1--Anticipating the next bank run; Getting out won't be easy, NYT
“We are worried about liquidity....And the question is, do we have enough time before a true liquidity event destabilizes the market?” Laurence D. Fink, the chief executive of BlackRock
as Pimco’s portfolio managers double down on their bet that high-risk bonds will thrive in a world of low interest rates, a growing number of global regulators are warning that the positions being taken on by the big asset management firms pose a broad danger to the financial system.
These concerns were amplified this week as stock markets gyrated, the yields of high-risk corporate and European bonds spiked upward and, crucially, trading volumes evaporated.
Regulators and bank executives have cautioned that an accumulation of hard-to-trade, risky bonds by a small group of fund companies could turn a bond market hiccup into a broader rout, in light of how illiquid many of these securities have become.
That asset management companies have emerged as the main providers of riskier types of credit to companies around the world is a little-appreciated consequence of increased regulation of banks following the financial crisis.
With banks shying away from these types of loans, bond-oriented mutual funds — which have benefited from an asset boom in the last five years — have stepped up.
For the first time ever, according to I.M.F. data, mutual funds have surpassed banks as the largest holders of corporate and foreign bonds, holding 13 percent of these securities.
Before 2008, for example, investment banks like Goldman Sachs and JPMorgan Chase were the main buyers and sellers of these bonds, earning profits for themselves and making a market for their clients.
Now, with banks being pressured to take fewer risks, they no longer trade or hold these securities in significant amounts. Wall Street executives worry about how the markets will react if funds start to sell off their concentrated positions....
“Now there is plenty of liquidity,” Mr. Broderick said. “But when things are different, the alternative providers will not be there.”
The term of art for this scenario is a liquidity mismatch, with some going so far as to call it a systemic liquidity mismatch. If, for example, there is a sustained emerging-market crisis and a fund wants to liquidate these bonds to meet redemption demands, the manager will be required to provide cash immediately even though it may take several days to sell the securities in question.
Traders calculate that less than 1 percent of corporate bonds trade more than $5 million a day.
“People are worried about massive liquidations in a market that is not as liquid as it used to be,” said Amy Koch, a senior trader at Standish, a Boston-based bond manager....
When retail investors are driving the investment money coming in and flowing out, the dangers are compounded.
3---Home prices headed for a triple dip, CNBC
The West, which has some of the largest metropolitan markets in the nation, has seen a huge drop in distressed sales, as fewer properties go to foreclosure. At their peak in 2009, just over half of all sales in the West were of distressed properties; today that share is just over 12 percent, according to Clear Capital. Investors, consequently, are moving on to other markets in the South and Midwest, where there are still bargains to be had. The West is therefore seeing sharper drops in home price appreciation.
"And that is why the West is really that leading indicator, the canary in the coal mine, because as the West goes, both on the downturn and in the recovery,we've seen the rest of the country go as well," said Villacorta.
4---Reserve Bank's Guy Debelle warns of violent market sell-off, MSN Money
The Reserve Bank's assistant governor Guy Debelle is warning that markets are likely heading for a "violent sell-off".
The RBA official charged with monitoring financial markets said traders appear to be underpricing risks around Middle East and Eastern European tensions, potential changes in US interest rates, policy uncertainty in Europe and Japan and rising concerns about China's economic health.
Dr Debelle said the contrast between relatively low volatility on markets and relatively high uncertainty in real world events is "unlikely to be resolved smoothly."
"There are a few other reasons to suspect that the sell-off, particularly in fixed income, could be relatively violent when it comes," he warned investors in a speech at the Citi Markets Conference in Sydney.
Dr Debelle said many investors seem to be assuming that there will be buyers for their investments when markets finally turn, and that they will be able to get out ahead of a major sell-off.
"History tells us that this is generally not a successful strategy. The exits tend to get jammed unexpectedly and rapidly," he cautioned.
Rate rises will 'blow up' positionsDr Debelle also sees zero, or near zero, interest rates in many major economies as another factor that could spark a violent market correction.
"There are undoubtedly positions out there which are dependent on (close to) zero funding costs. When funding costs are no longer zero, those positions will blow up," he said.
5---The next crash will take place in the shadow banking system, CNBC
"reason to suspect that the selloff might be violent is the starting point, namely zero nominal interest rates," he said. "That is a point we haven't started from before (with the possible exception of Japan). There are undoubtedly positions out there which are dependent on (close to) zero funding costs. When funding costs are no longer zero, those positions will blow up. Where are they? How large are they? ...
"I don't really have a good answer to those questions. It appears more likely that they are held by real money investors than directly on the balance sheets of the core banking system, which is probably a good thing. But then if we think back to 2007, structured investment vehicles weren't directly on the balance sheet of the core banking system either."
The result: Financial markets faced with uncertainty that isn't going away. The Europe slowdown is probably in the early innings, the Fed hasn't even begun to raise interest rates yet, and geopolitical crises seem to pop up by the day.
6---Don’t hold your breath waiting for QE4, cnbc
Those comments come two days after those of San Francisco Fed President John Williams (who, like Bullard, is a non-voting member of the Fed Open Market Committee). Williams told Reuters: "If we get a sustained, disinflationary forecast… then I think moving back to additional asset purchases in a situation like that should be something we seriously consider."
Some are extremely skeptical of a QE encore performance.
"The only thing that could justify QE4 is a high probability of a downturn in the real economy and/or falling core inflation," said Eric Chaney, chief economist at AXA Group, in a note. "The probability of a U.S. recession is close to zero," he said. "Overall, there is not one single indicator flashing red, as far as the risk of recession is concerned," he added, citing indicators such as the consumer debt-to-income ratio back at end-2002 levels, high corporate profitability and even the declining federal deficit.
7--Israeli DM: We’re Aiding Syrian Rebels to Keep al-Qaeda Away From Border antiwar
Insists Israel Backing FSA Along Golan Frontier
Yet Ya’alon presented this as a working model for keeping al-Qaeda from having a common border with Israeli occupied Golan, which hasn’t been the case for over a month, with al-Qaeda’s Jabhat al-Nusra controlling much of the territory
8--Brzezinski strategy behind war on Russia, RT-
Nikolai Patrushev who headed the FSB from 1999 until 2008 said in an interview with the Russian government daily Rossiiskaya Gazeta that intelligence analysts established a current anti-Russian program being executed by American special services dates back to the 1970s, and is based on Zbigniew Brzezinski’s “strategy of weak spots”, the policy of turning the opponent’s potential problems into full scale crises.
“The CIA decided that the most vulnerable spot in our country was its economy. After making a detailed model US specialists established that the Soviet economy suffered from excessive dependency from energy exports. Then, they developed a strategy to provoke the financial and economic insolvency of the Soviet state through both a sharp fall in budget income and significant hike in expenditures due to problems organized from outside,” Patrushev told reporters.
The result was the fall in oil prices together with the arms race, the war in Afghanistan, and anti-government movements in Poland, all of which eventually led to the breakup of the Soviet Union, said the former Russian security chief. He stressed that each of these factors bore hallmarks of US influence...
“Some US experts such as former Secretary of State Madeleine Albright have suggested that Moscow has power over enormous territory that it cannot develop and it prevents these territories from serving humanity’s needs. Statements are being made about the allegedly unjust distribution of natural resources and the necessity to provide free access to them for other nations,” he claimed
9---Russia; Number 1 Enemy, RT
10--The cruelty of Abenomics--The Continuing Struggles of Abenomics wsj
Despite robust profits, a booming stock market and low unemployment, too many Japanese have not benefited from the recovery
Real wages have fallen throughout the Abenomics experiment, including 2.6% in August. Households continue to keep much of their savings in cash, limiting the impact of a bull market. Virtually all of the new jobs are temporary, nonregular positions for low pay, few benefits and little advancement prospects. And, as the Abe government has acknowledged, Abenomics has exacerbated long-standing income inequalities between metropolises such as Tokyo and the depressed countryside....
the Abe government, at the urging of fiscal hawks in the LDP, the bureaucracy and the business establishment, has already abandoned fiscal stimulus for a spending policy that alternates between expansion and austerity. The government has no current plans for stimulus spending, and Mr. Abe has said that his 2015 budget will seek “spending cuts without sanctuary.” Moreover, Mr. Abe may soon decide to raise the consumption tax again, beginning in October 2015......
Meanwhile, Japan’s large exporters have continued to shift operations abroad, something that neither government pressure nor a proposed 5%-6% corporate-tax cut is likely to change.
10--The Russian response to America's 'declaration of war' , Saker
Must watch video
11---QE4 jawboning turns market positive, wolf street
Bank of America Merrill Lynch handed down the sacred words that “roughly 8 minutes” after the launch of the Alibaba IPO, the S&P 500 index hit 2019. And that was it. Since that fateful September 19, “US and global stocks have fallen 10%, and cyclical sectors such as energy, materials, and industrials have been decimated.”...
But here is what happened the last two times QE ended, as Bob Janjuah, Nomura’s global head of tactical asset allocation, pointed out:
I want to remind readers of a message that may be buried in the past: When QE1 ended, the S&P 500 fell just under 20% in a roughly three-month period before the QE2 recovery. When the QE2 ended, the S&P 500 fell about 20% in a three-month period before the next Fed-inspired bounce (aided by the ECB). QE3 is ending this month….Using declining inflation expectations as a pretext, he proposed to delay the end of QE. The Fed should continue buying $15 billion in securities a month. It wouldn’t be much, and Bullard doesn’t get to vote on the FOMC, and he’s considered a hawk and still wants the first rate hike in Q1, and it was just an interview. But nevertheless it instantly turned around the markets. The spoiled brats on Wall Street were ecstatic to imagine that the Fed might continue to deliver the goodies they’ve become addicted to, and without which life seems unbearable. To allow markets to return to some sort of old normal, forget it.
Bullard bailed out Wall Street by jawboning, for the day. But for investors to continue pouring perfectly good cash at startups that are just burning it, they must have a magnificent exit in view. That magnificent exit only exists in a booming no-questions-ask stock market. But that market psychology and momentum has popped.
12---Andrew Huszar: Confessions of a Quantitative Easer, wsj
We went on a bond-buying spree that was supposed to help Main Street. Instead, it was a feast for Wall
13--Wall Street Might Know Something the Rest of Us Don’t, NYT
“Due to excessive confidence in central banks, investors eagerly decoupled high market valuations from what was warranted by the sluggish fundamentals,” said Mohamed A. El-Erian, chief economic adviser of Allianz, the financial services company. That disconnect, he said, has been undermined over the last few weeks by signs that the global economy’s fundamentals are weaker than they seemed and concern that the European Central Bank will not adequately fight that continent’s economic drift....
Fed officials have been clear that they expect to start raising interest rates from their longstanding near-zero levels in the middle of 2015. Until this month, markets have believed them.
On Oct. 1, futures markets priced in only about 9 percent odds that the Fed would not raise rates by December 2015. By Wednesday, that had risen to about 40 percent. That means investors are now betting, given the recent declines in stock prices, bond yields and inflation expectations, that Janet L. Yellen, the chairwoman of the Fed, and her colleagues at the central bank are quite a bit less likely to follow through with their plans to increase interest rates next year. There have even been some early rumblings of a new round of quantitative easing, or bond buying (the previous round is set to end in the weeks ahead).....
14--We got your back: Bullard’s surprise suggestion of continuing QE lifts markets, marketwatch
By Andre Damon
The richest one percent of the world’s population now controls 48.2 percent of global wealth, up from 46 percent last year, according to the most recent global wealth report issued by Credit Suisse, the Swiss-based financial services company.
17 October 2014
Hypothetically, if the growth of inequality were to proceed at last year’s rate, the richest one percent for all intents and purposes would control all the wealth on the planet within 23 years.
The report found that the growth of global inequality has accelerated sharply since the 2008 financial crisis, as the values of financial assets have soared while wages have stagnated and declined.
“These figures give more evidence that inequality is extreme and growing, and that economic recovery following the financial crisis has been skewed in favour of the wealthiest,” commented Emma Seery, head of Inequality at Oxfam, the British anti-poverty charity. “This report shows that those least able to afford it have paid the price of the financial crisis whilst more wealth has flooded into the coffers of the very richest.”
While job growth has been solid this year, wages are rising barely faster than inflation, and the United States economy is producing far below its economic potential by most official estimates. Yet the stock market and other risky investments have generally been on tears since early in 2009, soaring to relatively high valuations relative to earnings. The Fed’s policies of printing trillions of dollars to buy bonds have been an important factor.
So the correction may not be about Wall Street knowing something about the outlook for the future that the rest of us do not, but rather about markets adjusting to more realistically reflect economic reality. Yes, things have improved, but maybe not enough to justify stock prices that are quite so high relative to corporate earnings........
Things are looking better, that is, unless you turn your eye to Wall Street. There, the stock market’s main gauge, the Standard & Poor’s 500-stock index, fell 0.8 percent on Wednesday after a wild ride during the day. It is off 7.4 percent since mid-September.
Moreover, longer-term interest rates are down sharply, which normally signals pessimism in the bond market about the nation’s economic future. A measure of expected volatility hit its highest level since 2011 on Wednesday, signaling that more manic days could lie ahead.
This apparent contradiction — and how it is resolved — points to the basic question for the United States economy and for Federal Reserve policy makers right now. How powerful is that underlying economic strength? And will the recent market volatility prove ultimately inconsequential, or does it presage harder times ahead for a nation still trying to muddle its way out of a downturn that technically ended more than five years ago?