Monday, June 13, 2016

Today's links

1--6 Events That Could Make Soros a Winner

A winning strategy in recent years has been to bet on the ability and willingness of central banks to repeatedly intervene to repress financial volatility and boost asset prices -- often at levels that are well beyond what is warranted by economic and corporate fundamentals.

Most agree that there is a limit to how far central banks can decouple asset prices from fundamentals. There also is broad agreement that, without some improvement in the political system’s ability to enact comprehensive policies that ease the over-reliance on central banks for growth, it will be hard to validate existing asset prices and push them higher in a sustainable fashion.

But this state of affairs isn't sufficient to ensure that bets against the current valuations of stock markets around the world will be highly profitable. Timing matters -- particularly when it comes to pinpointing events that could be catalysts for a correction.

2--The Distraction of Investment Noise

Earnings: I have watched the slowdown in earnings growth closely. Of all the things that are cause for concern, this is my biggest. On the one hand, the energy industry has seen its profits plummet as the price of crude oil fell. When a sector that once made up 11 percent of the Standard & Poor’s 500 Index has earnings fall almost to zero, it’s going to hurt. But that doesn’t explain the entire slump in earnings, especially in light of the big share-count reduction that has been occurring because of buybacks. If you are looking for something to be worried about, this seems like the one to watch.

3--Brexit vote is about the supremacy of Parliament and nothing else: Why I am voting to leave the EU  (Today's "must read")

We are deciding whether to be guided by a Commission with quasi-executive powers that operates more like the priesthood of the 13th Century papacy than a modern civil service; and whether to submit to a European Court of Justice (ECJ) that claims sweeping supremacy, with no right of appeal....

Stripped of distractions, it comes down to an elemental choice: whether to restore the full self-government of this nation, or to continue living under a higher supranational regime, ruled by a European Council that we do not elect in any meaningful sense, and that the British people can never remove, even when it persists in error....

I do not think this is remotely possible, or would be desirable if it were, but it is not on offer anyway. Six years into the eurozone crisis and there is no a flicker of fiscal union: no eurobonds, no Hamiltonian redemption fund, no pooling of debt, and no budget transfers. The banking union belies its name. Germany and the creditor states have dug in their heels....

The EU crossed a fatal line when it smuggled through the Treaty of Lisbon, by executive cabal, after the text had already been rejected by French and Dutch voters in its earlier guise. It is one thing to advance the Project by stealth and the Monnet method, it is another to call a plebiscite and then to override the outcome....

Nobody has ever been held to account for the design faults and hubris of the euro, or for the monetary and fiscal contraction that turned recession into depression, and led to levels of youth unemployment across a large arc of Europe that nobody would have thought possible or tolerable in a modern civilized society. The only people that are ever blamed are the victims.
There has been no truth and reconciliation commission for the greatest economic crime of modern times...

Has there ever been a proper airing of how the elected leaders of Greece and Italy were forced out of power and replaced by EU technocrats, perhaps not by coups d'etat in a strict legal sense but certainly by skulduggery?
On what authority did the European Central Bank write secret letters to the leaders of Spain and Italy in 2011 ordering detailed changes to labour and social law, and fiscal policy, holding a gun to their head on bond purchases?

4--PETER HITCHENS: The British people have risen at last - and we're about to unleash chaos

If membership is so good for us, why has it been accompanied by savage industrial and commercial decline? If the Brussels system of sclerotic, centralised bureaucracy is so good, why doesn’t anyone else in the world adopt it?
5--U.S. student loans are, in very simple term, a ticking time bomb.

The numbers are simply mad: total debt rose from around USD 100 billion ca 2006 to almost USD 1 trillion by the end of 2015

Currently, 43% of student loans are in default, representing an improvement over 2014 default rate of 46%. The Wall Street Journal recently attributed this decline to programs that allow some borrowers to lower their student loan payments by connecting them to a percentage of the borrower's income (also known as income-driven repayment). The number of borrowers taking advantage of the schemes nearly doubled since 2015 to 4.6 million.

U.S. student loans are, in very simple term, a ticking time bomb. The indebted generation is in the younger demographic with limited income prospects and the job markets that are longer-term characterised by greater income volatility and lower income trends. This means that repayment of these loans exerts greater pressure on household savings and investments exactly at the period of the household life-cycle when American workers benefit the greatest from the compounding effects of savings and investments on life-time income. In other words, the opportunity cost of this debt is the greatest.

6--Surging yen sends Nikkei tumbling 3.5 percent ahead of BOJ meeting

7--At a Crossroads: Syrian Army Has to Choose Between Raqqa, Aleppo

8--Congress, Obama call for a Financial Control Board for Puerto Rico

Obama is in reality not committing himself to anything that will in any way interfere with the imposition of a financial dictatorship over the island’s economy.

In fact, participating in the writing of HB 5278—the “Puerto Rico Oversight, Management and Economic Stability Act” (PROMESA)—were lobbyists for the major Wall Street hedge and vulture funds that own most of Puerto Rico’s debt. The so-called “temporary system of oversight” will be a seven-member fiscal control board. Republican lawmakers will appoint four of its seven members.

Supposedly, the Fiscal Oversight Board will cease operations once Puerto Rico regains its credit standing in world bond markets and balances its budget for four consecutive years. For Puerto Rico such a balanced budget is estimated to require the elimination of 100,000 public jobs and the reduction of government expenditures by 30 percent.
The role of the Fiscal Oversight Board is to impose these draconian measures from the outside, providing a political cover to the local political establishment, the trade unions, and the US government

9--How Corrupt America Is

America’s former President Jimmy Carter, said recently of the U.S. government:

Now it’s just an oligarchy with unlimited political bribery being the essence of getting the nominations for president or being elected president. And the same thing applies to governors, and U.S. Senators and congress members. So, now we’ve just seen a subversion of our political system as a payoff to major contributors, who want and expect, and sometimes get, favors for themselves after the election is over. ... At the present time the incumbents, Democrats and Republicans, look upon this unlimited money as a great benefit to themselves. Somebody that is already in Congress has a great deal more to sell.

10--After Record Week, How Much Lower Can Bond Yields Go?

Record-shattering declines in government-bond yields are forcing investors to reassess once again just how low interest rates can go.

The 10-year German government-bond yield closed at an all-time low of 0.028% Friday, putting it on the cusp of expanding the record global pool of negative-yielding sovereign debt. The yield on the 10-year U.S. Treasury note settled at 1.639% Friday, the lowest closing since May 2013.

The plunge is the latest shocker for analysts and investors who have spent much of the postcrisis period predicting a liftoff for U.S. and global interest rates. They have been spectacularly wrong. The 10-year U.S. yield has dropped more than 0.6 percentage point in 2016 and is close to its record low four years ago

Even now, yields have a clear path lower, traders and portfolio managers said. Economic growth appears soft, inflation remains low, and central banks are purchasing large amounts of corporate and government debt. Few said they expect rates to rise significantly this year, citing economic slack afflicting labor markets around the globe.
Some analysts said the U.S. 10-year yield could break its all-time closing low of 1.404%, set in the summer of 2012, if the market faces a shock that prompts investor flight to safe bonds...

Some even said they wouldn’t rule out that the U.S. 10-year yield could fall to 1% or below, especially if the U.S. economy lost momentum and headed into a recession. “There is no limit to how low 10-year yields in Treasurys or German bunds can go,’’ said Ian Lyngen, senior government-bond strategist at CRT Capital...

Goldman Sachs Group Inc warned in a report earlier in June that a one-percentage-point “upward shock to interest rates would translate into over $1 trillion in capital losses’’ to investors holding U.S. Treasury and other fixed-income debt....

Many investors are willing to accept low or even slightly negative yields because they aren’t confident that major central banks will be successful in their efforts to boost economic growth or inflation. Events such as the British vote on whether to exit the EU still pose a threat.
Supply issues are also helping keep U.S. bond yields low. A shrinking fiscal deficit has reduced government-funding needs and the Treasury has reduced issuance of long-term Treasury debt in recent months. The diminished issuance puts upward pressure on prices, driving down yields

11--Profits set to move higher??  Earnings to the Stock Market’s Rescue  

For all the negatives on the stock market, there is one big positive: Profits are set to start growing again

12---The yield curve tells the future...Most Expensive Bond Market in History Has Come Unhinged. Or Not  excellent analysis

The stakes couldn’t be higher. Average yields for 10-year notes in the U.S., Japan, Germany and the U.K., which have issued more than $25 trillion in government debt, fell to 0.69 percent last week, data compiled by Bank of New York Mellon Corp. showed. That’s the lowest on record and well below the 5 percent average over the course of 145 years....

With yields so low, bond buyers are leaving themselves no room for error. In the U.S., a metric known as the term premium now stands at minus 0.47 percentage point for 10-year notes. The measure, which the Fed uses as a tool in guiding monetary policy, reflects the extra compensation investors demand to hold longer-maturity debt instead of successive short-term securities.
As its name suggests, the term premium should normally be positive and has been for almost all of the past 50 years. But since the start of the year, the premium has turned into a discount, suggesting that bond investors can’t see any risks on the horizon that would push yields higher. The same is true in Japan, Germany and the U.K., where the term premium has gone negative as benchmark yields in all three markets hit all-time lows last week.
The “term premium should almost never be negative, but we’re in a new normal,” said Stanley Sun, a New York-based strategist at Nomura Holdings Inc., one of 23 dealers that trade directly with the Fed.

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