Monday, June 24, 2013

Today's links

1---Lost Decade for Bonds Looms With Growing Return for Equities, Bloomberg

(Bloomberg thinks the economy will continue to improve pushing more investors into stocks)

2---The impending  “disorderly reversion” of yields, Testosterone Pit

Andy Haldane, Director of Financial Stability at the Bank of England, put it this way: “We’ve intentionally blown the biggest government bond bubble in history.” The bursting of that bubble was now a risk he felt “acutely,” and he saw “a disorderly reversion” of yields as the “biggest risk to global financial stability”
Long-term Treasuries went into a tailspin. The 10-year note had the worst week since June 2009, the days of the Financial Crisis; yields jumped 39 basis points (13 bps on Friday alone), to 2.55%. Up from 1.66% on May 2. And almost double from the silly 1.3% that it briefly bushed last August.

Then there was the junk-bond rout. They’d had a phenomenal run since the Fed started its money-printing and bond-buying binge. Average yields dropped from over 20% during the Financial Crisis to an all-time insane low of 5.24% – insane, because this is junk! It has a relatively high probability of default, and then the principal vanishes. That was on May 9, the day the rout started. The average yield hit 6.66% on Thursday. Investors have started to take a gander at what they’re buying and would like to be compensated for some of the risks that they’re suddenly seeing again. The feeding frenzy for yield is over. A sea change! Some companies might not be able to find buyers for their junk. And there will be defaults.

3---Losses on US Treasury securities alone will reach $1 trillion, naked capitalism

remember that Treasuries are also the foundation for valuation of all other securities. So hitting the Treasury market hard hits all other financial instruments because it raises the risk-free return rate. As Ambrose Evans-Pritchard points out:
The Swiss-based institution said losses on US Treasury securities alone will reach $1 trillion if average yields rise by 300 basis points, with even greater damage in a string of other countries. The loss could range from 15pc to 35pc of GDP in France, Italy, Japan, and the UK. “Such a big upward move can happen relatively fast,” said the BIS in its annual report, citing the 1994 bond crash. ... 
And Evans-Pritchard also points out that history shows that exiting extraordinary monetary measures on the late side isn’t the big deal that inflationistas have made it out to be:
Scott Sumner from Bentley University said the BIS is wrong to argue that delaying exit from QE and zero rates is itself dangerous. The historical record from the US in 1937, Japan in 2000, and other cases, is that acting too soon can lead to a serious economic relapse. When the US did delay in 1951, the damage was minor and easily contained.
And Frances Coppola stresses that the idea that QE caused inflation was a myth:
There is zero chance of domestically-generated inflation while wages are falling, contractionary fiscal policy is depressing real incomes, banks are not lending and corporates are failing to invest. Externally-driven inflation is possible, and we are of course seeing inflation in asset prices as a consequence of QE. But the core trend is disinflation in developed countries – I hesitate to say “deflation”, since inflation is still above zero, but core inflation is on a downwards trend in nearly all developed countries. ... 
While Tim Duy concluded that economic data has to be “pretty bad” to persuade the Fed not to taper, it might be even worse than that, that it will take signs of stress in financial markets or financial institutions to get them to relent. So brace yourself for a rough ride
4---Analysis: Another China central bank worry; companies push into lending, Reuters

debt is shaping up to be China's biggest financial problem. The cabinet has said it would control the flow of new money into industries struggling with overcapacity.
Beijing worries the shadow banking market is creating asset-price bubbles, and the central bank has tried to put a barrier in the way of it in recent weeks by declining to inject major funds into money markets.

The shadow banking system has arisen because main stream banking is focused on the needs of big state-owned enterprises.
Ratings agency S&P has estimated that outstanding shadow banking credit totaled $3.7 trillion by the end of 2012, equal to 44 percent of GDP.

Fitch has put it at about 60 percent, saying "torrid growth" has made the total of all forms of credit, including regular lending, shadow and hidden underground lending, as much as 200 percent of GDP.
"This is a very, very big problem for the economy," said Wei Yao, China economist at Societe Generale in Hong Kong.

"The existence of all these arbitrage efforts shows that in the real economy, there are few opportunities. You've limited all the opportunities for real growth, then you open a window in the financial markets; of course everyone goes there!"....

Chinese companies are getting more creative in the business of money lending as they struggle to keep profits ticking over in a cooling economy, raising concerns they are adding to the mountain of debt risks building in the world's No.2 economy.
Big state companies in industries struggling with over-capacity but with easy access to credit are borrowing funds, not to invest in their business but to lend to smaller firms sometimes at several times the official interest rate, part of an informal lending market in China that authorities are taking aim at.

China's central bank increased pressure on banks to rein in such informal lending and speculative trading last week in money markets, letting short-term interest rates spike to extraordinary levels.
In the $3.7 trillion so-called shadow banking market, the fastest growing area is in so-called entrusted loans, which are arranged by banks on the companies' behalf, and in bankers' acceptance notes, tradable securities that give a steady flow of cash.

Issuance of entrusted loans and bankers' acceptance notes has more than doubled to 1.6 trillion yuan ($261 billion) in the first four months of this year from 636 billion yuan a year ago.
"Can we use the money to expand production? Definitely not," said a deputy general manager at a state-owned steel firm in the eastern Shandong province, speaking on condition of anonymity.
"We will lose more if we produce more. We can only rely on other channels," he added, noting the firm loses an average 100-200 yuan per metric ton (1.1023 tons) of steel sold.

5---QE myths and the Expectations Fairy, Coppola Comment (must read)

The last five years have seen what the FT describes as the "largest economic experiment in history". And the results are stagnant economies, falling real incomes, increasing insecurity and uncertainty for the majority of people (especially the young), and a catastrophic drop in both private and public sector investment in many developed countries. The "vision" is an illusion. That is why there is no lasting recovery.

The Expectations Fairy is no more real than the Confidence Fairy, the Inflation Monster or the Bond Vigilantes. It is time for all of them to be consigned to the realm of mythology, and for monetary and fiscal policy to be grounded firmly in reality and redirected towards achieving the best quality of life for ordinary people.

6----Bond funds: From rotation to panic - a turning point? , sober look

7---Facebook ex-officer ‘signs up’ with NSA, RT

8--Afghanistan; We learned nothing, Ron Paul

The long US war in Afghanistan never made any sense in the first place. The Taliban did not attack the US on 9/11. The Authorization for the use of force that we passed after the attacks of 9/11 said nothing about a decade-long occupation of Afghanistan. But unfortunately two US presidents have taken it to mean that they could make war anywhere at any time they please. Congress, as usual, did nothing to rein in the president, although several Members tried to repeal the authorization.
Afghanistan brought the Soviet Union to its knees. We learned nothing from it.

We left Iraq after a decade of fighting and the country is in far worse shape than when we attacked in 2003. After trillions of dollars wasted and tens of thousands of lives lost, Iraq is a devastated, desperate, and violent place with a presence of al Qaeda. No one in his right mind speaks of a US victory in Iraq these days. We learned nothing from it.

We are leaving Afghanistan after 12 years with nothing to show for it but trillions of dollars wasted and thousands of lives lost. Afghanistan is a devastated country with a weak, puppet government – and now we negotiate with those very people we fought for those 12 years, who are preparing to return to power! Still we learn nothing.

Instead of learning from these disasters brought about by the interventionists and their failed foreign policy, the president is now telling us that we have to go into Syria!
US Army Col. Harry Summers told a story about a meeting he had with a North Vietnamese colonel named Tu while he visiting Hanoi in 1975. At the meeting, Col. Summers told Tu, "You know, you never defeated us on the battlefield." Tu paused for a moment, then replied, "That may be so. But it is also irrelevant."

Sadly, that is the story of our foreign policy. We have attacked at least five countries since 9/11. We have launched drones against many more. We have deposed several dictators and destroyed several foreign armies. But, looking around at what has been achieved, it is clear: it is all irrelevant.

9--Bonds Drop Globally as U.S. Yields Advance to Highest Since 2011, Bloomberg

10--Bond Losses of $1 Trillion if Yields Spike, BIS Says, CNBC

As foreign and domestic banks would be among those experiencing the losses, interest rate increases pose risks to the stability of the financial system if not executed with great care," the BIS said.
"Clear central bank communication well in advance of any moves to tighten will be critical in this regard."
Underlining the BIS's warning, U.S. bond prices slumped after Fed Chairman Ben Bernanke said on Wednesday that the U.S. central bank expected to reduce its pace of bond buying, now $85 billion a month, and cease purchases completely by mid-2014 if the economy continues to improve.
The BIS acknowledged that bond yields were unlikely to rise 3 percentage points overnight. But it noted that big moves can happen quickly: in 1994 yields in many advanced economies rose by about 2 percentage points in the course of a year.
Defense of Austerity
Brushing aside the contention that austerity is counterproductive, the BIS said countries must redouble their efforts to make their debt manageable because growth alone will not do the job.
"Over indebtedness is one of the major barriers on the path to growth after a financial crisis. Borrowing more year after year is not the cure," the report said.
The fiscal adjustments required in rich countries are especially sizeable when projected increases in age-related spending are taken into account. Indeed, the adjustments are so large that governments are likely instead to water down entitlements such as pensions, the report said. ...

Not only has the debt of households, firms and governments increased as a share of GDP in most countries since 2007, but debt-service ratios are now higher in most rich countries than the 1995-2007 average—despite low interest rates. The country with the highest debt ratio is Sweden.
And governments have balked at labor and product market reforms, despite overwhelming evidence that making it cheaper to lay off workers and reducing the barriers to competition in sectors such as retailing would deliver a big boost to growth.
Expecting monetary policy to solve these problems is a recipe for failure, the BIS said.
(Read More: Here's the Real Reason the Fed Will Taper QE)
Stephen Cecchetti, the BIS's chief economist, said central banks could not do more without compounding the risks they have already created.
"It is others that need to act, speeding up the hard but essential reform and repair work to unlock productivity and employment growth. Continuing to wait will not make things any easier, particularly as public support and patience erode," he said on a conference call.

11---Bond yields spike to 2-year highs, CNN

12---GLOBAL MARKETS-Bond yields eye biggest weekly rise in 10 years, Reuters

13---China's cash squeeze caused by shadow banking: Xinhua, Reuters

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