard sets the finest of examples for the entire investment industry.

    pgl -> anne:

    Maybe you are being paid by Vanguard but you are wrong. You are not qualified to comment on financial economics. Stephen Cecchetti and Kermit Schoenholtz are.

    And they are not trying to undermine anyone. They are simply telling the truth. Repeat your garbage all you want but it is garbage.

    mulp -> anne:

    Anne, unless you call the FDIC bailout of the money market funds, and the Fed providing liquidity to them in 2008-9 totally wrong and you should have suffered losses in your holding in MMMF as they marketed to market (breaking the buck) and froze withdrawals until they could liquidate their holdings, or alternatively, declared bankruptcy, then you are totally bought into the free lunch economics of Friedman, Reagan, and all the bank lobbyists dependent on government handling the losses while they reap the profits.

    I remember the debate in the late 60s and early 70s on money market funds. We (the People) were assured that MMFs would never be seen as banks by any one investing in them because everyone would know the MMF would someday lose value and in the process freeze the assets for some length of time until the fund could be liquidated.

    In other words, not one person putting money in a MMF would see it as a bank that pays higher interest. More importantly, no business or corporation would ever confuse a MMF with a bank.

    In 2008, it is clear that the promises made four decades earlier to allow unsophisticated investors access money market funds without lengthy notice of intent to withdraw funds was all a lie, or a belief in tinker bell, pixie dust, and free lunches.

    The money market funds should have been left to collapse in 2008 to destroy all faith in them as safe for individuals to use, and in the process, "destroy trillions in wealth" held by tens of millions of upper middle class workers.

    I would have lost more than I did in 2008, but the demand for greater government control of the financial sector plus greater social safety nets would have followed.

    This is the first time I've seen someone besides me state that mutual funds are banks as we knew them in the 60s, except they pay nothing for the protection of FDIC and Federal Reserve membership.

    anne:

    http://www.nytimes.com/2015/05/10/your-money/fees-on-mutual-funds-fall-thank-yourself.html

    May 9, 2015

    Fees on Mutual Funds Fall. Thank Yourself.
    By JEFF SOMMER

    Wall Street is reaping mounting revenue from mutual funds and exchange-traded funds, yet investors are paying lower fees.

    That sounds like a good deal for the millions of people who use the funds to invest their savings, and a great deal for the companies that run and sell the funds.

    But that win-win situation is not quite as benign as it would seem. Many investors are still - often unwittingly - paying huge fees that cut into retirement savings.

    A new Morningstar study offers an excellent explanation of what is happening. The report, "2015 Fee Study: Investors Are Driving Expense Ratios Down," found that, by one measure, mutual fund and E.T.F. fees paid by individual investors had dropped significantly - 27 percent - over the last 10 years. But it isn't mainly because Wall Street fund managers have been reducing fees. The study found that investors have been voting with their feet, moving money from expensive funds into cheaper ones, like index funds. That drives down the asset-weighted cost of mutual funds, skewing the statistics.

    "It's not mainly thanks to the efforts of the fund companies," Michael Rawson, an author of the Morningstar study, said in an interview. "It's mainly because people have gravitated toward lower-cost funds."

    There's a good reason for the migration to lower-cost funds: They tend to outperform higher-cost ones. As I've written recently, most actively managed mutual funds don't beat the market; those that do beat it rarely manage the feat consistently. Many consumers have gotten the message. Of the 100 lowest-cost funds on the market in March, 95 were index funds that merely try to match the market, not beat it, according to an unpublished study by the Bogle Financial Markets Research Center. Many investors have chosen index funds.

    Yet because of the peculiar economics of the asset management industry, fund companies are still doing great. The companies that run the funds have been reaping outsize rewards because as fund assets have grown - thanks in part to the market's terrific performance over the last six years - the companies' own costs have declined.

    That's because of economies of scale that the companies don't share fully with customers. "The cost of individual funds has dropped, but the assets have gotten so much bigger that the companies' revenue from fees has grown tremendously," Mr. Rawson said. "They could be sharing more of those revenues with consumers, but they're not."

    Using publicly available documents, the Morningstar researchers estimated that in 2014, fee revenue from all stock and bond mutual funds and E.T.F.s reached a record high of $88 billion, up from $50 billion a decade earlier. Assets under management grew 143 percent, and industry fee revenue surged more than 75 percent. The asset-weighted expense ratio - the funds' publicly declared expenses divided by the actual money that investors put into them - declined, too, but only by 27 percent. "The industry - rather than fund shareholders - has benefited most," the report said. Mr. Rawson, a Morningstar analyst, wrote the report with Ben Johnson, director of global E.T.F. research at the company.

    The details are fresh, but the economic machine that propels the asset management business has been whirring along for decades. In a telephone interview last week, John C. Bogle, the founder of Vanguard, the industry's low-cost leader, said that in some ways, running a fund company is like operating a factory. As you ramp up production, it becomes cheaper to produce additional items because important costs - fixed costs - don't rise.

    For an asset management company, he said, a stock or bond portfolio is the core product and the intellectual exercise of selecting stocks and bonds for it is a fixed cost. "When you set up and run the portfolio, it's not much more expensive to do it when your fund has, say, $1 billion in assets, than when it had only $30 million," Mr. Bogle said.

    "Unless you cut your fees drastically, you're going to generate a lot more money for your company as assets grow," Mr. Bogle said. "But do you think the industry wants you to understand that? Absolutely not. Most fund companies aren't passing those savings on to investors."

    Vanguard, which is owned by shareholders of its funds, passes along most of the savings. Morningstar found that Vanguard's average asset-weighted expense ratio in 2014 was 0.14 percent, lower than any of the other top asset management companies and lower than 0.64, the current asset-weighted expense ratio for all funds.

    Mr. Bogle says companies should charge a modest, flat fee for setting up a portfolio - not a percentage of assets, charged annually, which is the current practice - and give fund investors the rest of the money. That would not generate the splendid profits that asset management companies and their owners have enjoyed, however.

    No wonder that in a rising market, shares of publicly traded asset management companies tend to outperform their own stock portfolios. For example, since the beginning of March 2009, the start of the current bull market, through April, the stock of BlackRock, the giant E.T.F. company, returned 27.1 percent, annualized, compared with 20.8 percent annualized in the iShares Core S&P 500 E.T.F., a BlackRock fund that tracks the Standard & Poor's 500-stock index, according to Bloomberg. You would have been better off investing in BlackRock, the company, than in its own S.&.P. 500 index fund.

    Why should mutual fund and E.T.F. investors care about the economics of fund expenses? Because it's the dark side of compounding, a force that can be magical when it works in your favor:.

    anne:

    https://personal.vanguard.com/us/funds/snapshot?FundId=0040&FundIntExt=INT#hist%3A%3Atab=1&tab=1

    Vanguard 500 Stock Index Fund

    Average annual returns as of 3/31/2015

    3/31/2014 ( 12.56%)
    3/30/2012 ( 15.93)
    3/31/2010 ( 14.29)
    3/31/2005 ( 7.89)

    08/31/1976 ( 11.05)


    https://personal.vanguard.com/us/funds/snapshot?FundId=0028&FundIntExt=INT#hist%3A%3Atab=1&tab=1

    Vanguard Long-Term Investment-Grade Bond Fund

    Average annual returns as of 3/31/2015

    3/31/2014 ( 14.54%)
    3/30/2012 ( 8.42)
    3/31/2010 ( 10.34)
    3/31/2005 ( 7.49)

    07/09/1973 ( 8.71)

    anne -> anne:

    This is what Vanguard has meant for modestly wealthy conservative long term investments since the 1970s. From Warren Buffett to David Swenson, the chief investment officer at Yale, Vanguard has been the recommended vehicle for ordinary stock and bond investors.

    Harming Vanguard would be a tragedy.

    anne -> anne:

    "Harming Vanguard would be a tragedy."

    The point is harming Vanguard would be harming the ordinary investors who in effect own Vanguard since Vanguard is indeed a "mutual" fund company, a company owned by fund investors.

    Dan Kervick -> anne:

    The well-being of modestly wealthy long-term investors is only one factor to consider in relation to the well-being of the entire US and global economy. Shouldn't we broaden the discussion?

    anne -> Dan Kervick:

    Vanguard forms a model for investment well-being in the United States.

    Bob:

    Anne, having liquidity requirements is not a tax on investors. When McNabb represents it as such, he is lying. There are no new fees or taxes imposed. It just requires that stock funds hold a percentage of assets in safe bonds in order to handle redemptions in panic situation rather than rely on taxpayer bailouts.

    Investors are still entitled to 100% of the returns from the fund. Yes, it is true that the total return may be somewhat less because bond returns are typically less than stock returns. However, that isn't a tax or fee on investors.

    Almost no investors maintain a 100% stock portfolio. The typical investor my have anywhere from 20% to 80% bonds. So with the liquidity proposal, some portion of the bond assets they hold anyway will be in their stock fund. They can adjust their stock vs bond allocation accordingly, taking into account the bonds held in their stock fund. After this adjustment, they will receive exactly the same total portfolio return as previously.

    The idea that this is a tax or fee is simply a lie. Investors still receive 100% of their investment return.

    Dan Kervick -> anne:


    Well, it seems prima facie plausible that the ability of some firms to deliver very high returns at low cost is due to the amount they have invested in high-risk, high-yield assets. An economy filled with many such firms is going to be an economy with a higher level of systemic risk. If we want a financially safer world, then some rich people are going to have to get richer much more slowly than they did in the past.

    JohnH: I don't believe Vanguard needs any liquidity requirements because none of its investments use leverage. If money is needed, they would just sell the assets at the current market value and disburse the proceeds.

    MMMFs are a little different, because there is the presumption that that value of each share will always be $1, which it will be if short term treasuries are kept to term. In case of a run, the Fed could also buy the treasuries and keep them a few weeks to maturity, as they do under QE.

    For funds that use leverage, the risk of a run is entirely different:

    Longtooth:

    My interpretation of Anne's issue is that she simply favors individualism's credo for the "moderately wealthy" over the rest of our society, and rationalizes her position by believing (in faith) that Vanguard is immune to failure and thus would not be a participant in any new liquidity meltdown, ergo the nation's taxpayers should shoulder the burden of for profit financial investors when such financial markets fail.

    I'm not sure what Anne's position is/was related to the meltdown just past.. but she's caught on the horns of dilemma --- either taxpayer's bail out private investors or they suffer an even greater financial and economic calamity.

    The whole point of Cecchetti & Schoenholtz open letter is that a) Vanguard is not immune, and b) taxpayers should NOT be placed on the horns of that dilemma again, and thus the Vanguard letter was indeed self-serving and misleading.

    EMichael -> Longtooth:

    Perfect.

    McMike:

    Well, the critiques may be technically accurate enough as far as they go.

    But I fail to see how attacking one of the last pockets of low-fee, consumer-facing investment helps anyone in the long run, except those who wish to herd all money into complex, opaque, high-fee vehicles.

    Money Market "reform" may have found some reasonable-sounding talking points on which to promote itself, but stepping back, one cannot help but see it is simply one more wave in the voracious plunder and elimination of any and all alternatives to the relentless and jealous Wall Street flim flam machine.

    anne:

    A democratic investment company is a company that is investor owned, that offers the finest quality long term stock and bond funds with minimal transactions or turnover at low management cost for investors with $10,000. For those men and women who prefer to deal with a Goldman Sachs, a suggest giving that company a call and finding the difference.

    The idea that a Warren Buffett is paid by Vanguard for recommending Vanguard only shows a failure to understand that Vanguard is owned by investors and there are no payments made to financial advisers for recommending the company.

    DeDude -> anne:

    If you think the leadership if Vanguard is controlled by and serving its investors - then you need to get out of the Ivory tower a little more.

    Leadership in any Wall Street company are always serving themselves first, second and third. It is just that some of them are better at hiding that fact than others.

    DeDude:

    As much as Vanguard is trying to sell itself as the investors friend on Wall street, their leadership is just as much a part of the Wall street vampire tribe as the rest of them. Yes, they suck less less blood from each victim, but they are still blood-suckers. When I see Vanguard offering a fund that restrict its investments to companies that compensate CEOs less than average (for that industry and size), then I will know they have left the blood-sucker tribe. The one product that would truly serve the interest of investors is not available from any investment company, because as useful as it would be for us it is dangerous for them.

    anne:

    The descent to profane and violent language on this thread, the descent to intimidation and bullying, is intolerable, horrifying, and meant only to destroy this thread and this blog.

    EMichael -> anne:

    Personally, I think the constant repetition of a Edwardian rant about language is "intolerable, horrifying, and meant only to destroy this thread and this blog."

    As Keynes said, "words ought to be a little wild".

    Syaloch -> EMichael:

    Amen to that.

    Syaloch -> anne:

    Am I missing something? Neither "vampire" nor "blood-sucker" is profanity -- unless you mean it in the sense of blasphemous, i.e. criticism of something sacred.

    Do you think that this "class of people" who work on Wall Street are holy deities and therefore beyond reproach?

    You attitudes toward Vanguard certainly seem to point in that direction:

    anne -> Syaloch:

    These very terms were used to characterize and dehumanize a class of people in the 1930s. These are terrible, fearful terms to use to describe and stereotype people.

    anne:

    The use of profanity and a metaphor from the 1930s in describing a class of people is intolerable. Paul Krugman made a serious mistake in using a 1930s metaphor in description, both for the dismissing of the decency of the humanness of an entire class of people and for setting an example as to use of the metaphor.

    Millions of people were methodically murdered during the 1930s in the wake of a campaign to stereotypically deny their decency, to deny their humanness by using dehumanizing metaphors to describe them.

    likbez -> anne:

    While behavior that you mentioned are unacceptable, a part of the blame is on you: you demonstrated a perfect example of the psychology of rentier, Anna.

    Rentier capitalism is a term used to describe the belief in economic practices of parasitic monopolization of access to any kind of property, and gaining significant amounts of profit without contribution to society.


    DeDude:

    No, I think people are just having a little fun with your stuttering failure to address the issues. However, I will stop now (before being called a Nazi again – but don't think your bullying has worked, its just that I am tired)

    DrDick -> DeDude:

    Nothing I love more than passive-aggressive bullies, but that is Anne's schtick.

    likbez

    The key question to Anne is whether Vanguard is really better for unmanaged funds then ETFs. You need to provides us with solid evidence or all your post with belong to the category that Prince Hamlet defined as:

    The lady doth protest too much, methinks.

    And for managed funds Vanguard experienced several high profile disasters such as with their flagship Primecap fund around 2008. In this sense there is not much to talk about here. Thir managed funds is just a typical example of "go with the crowd" approach.

    Issue of fees was important in 90th. But now IMHO Vanguard belongs to "also run" category: for each Vanguard fund you probably can find other fund or ETF with comparable fees.

    So why you so adamant in defending Vanguard Anne? It' just one of Wall Street sharks which was broght to the surface by establishing 401K in 1978

    P.S. I also consider Vanguard to be among more decent category of Wall Street sharks. But it is still a shark.

    [Apr 12, 2015] The American Consumer Will Never Be Back

    Under neoliberalism most Americans became debt slaves ("What is normal for many everyday Americans is crippling debt levels, and no such thing is recognized in these theories. ")...
    Quote: " I decided to look up how the US personal savings rate is calculated. Turns out, it's another one of those whacky goal-seeked government numbers. At least, that's what I make of it. Mainly, though not even exclusively, because of things like this, from a site called Take A Smart Step: "[The personal savings rate in] November 2012 was 3.6%, this is not even close to where we need to be for financial health. This savings rate barely gives us enough to handle emergencies, and makes us as a nation weaker. The government calculates the personal savings rate as the difference between the after tax income and consumption of Americans. So they include not only retirement savings, but debt repayments, college savings, emergency fund savings, anything that was not spent. " "
    Apr 11, 2015 | Zero Hedge

    Submitted by Raul Ilargi Meijer via The Automatic Earth blog,

    That title may be a bit much, granted, because never is a very long time. I might instead have said "The American Consumer Won't Be Back For A Very Long Time". Still, I simply don't see any time in the future that would see Americans start spending again at a rate anywhere near what would be required for an economic recovery. Looks pretty infinity and beyond to me.

    However, that is by no means a generally accepted point of view in the financial press. There's reality, and then there's whatever it is they're smoking, and never the twain shall meet. Admittedly, my title may be a bit provocative, but in my view not nearly as provocative, if not offensive, as Peter Coy's at Bloomberg, who named his latest effort "US Consumers Will Open Their Wallets Soon Enough".

    I know, sometimes they make it just too easy to whackamole 'em down and into the ground. But even then, these issues must be addressed time and again until people begin to understand, and quit making the wrong decisions for the wrong reasons. People have a right to know what's truly happening to their lives, and their societies. And they're not nearly getting enough of it through the 'official' press. So here goes nothing:

    US Consumers Will Open Their Wallets Soon Enough

    People are constantly exhorted to save, but as soon as they do, economists pop up to complain they aren't spending enough to keep the economy growing. A new blogger named Ben Bernanke wrote on April 1 that there's still a "global savings glut." Two days later the Bureau of Labor Statistics announced the weakest job growth since 2013, which economists quickly attributed to soft consumer spending.

    The first problem with Coy's thesis is that even if people open their wallets, far too many of them will find there's nothing there. And Bernanke simply doesn't understand what savings are. His ideas through the past decade+ about a Chinese savings glut were always way off the mark, and his global – or American – savings glut theory is, if possible, even more wrong. In the minds of the world's Bernankes, there's no such thing as people opening their wallets to find them empty. If they don't spend, they must be saving. That there's a third option, that of not having any dollars to spend, is for all intents and purposes ignored.

    The U.S. personal savings rate-5.8% in February-is the highest since 2012. "After years of spending as if there were no tomorrow, consumers are now saving like there is a tomorrow," Richard Moody, chief economist at Regions Financial, wrote to clients in March. Saving too much really can be a problem when spending is weak.

    The little man inside, when I read things like that, tells me this is nonsense. So I decided to look up how the US personal savings rate is calculated. Turns out, it's another one of those whacky goal-seeked government numbers. At least, that's what I make of it. Mainly, though not even exclusively, because of things like this, from a site called Take A Smart Step:

    [The personal savings rate in] November 2012 was 3.6%, this is not even close to where we need to be for financial health. This savings rate barely gives us enough to handle emergencies, and makes us as a nation weaker. The government calculates the personal savings rate as the difference between the after tax income and consumption of Americans. So they include not only retirement savings, but debt repayments, college savings, emergency fund savings, anything that was not spent.

    Making paying off your debt (i.e. money you've already spent) count towards your savings is a practice fraught with questionable consequences. But useful for economists, and accountants alike, no doubt. The problem with it is that it hides reality behind a veil. Because debt repayments are not really savings at all; people are not free to spend what they put into paying off debt, on something else, like iPads, cars or trinkets. Not even on hookers or crack cocaine, for that matter.

    For the vast majority of what is paid off in debt, there's no such thing as free choices. People pay off debt because they must. Or, to look at it from another, wide lens, angle, Americans would have to stop servicing their debt payments if they want to 'start spending' again.

    Going through the numbers from various sources, I can see that the US personal savings rate is presently some 5.8% of pre-tax income, and debt repayment is close to 10% of disposable -after tax – income. I'm still trying to make those stats rhyme. But no matter how you read and interpret them, it should be clear that debt repayments are a large part of 'official' savings. Even if they really shouldn't be counted as such.

    Of what remains in real savings, retirement/pension savings must necessarily be a substantial percentage, and it would be weird to call those things 'saving like there is a tomorrow', if only because they are about, well, tomorrow. But that seems to be the new normal: creating the impression that saving any money at all is somehow detrimental to the economy. A truly crazy notion, if you ask me. Let's get back to Bloomberg's Coy:

    There are only two things you can do with a dollar, after all: spend it or save it. If you spend it, great-that's money in someone else's pocket.

    In someone else's pocket, but no longer in yours. Why would that be so great? It's only great if that someone has added value to something by doing productive work, not if you simply swap paper assets.

    If you save it, the financial system is supposed to recycle your dollar into productive investment with loans for new houses, factories, software, and research and development.

    That notion of 'the financial system is supposed to' refers to theories such as those that Bernanke and his ilk 'believe' in. Theories that have no practical value. What is normal for many everyday Americans is crippling debt levels, and no such thing is recognized in these theories. After all, according to them, whatever amount of dollars you get in, you either spend or save them. And if you use them to pay off previously incurred debt, you're supposedly actually saving, even though you no longer have possession of the money in any way, shape or sense, nor a choice of what to spend it on.

    But if no one's in the mood to invest more and interest rates are already as low as they can go (as they are in much of the world), the compulsion to save can sap demand and throw people out of work. For the U.S. economy, the good news is that the jump in the personal savings rate is probably no more than a blip. Three economists from Deutsche Bank Securities in New York explained why in a March 25 report called 'U.S. Consumers: Still Shopping, Not Dropping'. While noting a "deceleration" in consumer spending, they wrote, "we think that concerns about the outlook for the consumer are overstated." Their model of the U.S. economy predicts the savings rate will fall to 3% to 3.5% by 2017.

    Oh sweet lord. Now a falling savings rate has become a beneficial thing, even when and where savings are very low. Not saving will allegedly save the economy. How did that happen? If we may presume that debt repayments will continue virtually unabated, and there seems to be little reason to think otherwise, this means that by 2017 there will be just about nothing saved at all anymore in America. Which means there'd be very little left of the 'If you save it, the financial system is supposed to recycle your dollar into productive investment'.

    The only 'growth' perspective America has left is to grow its debt levels continually, continuously and arguably exponentially.

    Other economists have also concluded that the spending dropoff is temporary, which is why the slowdown in job growth, to just 126,000 in March, didn't set off many alarm bells. "Consumer spending is starting to look more and more like a coiled spring," says Guy Berger, U.S. economist at RBS Securities. One sign that consumers aren't retrenching: On April 7 the Federal Reserve reported that consumer credit rose $15.5 billion in February, in line with the recent past.

    They got deeper into debt, and this is a sign they're not 'retrenching'? A coiled spring? Really?

    According to Deutsche Bank Securities, the first reason to think consumers will resume spending is that their incomes are rising. Annual growth in average hourly earnings has averaged about 2% since 2010, which isn't great but does exceed inflation. With more people working as well, aggregate payroll outlays are up 4.9% from the past year, according to Bureau of Labor Statistics data.

    The rises in stock and home prices should make consumers more willing to live a little, say the Deutsche Bank authors. They calculate that households' net worth is almost 6.5 times consumers' disposable personal income. That's the highest ratio since before the housing crash.

    But that last bit is arguably all due to QE induced asset bubbles. Not an argument the author would make, I know, but nevertheless. Coincidentally, another Bloomberg article published the same day as the one we're delving in here is called:Why Your Wages Could Be Depressed for a Lot Longer Than You Think. Perhaps the respective authors should have a sit down.

    No question, the high savings rate depresses spending in the short run. Purchases of durable goods, from cars to couches, remain well below their 60-year average share of GDP. But all that saving helps consumers get their finances in order, which will allow them to satisfy pent-up demand for that sweet new Ford F-150.

    No no no: they just paid off part of their debts. How can that possibly mean they'll go out and get a new F-150? In real life, they spent their money instead of saving it. Either way, they don't have it any longer to spend on a F-150. It would mean they need to get into new debt. On top of what they still have left over even AFTER paying down part of it.

    Fed data show that financial obligations including debt service, rent, and auto leases are about their lowest in comparison to disposable income since 1981.

    Hmm. According to Wikipedia, "Household debt as a % of disposable income rose from 68% in 1980 to a peak of 128% in 2007, prior to dropping to 112% by 2011." It's about 105% today. So that's just a very weird statement. Someone's wrong, very wrong, and I think I know who that would be. Maybe Peter Coy conveniently ignores mortgage payments when he talks about "financial obligations including debt service, rent, and auto leases"?!

    When consumers are ready to borrow more, it won't hurt that, according to the Fed's survey of banks' senior loan officers, banks are easing lending standards.

    See? That's what I said: they can only spend if they acquire new debt. They're just getting rid of the last batch, and it's going mighty slowly at that. Lest we forget, when debt as a percentage of income falls, that is due to quite an extent to people failing to make any debt payments at all, and losing their homes and cars. This is a dead economic model. This model is pining for the fjords.

    These factors add up to an optimistic consumer.

    Oh, c'mon. What is that statement based on? That 'sky high' savings rate that is really just poor slobs paying off what they can in debt repayments so they won't get hit with even more fees and fines?

    What I think these factors add up to, is a delusional reporter. There is no excess saving. It's ludicrous. As far as people have any money at all, they're using it to pay down their previously incurred debts. And that gets tallied into their savings rate by the government's creative accounting methods. That's all there is to the whole story. But it will, regardless, induce a few more poor souls to sign up for more mortgages and car loans and feel like happy American consumers on their way down into the maelstrom.

    It's sad, it really is. Maybe we should first of all stop referring to the American people as 'consumers'. That might help.

    [Mar 19, 2015] The Central Banks Will Not Be Able to Control This by Phoenix Capital Research

    Mar 19, 2015 | Zero Hedge

    The biggest issue facing the financial system today is the US Dollar rally.

    The Fed and other Central Banks are trying to maintain the illusion that they have everything in control by talking about interest rates, but the reality is that the US Dollar carry trade is ABOVE $9 trillion in size. That is almost as big as ALL of the money printing that occurred between 2009 and 2013.

    And it's imploding as we write this.

    Globally, the world is awash in borrowed money… most of it in US Dollars. The US Dollar carry trade is north of $9 trillion… literally than the economies of Germany and Japan COMBINED.

    When you BORROW in US Dollars you are effectively SHORTING the US Dollar. So when the US Dollar rallies… you have to cover your SHORT or you blow up.

    And the US Dollar has been rallying… HARD. Indeed, the move that began in July 2014 is already larger par in scope with that which occurred during the 2008 meltdown.

    Moreover, this move has occurred with little to no rest. The US Dollar barely corrected 2% after rallying a stunning 16+% in a matter of months before beginning its next leg up.

    You only get these sorts of moves when the stuff hits the fan. CNBC and the others are babbling about the Fed's FOMC changes, but all of that is just a distraction from the fact that a $9+ trillion carry trade, arguably the largest carry trade in history, has begun to blow up.

    Rate hikes, QE, all of this stuff is minor in comparison to the carnage the US Dollar is having on the financial system. Take a look at the impact it's having on emerging market currencies.

    ... ... ...

    [Mar 18, 2015] Here Is Why The Fed Can't Hike Rates By Even 0.25%

    Mar 18, 2015 | Zero Hedge
    There was a time when Zoltan Poszar was the most important person at the Fed (and Treasury), because he was likely the only person in the government's employ who grasped the enormity and complexity of the then-$30 or so trillion US shadow banking system. A quick refresh of his bio from the Institute for New Economic Thinking:

    Mr. Pozsar has been deeply involved in the response to the global financial crisis and the ensuing policy debate. He joined the Federal Reserve Bank of New York in August 2008 in charge of market intelligence for securitized credit markets and served as point person on market developments for senior Federal Reserve, U.S. Treasury and White House officials throughout the crisis; played an instrumental role in building the TALF to backstop the ABS market; and pioneered the mapping of the shadow banking system which inspired the FSB's effort to monitor and regulate shadow banking globally. Prior to Credit Suisse, Mr. Pozsar was a senior adviser to the U.S. Department of the Treasury, where he advised the Office of Debt Management and the Office of Financial Research, and served as Treasury's liaison to the FSB on matters of financial innovation. He also worked with the Federal Reserve Board on improving the U.S. Flow of Funds Accounts.

    While Zoltan is currently working in the private sector at Credit Suisse, he is perhaps best known for laying out, back in 2009, the full topographical map of the US shadow banking system in all its flow of assets (or is that contra-assets when it is a repo) beauty.

    Which is also why we bring him up, because in a much welcome follow up to his previous work title "A Macro View of Shadow Banking" which we will discuss further in the coming days because it is not only Zoltan's shadow banking magnum opus and must read for anyone who wants to get up to speed with all the latest development in the unregulated shadow banking space, but because Poszar also provides perhaps what is the most important chart which explains why the Fed is so very terrified of even the smallest possible incremental rate hike of 0.25%.

    Specifically, we look at Poszar's findings about the implied leverage within the fixed income asset space in America's just a little levered buyside community. This is what he says:

    Although no precise measures are available, the presence of leverage among hedge funds with credit and fixed income strategies has been recognized since the LTCM crisis (see Figure 21), as is leverage in separate accounts in the asset management complex.

    While hedge funds and separate accounts are allowed to use leverage liberally – in fact, leverage is the sine qua non of these investment vehicles – it is widely underappreciated that bond mutual funds that are typically thought of as unlevered and long-only also have considerable room to use leverage.

    The extent to which this room to use leverage is utilized is up to bond portfolio managers to decide, and it is not uncommon for the largest bond funds to maximize the leverage they may bear in their portfolio within the limits allowed by the Investment Company Act of 1940, and the SEC's interpretation of the portfolio leverage and concentration incurred through the use of derivatives.

    However, the creep of leverage into what are traditionally thought of as long-only bond funds was missed by the mainstream economics literature and textbooks entirely. For example, recent works that identify asset managers as the core intermediaries behind the "second phase of global liquidity" focus solely on indirect forms of leverage (FX mismatches) embedded in bond portfolios through holdings of dollar-denominated emerging market sovereign and corporate bonds (see Shin, 2013).

    Other works state even more explicitly the widely-held assumption that fixed income mutual funds are unlevered, and analyze episodes of market volatility induced by redemptions without any regard to how direct forms of leverage embedded in fixed income mutual funds may amplify volatility during periods of rising redemptions (see for example Feroli, Kashyap, Schoenholtz and Shin, 2014, Chapter 1 of the International Monetary Fund's October 2014 Global Financial Stability Report, Chapter 6 of the BIS' 84th Annual Report, and Brown, Dattels and Frieda, 2014 (forthcoming)).

    But all of these views sit uncomfortably with the hard evidence presented above, and recent revelations about "perceived" alphas (see Gross, 2014b) and price action in the interest rate derivative markets amidst soaring redemptions from the largest bond portfolio in the global financial ecosystem – the PIMCO Total Return Fund (see Mackenzie and Meyer, 2014). More concretely, a look at the portfolio of this specific fund provides good examples of the forms of leverage discussed above.

    ...

    More broadly, the above example demonstrates the evolution of the traditional core product of the asset management industry – long-only, relative-return funds – as it came under pressure from two directions: from hedge funds, offering absolute return strategies, and from passive index-replication products in the form of low-cost exchange traded funds (ETFs). Core-satellite investment mandates became the trend, with hedge funds providing alpha and index-replication vehicles delivering beta at low cost. Traditional asset managers responded to this challenge a number of ways: some by launching their own, internal hedge funds, and some by incorporating into their core products many of the alternative investment techniques used by the hedge funds. These industry trends were the sources of competitive push that drove the above-mentioned creep of leverage into the industry's traditional, long-only, relative-return bond funds (and hence the rise of levered betas), all designed to stem the flow of assets to the hedge fund competition and command higher fees as the profitability of traditional core products was squeezed (see Bank of New York, 2011 as well as Haldane, 2014).

    And visually:

    In short, what Poszar is saying is that in a world in which the traditional broker-dealers and banks have indeed reduced leverage and instead use $2.5 trillion in Fed reserves as fungible collateral against which to buy credit derivatives (for example as in the case of JPM's CIO office and its attempt to corner the IG9 market) the buyside community, which as we have long discussed has largely avoided equities due to fears of a spectacular market implosion (and certainly minimized levered exposure in the space with the exception of several prominent HFT participants) has instead been forced to chase after fixed income products. And chase with leverage that would make one's head spin as can be seen in the outlier chart above.

    And while Poszar may be quite correct in stating that most have missed the leverage creep he observes above...

    Perhaps the key reasons why economists have missed the creep of leverage into the traditionally long-only world of fixed income mutual funds are the conceptual gaps in the way in which the U.S. Financial Accounts (formerly the Flow of Funds) depict the global financial ecosystem, and by extension, the limited mental map it gives to economists who use it to understand asset prices.

    ... one entity that does understand all this and grasps the momentuous implications of even the smallest quantum of interest rate increase, is the entity where Poszar previously worked: the US Treasury and the Federal Reserve itself.

    And so, the next time someone asks "why is Yellen so terrified of even the smallest possible rate hike", show them this chart above and explain that the Fed vividly remembers what heppened when LTCM blew up. What the Fed doesn't want, is not one but one thousand LTCMs going off at exactly the same time in what is now the world's most levered trade...

    strannick

    So the dollar isnt going up because of America's sound fundamentals? But rather because its newly minted QE is being used to make leveraged, unhedged gambling bets in derivatives markets (ie. CDOs that cant be paid by counter parties like AIG to losers like MF Global) by primary dealers as repo collateral instead of being released into the economy and increasinging the money velocity?

    So the Fed is lying when they say they will soon raise interest rates? Even though raising interest rates .25 % would add 100s of billions in interest to the over 18 trillion dollar debt?

    So there is a quadrillion dollar hidden -shadow- banking system beyond the site of Congress and investors at large? That is potentially worse than a 1000 Lehmans?

    So then shouldn't we be using our overvalued dollars to buy suppressed under valued gold

    waterwitch

    I found this helpful:

    http://www.barclayhedge.com/research/educational-articles/hedge-fund-str...

    ZerOhead

    Crap... It's just like the movie SPEED with Sandra Bullock and Keanu Reeves back in '94 when a former banker rigs a bus loaded with muppets to explode unless he get's paid a million$$ ransom.

    If Yellen let's the speed fall below 50 MPH then the bomb goes off and everyone dies.

    Meanwhile she's desperately looking for an off-ramp called ECONOMIC GROWTH but it ain't there... and now she's running out of road and there's a hole in her gas tank...

    SWRichmond

    we look at Poszar's findings about the implied leverage within the fixed income asset space

    Do you have any idea what the avg rate on the 10 year bond is?

    Of course it is about leverage, it has always been about leverage. There are two ways for control freaks to fight a deleveraging: 1) print money, and 2) re-lever. And since the fixed income markets are by far the largest, guess where the leverage (mostly in the form of swaps) was placed?

    And in order to keep this leverage from blowing up, interest rates have to stay zero, forever. This is not rocket science. Neither, however, is it reality, but that is what they are trying to do.

    Totentänzerlied

    1. Average all-time historical return is 0 or negative. Inflation beyond a few tenths of a percent only became a standard phenomenon during the industrial age. This is one of the key points of metallism and one of the reasons monetarists and chartalists (more like charlatans) hate metallism.

    2. Savers should not have their money in the bank (or brokerage) if they don't want the banks to use it.

    To my knowledge the long-run average coupon on government debt in all places was 3%-5% or less, it was the preferred asset class (in addition to farmland, of course) of the rentier parasites of recent centuries. This high rate is part of why we got national income taxes; careful what you wish for.

    There is no point in calling fiat currency stolen, any more than there is in calling a unicorn stolen. It is all debt, not money. The theft begins as soon as it is loaned into existence. Beyond that, the interest means it by nature requires theft from the future.

    aVileRat
    aVileRat's picture

    Fun fact,

    The mean 'seed' fund runs at around 120% gross and you would think one would do a 'hedged' book, you know, at best 100% leverage, maybe 120% gross in extreme periods right ?

    Saw a fund yesterday, small, about XYZ MM under management, running on 197% gross and 300% net. Yes, you are reading that correct. US Institutional qualified, with more than 10 accounts.

    Now either I'm getting really old, or my idea of risk management is totally shot to shit at this stage in my career, but this guy was balls deep in fixed credit and swaps. Refused to give over his VaR metrics, or altman score, but had a stupidly great sharpe ratio. Some days, when I think about how some junk companies inflate by 20% a day, I think about this guy, and his fund.

    And I wonder, what if this is the new normal. If Bill, Leon, George.... old crew is working away, and there are a whole bunch of wingnuts like this ZYZ nutter who are chasing yield with every risk hedged to keep below your Prime guidebook, but in reality are running at ratios Myron Sholes would have shit himself at.

    Just a food for thought.

    Toten is 100% correct, risk free is a economic concept derived from post-war 1918 sov. growth rates vs. the real 400 years of economic history; While Case Shiller's often trot out CAPE model works great at predicting rate moves using smoothing, that whole thing assumes underlying growth conditions which are not normal; namely a baby boom, accretive fixed capital rates, technical revolutions every 5 to 10 years and monetary stability. Throw CAPE into some funky currency wars, like the 1750's with only 3 varables ? busted like TRIPS.

    Fed policy is going to give stability, which we expected

    Now the rest needs to come from the rest of the world. Arguably the US technocrats are more inclusive and forward looking than the fractionalized govts in Japan (no offense Abe!) so Fiscal policy, has a fighting chance of at least respecting the structural reforms required by US gov, lest major allies switch to RNB; creating the bi-material system Austrians badly want. Where RNB is the 'silver' and UST is the 'gold standard'.

    If they fail to act, and US corps/US Trading partners will continue to plan outlays for tax management & accretive ROE's to optimize their USD purchasing power, and will invest abroad. Which is pretty much what happened when economic powers dropped gold or bi-standard switching the last time this happened; when the world had a band of iron to every corner of the globe.

    In this scenario, US investors can certainly rely on price stability, but as Janet Yellen said in press scrum today: the world is responsible for their own portfolios and yield valuations. Fed does not promise a risk free rate, nor does it target a risk free rate; only inflation & job growth.

    As ZH has spoke about ad nausum, job quality is shit, and projected tax planning & wage growth, when millennials hit 40 is going to be nowhere close to sustaining the AA rating of the USA, let alone its G8+7 trade allies. So until we see 57% of U-5 semi-attached workers actually get with something approaching post-war wage & family formation rates, achieving a 8% risk free world is beyond us. Which is where a Fiscal & technocratic solution comes into play; and requires a global coordinated effort which is inclusive of all the key countries. The alternative ? They'll just fuck off and hit up China, turning a blind eye to middle kingdom 2.0, which was a key behind the dead global growth post- 1 AD, and likely even pre-1AD given Chinas total inability to govern that cesspit since the Bronze Age.

    In this scenario, I think back to that tool, and his reach for yield hyper-LTCM trading vehicle. When that martingale hits zilch, what happens to them? Will it matter at that point ? Will credit origination matter at all when NIRP becomes accepted as a cost of trade, and we simply trade in 1 oligarchy and swap in UST? where the UST becomes a scarce form of barter like gold was in 1500 ?

    Will Primes and Institutional investors be able to tell the difference between technical and productive growth at that point ? Or will the fear of risk, or perhaps the lack of education on industry specific risk lead to a total lack of interest in exploration & moonshot capital ?

    Fun fact, the cotton gin is thought to have been 'invented' in at least 5 instances in history, but it only was when some Jews with a some funny names decided to arb their trade float for a merchant capital fund. This was amid a raging stagflation enviroment, and it worked out well for us since 1680.

    If we are staring down the barrel of another 40 year stagnation ecosystem (at least), and if we assume Washington/NATO gridlock extends as long as the Holy Roman Empire's decline; we could be in for a good long time of NIRP.

    On an end note. ZH lobbied for 'healthy' deflation for 4 years, and now its happening. You cant have a rate hike, and price deflation at the same time. We are done with the Keynsian real time lab study, and now we're onto the Austrian study:

    Austrians propose that Federal reserve money printing is the bane of all evil, and the Fed is the sole originator of all credit default which starts the busines cycle. The fed is now accomodative, and neutral, as 'the market' desired. Now its time for the Austrian system to prove money is all locked into one closed economic system; and fixed capital can thrive in a liquidity moderating system.

    Our current economic model based on the 1929-1941 experiment proved flawed, so lets see what happens. Ball is in 'the market' and ZH's court to prove this works, in my view.

    And for the little meth-Myrons out there, lets hope this NIRP works. If 92/95 happens (it still could with the natural move in rates down by currency flight to USD; esp if ECB is limit bound by QE assets), that is our best solution out. And Gold is at best, a marginal utility vehicle for wealth preservation; which makes Goldbugging a moot point if we're arguging (happily I might add) for creative wealth destruction to prosperity.

    TLDR:

    - Credit risk is a passing fad, they will flame out if growth is going to its pre-1880 level of stangation to -3% for most of Europe; without Antilla's creative destruction no less. Its about 10x worse today than when Rockstar did his very well done study on shadow risk, and how its warping leins & economic momentum.

    - USA's trade partners will eventually conclude its a bad trade partner due how a strong dollar is killing both domestic wealth effects, and the USA's increasing protectionism, USA global policy becomes inert as the USA Dol & T's become a Giffen good

    - Last time something barbaric happened, large debts and a useless Technocratic fiscal govt. had their way with the world, we ended up with a badly FUBAR Europe, and all 14 eras of Chinese society.

    - Settle in, unless the last 2 generate something constructive; you are all fucked. But thats good for doom porn lovers.

    - Yellen looks at the same shit as ZH. In fact, she straight up said she knows it just as well as TD1, and until you see the same numbers they do, which they do, and real time u-5 wages and job quality improves, forcasts changed, because Saudi Arabia had a Taper Tantrum, and while inflation is one part of the puzzle, data dependance is just as transparent as a post on ZH.

    And to hike rates would bail out wall st. Pensions, at the further expense of 'the middle class', and pretty much the entire world. As predicted.

    alphamentalist

    wake up! look at the jefferies numbers of the other day. it is nearly impossible for banks to make money under these conditions. sure they saw some MTM on their rates books back in '10/11/12, but the rest of "earnings" for years running has been from mark-to-fantasy, headcount reductions, buybacks, offshoring, and loss avoidance (delaying foreclosures and repossessions on NPLs). this the-Fed-is-saving-the-banksters meme, while popular, doesn't fit the observable realities. fed policy is--as tiny timmah geithner confessed--the best progressive economics in action.

    it is direct monetary financing of our bloated federal government. when you see a person doing something most people infer the motivation for the action is the reward for the action. in the case of the fed we need to adjust our optics to understand they are doing things not to be rewarded but to avoid consequences (like the Dutch boy with his finger in the dike, no Yellen pun intended). what would happen if they allowed a return to market economics?

    the federal government would have to fund its ever growing shortfall in the rates market. that would probably be possible at first, but the higher rates would slow the remains of the "economy", which would increase demand for services AND retard tax receipts, which would increase the funding shortfall, which would push up rates, which would choke the economy, which would...well, you get the picture. without the Fed, the overlevered federal candy machine would quickly tear itself apart.

    I think the Fed is going to try to raise in order to re-set the shock absorbers before the coming sell off in order to maintain at least the illusion they can stimulate the economy. but it is too little, too late. we will quickly be back to the Fed protecting the politicos by trying to slow the collapse. (to keep this simple I have avoided the obvious asset-inflation scheme as a tool to keep large donors happy, but even analyzing that will bring you back to the same place: the Fed must protect the politicians or die trying.) this is the slow motion death rattle of America's nanny state.

    kaiserhoff

    This is a very popular view, but it is wrong. We are talking about fractions of a percent. Declining oil prices have given them an undeserved window, in which to begin normalization.

    It's true there is no exit strategy. There never was. This is their one last chance to let market rates emerge without complete chaos. They are too stupid to take it. Unfortunately, the consequences will fall on us all.

    tahoebumsmith

    The FED has over 4 Trillion on their balance sheets now compared to 852 billion in 11/08.. The US Government has over 17 Trillion dollars of debt compared to 9.23 Trillion in 11/08... need I say more? That is unless they don't have to pay interest> Were all Japanese now and if inflation forces the 0% interest Ponzi to raise interest rates you might just as well bring the whole herd of deer out Tyler because it will be carnage

    WTFRLY

    9/11 Truth: Judges shocked by first time seeing video of WTC 7 collapse in Denmark court

    walküre

    "Magic" number 7

    US is run by gangsters. Greatest criminal enterprise ever conceived in the history of man.

    KuriousKat

    The hellicopters will come but they won't be dropping money.

    Some folx ain't waitin till September..

    coming to a theater near you.

    http://news.yahoo.com/police-car-burnt-windows-smashed-start-anti-ecb-06...

    Frankfurt (AFP) - Violent clashes between anti-capitalist protesters and German police left dozens injured and a trail of destruction in Germany's financial capital as the European Central Bank opened its new headquarters Wednesday.

    Draghi, addressing some 100 invited guests at a low-key ceremony, rejected blame for the suffering brought by budget cuts and austerity policies amid the financial crisis in Europe.

    MATA HAIRY

    um...those are europeans rising up against their masters. Not americans.

    Americans are cattle and will never do so. At least white americans never will.

    kchrisc

    "There was a time when Zoltan Poszar was the most important person at the Fed (and Treasury), because he was likely the only person in the government's employ who grasped the enormity and complexity of the then-$30 or so trillion US shadow banking system."

    The FedRes is NOT a part of the governmnet, but a PRIVATE branch of the PRIVATE Zionist banking cabal that owns and controls the DC US.

    The FedRes only wants to comprehend the ramifications of their actions the same as a thief does. And like a thief, they wish to keep their loot, and to remain free to thieve more in the future.

    The banksters need to repay us. Guillotine the Fed. Audit the heads.

    yogibear

    LOL, the Federal Reserve can't raise rates.

    Just BS the markets for months and later years.

    The markets may have just figured it out.

    Junk Bonds Whipsawed as Trading Drought Rattles Investors

    Nov 21, 2014 | Bloomberg

    Junk bond investors have a bad case of the jitters. Every bit of bad news is whipsawing prices, with bonds tumbling as much as 50 percent in a single day.

    "We've seen some flash crashes in the market," saidHenry Craik-White, a senior investment analyst at ECM Asset Management in London, which oversees $8 billion. "If you get caught on the wrong side of a name, you can get severely punished in this market."

    Investors are rattled because they're concerned that a lack of liquidity in the bond market will make it impossible for them to sell holdings in response to negative headlines. Trading dropped about 70 percent since 2008, with a corporate bond that changed hands almost five times a day a decade ago now only being sold once a day on average, according to Royal Bank of Scotland Group Plc.

    Alarms started ringing in September with the collapse of British retailer Phones 4u Ltd. after Vodafone Group Plc and EE Ltd. refused to renew contracts. The retailer shut its business and sought creditor protection on Sept. 15, sending the company's payment-in-kind bonds down to 1.9 pence on the pound, according to data compiled by Bloomberg.

    [Dec 14, 2014] Should you sell stocks Check junk bonds first

    "That swing away from junk bonds often happens shortly before stock market downturns. "
    Nov. 30, 2014 | money.cnn.com

    One man's junk bonds might be another man's treasure.

    Dramatic swings in the junk bond market often provide a valuable warning to investors. During times of turmoil, investors pile into ultra-safe U.S. government debt and rotate away from far riskier junk bonds.

    That swing away from junk bonds often happens shortly before stock market downturns.

    "High yield does provide useful sell signals to equity investors," Barclays analysts concluded in a recent report.

    Barclays combed through the past dozen years of data. The warning signal they found is a 30% or greater increase in the spread between Treasuries and junk bonds before a dip.

    History is a guide: Consider 2002. The "spread," or gap between the yields of junk bonds and Treasuries, spiked in July that summer after WorldCom defaulted on its debt and US Airways signaled it was filing for bankruptcy.

    Investors who sold stocks based on the turbulence in the high-yield debt market would have escaped a 14% nosedive in the S&P 500 over the next 10 days.

    "Had equity investors heeded the warning being sent from high yield, significant losses may have been avoided," Barclays wrote.

    While the stock market bounced back from that 2002 episode pretty quickly, the same can't be said about when the sell signal was triggered five years later.

    Junk bond spreads surged in June 2007 as two Bear Stearns hedge funds dropped a bomb on investors about massive losses in subprime mortgage assets.

    Despite the alarm bells ringing in the credit markets, the S&P 500 set all-time highs as late as the fall of 2007. But then stocks began a long descent as it came to light that many more firms had similar subprime mortgage problems.

    Many investors clearly wish they listened to that early warning from junk bonds.

    Barclays said equity investors should "position defensively" the next time junk bonds start to go haywire. That doesn't necessarily mean dumping stocks altogether. After all, the stock market eventually bounced back from each of the sell-offs Barclays examined.

    Instead, lower volatility sectors like consumer staples and utilities could provide investors with cover during a potential storm. The analysis found that after the sell signal was triggered, these sectors outperformed higher-turbulence ones like materials and energy.

    [Dec 10, 2014] Oil Market Reminds Me of 1986 Price Drop Sass

    (Video). Looks like his view is that the economy is entering period of high turbulence...
    finance.yahoo.com

    Bottom of oil prices is not seen yet. Last time in 1986 oil fall $35 to $10. Most of the damage in oil price decline behind us. But not oil speculators were washed out.

    Marginal producers will go out of business. They are highly leveled and they will have problems in refinancing their debt. There will some ripple affects on financial market. Increased volatility is probably coming in 2015. Fed intend to raise rate.

    High yield bond market will be affected.

    [Nov 01, 2014] Richard Lehmann's 6% Solution Finding Gems Among Junk Bonds

    Lehmann: Yes. We watch the market and the diversity of securities in that market. And we try to stay diversified. But one of the things about the preferred market is that it's really quite complex. We've identified seven different categories of what's called preferreds.

    And the majority of the preferreds are actually bonds. They're not stock at all. Then you have your foreign preferreds, which get dividend treatment just like a common stock in the U.S. There is a real diversity of selection, which is one of the reasons our newsletter is quite successful. Because it addresses that market and points out these differences.

    Forbes: In terms of the high-yield bonds, junk bonds as we call them, you make, again, a counterintuitive case that the huge issuance which some people thought of, "Oh, my gosh. This is a bubble out there." You say, "Well, in many cases, that's actually a sign of strength."

    Lehmann: Yes, I do. I think that people aren't doing their homework when they malign the high-yield market. Because they look at these spreads between investment grade, below investment grade in the past and they say, "Well, no, these spreads are so small now that the risk is not counted in."

    But I think the risk is dramatically changing by all this new issuance. Because you have to look at, really, the purpose for the bond issue, not just who's issuing it. And if a company is issuing high-yield bonds at lower interest rates to replace, for example, existing dead issues or to replace bank loans, that's a tremendous strength in the other balance sheet.

    Because it gives them more borrowing capacity from the banks in the future if and when they need it, and when they can't issue bonds anymore. So, actual survival chances are greatly enhanced by this volume of new issuance. The junk bonds were high risk when they were being used to make risky new acquisitions or to buy back stock. But when you're using it to buttress your balance sheet, the way it's being done today, I think that there's a real positive to the market.

    Forbes: You also make an interesting case, and you cite Bank of America, where the credit rating agencies end up giving a low grade, even though in reality it's investment grade.

    Lehmann: Yes. This is sort of a technical factor that distorts the market, where because somebody like Bank of America, that has four or five tiers of debt, different levels of seniority, those levels are rated by the rating agencies based on their claim in a bankruptcy situation, which would make sense except if you say, "Well, Bank of America isn't going to go into bankruptcy. And it's an A-rated at the top" So, you look at it and you say, "Well, that's their chance at bankruptcy," which is pretty close to nothing. And therefore, why wouldn't you invest in their lower-rated paper? Because you're not worried about their claim in bankruptcy and you can collect an extra 100 – 200 basis points of yield.

    Forbes: You make the point that in some of these companies, look at what the senior debt is rated at and that, in effect, is what you should look at the junior.

    Lehmann: Well, that's what we tend to do. We think that the term junk is really detrimental to making an investment decision. They're anything but junk.

    Forbes: High-dividend stocks: You think there are some that we should look at. Everyone says go for dividends. But you make the point 2% versus 6%. But there are some like Altria that you think are worth looking at. Are there other ones? Altria do you still like?

    Lehmann: There are quite a few. The tobacco companies are good. Some of the shipping companies, some of the LLPs and the master limited partnerships. These are all good categories, especially when you're concerned about interest rates going up. They offer a lot more protection than a fixed-rate 30-year bond, for example.

    Forbes: One of the things you make the point in terms of comparing junk and investment-grade bonds is that results are skewed because investment-grade bonds have a longer maturity than traditional junk bonds do.

    Lehmann: Yes. That's one of the things. We don't tend to look at the maturity of the issues so much because in the case of high-yield bonds and in the case of our audience, which is individual investors, they're not buying a bond necessarily to hold it to maturity. They're buying it because it's a good yield now. But their life span is not going to be the length of that bond issue. They're in a different analysis position relative to what they want to buy.

    Forbes: Municipal bonds, which covers a multitude of sins.

    Lehmann: Of sins, yes.

    Forbes: How do you look at munis today?

    Lehmann: For my audience, I've always discouraged them from buying municipal bonds. Because I think that your investment decision should be based on rates of return that you can achieve. For years, I was mystified as to why retired individuals and such who were in a very low tax category were buying municipal bonds.

    And somebody finally gave me an explanation of why they do that. And it's basically, they say, "I want to simplify my life. I don't want to have to worry about making a tax return and having a big payment in April. I just take all this tax-free income and I don't have to file a tax return."

    Well, that's the worst reason I could think of to buy municipal bonds. And as we've seen over time now, the quality of municipalities is deteriorating significantly. And I don't think the market really reflects tha

    Forbes: Let's quickly hit - because a lot of people do buy these things, even if for the wrong reasons - your quick assessment of Detroit, the proposed settlement there.

    Lehmann: I think Detroit is a real beginning of what may turn out to be a wave of similar-type situations. There is new ground being broken in terms of Chapter 9 bankruptcies in that case. And a lot of municipalities, I'm sure, are sitting on the sidelines watching this and saying, "Does this become a viable option to me?"

    But I think more importantly is the fact that for all of these municipalities, the unions, who are usually the major claimants in this situation because of pension and health care, unfunded benefits, they need to watch this very closely. Because we're seeing that their rights are being terminated and having to be renegotiated. And they are going to be much more flexible, I think, to avoid a Chapter 9 bankruptcy than they have been in the past. And so that's probably one of the positives that's going to come out of the Detroit bankruptcy.

    Forbes: Another large issue out there: Puerto Rico. Is that still a wing and a prayer? There's over $70 billion of issuance.

    Lehmann: Puerto Rico, there's no question that that is going to end up as a tragedy. There is no way that they can meet that debt level. And it's only a question of the mechanics of, basically, how they will shorten off the debt. We see that this last bond issue and the market was very receptive to it.

    But if you probably looked at who was buying that, it was the people who were looking at that bond issue as generating the funds by which they can make the interest payment on their $70 billion. Because the amount that was put out was just about what was needed for that. And I don't know how many times you can play that game. But eventually, even with all the reforms that the new governor is promising, it's just gotten way beyond the capabilities of the island to service that debt.

    Forbes: So, would you tell individuals, "Lick your wounds and fight another day"?

    Lehmann: I would say to them, "Look very closely at any municipal funds you hold and how much Puerto Rico paper is in there. Because it's going to take a major hit." And the same for tobacco bonds.

    Forbes: I'm going to ask you about tobacco bonds, another thing, you might say, going up in smoke.


    Lehmann: Yes. That's one of those where the original basis for the issuance of many of these bonds was a study that was done in the '70s when this agreement was reached. When the original agreement was reached here, some projections about cigarette consumptions over the next 30, 40 years were made.

    And, of course, making a five-year projection, never mind a 40-year projection, is ridiculous. But the market needs something. And they all signed onto this thing. And now we're seeing that cigarette consumption is dropping at a much greater rate than anybody had projected. And many of them are zero-coupon issues. And, consequently, those people are just trading in paper that will never pay off at maturity.

    Forbes: A lot of people live in Florida. What about the so-called dirt bonds?

    Lehmann: The dirt bonds is kind of a controversial thing there. Most of the dirt bonds were bought by mutual fund families and they didn't do a hell of a good job of scrutinizing.

    Forbes: Just to explain, these are housing developments.

    Lehmann: Yes. These are community development districts, or housing developments, where any developer can go out and buy 1,000 acres of land, get a mortgage on it, and get all his money out of it, and then issue a $20 million bond issue or a $50 million bond issue to build infrastructure.

    This was going hot and heavy in Florida until 2005, when, of course, the collapse came in the real estate market. And they continued to build out and spend all that money because they had raised it and they didn't have any money in the deal. They'd taken their investment out through the bank loans. And, so, when they finished the infrastructure deal and it got to the point where they would have to start paying the assessments, they all said no. They let the thing default. And it has been laying in limbo. And you would've thought there would've been a wave of lawsuits as a result of that. But the mutual funds that bought these bonds were so exposed themselves for having bought them in the first place without really doing a good due diligence exam of this thing. Because it should have been obvious earlier that this was going to end badly.

    Forbes: You add it up all together, Detroit, Puerto Rico, tobacco bonds, dirt bonds.

    Lehmann: A lot of money.

    Forbes: Munis are a minefield.

    Lehmann: Tobacco bonds alone is $100 billion. That's a huge chunk of the market. Puerto Rico is $70 billion. These are just the big ones. There are hundreds of municipalities with unfunded pension liabilities and health care who are in the same boat, just their numbers are smaller.

    [Sep 26, 2014] Vanguard junk drops below 200 days simple average...

    What next ?

    http://www.zerohedge.com/news/2014-09-26/its-dollar-stupid To claim that this is the market at work makes no sense anymore. Today central banks, for all intents and purposes, are the market.

    Our overall impression is that the Fed has given up on the US economy, in the sense that it realizes – and mind you, this may go back quite a while - that without constant and ongoing life-support, the economy is down for the count.

    And eternal life-support is not an option, even Keynesian economists understand that. Add to this that the "real" economy was never a Fed priority in the first place, but a side-issue, and it becomes easier to understand why Yellen et al choose to do what they do, and when.

    When the full taper is finalized next month, and without rate rises and a higher dollar, the real US economy would start shining through, and what's more important - for the Fed, Washington and Wall Street - the big banks would start 'suffering' again.

    High Yield Credit Market Flashing Red As Outflows Surge

    07/25/2014 | zerohedge.com

    As we have been highlighting for a few weeks, something is rotten in high-yield credit markets. This week, the mainstream media is starting to catch on as major divergences in performance (high-yield bond spreads are 30-40bps off their cycle tights from just prior to MH17 even as stocks rally to new record highs) and technicals weaken.

    However, as BofA warns, flows follow returns and this week saw the biggest outflows from high-yield funds in more than a year. Investment grade bonds saw notable inflows as investors chose up-in-quality, rather than reach-for-yield, for the first time in years... equity investors, pay attention.

    High yield credit markets have been overvalued for a record period of time...

    On Tuesday, analysts at Ned Davis Research recommended that investors begin to sell high-yield bonds, partly because they look pricey and partly because performance has been flagging. "Investors are no longer being compensated for the additional risk in high-yield bonds," they wrote.

    High yield credit markets are majorly diverging from stocks...

    "Geopolitical risk is causing a pause," said Frank Ossino, senior portfolio manager at Newfleet Asset Management in Hartford, Conn., which oversees $12.9 billion. Investors tend to flee riskier assets during times of turmoil.

    High yield credit markets are suffering major outflows...

    Outflows from high yield funds and ETFs accelerated last week to $2.46bn following a sizable $1.85bn outflow in the prior week. Both of these outflows are the largest since the "taper tantrum"episode in the summer of last year.

    "We're not seeing massive outflows yet, but at some point that's going to change," warned Phil Blancato, chief executive at Ladenburg Thalmann Asset Management, which oversees about $2 billion.

    He said he is steering clear of high-yield exchange-traded funds in large part due to concerns about how they will fare in a downturn.

    * * *

    Between a sudden shift to a preference for "strong" balance sheet companies over "weak" balance sheet companies (the end of the dash for trash trade), and this rotation from high-yield to investment-grade, it is clear that investors are positioning defensively up-in-quality ending the constant reach-for-yield trade of the last 5 years.

    Why should 'equity' investors care? The last few years' gains in stocks have been thanks massively to record amounts of buybacks (juicing EPS and also providing a non-economic bid to the market no matter what happens). This financial engineering - for even the worst of the worst credit - has been enabled by massive inflows into high-yield and leveraged loan funds, lowering funding costs and allowing CFOs to destroy/releverage their firms all in the goal of raising the share price.

    Simply put - equity prices cannot rally for long without the support of high-yield credit markets - never have, never will - as they are both 'arbitrageable' bets on the same capital structure. There can be a divergence at the end of a cycle as managers get over their skis with leverage and the high yield credit market decides it has had enough risk-taking... but it only ends with equity and credit weakening together. That is the credit cycle... it cycles.

    Jeff Gundlach was right.

    April this year on the danger of junk bonds

    2014-04-30 | Bloomberg

    The U.S. drive for energy independence is backed by a surge in junk-rated borrowing that's been as vital as the technological breakthroughs that enabled the drilling spree. While the high-yield debt market has doubled in size since the end of 2004, the amount issued by exploration and production companies has grown nine-fold, according to Barclays Plc. That's what keeps the shale revolution going even as companies spend money faster than they make it.

    "There's a lot of Kool-Aid that's being drunk now by investors," Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management LLC. "People lose their discipline. They stop doing the math. They stop doing the accounting. They're just dreaming the dream, and that's what's happening with the shale boom."

    ... ... ...

    Spending Treadmill

    "Who can, or will want to, fund the drilling of millions of acres and hundreds of thousands of wells at an ongoing loss?" Ivan Sandrea, a research associate at the Oxford Institute for Energy Studies in England, wrote in a report last month. "The benevolence of the U.S. capital markets cannot last forever."

    The spending never stops, said Virendra Chauhan, an oil analyst with Energy Aspects in London. Since output from shale wells drops sharply in the first year, producers have to keep drilling more and more wells to maintain production. That means selling off assets and borrowing more money.

    "The whole boom in shale is really a treadmill of capital spending and debt," Chauhan said.

    Access to the high-yield bond market has enabled shale drillers to spend more money than they bring in. Junk-rated exploration and production companies spent $2.11 for every $1 earned last year, according to a Barclays analysis of 37 firms.

    ...

    "It's a perfect set-up for investors to lose a lot of money," Gramatovich said. "The model is unsustainable."

    [Apr 23, 2014] Junk Bonds: Not Worth the Risk ?

    At $6.12 per share Vanguard High Yield is too pricy
    Many top bond investors, including Doubleline's Jeffrey Gundlach, believe high-yield bonds are overvalued after a long run.

    Vanguard High-Yield Corporate Fund Admiral Shares

    YTD 1 Yr 3 Yr 5 Yr 10 Yr
    +3.26% +5.63% +8.41% +14.60% +7.06%

    Wolf Richter: Bubble Trouble: Record Junk Bond Issuance, A Barrage Of IPOs, "Out Of Whack" Valuations, And Grim Earnings Growth

    By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Cross posted from Testosterone Pit.

    When Blackstone's global head of private equity, Joseph Baratta, said Thursday night that "we" were "in the middle of an epic credit bubble," the likes of which he hadn't seen in his career, he knew whereof he spoke.

    Junk bond issuance hit an all-time record of $47.6 billion in September, edging out the prior record, set in September last year, of $46.8 billion, according to S&P Capital IQ/LCD. Year to date, issuance amounted to $255 billion, blowing away last year's volume for this period of $243 billion. The year 2012, already in a bubble, set an all-time record with $346 billion. This year, if the Fed keeps the money flowing and forgets about that taper business, junk bond issuance will beat that record handily.

    Junk-bond funds got clobbered in July and August as retail investors briefly opened their eyes and realized what they had on their hands and fled, and they went looking for yield elsewhere, but there was still no yield in reasonable places, and so they held their noses and picked up these reeking junk-bond funds again. Cash inflow doubled over the last week to $3.1 billion, the most in ten weeks.

    These retail investors were fired up by the Fed's refusal to taper even a little bit, giving rise to the hope that it might actually never taper, that this is truly QE Infinity, Wall Street's wet dream come true – on the theory that the Fed is mortally afraid that any taper would blow over the sky-high financial-markets house of cards it has constructed over the last five years. And the retail cash returned to these junk-bond funds and just about refilled the hole that had been dug during the summer.

    "The cost of a high-yield bond on an absolute coupon basis is as low as it's ever been," explained Baratta, king of Blackstone's $53 billion in private equity assets. Even the riskiest companies are selling the riskiest bonds at low yields. The September frenzy hit the upper end too and set a new record: companies sold $145.7 billion in investment-grade bonds in the US. And Baratta complained that valuations "relative to the growth prospects are out of whack right now."

    These "growth prospects" look grim, with corporate revenues barely keeping up with inflation, and with earnings growth, despite all-out financial engineering, getting decimated. On October 1 last year, earnings estimates for the third quarter 2013 still saw a growth of 15.9%. As of Friday, estimated earnings growth had plunged to 4.6%, dropping 20 basis points per week in August and 10 basis points per week in September. And they may still be too optimistic.

    Meanwhile, earnings growth estimates for the fourth quarter have barely budged since August and remain at the deliriously lofty level of 11.1%, pulled up largely by financials, whose earnings growth is still pegged at a breath-taking 25.7%, based on the assumption that the Fed will continue to feed them.

    But financials are having some, let's say, issues. The five biggest banks alone face a $1 billion cut in earnings from just the past month, based on a big decline in fixed-income trading revenues – with our special friend, JPMorgan, eating more than half of it. There had been "hopes of a final trading flurry in the last few weeks of the quarter," the FT observed, but those hopes have now been squashed.

    Then there is the death of the mortgage refi bubble that has been hammering banks, with number one mortgage lender Wells Fargo suffering the most. Four banks have so far announced 7,000 layoffs in their mortgage divisions. JPMorgan confessed that it would lose money in its mortgage business in the second half. On top of that, JPMorgan is contemplating $11 billion in legal settlements for its various mortgage scams. And earnings at financials are still expected to grow 25.7% in the fourth quarter?

    "Out of whack" is what Baratta called this phenomenon of sky-high valuations in relationship to grim growth prospects.

    Earnings estimates have been slow in coming down. And the stock market, supposedly forward looking and focused on corporate revenues and earnings, has been completely blind to them. It follows the mantra that fundamentals no longer matter. All that matters is the Fed. A shift that has become the Fed's most glorious accomplishment. And the Fed continues to feed Wall Street with $85 billion a month.

    Yet in this glorious environment where there is no gravity for stocks and even junk bonds, the smart money is selling hand over fist, unloading whatever they can, however they can. Record junk bond issuance is just one aspect.

    from Mexico

    October 1, 2013 at 5:31 am

    It looks like one of the consequences of QE has been to drive investors into increasingly high-risk investments in quest of yield. I don't see how this can end well.

    Our current era seems to resemble the 1890 to 1914 era in many ways, poised as it was on the precipice of three decades of world-wide war and depression. When the rentier's quest for yield blows up in their faces, the quest for scapegoats will begin.

    As Jacques Barzun asks in From Dawn to Decadence,

    how can it be that in retrospect the period was seen as an ideal time deserving to be called la belle epoque? … Here it is enough to say that the intellectual and artistic elites, and to a certain extent high society, lived in their world of creation, criticism, and delight in the new. They were aware of the crises, no doubt, but after one or two had gone by gave little thought to what they might still cause. At any rate, those engaged in high art and science took little notice.

    [....]

    The haughty ignorance of social and political facts enables us to understand why the cultivated classes reacted as they did when war came: several hundred intellectuals in Germany signed a manifesto denouncing "the other side" as if betrayed by a friend and brother. It was immediately answered, with a like rhethoric, by several hundred of the French. The enemy's purpose must be wicked since we are innocent.

    [....]

    Overnight, en masses like so many sheep, they turned into rabid superpatriots….

    Looking over the roster of great names in literature, painting, music, philosophy, science, and social science, one cannot think of more than half a dozen or so who did not spout all the catchphrases of absue and vainglory….

    Freud wrote of "giving all his libido" to Austria-Hungary. The historians and social scientists - Lamprecht, Meinecke, Max Weber, Lavisse, Aulard, Durkheim, Tawney - all found in the materials of their field good arguments in praise of war or reasons to excoriate the enemy. Arnold Toynbee wrote volumes of atrocity propaganda…

    And everywhere the clergy were the most rabid glorifiers of the struggle and inciters to hatred. The Brotherhood of Man and the Thou Shalt Not Kill were no longer preachable…. They enlisted God: "He is certainly on our side, because our goals are sinless and our hearts are pure."

    The most moderate said: "Kill but do not hate." One English preacher spoke of "the wrath of the Lamb" and another speculated that although Jesus would not have become a combatant, he would have enlisted in the Medical Corps.

    susan the other

    Right. And it is still just as terrifying to know that history dictates, proves, that we are all totally nuts.

    Moneta
  • The market is forward looking in pricing positive or negative delusions.
  • I regularly look at page 21 of this report:
  • http://research.stlouisfed.org/publications/net/
  • The market has a hard time noticing drops in earnings. It usually takes a few quarters of dropping corporate profits to GDP before the market really reacts.
  • Right now, the ratio is still at an all-time high so we probably still have a few more quarters of optimistic delusions… but the debt market is usually faster on the trigger.
  • MikeNY

    Functionally, the Fed believes that the only cure for a burst bubble is a bigger bubble - so this comes as no suprise. They appear to be wilfully blind that, in an era of plutocratic concentration of wealth, the old supply-side nostrums don't work.

    The economic model is broken, and until we have a large redistribution of wealth in America, it will stay broken. The bi-partisan focus on 'growth' is a red herring, a distraction, so that we don't have a conversation about the real problem.

    Code Name D

    But they don't believe in bubbles. Any more than they believe in evolution, global warming, or that the poor can only afford to take weekend trips to the Bahamas.

    TimR

    …"before the Fed turns off its crazy money spigot"

    "if the Fed keeps the money flowing and forgets about that taper business"

    "And the Fed continues to feed Wall Street with $85 billion a month."

    I'm still confused about QE. In a recent podcast with Stephanie Kelton and Warren Mosler (at neweconomicperspectives.org ), Mosler says, IIRC "..but QE doesn't flood the market with money." He describes QE as (correct me if I'm wrong) just shifting assets from the banks' savings account at the Fed, to their checking account at the Fed (although these accounts are called Treasuries and Reserves, they amount to savings/checking accounts.)

    In the Randy Wray podcast (also at newecon), he says if QE ended, there would be a brief turmoil in the markets, and then investors would realize it didn't really make any difference.

    Mosler also says that far from increasing the money supply, QE actually *removes* money from the economy, by turning interest-bearing assets into non-interest-bearing assets. And just because they're more liquid, doesn't mean people will run out and spend them into the economy. (One question I have on this aspect of it: what mechanism lets the Fed convert other parties' bonds to reserves, is it voluntary or involuntary for those bond-holders?)

    I'm still looking for a really lucid source that describes in detail what's going on with QE. Mosler is great but I can't find an article by him drilling down into some of the details that are still unclear to me.

    But posts like this throw me off, given Mosler's seeming authority and expertise. Is Wolf Richter just speaking in some shorthand, or does he not know what he's talking about wrt QE?

    Moneta

    For example:

    The Fed decides to buys MBS… Pimco might be the seller… then Pimco ends up with cash which permits it to buy something else… government bonds, newer MBS, high yield, etc? So part of this money ends up in the economy and another part moves around across pension plans.

    With low velocity, I would say that a lot of this money is just flowing up into the large DB plans.

    Dan Kervick

    Right, but because that MBS that once belonged to Pimco now belongs to the Fed, that cash flows attached to the MBS that would have gone to Pimco go to the Fed instead. So over time, about as much money is drained out of the private sector to the Fed as was injected into the private sector by the Fed's purchase.

    Moneta

    Not really because the new security that replaces the MBS has coupons also. Furthermore, if those MBS were backed by delinquent mortgages, no money would have been flowing anyway. Also, because the pension plans got propped up, pension benefit cheques are still being sent to retirees.

    However, one thing is for sure, money is getting parked…
    instead of having dollars move hand to hand, government must generate more dollars of debt to generate GDP.

    susan the other

    But the bottom line is that capitalism, not just our brand of gangster capitalism, is dead in the water. Capitalism relies on skimming from somewhere – excessive growth; trashing the environment; screwing labor, etc. Nothing is going to revive it now. We are "in crisis" because the old economy is useless and we will be here for a long time, years, maybe decades. So what's a Fed Head to do? Just keep the money circulating as much as possible. Life support. It is, however, a life support system that left out all but the very rich. So it will not save them either. Poetic justice. And Congress? Forget it.

    Sufferin'Succotash

    The situation resembles that editorial cartoon back in the late 1920s showing an endless belt with money flowing from Germany to France as reparations, from France to the US as repayment of war debts, then from the US back to Germany as loans.

    Something in it for everybody (snicker)!

    markf

    "I'm still confused about QE."

    You're not alone.

    I've read articles by people explaining in incomprehensible (to me) detail, either why it's great, or why it's terrible.

    and none of them seem to be able to write an explanation without using words and acronyms that I suspect many people don't understand.

    They're talking to each other I suppose.

    my simple question is, who is getting the credits, the money, and what are they using it for?

    Where's it ending up? Is it going into the stock market?

    is there a simple, layman's explanation for this? without any insider jargon?

    craazyboy

    "The Fed Winged It"

    Moneta

    QE is good if it props up confidence and stops the world from imploding (which it did) but is bad if it generates a drop in confidence by squeezing out industry (which it is increasingly doing).

    Go look at the balance sheets of the large consumer discretionary stocks over the last 1-2 years, compare it to the stock prices and tell me that their activity inspires confidence in future economic growth.

    participant-observer-observed

    DIY QE education via "Quantitative Easing Explained" with 5.6 million views since 11/2010!

    http://www.youtube.com/watch?v=PTUY16CkS-k

    And "Quantitative Easity Revisited"

    http://www.youtube.com/watch?v=oGIvw7T0GPI

    I wonder if NC readers find anything false in these.

    markf

    thanks.

    Code Name D

    "I'm still confused about QE. In a recent podcast with Stephanie Kelton and Warren Mosler (at neweconomicperspectives.org), Mosler says, IIRC

    "..but QE doesn't flood the market with money." He describes QE as (correct me if I'm wrong) just shifting assets from the banks' savings account at the Fed, to their checking account at the Fed (although these accounts are called Treasuries and Reserves, they amount to savings/checking accounts.)"

    Ha ha! That's a good one. The guy probably even believes it too.

    Creating money is actually quite easy. *Poof* I just created a million