Monday, July 14, 2014

Today's Links





1--Since last year, however, they have been in firm agreement that the time has come to stop buying bonds. , NYT
...


The purchases are intended to reduce borrowing costs for businesses and consumers, and to encourage risk-taking by investors. But the impact of the Fed’s asset purchases, and similar efforts undertaken by central banks in Britain and Japan, remains highly contentious. Officials and academics disagree about how much, if at all, the purchases have reduced the cost of mortgages and other kinds of consumer and business loans. They also disagree about the consequences. Warnings about inflation proved to be mistaken, but there is still concern the purchases have destabilized financial markets.....


Officials in recent months have expressed particular concern that many investors have grown overly complacent about the Fed’s plans, mistaking its predictions about the likely timing of its retreat for bankable certainties. While that sense of certainty is helping to hold down borrowing costs, officials are concerned that it will come at a price if those expectations are disappointed. As investors have discounted the risk of losses, they have driven up asset prices in markets across the globe, raising concerns about potential bubbles.

“Low implied volatility in equity, currency and fixed-income markets, as well as signs of increased risk-taking, were viewed as an indication that market participants were not factoring in sufficient uncertainty about the path of the economy and monetary policy,” the account said in describing the Fed’s misgivings....

the Fed, in buying bonds from banks as part of its recent stimulus efforts, has flooded those banks with excess reserves, all but eliminating demand for interbank loans...


Investors generally expect the Fed to start raising interest rates next summer. The Fed said the decision to end bond purchases in October, rather than continuing purchases at a nominal level until the end of the year, should not be interpreted as evidence that rate increases were likely to begin sooner.


Five years past the end of the Great Recession, the share of adults with jobs has barely recovered, inflation remains below the level the Fed regards as healthy, and economic output remains weak. Officials are increasingly convinced that some of this damage is permanent — or at least, that it cannot be fixed by holding down borrowing costs — but they differ on the depth of the damage...


Even after the Fed ends the expansion of the portfolio, it plans to maintain the size of its holdings by continuing to reinvest proceeds from matured bonds. Those proceeds, primarily from mortgage bonds, totaled $16 billion a month so far this year..


2---Who is the Fed working for? Main Street or Wall Street?




3---Here comes the dumb money, reformed broker


 Bloomberg News via Zero Hedge:
Individual investors are plowing money back into the U.S. stock market just as professional strategists say gains for this year are over. About $100 billion has been added to equity mutual funds and exchange-traded funds in the past year, 10 times more than the previous 12 months, according to data compiled by Bloomberg and the Investment Company Institute.
and the chart via Merrill Lynch’s quants (annotated by Tyler) that depicts this:
20140501_rotation

Josh here – Everybody can’t be right in the end. This is a pretty stark divide. If the pros are right, we’re at a cyclical peak and a plummet happens sometime this year – or at least before any further upside. If the Joe’s are right, we’re in a secular bull market and the cyclical peak will hurt, but not so badly.


4---Gallup Slams Lid On Hopes For US Economy , wolf street


Consumers are “straining against rising prices on daily essentials to afford summer travel, dining out, and discretionary household purchases – the kinds of purchases that ordinarily keep an economy humming.” That’s what Gallup found when it used a new survey to dive deeper into consumer spending...


And what about “escape velocity” in consumer spending? Despite what Wall Street economists and other hype mongers have been predicting for five years in a row, Gallop soberly slams the lid on those speculations:
If there was any doubt that the U.S. economy is still struggling to get back on its feet, the results of this poll reinforce that reality. Because consumer spending is the lifeblood of a healthy economy, these findings suggest that discretionary spending still has a ways to go before it will fuel the kind of economic growth Americans have been hoping for.
5---BIS chief fears fresh Lehman from worldwide debt surge, Telegraph
Jaime Caruana says investors are ignoring prospect of higher interest rates in the hunt for returns ..


The world economy is just as vulnerable to a financial crisis as it was in 2007, with the added danger that debt ratios are now far higher and emerging markets have been drawn into the fire as well, the Bank for International Settlements has warned.
Jaime Caruana, head of the Swiss-based financial watchdog, said investors were ignoring the risk of monetary tightening in their voracious hunt for yield.
 
“Markets seem to be considering only a very narrow spectrum of potential outcomes. They have become convinced that monetary conditions will remain easy for a very long time, and may be taking more assurance than central banks wish to give,” he told The Telegraph.


6--ISIS and Iraq: The T-Shirts, the Cats, the App, the Hasbara, naked capitalism


7---Credit - The Golden Mean , macronomy


As a reminder, back in January 2012 in our conversation "Bayesian thoughts" we quoted Dr. Constantin Gurdgiev, from his post entitled "Great Moderation or Great Delusion":
"when investors "infer the persistence of low volatility from empirical evidence" (in other words when knowledge is imperfect and there is a probabilistic scenario under which the moderation can be permanent, then "Bayesian learning can deliver a strong rise in asset prices by up to 80%. Moreover, the end of the low volatility period leads to a strong and sudden crash in prices."



Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.
It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail


All told, we believe current market conditions will at the very least place a governor on the impetus for rising long-term yields despite the fact that inflation is starting to pulse strongly through the system.....


Another major parallel, which dovetails into our third point is the fact that the only other period in which the Fed actively intervened and bought the Treasury market in support of the broader system was in the 1940's. Similar with the current lackluster fundamental backdrop that has diverged over recent years from the stoic strength of the equity markets, the massive bond buying program in the 1940's had a much stronger correlation to the capital markets it directly affected than the macro climate that most economists appraise.


In an effort to keep interest rates low during and directly following WWII and avoid another chapter of the near-view Great Depression, the Fed purchased all available short-term US Treasuries and virtually all long-term US Treasuries from the market starting in April of 1942. When all was said and done, the US had a debt to GDP ratio that was almost 20% larger than where it currently resides today.

In Milton Friedman and Anna Schwartz's A Monetary History of the United States 1867-1960, the market climate in the 40's is described as being so sensitive and suspect of the Fed and Treasury's very visible hand, that the entire equity market rally (150+%) from the April 1942 low through the cyclical high in 1946 was viewed with great skepticism and likely to end with another pronounced economic contraction. The fresh scars of the Great Depression provided abundant fear for market participants of a possible revival of kindred economic instabilities, despite the countervailing strength of the equity markets that continued to rally more than 20% even through the recession in 1945. 


What happened in 1946 when the Fed and Treasury stepped away from their extraordinary support of the Treasury markets? Similar to the air pockets experienced with the Fed pauses in QE I and QE II, the equity markets swiftly revalued expectations. From our perspective a similar fate awaits the current equity market rally, which in turn should continue to support the Treasury market - despite rising inflation expectations and the calls by many that the Fed will begin raising rates as early as next year. 



Commence the Muppet fucking! e_Goldstein  zero hedge

The growing optimism contrasts with forecasters from UBS AG to HSBC Holdings Plc, who say the stock market will be stagnant with valuations at a four-year high. While the strategists have a mixed record of being right, history shows the bull market has already lasted longer than average and individuals tend to pile in at the end of the rally. ...

For most of this year, equity investors have seen little volatility and steady gains, giving them confidence to put money back into the market. Individuals deposited about $9.5 billion in June to stock funds and have added cash in eight of the past 10 months, data compiled by ICI and Bloomberg show. That’s a reversal from the five years through 2012, when $300 billion was withdrawn.

Blue Skies

Professional investors, such as Nick Skiming of Ashburton Ltd., say that individuals investors are attracted to stocks after seeing others getting rich from a big rally, a time when equities are usually overpriced. The bursting of the technology bubble in March 2000 was marked by mutual funds absorbing a record $102 billion in the first quarter.
“As institutional investors, we’re always concerned when the retail investor is actually arriving in the market,” Skiming, who helps manage $10 billion at Ashburton, said by telephone from Jersey, the Channel Islands. “The retail investor arrives when they can only see blue skies.”
...“When you’re making a transition away from the Fed being the primary driver to corporate profits and a growing economy, it’s more muted returns,” Emanuel said by phone on July 10. “Stocks will pause or set back a little.”
Relatively expensive valuations will also limit future gains, according to Garry Evans, HSBC’s global head of equity strategy in Hong Kong. ... The rally has lasted 64 months, about a year longer than average, according to data since 1962 compiled by Birinyi and Bloomberg











Groceries, gasoline top list; leisure, travel, dining out at bottom



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