March 14, 2013 1:42 pm
Remember lessons of 2007 in rush for junk
Warnings over high yield ‘overheating’ are growing

Five years ago, the phrasematurity transformation” made investors shudder. Little wonder. Back in the credit bubble, short-term money was used to fund a mountain of long-term assets, such as mortgages, via the commercial paper market and repo world. But when the 2007 crisis hit, that short-term capital fled – and the maturity mismatch was revealed, creating a liquidity crunch.

It is a lesson that investors and policy makers should remember. Think, for a moment, about the corporate debt world. In recent weeks, the antics of the high-yield bond market have sparked a frenzy of investor debate. After all, the yield on high-yield bonds has recently tumbled to below 6 per cent, from nearly 16 per cent at the crisis peak, and issuance has surged dramatically.

Some bankers insist that this behaviour is benign, given that default rates remain low. And, as Melanie Mitchell of Kames High Yield Bond fund noted last week, the phrase high yield” covers many sectors and companies, some of which may well deserve low yields.

But others are uneasy. This week in Washington, for example, Robert Rubin, the former US Treasury secretary, warned that “excesses” seemed to be developing in the high-yield market, partly due to the huge provision of liquidity by central banks. Jeremy Stein, a Federal Reserve governor, was even more pointed last month, arguing that the swing in high-yield prices and surge in issuance signalled overheating*.

But while those tumbling yields have sparked debate, what has received less attention is the issue of maturity transformation. In previous decades, it was taken for granted that the type of people investing in high-yield debt or bank loans were mostly medium- to long-term investors, such as pension funds or life assurance groups, if not banks themselves.

But mutual funds and exchange traded funds have increasingly started gobbling up risky corporate debt on a significant scale. By late last year, assets in high-yield funds were running at about $350bn, having almost doubled in three years. And, although those flows reversed slightly in February, money is now flooding into bank loan funds.

Indeed, industry data suggest $16bn has moved into loan funds since last summer, with $5bn of flows in February alone. Federal Reserve figures show that funds are now buying more than two-thirds of all corporate credit debt, up from a quarter in 2007.

This trend should come as no surprise. After all, many banks are reducing loans to risky corporate names because of new capital regulations – and investors are hunting for new places to put their funds. It is little wonder, then, that mutual funds and ETFs are stepping into this gap; to politicians, or credit-starved businesses, this could look benign.

But the rub is that high-yield and bank debt funds generally have no lock-up system: investors can withdraw their money at will. But company debt is medium-term in nature. And if anything causes a panic among retail investors, the money that has been backing all those corporate loans and bonds could vanish overnightrevealing another maturity mismatch, and funding gap.

Now don’t get me wrong: I am not forecasting that this flight will happen. Although there were four weeks of outflows from high-yield mutual funds in February – or after Mr Stein’s speechsome $820m flooded back in the first week of March; investors are (thankfully) not exiting this sector in panic now. So far, the short-term money that has gone into the corporate debt world does not appear to be associated with too much leverage; this makes the picture notably different from the asset-backed commercial paper market or repo sector in 2007.

But a key problem that confronts policy makers is that as money flicks between financial channels – say from repo into short-term funds – it is hard to track the maturity exposures or imbalances because the data are weak. Ideally we would total all of the ways in which a given asset class is financed with short-term claims,” Mr Stein observed. “[But] I want to stress how hard it is to capture everything we’d like ... If relatively illiquid junk bonds or leveraged loans are held by open-end investment vehicles such as mutual funds or by exchange traded funds, and if investors in these vehicles seek to withdraw at the first sign of trouble, then this demandable equity will have the same fire sale-generating properties as short-term debt.”

Or, to put it another way, nobody really knows just how vulnerable the sector is to a sudden capital flight. In the meantime, we had all better hope that those corporate debt markets remain benign; and that investors do not entirely forget that 2007 lesson about maturity mismatches.

*Overheating in Credit Markets: Origins, Measurement, and Policy Responses, Jeremy Stein, February 2013, Federal Reserve Bank of St Louis

Copyright The Financial Times Limited 2013

Gold: Currently The Ultimate Contrarian Bet

Mar 14 2013, 07:57

by: Dave Kranzler

People are going to see moves in gold that will shock them. Some of the advances will be spectacular, but right now people are focused on short-term weakness so they are missing the big picture. - John Embry, King World News

The U.S. media is oozing with bearish reports offering up every reason imaginable as to why the bull market for gold is finished and why gold is entering a bear market. Several Wall Street banks have put a proverbial "fork" in gold. Tuesday morning Bloomberg News published the latest death proclamation, explaining that big sales by investors are signaling the end of gold's bull run: "Gold's 12-yr Bull Run Decay."

The Bloomberg article contained several incorrect statements concerning the gold market, prompting me to look at the true facts. Furthermore, and ironically, Bloomberg's thesis about investor bearishness - in fact - supports the contrarian argument that the best time to buy into the gold market is indeed when hedge funds are positioned at their most bearish.

To begin with, Bloomberg references the fact that investors have sold a record amount of GLD since the beginning of February. And indeed this is true. Taken out of context, that number looks ugly. However, it is very important to understand that, relative to the total size of GLD, the recent drop in holdings is quite small. This chart - courtesy of Bianco Research - shows the drop in ETF holdings in its proper context:

(Click to enlarge)

As you can see, the current drop in total ETF gold holdings is visually the largest on record. But in the context of the overall ETF gold holdings, it is not significant. You can also see visually that when large drops in ETF holdings have occurred (late 2008, for instance), the drop correlates with a subsequent big move higher in the price of gold.

Furthermore, the biggest liquidation of GLD began on February 20, when the price of gold was $1564. The price today is $1592. The point is, the price has actually climbed higher since GLD began heavily liquidating. This is actually very bullish, as the market has absorbed the 4 million ounces of gold liquidated from GLD while grinding higher. Makes you wonder who is buying the gold being liquidated.

The second issue misrepresented by the Bloomberg article has to do with the bearish stance on gold taken by the large hedge funds, as represented by their short interest position in Comex gold futures. The Bloomberg article linked above indicates that the hedge fund positioning is the least bullish since 2007, implying that it's a big negative for the price of gold. But let's review the facts and evidence, as shown in the chart below:

(Click to enlarge)

This chart is a 12-yr Comex gold futures chart which highlights when the large hedge fund short interest as a percentage of the total hedge fund open interest (short position/(long + short position) has been at particularly high levels (red arrow) over the last 12 years. It also shows the commercial/bullion bank net short position as a percentage of total interest, when this metric has been at particularly low relative levels over the last 12 years. It makes sense that a high speculator/hedge fund short position would correlate with a low relative net short position for the banks, as the banks take the other side of hedge fund position (futures are a zero-sum game).

As you can see, and contrary to what is implied by the Bloomberg report, whenever the hedge funds have a high relative short position in gold - and concomitantly the banks have a low relative short position in Comex gold - the subsequent move in the gold market has been an explosive rally.

After the summer of 2005 (see the red arrow above), gold ran up over 60% in about 8 months. After the 2007 bearish positioning by hedge funds referenced by Bloomberg (see the red arrow), gold ran up another 60% over the next 9 months.

The point here is that, based on the evidence and hard data, whenever hedge funds get excessively bearish on gold based on their Comex short interest, it tends to mark the end of a large price correction and the start of a monster rally. Remember, hedge funds almost never deliver, or take delivery of, actual physical gold. This means that if the price starts to go against them, they'll rush to cover their short positions, triggering a big short-cover rally.

As you can see from the far right side red arrow, the hedge funds currently are as short Comex gold as they have been at any time over the last 12 years. It remains to be seen if history will repeat and we get another massive rally. One huge factor that is affecting the market now that was not a factor back in 2005 and 2008, however, is the massive accumulation of physical gold by China and Russia, among other countries. My bet is that this will amplify the degree to which gold moves higher this time around.

If you want to take advantage of the view that hedge funds are wrong once again, the best way to speculate on gold is to use GLD to index the price. In fact, the most aggressive play would be to buy some longer-dated, out-of-the-money call options. I like the GLD June 165's for $1. A 10% rally in the price of gold before the June options expiry would put spot gold at $1750, which corresponds with $169 on GLD - yielding a 400% profit on the play.

Blinded by the Light

Bjørn Lomborg

13 March 2013

 This illustration is by Paul Lachine and comes from <a href=""></a>, and is the property of the NewsArt organization and of its artist. Reproducing this image is a violation of copyright law.

NEW YORKOn the evening of March 23, 1.3 billion people will go without light at 8:30, and at 9:30, and at 10:30, and for the rest of the night – just like every other night of the year. With no access to electricity, darkness after sunset is a constant reality for these people. On the same evening, another billion will participate in the environmental eventEarth Hour” by turning off their lights from 8:30-9:30.

The organizers say that they are providing a way to demonstrate one’s desire to “do something” about global warming. But the stark reality is that Earth Hour teaches all the wrong lessons, and actually increases CO2 emissions. It may inspire virtuous feelings, but its vain symbolism reveals exactly what is wrong with today’s feel-good environmentalism.

Earth Hour teaches us that tackling global warming is easy. Yet, by switching off the lights, all we are doing is making it harder to see.

Notice that you have not been asked to switch off anything really inconvenient, like your heating or air conditioning, television, computer, mobile phone, or any of the myriad technologies that depend on affordable, plentiful energy electricity and make modern life possible. If switching off the lights for one hour per year really were beneficial, why would we not do it for the other 8,759?

Hypothetically, switching off the lights for an hour would cut CO2 emissions from power plants around the world. But, even if everyone in the entire world cut all residential lighting, and this translated entirely into CO2 reduction, it would be the equivalent of China pausing its CO2 emissions for less than four minutes. In fact, Earth Hour will cause emissions to increase.

As the United Kingdom’s National Grid operators have found, a small decline in electricity consumption does not translate into less energy being pumped into the grid, and therefore will not reduce emissions. Moreover, during Earth Hour, any significant drop in electricity demand will entail a reduction in CO2 emissions during the hour, but it will be offset by the surge from firing up coal or gas stations to restore electricity supplies afterwards.

And the cozy candles that many participants will light, which seem so natural and environmentally friendly, are still fossil fuels – and almost 100 times less efficient than incandescent light bulbs.

Using one candle for each switched-off bulb cancels out even the theoretical CO2 reduction; using two candles means that you emit more CO2.

Electricity has given humanity huge benefits. Almost three billion people still burn dung, twigs, and other traditional fuels indoors to cook and keep warm, generating noxious fumes that kill an estimated two million people each year, mostly women and children. Likewise, just a hundred years ago, the average American family spent six hours each week during cold months shoveling six tons of coal into the furnace (not to mention cleaning the coal dust from carpets, furniture, curtains, and bedclothes). In the developed world today, electric stoves and heaters have banished indoor air pollution.

Similarly, electricity has allowed us to mechanize much of our world, ending most backbreaking work. The washing machine liberated women from spending endless hours carrying water and beating clothing on scrub boards. The refrigerator made it possible for almost everyone to eat more fruits and vegetables, and simply to stop eating rotten food, which is the main reason why the most prevalent cancer for men in the United States in 1930, stomach cancer, is the least prevalent now.

Electricity has allowed us to irrigate fields and synthesize fertilizer from air. The light that it powers has enabled us to have active, productive lives past sunset. The electricity that people in rich countries consume is, on average, equivalent to the energy of 56 servants helping them. Even people in Sub-Saharan Africa have electricity equivalent to about three servants. They need more of it, not less.

This is relevant not only for the world’s poor. Because of rising energy prices from green subsidies, 800,000 German households can no longer pay their electricity bills. In the UK, there are now over five million fuel-poor people, and the country’s electricity regulator now publicly worries that environmental targets could lead to blackouts in less than nine months.

Today, we produce only a small fraction of the energy that we need from solar and wind0.7% from wind and just 0.1% from solar. These technologies currently are too expensive. They are also unreliable (we still have no idea what to do when the wind is not blowing). Even with optimistic assumptions, the International Energy Agency estimates that, by 2035, we will produce just 2.4% of our energy from wind and 0.8% from solar.

To green the world’s energy, we should abandon the old-fashioned policy of subsidizing unreliable solar and wind – a policy that has failed for 20 years, and that will fail for the next 22. Instead, we should focus on inventing new, more efficient green technologies to outcompete fossil fuels.

If we really want a sustainable future for all of humanity and our planet, we shouldn’t plunge ourselves back into darkness. Tackling climate change by turning off the lights and eating dinner by candlelight smacks of the “let them eat cakeapproach to the world’s problems that appeals only to well-electrified, comfortable elites.

Focusing on green R&D might not feel as good as participating in a global gabfest with flashlights and good intentions, but it is a much brighter idea.

Bjørn Lomborg, an adjunct professor at the Copenhagen Business School, founded and directs the Copenhagen Consensus Center, which seeks to study environmental problems and solutions using the best available analytical methods. He is the author of The Skeptical Environmentalist and Cool It, the basis of an eponymous documentary film.

Copyright Project Syndicate -

Time for the IMF to follow the Vatican

Mohamed El-Erian

March 14, 2013

Few would have predicted the Vatican would beat the International Monetary Fund in electing a non-European as its leader. The considerations that reportedly led to the selection of Argentina’s Jorge Mario Bergoglionow known as Pope Francis – will resonate well with those who feel the IMF has been increasingly short-sighted in holding on to an outdated nationality-based approach for selecting its managing director.
The ascendancy of Pope Francis is widely seen as an explicit recognition that Europe no longer dominates the Catholic church, and as consistent with a shift in dynamism and numbers in favour of the developing world. It is also an attempt to bring the perspective of a relative outsider to a church whose insularity is believed by many to have undermined its credibility. Finally, it is expected to facilitate renewal at a time when many are looking for inspiration and enlightenment.
The essence of these arguments is similar to those made to encourage the IMF to move decisively from its nationality-based approach – which has ensured only Europeans have led it since its creation in 1944 – to one that is genuinely open, transparent and merit-based.

Europe no longer dominates the global economy. If anything, it has become the biggest source of systemic risk in recent years. Meanwhile, developing countries have significantly outperformed, both economically and financially, with some gaining systemic influence greater than that of several European economies.

The continent is seen by many as having co-opted the IMF to support an insufficiently objective approach to solving Europe’s own problems. Moreover, the fund has appeared shy in conveying important lessons learnt in previous developing economy debt crises. Indeed, officials from Africa, Asia and Latin America complain about its outmoded adherence to a one-way flow of best practices.

In the past, western governments showed little restraint in using the IMF as a vehicle for giving advice to (and imposing conditionality on) emerging economies. But now they themselves face persistent problems, the IMF appears hesitant to engage the whole membership in formulating advice, let alone to act as a conduit for suggestions from developing to advanced countries.

Then there is the relative void at the centre of the global system. After the high reached in April 2009 at the London meeting of the Group of 20 leading economies, global policy co-ordination has diminished to a worrying degree – especially when judged against the complexity and fluidity of today’s global economy.

All this has served to undermine the credibility and effectiveness of the IMF – at a time when the interlinked nature of the world’s economies is substantial. Just witness the currency tensions associated with the widening pursuit of unconventional monetary policies.
The IMF should not wait for the end of the tenure of Christine Lagarde, its managing director, to reform the selection process comprehensively. Indeed, as illustrated in the two previous occasions when governments had to scramble to choose a new managing director after incumbents resigned, a proper revamp cannot be undertaken in the midst of intense political posturing and electioneering.
Using the Vatican’s achievement as a catalyst, Ms Lagarde should calmly start the process now, especially as she is not even midway through the first of her potential multiple terms. Already, she has shown her willingness to do the right thing even when this risked upsetting western officials (warning about the fragility of European banks, for example, and telling US Congress that its dysfunctional behaviour was threatening the global economy).

With the help of outside experts, she could spearhead a lasting revamp that decisively places merit above nationality. This would also allow for changes to rules that preclude highly qualified candidates from making it to the final rounds (such as the arbitrary age limit that in 2011 derailed the Israeli central bank governor Stanley Fischer, a respected monetary official who has excelled at both the national and multilateral levels).

Even better, such changes would come at a time when political squabbles in America’s Congress risk derailing implementation of the marginal adjustment to the IMF’s voting and representation agreed in 2010.
We should not underestimate the role such a move could play in enhancing the integrity and effectiveness of the IMF.

The writer is the chief executive and co-chief investment officer of Pimco

sábado, marzo 16, 2013



Are Global Central Banks Manipulating Gold?

Published: Thursday, 14 Mar 2013 | 4:17 AM ET

By: Roshan Vaswani, Senior Producer, CNBC Asia Squawk Box


Getty Images

Gold prices are being kept artificially low by Western Central Banks and "no one alive" has ever seen the true price of gold, according to Chris Powell, Secretary of the Gold Anti-Trust Action Committee (GATA).

GATA, an organization co-founded by Powells in 1998, claims that central bankers have been manipulating markets for decades, by overstating the amount of gold they hold in reserves to give the impression that there's abundant supply of bullion in order to depress prices. It argues that central banks are trying to control the price of gold because of bullion's influence on financial instruments, including currencies, government bonds and interest rates.

According to World Gold Council (WGC), an industry body, official reserves of global central banks have grown to more than $12 trillion in 2012 from $2 trillion in 2000. But Powell argues that at least 70 percent to 75 percent of the gold central banks say they keep in reserves does not exist.

"There's a vast imaginary supply of gold that's been created by Western central banks," Powell told Squawk Box Asia on Thursday. "It is simply just a paper claim on metal that's not there."

In response to a query from CNBC on GATA's views, the WGC said, "GATA has its own views on the factors driving the gold price and the influence of gold market participants. The World Gold Council respects the right of GATA to hold these views but does not share them.

In a report released on Wednesday the WGC, which is funded by the gold industry, says the yellow metal continues to be the asset of choice for central banks as they look to diversify away from the US dollar.

"Building gold reserves in tandem with new alternatives is an optimal strategy as central banks remain under-allocated to gold," Ashish Bhatia, Manager for Government Affairs at the WGC said in a statement.

Jeffery Christian, founder and managing director of commodities research firm CPM Group, was a lot more blunt about GATA saying, "I think they're outright liars... pretty much what they do is nonsense."

Christian added that he believed there was no conspiracy among global central banks to collude over the gold prices, and that central banks are "very transparent" about their monetary gold reserves.

CPM Group is a well-known critic of GATA and published a power presentation on their website in 2010 called 'GATA you lie' where they refute GATA's premise point by point.