Op-Ed Contributor

Why a ‘Brexit’ Looms Large

By MATTHEW J. GOODWIN

SEPT. 21, 2015



Credit Dom McKenzie




LONDON — Before the end of 2017, Britain is due to vote in a referendum on continuing its membership in the European Union. Until now, the conventional wisdom has been that the country will opt to stay in. But the landscape is changing. The prospect of a “Brexit,” as a possible British exit is known, looks more likely now than it has for more than a generation.
 
The British never fell in love with the European project. As their neighbors moved toward closer union, Britain became known for its instinctive “euroskepticism.” It was the awkward partner that had only reluctantly joined, neither fully embracing the broader vision that united Berlin, Paris and Rome, nor adopting the single currency that followed.
 
This approach was driven by pragmatism more than passion, true to Winston Churchill’s 1953 description of Britain’s relationship with Europe: “We are with them, but not of them.” 
 
Yet the prospect of a Brexit always felt remote; only rarely has there been mass support for quitting the union. When people were pushed on how they would actually vote in an “in-or-out” referendum, only a minority ever identified themselves as “Outers.” Little more than a year ago, “Inners” held a 56 to 36 percentage-point lead over the Outers, while the decision of Scottish voters to reject independence in 2014 underlined the risk-averse nature of these islands.
 
When it came to Europe, the average voter acted like an unhappy spouse: dreaming of alternatives but reluctant to end the relationship. That picture is now changing.
 
Earlier this month, one poll put the Outers ahead, while another found only a negligible margin between the two camps. Some argue that these surveys are outliers, and point to how the pollsters widely failed to predict the outcome of May’s general election. But below the surface, several trends are combining to push the country closer to a Brexit.
 
Those in favor of Britain’s membership long assumed that the merits of the single market and economic integration would suffice, that appeals to the head over the heart would win any vote. This no longer seems true. Seen through the eyes of most voters, the stagnation and instability of the eurozone contrasts with Britain’s economic recovery.
 
This comparison, alongside claims of economic competence and a turnaround, helped the Conservative Party win its first majority government in more than 20 years. Convincing voters that it is in their financial interest to cling to the eurozone is not as easy as it once was.
 
It’s not only about economics; there is a cultural dimension, too. In the last election, nearly four million mainly white working-class retirees abandoned the mainstream in favor of the U.K. Independence Party, a stridently euroskeptic populist party. The rise of UKIP, which campaigns as hard against an influx of European workers as it does for withdrawal from Europe, is a register of how immigration has moved to the forefront of Britain’s debate.
 
Much of this was a long time coming, among an electorate that has never warmed to demographic change. Some of the sentiment is wrapped up with public anger over the failure of the Conservative government to fulfill its pledge, dating from the 2010 election, of reducing net migration to just “tens of thousands” a year. The most recent figure available put net migration into Britain at an annual record high of 330,000.
 
Such trends have dealt the euroskeptics — who earlier this year were writing off their chances of winning the referendum — a strong hand. Some now believe they can turn the vote on European Union membership into a plebiscite on immigration and securing national borders.
 
Britain’s prime minister, David Cameron, finds himself in a difficult position. His reluctance to match the commitment of some other European member states to receive refugees — he has promised to resettle only 20,000 over five years — is broadly in line with public opinion. But this risks eroding his political capital in Europe as he tries to renegotiate the terms of Britain’s membership, before returning to the people for the vote.
 
Europe’s leaders are distracted from efforts to prevent a Brexit, and given Britain’s stance on the refugee crisis, they are unlikely to feel sympathy for Mr. Cameron’s requests to curb welfare benefits for migrant workers from the European Union. Unless he extracts something from the renegotiation that addresses public concern over the free movement of labor — long seen by other states as a pillar of the European project — a Brexit will start to look probable, rather than merely possible.
 
The political context has also changed. Last weekend brought the shock election of the radical left-winger Jeremy Corbyn as leader of the Labour Party — ushering in a new ambivalence toward Europe among the parliamentary opposition. Mr. Corbyn has said that he cannot see himself campaigning for a Brexit, but he reiterated his desire for a “social Europe” that protects workers’ rights and the environment, rather than a free-market one. Angered by the European Union’s treatment of Greece and a perceived democratic deficit within its core institutions, and concerned that workers’ rights might be watered down, other left-wingers and some trade unions have actually suggested that they could campaign for a Brexit.
 
So, gone are the days of New Labour’s unequivocal support for the European Union. And the only other vigorously pro-union party, the Liberal Democrats, was all but obliterated in the last election.
 
True, support for the union remains the dominant view in Westminster, but for the first time in decades, there is a split on both the left and the right.
 
With Mr. Cameron expected to announce a date soon for the referendum, the skeptics remain the underdogs. But the prospect of a Brexit feels far less remote than it once did.

viernes, septiembre 25, 2015

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The New Bond Market: How One Manager Doubles Down on Danger

When oil prices collapsed, the Franklin Income Fund lost more than $2 billion, so Ed Perks doubled down

By Matt Wirz and Tom McGinty 
 
Portfolio manager Ed Perks at Franklin ResourcesPortfolio manager Ed Perks at Franklin Resources Photo: Brian L. Frank for The Wall Street Journal
 
 
When oil prices collapsed late last year, the $83 billion Franklin Income Fund suffered mightily, losing more than $2 billion on its energy-company investments.

Ed Perks responded as portfolio managers at Franklin Templeton often do: He doubled down, purchasing $2 billion more of energy-sector junk bonds.

So far, the trade is a bust. Stock and bond prices declined further this summer as oil dropped. In August, fund investors pulled out about $1.47 billion, the biggest departure in the fund’s 67-year history save for October 2008.

The bond market has transformed immensely since the financial crisis.

Investors have piled into bond mutual funds in record numbers, while low interest rates compelled the funds to buy riskier securities to deliver income. Meanwhile, banks have retreated from trading, reducing their stockpile of bonds by more than two-thirds from the precrisis high.

That makes it harder for mutual funds to buy and sell bonds, which they now own in record amount. Mutual funds owned 17% of the $7.8 trillion corporate-bond market in 2014, up from 8% of the $5.4 trillion market in 2008, according to data from the Securities Industry and Financial Markets Association and the Investment Company Institute.

Across the industry, there are 10 bond mutual funds managing more than $40 billion today, up from two in 2010, according to data from Morningstar. Franklin Resources BEN 0.36 % managed $867 billion at June 30, up from $507 billion in 2008.

When central bankers start lifting interest rates, bond prices will fall and bond funds will take losses, says Markus Brunnermeier, an economist at Princeton University who specializes in financial crises. The biggest danger for mutual fund managers will be “run risk” of mass shareholder redemptions, and funds with high concentrations of illiquid securities will be the most susceptible, he says.

The question for Mr. Perks and other large fund managers is this: Can they avoid painful losses from liquidations when those outflows hit?
Deep roots
The Franklin Income Fund is one of the oldest and most storied funds in America. It has been among the strongest performers in its mutual-fund category, returning an average of 6.8% a year since 2000 by investing in a shifting mix of stocks, bonds and other assets. It has paid a dividend every month since 1948.

But the fund lost 10.2% over the past 12 months because Mr. Perks concentrated about 20% of its portfolio in energy stocks and bonds. After adding $20 billion into the fund from 2009 to 2014, investors have pulled out about $3.8 billion during 2015, according to data from Morningstar Inc. MORN 1.53 % Analysts peppered Franklin executives about losses from the fund on a June conference call and the stock of parent company Franklin Resources Inc. has declined 30.5% this year.

Mr. Perks says the fund will manage the redemption wave as it has others throughout its history.

In July, investors withdrew $776 million from the fund and the 45-year-old fund manager sold short-term junk bonds at high prices, boosting the cash portion of the portfolio to 6.72% from 1.98%. When stock-market turmoil—and outflows—increased in August, he spent cash on redemptions and on buying hundreds of millions of dollars of stocks he considered cheap.

Investors in the fund lost 4% in August, compared with a 2.7% loss for investors in comparable funds, according to Morningstar.

“How we manage these periods coming out of volatility has a lot to do with our historical success,” Mr. Perks said. “We don’t stick our heads in the sand and hope everything turns out OK.
Big in ‘junk’
Franklin Income Fund owns about $25 billion of high-yield, or “junk” securities, more than any other mutual fund. Mr. Perks says he had no problem selling junk debt in August and that his portfolio also holds large quantities of easy-to-trade stocks.

About 21% of the bonds the Franklin Income Fund owned as of March 31 might not have been sellable within seven days—based on the average daily trading volume of the bonds over the first six months of the year, an analysis by The Wall Street Journal of MarketAxess data shows.

The data aren’t a comprehensive measure of liquidity but they give some indication of what assets might be tough to sell in a market panic.

Franklin disagrees with the Journal’s analysis: “Fund liquidity is measured, pursuant to SEC guidelines,” a firm spokeswoman said in an email. “On that basis, as of Aug. 31, 2015, 0.14% of the Franklin Income Fund’s portfolio constituted illiquid securities.”

Franklin monitors concentration and liquidity risk with a team of 100 risk-management professionals, says Wylie Tollette, who built the department and now runs risk management for the California Public Employees’ Retirement System. The team calculates fund performance, dissects how much in losses and gains come from active investment decisions versus from broader market moves, then analyzes the risk in each fund.

“It took about 10 years and a lot of resources to develop that, but the firm was very committed to it,” Mr. Tollette says.

Much of Franklin’s success comes from an unusual willingness to hold on to losing trades and turn them into winners. Mr. Perks, a former football place kicker nicknamed “Steady Eddie” by teammates at Yale University, credits Charles B. “Charlie” Johnson, the man who led Franklin for 56 years, for much of his sangfroid.
Family legacy
Although publicly listed, Franklin remains controlled by its founding family, the Johnsons of Hillsborough, Calif. Charlie Johnson took Franklin over from his father in 1957, when it managed $2.5 million, and ran it until 2012, when he handed over the reins to his son Greg Johnson.

Charlie Johnson stressed frugality, civility, hard work and innovation at the firm and launched it into the investment big leagues. He grew so wealthy he is now the principal owner of the San Francisco Giants. Mr. Johnson, also a former Yale football player, donated $250 million to the school in 2013, its largest gift ever.

“He’s the opposite of a meddler,” says Larry Baer, president of the Giants, about Mr. Johnson.

In sports, he said, “you have your George Steinbrenners who want to be into everything—that’s not Charlie.”
Staying calm
Mr. Perks fit into the down-to-earth culture. Despite buying stocks and bonds in hundred-million-dollar chunks on Wall Street, he rarely wines and dines, preferring to leave his office in San Mateo, Calif., by 4 p.m. to coach his childrens’ baseball and soccer teams.

The son of a Brooklyn firefighter, Mr. Perks grew up in Levittown, Long Island, and joined Franklin’s management training program in 1992 right out of Yale.

He arrives at work at 5:30 a.m. to prepare for the open of markets in New York, and executives from the companies he invests in often drop by. Last week the CEO of Royal Dutch Shell—Franklin is the third largest shareholder, according to Capital IQ—paid him a visit.
“I taught him to be opportunistic, to not necessarily go with the crowd,” Charlie Johnson says of Mr. Perks.

While Mr. Perks sold some bonds in the recent oil downturn, he purchased more than $1 billion face amount of debt between Energy XXI Gulf Coast Inc., Halcon Resources Corp. and Linn Energy LINE -1.20 % LLC, often at deep discounts.

In some cases he exacted a price for his support.

In July, Linn Energy LLC announced that it would suspend stock distributions to build cash that could service debt payments, sending its stock tumbling by 48%. It is an approach Mr. Perks encouraged. “We’ve been engaged with management on that,” says Mr. Perks.

Some of the bonds trade at half of what he paid, but Mr. Perks says he is fine waiting for higher commodity prices.

Ten years ago, higher natural-gas prices helped sink the value of bonds he held in electricity producer Calpine Corp. CPN -0.77 % Distressed-debt investors called hoping he would sell them the bonds but instead he bought still more, and later profited when gas prices fell again.

Now hedge funds are calling anew, trying to buy his energy bonds. His response is the same.

“When we have investments that become distressed, many market participants automatically assume we’re going to sell but that’s not how we do things.”
 


Getting Technical

Financial Stocks Breaking Down, According to Charts

The Fed’s decision to stand pat sparked a technical breakdown in the financial sector. It could get worse.

By Michael Kahn
.

Bloomberg News
 
If the Federal Reserve’s decision not to raise short-term interest rates last week delivered a body blow to the stock market, it was a left hook to financial sector.
 
Financials had already been leading the market lower since early August, and they fell even harder after the last week’s Fed meeting. The drop was steep enough to spark technical breakdowns in sector gauges from the broad Select Sector SPDR Financial exchange-traded fundto narrower indexes individually covering insurance, banks and securities brokers.
 
This group may not appear weak, especially since it rebounded better than the Standard & Poor’s 500 did Monday. But it seems to be a case of worst-to-first. Prices were more depressed, creating an illusion of value after a weekend where nothing really got any worse in the economy or in other markets.
 
The chart of the SPDR S&P Bank ETF provides a good illustration. Since Aug. 25, the day after the 1,000-point intraday drop in the Dow Jones Industrial Average, the ETF formed a clear rising wedge formation (see Chart 1). The analysis ignores the out-of-whack low seen Aug. 24 itself when scores of ETFs were mispriced in the early moments of trading that day.

Chart 1

SPDR S&P Bank ETF
A rising wedge is a counter-trend move that usually serves as a pause or correction in a new falling trend. Top and bottom borders converge as volatility calms and volume usually diminishes until the day price action breaks out from the pattern.
 
The bank ETF displays this textbook action complete with a false rally on Fed day followed by a strong breakdown on heavy volume. The gap, or jump down the next day confirmed the bearish configuration while even Monday’s strong performance could not put much of a dent in what it lost last week.
 
It would not be a surprise to see this ETF drop back down to its 52-week lows, which are about 10% below Monday’s trading. And most banks in the group across the size spectrum have similar patterns.
 
Another sub-group with a technical breakdown and similarly bearish outlook is life insurance. The Dow Jones U.S. Life Insurance index sports a triangle pattern instead of a wedge but the meaning is the same (see Chart 2). The only difference is that the bulls could not press their case during the market’s rebound from last month’s lows, hence the falling, rather than rising upper border. One could argue that this makes for a slightly more bearish pattern, but let’s not split hairs.

Chart 2

DJ U.S. Life Insurance Index
The good news is that the damage has largely been done in life insurance stocks, as the sell-off last month was sharper than even the banks’ decline. Support is only about 3% below current trading so it might be too late to step out for stocks such as MetLife.
 
There is one stock, however, that sports a similar pattern but is still holding on above its major moving averages. Torchmark, which also operates in health insurance and annuities, has the broken triangle pattern but is trading in the middle of its 52-week range (see Chart 3). That gives it more downside potential if and when it gives us one more bearish signal. A move below its 200-day average would also make it clear that this stock was moving lower to catch the group.

Chart 3

Torchmark
Securities brokers are another area where the technicals look quite weak in the near-term. Charles Schwab , to take one example, took a beating after the Fed meeting as it broke down sharply from its late-August to early September recovery (see Chart 4).

Chart 4

Charles Schwab




A Rally in Gold: The Bottom is In?

By: Dan Norcini



As mentioned in an earlier post this morning, the TRIPLE THREE safe havens, the Yen, Bonds and Gold, are all getting a boost in today's session with the Bonds being the stand out performer as can be expected.

Gold, while moving higher, is also being weighed down by falling commodity prices with weakness in this sector a reason why many traders are selling into its rally.

Gold 2-Hour Chart
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On the short term chart, the metal has run to a band of overhead resistance near $1142-$1140.

That region is attracting a fair amount of selling.

The spike in volume that occurred later in the session YESTERDAY was a surge of short covering by weaker-handed shorts who were blindsided by the extent of dovishness coming out of the FOMC and the Yellen presser.

However, much as is the case with crude oil and the many other commodities, especially copper, that same dovishness is being construed to support fears of slowing economic growth, especially in emerging markets.

We have seen what a deflationary sentiment does to the gold price and it is never pretty. While the Dollar has been derailed by the FOMC dovishness, it is currently seeing some buying coming back in with many traders feeling its downside reaction was overdone.

After all, Draghi and company are not going to stand for a soaring Euro nor are Abe and company going to tolerate a soaring yen. I am looking for Draghi to sound a very dovish tune ahead of the ECB's next policy meeting and I fully expect an effort to talk down the Euro from that quarter.

Gold 2-Hour Chart
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Meanwhile, gold has had a nice little pop here but unless it can extend through the resistance zone noted, shorts will become emboldened and begin to press it, especially if the Dollar stabilizes.

Once again, the fly in the ointment when it comes to gold, is the lackluster performance of the mining shares. Thus far, the high of the session was made early in the morning. Since then, they have done nothing but fade. Maybe they can reverse ahead of the closing bell and go out on a strong note but I remain extremely skeptical of the sector.

HUI Daily Chart
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Just this morning, there was a note by an investment bank RBC that the possibility of a credit rating downgrade could hit Barrick is gold prices linger near the $1100 level.

The price action in the HUI has been decidedly choopy over the last 6 weeks with the index currently moving back and forth in a wide trading range. It is not unexpected that the shares are getting a bit of a bid, after all, we are talking about a sector that has performed so miserably that it has managed to wipe out THIRTEEEN YEARS of price action yet for all that, the lack of buying enthusiasm remains palpable.

I wish to repeat my warning from yesterday - the gold cult is screaming once again about gold shortages at the Comex. Remember, since gold entered its current bear market some years ago when it broke down below $1530 and never regained that level, this crowd has conjured up one wild theory after another to support their reckless and subsequently-proven-to-have-been-false claims that gold was ready to rocket "any day now".

Backwardation, JP Morgan cornering gold on the long side, negative GOFO rates, surging Chinese and/or Indian demand, Bank bail-ins, Russian Ukranian invasions, Chinese stock market worries, Greece exiting the Euro, and on and on and on and on and on... Blah, blah and more blah.

Every single one of these utterly useless and worthless claims have done nothing except leave those who subscribed to them all the more poorer for paying the least bit of heed.

The gold cult has no shame and it also believes the rest of us have no memories. Do not let this group claim you as a victim. Respect the price action on the charts and let that be your guide. Your wallet will thank you in the weeks and years ahead.

if gold ever does manage to somehow become a bull market once more, the chart will show it. Until then, the primary trend in gold remains a bear. That means you sell rallies until the market price action tells you to do otherwise.

Gold Weekly Chart
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Here is a look at the reason - this is the intermediate term or weekly chart. Notice that for all the hoopla being raised by the gold cult about gold shortages at the Comex, the price remains well below its starting level of this year. Not only that, it has barely managed to scratch and claw its way back to broken support, which is the horizontal line drawn off the November 2014 spike low. It also remains BELOW the broken support line just above $1150 which is the bottom of that shaded rectangle that I have drawn in.

What I see when I look at this chart, is a market in the midst of DOWNSLOPING PRICE CHANNEL and thus one that is grinding relentlessly lower.

Gold Weekly Chart 2
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Now, maybe that will change and the market will finally start a trend higher but it has an awful lot of work to do on the technical price charts before one can say with any objectivity, that the worst is over for gold.

Personally, I do not think the true bottom is in yet. I am keeping an open mind but at the first sign of any possibility of a Fed interest rate hike, gold is headed lower again and it may very well do that even before then, if commodity prices start tumbling any further.

Note how the RSI on the weekly chart cannot even make it to the 60 level. That is how weak this market is. If that level ever does get taken out and the technical posture on this intermediate term chart changes for the better, I will shift with it. Until it does, ignore the gold cult... they will end up ruining you financially.

While they huff and puff and bluster and fluster about this or that as being wildly bullish for gold, remember, remember, remember, how many wild claims they have made for the last 3-4 years and how much lower and lower gold and the shares have gone. Their financial net worth, has been devastated whereas those who objectively stuck with the advice of the price charts only, have managed to prosper. After all, that is what trading/investing is really about - to make money - not to sing songs from the same choir book and console oneself while one's net worth is going up in smoke.




Will the FED Ever Pull The Trigger Under The Obama Administration? RE: Fixed Income Markets?

Chris Vermeulen


“Liquidity crunch” is the watchword in the bond trading market that threatens to cause deep rifts in the financial market. The fixed income market in the U.S. finds itself suffering from the unintended consequence of injecting half a trillion dollars in the market in the forms of corporate and sovereign bonds.
 

Companies in the US have offered record number of bonds this year with the assumption that the fed rates will remain low and investors will still have an increased appetite for fixed income financial instruments.
 

And up until now they have been spot on in their predictions about the federal rates.

On September 17, 2015, the Federal Reserve members had unanimously decided to keep the rates low at 0% to 0.25%. But with the U.S. corporate bond ballooning by an astounding 47% from $5.4 trillion at the end of 2008 to $8 trillion currently, the stage looks set for the bursting of the bond market bubble.
 
Liquidity Crisis: A Fling or the Real Thing
 
The size of the corporate bond market in the U.S. has increased by $2.6 trillion in the past seven years. However, most of the growth in the market has been concentrated in three types of buyers: i) Foreign Investors, ii) Mutual Funds, and iii) Insurance Companies, according to a report by Citigroup.
 
bonds
This represents a serious concern that can have a significant knock-out impact on the entire US economy. If the Fed pulls the trigger and increases the rates for the first time in nearly a decade, it could result in increased selling – much more than the market could absorb – leading to what experts are calling a severe liquidity crunch in the U.S. 

The current situation in the bond market has the potential to bring the next financial crises that could have a ripple effect in every major industry in the U.S. 

The lack of liquidity that currently exist in the fixed income market is something that the bond buyers, sellers, and regulatory authority need to be concerned about. In the past there were more than 23 different type of investors but now we have only three. And that according to analysts is the main reason that the bond market could pop. 

All that is needed is a spark in the form of a fed rate hike that would fuel liquidity crises when the investors flee bonds. This shortage of liquidity could result in a fall in asset prices below their long run fundamental price, thereby deteriorating external financing conditions, a reduction in the number of market participants, or simply difficulty in trading assets. 

But, how did the liquidity crises started in the first place? Well, in the past big banks took an active part in the bond market. They acted as a market maker facilitating trade between the bond buyers and sellers. They maintained stability in the market by buying when the market wanted to sell in large lots, and selling in the case of the opposite situation. 

However, the new regulations and higher capital requirements meant that banks had to curtail their bond trading activities. It doesn’t makes financial sense to trade in the market anymore. As a result the liquidity has all but dried up in the bond market. 

Liquidity in the context of bond market reflects how easily buyers and sellers can transact the bonds. In a liquid market markets can easily trade the bonds and at low transaction costs. An illiquid market, on the other hand, would lead to wild and instantaneous swings in the prices.
 
A Single Spark Could Lead to a Liquidity Crunch
 
According to an estimate by JPMorgan Chase about five years ago, you could trade around $280 million worth of bonds in the U.S. treasury market without affecting the price. Now, that figure has gone down to just $80 million, which represents a decline of more than 70%. 

Reduced liquidity represents a warning shot according to JPMorgan CEO Jamie Dimon as when the panic sets in there won’t be anyone buying the bonds. The lack of demand for the bonds serve is the main crux of a liquidity crisis. 

A single hiccup in the market like the fed raising its interest rate could lead to great strain in the market especially for small bond owners. Without adequate liquidity, the sellers will not see lower prices. In fact they will see no prices at all as there won’t be anyone major market mover stepping in with the intention of stabilizing the prices, a part that has been played by banks in the past. 

The mutual funds and Wall Street money managers do not have that much funds to purchase depreciated bonds.
 
International Warnings about the Bond Market Collapse
 
Earlier this year, Robert Stheeman, head UK Debt Management Office, warned that the gilt market has been threatened by falling liquidity in the bond market. 

Recall the unprecedented “flash crash” of the Germany’s 10-year Treasury yields whose primary factor was its faltering liquidity. The sudden drop was extraordinary because the Treasuries are supposed to be the most “liquid” market on the globe. 

The most pressing problem is occurring in the corporate bond market where the post-financial crisis era’s ultra loose monetary policies (pursued by the European Central Bank, the Federal Reserve, and the Bank of England) caused a torrent of bond insurance during the recent years as companies tried to capitalize on the rock bottom interest rates. 

Imagine the state of the European and British companies (excluding banks) who sold a combined $435.3bn of investment-grade debt last year, and $458.5bn in 2013. This was possible because of the high level of issuance during the post-financial crisis.
  
These issuances have occurred in the primary market (where they have grown).
 
However, they are not assured the required level of liquidity in the secondary market to insure a balance. As liquidity dries up, an imbalance in the secondary market has been created, caused ironically by the regulations aimed at averting the 2008 crisis. 

The Bank for International Settlements has also cautioned that conditions in the less liquid securities is deteriorating as liquidity concentrates in the more readily traded securities whereas Edwin Schooling-Latter from Financial Conduct Authority pointed out (earlier this year) that the reduced liquidity in corporate bonds now warrants “careful regulatory monitoring”. 

However, the most impacting warning had already been delivered November last year when a survey of traders, analysts, and investors of the European corporate bonds by the International Capital Market Association (ICMA) concluded that “meltdown” of a global credit markets was unavoidable.
 
Now, we come to the main question that given the present market position. Will the Feds ever pull the trigger under the current Obama Administration?
 
The answer to this looks like a complete No. Although market pundits were predicting, rather praying, that the fund rates would rise this month, the Feds took the opposite decision and decided unanimously to maintain the rates for the time being. 

The reason is that it will not just be the corporate bonds that would be hurt by the collapse in bond prices. The sovereign bond will also be hit with unprecedented and ‘flash’ crash.  The sudden drop in yields will be more significant for Treasury bonds as they are considered the most liquid all over the world. 

Janet Yellen, the Fed Chairman, has not given any timeframe as to when the Feds would raise the rates. “I can’t give you a recipe for exactly what we’re looking to see,” she had said airing her views about the fund rates. 

However, the reasons for the feds reluctance to hike the rates are not that hard to decipher. The inflation is running low, unemployment and the real wages remain flat. Unless these two factors start to spiral out of control, the Fed has no incentive to strengthen the rates at the moment. 

In addition, concerns about economic situation in China, which is the biggest bondholder, is also what is holding the current administration to increase the fund rates. Any further strain in the worlds’ second largest economy could lead a global economic meltdown and would hurt U.S. exports, which had exceeded $116 billion on average in the past five years. It would greatly hurt the American manufacturers and may well lead to another economic recession in the U.S.
 
Final Remarks
 
Regulators have tried real hard to insure that the economy and financial system could avert, or at least withstand moments similar to 2008, when Lehman crashed; 1994, when US rates rose aggressively; and 1987, when stocks crashed. 

Given that the bond market is much larger than the equity market, and that investors have piled into fixed income in the recent years, the fears of a bond market liquidity crunch are very real.
  
Therefore, it’s important that the Feds take steps to prevent a mass selloff of bonds in case it decides to raise the rates. Because if the credit investors attempt to sell their bonds in masses, and head for the exit, the liquidity in the market has the potential to create a rift similar, if not larger, in magnitude to the recent credit crunch experienced in 2008 that shook the very foundation of the global financial market.


Deflation on the Horizon

by Jeff Thomas


For years, a rather pointless argument has been ongoing amongst economists - that of inflation versus deflation.

The principle countries of the world have amassed a greater level of debt than the world has ever seen and, of course, this can only end badly. But will it end in inflation or deflation? To me, this discussion is akin to arguing whether the sun will rise in the morning or set in the evening.

Those who predicted inflation and those who predicted deflation will both get to be right. This will be an equal-opportunity disaster.

Certainly, whenever there’s an increase in the currency in circulation, there will be inflation. Yet we don’t seem to be witnessing significant inflation. But, then, the massive money printing that’s occurred hasn’t been widely circulated. It has, instead, been pumped into the banks, where most of it has stayed.

Also, there has been inflation in the world in general, but less so in the U.S., as the U.S. dollar is rising against most currencies. As a result of these factors, the traditional inflation before a crash has been limited.

The next major event in the row of dominoes falling is likely to be a crash in markets. Whilst it’s obvious to anyone who studies economics that the bond and stock markets are in a bubble of historical proportions, the majority of people (those who rely upon the media for their financial guidance) are vainly hoping that political leaders will come up with an economic aspirin of some sort that will make the debt problem go away, eliminating the possibility of market crashes.

But, now, we’re beginning to close in on the first crash. It’s within view and is finally giving pause even to the many who had maintained that it would somehow not come to pass. It’s beginning to look more real to the average person.

The bellwether has been a significant drop in the stock market. This drop does not constitute a crash, but neither is it an anomaly. It’s merely the first downward leg in the overall decline.

There will be a correction to the upside, then another downward lurch, and so on.

Plan on Deflation Following the Crash

Deflation always follows a crash. The dollar won’t go down right away. That will happen in the inflation period (more about that below).

Investors tend to muse that, if a market begins to decline, they will view the situation carefully and decide whether to sell some stocks and which ones to sell. Unfortunately, in a crash, it’s very unlikely to turn out that way. In a crash, the price is heading south rapidly and there’s little time to ponder the situation. The investor is likely to find that his broker has made the decision for him.

When the equity in a brokerage account falls below the maintenance margin, the brokerage issues a margin call that forces the investor to either pony up more cash, or have his portfolio sold off to make up the loss. This may come as an unwelcome and badly-timed shock, but there’s worse to come. The greater downside is that the broker is not obliged to contact the investor prior to the sell-off. The broker may decide to sell any of the stocks he chooses in order to save himself. So, not surprisingly, he may well choose to sell those stocks that are not headed south, as it will be easier to find buyers for them.

Plan on a Drop in the Gold Price

Many investors maintain in their portfolio a percentage of precious metals stocks “just in case.”

They consider this to be a diversification, an insurance policy. If the stock market heads south in a significant way, there’s every likelihood that this will drive up the price of precious metals.

But, of course, in a crash, even a moderate one, this position will be the easiest one for the broker to sell. The investor may discover that, overnight, both his more conventional stocks and his insurance policy have diminished or disappeared.

In addition to the above, those who hold physical gold as an insurance policy against stocks may find that, if they depend upon the stocks for income, they cannot afford to pay their bills if stock earnings suddenly disappear. Something will have to go. Maybe it will be the family boat, or that beloved Harley in the garage. Maybe it will be the precious metals.

For these reasons, even the most adamant of goldbugs should be prepared for a downward spike in precious metals following a significant crash. And, if the overall crash is a series of downward thrusts interspersed with smaller upward corrections, it shouldn’t be surprising if the gold price follows a similar path.

So, does that mean that gold and silver are not a safe haven against stormy economic periods?

Not at all.

It merely means that, in addition to the major cleanout of the gamblers and traders from the gold market from 2011 to 2015, there will be a final (and possibly very sudden) cleanout after a fall in the market. In my estimation, it will reflect the crash - the more severe the crash, the greater the downward spike in metals.

However, the reverse will be true in terms of its duration. The deeper the crash, the quicker those investors who still have cash will jump onto the gold truck. Therefore, the spike could be very brief and pronounced.

For those who have been prudent enough to exit the market prior to the crash and still be holding money in their hands, that would be an excellent time to buy gold. In fact, it may be the very best opportunity, because, at that point, it’s likely that gold will have reached its bottom and will be poised for a historic rise.

Plan on Inflation, in Addition to Deflation

At this time, or relatively soon thereafter, the central banks can be expected to fulfill their oft-repeated promise that they will fight deflation with money printing.

In all likelihood, we will see quantitative easing like never before.

Central banks will print as much as they feel is necessary to counteract deflation. However, this will have a more dramatic effect on increasing the cost of commodities than to relieve the fear of purchasing assets. (The average person will readily buy food and fuel, but will not buy the boat or Harley that’s for sale in the driveway down the block.)

Historically, when this happens, wages never keep pace with the rising prices of commodities, so the situation will worsen - deflation in asset prices with inflation in costs.

Again, historically, this is a recipe for dramatic inflation that becomes hyperinflation. To my mind, this is the only uncertainty. Whilst the other dominoes described above are almost certain to fall, each in their turn, hyperinflation is the wild card. Hyperinflation occurs when the people of a country lose faith in the political/economic governance of the system. If it occurs, no government has ever succeeded in reversing it. It plays out until full economic collapse occurs.

If and when this happens, precious metals will most certainly retain their lustre and may provide a soft landing for those who have held their metals position during the doubtful times.

One caution: Since most of the traders and gamblers are already out of the gold market and most gold is now held by those who are long, the window of opportunity will be brief if a spike does occur.

Whatever precious metals are on offer will be gobbled up quickly.


Don’t Ignore the Big, Fat Transportation Warning Sign

Tony Sagami


The more the stock market falls, the more hate mail I get… almost like I’m the source of the stock market’s problems. Maybe there is some type of market-timing signal buried in the volume of the hate mail I receive.
 


[NOTE: Please feel free to leave your comments—good and bad—in the discussion forum at the end of the column.]

But all I really do in this column is try to highlight the connection between multiple sources of economic and business data to show you what is really going on with the US economy.

And one of the clearest sets of connecting dots I see today is the collision course that transportation stocks are on.


Not all is well in the transportation sector; the Dow Jones Transportation Average (DJT) started the year at 9,139 and closed at 8,163 on September 15, a 10.6% loss for the year.

By comparison, the S&P 500 is down 3.8% during the same time, so the DJT has dropped almost 3 times as much.

That weak relative performance is your first clue, but there are plenty of other clues (dots) that explain why transportation stocks are doing so poorly.

Dot #1: China Freight Rates Plunge. The China Containerized Freight Index (CCFI) tracks the rates for shipping containers from Chinese ports to major ports around the world. The CCFI dropped to 820.9 last week, is 22% below where it was in February, and 18% below where it was in 1998 when the index was created.


 
Rates to the US have dropped the most. Rates from Shanghai to the US West Coast ports are down 33%, and the rates to East Coast ports are down 41%.

Dot #2: Air Cargo Volume Shrinks. Container ships are just one transportation option. What about trucks, rails, and airplanes?


According to the International Air Transport Association (IATA), global air freight was down 0.7% in July from a year ago.

"The disappointing July freight performance is symptomatic of a broader slowdown in economic growth," IATA Director General Tony Tyler said.

Dot #3: Asian Air Freight Is Even Worse. The Association of Asia Pacific Airlines (AAPA) echoed that slowdown by reporting a year-over-year drop of 1.8% in international air cargo across the region in July.

“Air cargo demand began the year quite strongly but has lost momentum as a result of a slowdown in global trade and weaker demand for Asian exports,” said Andrew Herdman of AAPA.

Dot #4: Less Freight, Less Demand for Airplanes. Nippon Cargo Airlines, Japan's biggest cargo carrier, canceled a $1.5 billion order for four 747-8F freighters from Boeing. Not passenger planes—cargo planes.


Dot #5: Don’t Forget About Truckers. The Cass Freight Index tracks North American trucking volume, and as you can see, the trucking business is definitely slowing down.


The number of freight shipments fell 1.2% in August on the heels of another 1.2% percent drop in July.

The August decline is a diversion from the normal pattern seen at this time of year. Generally, retailers are stocking up for fall sales, so the August drop is a big red flag.

Dot #6: Read the Fine Print. The Bureau of Labor Statistics (BLS) released its Producer Price Index numbers for last week and showed that wholesale prices were up by +0.2% in August.

A 0.2% gain isn’t much, but at least it is positive… but hold on. The index for final demand of transportation and warehousing services dropped 0.7% in August.

The BLS stated:

Prices for final demand services less trade, transportation, and warehousing moved up 0.2 percent. Conversely, the index for final demand transportation and warehousing services dropped 0.7 percent.

Final-demand numbers measure changes in margins received by shippers. That means not only are their profit margins shrinking—they are doing so in the face of a giant drop in the price of diesel fuel.

And those are the numbers from just last week!

Moreover, the discouraging transportation numbers aren’t new. Go back and read my July 14 column where I outlined my case for transportation stocks to move lower.

More importantly, I believe that the transportation industry provides an early canary-in-the-coal-mine warning signal for the rest of the US economy.

Call me a pessimist, a bear, or an idiot… but my personal portfolio and that of my Rational Bear subscribers are prepared to profit from falling stock prices.

viernes, septiembre 25, 2015

DEATH AND TRANSFIGURATION / THE ECONOMIST


Schumpeter

Death and transfiguration

The golden age of the Western corporation may be coming to an end




EDWARD GIBBON, the great English historian, begins his “Decline and Fall” with a glowing portrait of the Roman Empire in the age of Augustus. The Empire “comprehended the fairest part of the earth”. Rome’s enemies were kept at bay by “ancient renown and disciplined valour”. Citizens “enjoyed and abused the advantages of wealth and luxury”. Alas, this happy state of affairs was not to last: the Empire already contained the seeds of its own destruction.

Gibbon soon changed gear from celebrating triumphs to chronicling disasters.

Perhaps the history of the Western corporation will one day be written in much the same vein.

Today’s corporate empires comprehend every corner of the earth. They battle their rivals with legions of highly trained managers. They keep local politicians in line with a promise of an investment here or a job as a consultant there. The biggest companies enjoy resources that have seldom been equalled; Apple, for instance, is sitting on a cash pile of more than $200 billion.

And they provide their senior managers and leading investors with “wealth and luxury” that would have impressed even the most jaundiced Roman.  

A new report by the McKinsey Global Institute provides some invaluable statistics for any future Gibbon, which MGI calculated by crunching data from nearly 30,000 firms across the world. Corporate profits more than tripled in 1980-2013, rising from 7.6% of global GDP to 10%, of which Western companies captured more than two-thirds. The after-tax profits of American firms are at their highest level as a share of national income since 1929.

Yet the men and women from McKinsey change gear as quickly as Gibbon. The golden age of the Western corporation, they argue, was the product of two benign developments: the globalisation of markets and, as a result, the reduction of costs. The global labour force has expanded by some 1.2 billion since 1980, with the new workers largely coming from emerging economies. Corporate-tax rates across the OECD, a club of mostly rich countries, have fallen by as much as half in that period.

And the price of most commodities is down in real terms.

Now a more difficult era is beginning. More than twice as many multinationals are operating today as in 1990, making for more competition. Margins are being squeezed and the volatility of profits is growing. The average variance in returns to capital for North American firms is more than 60% higher today than it was in 1965-1980. MGI predicts that corporate profits may fall from 10% of global GDP to about 8% in a decade’s time.

Two things in particular are shaking up the comfortable world of the old imperial multinationals. The first is the rise of emerging-market competitors. The share of Fortune 500 companies based in emerging markets has increased from 5% in 1980-2000 to 26% today.

These firms are expanding globally in much the same way as their predecessors from Japan and South Korea did before them. In the past decade the 50 largest emerging-world firms have doubled the proportion of their revenues coming from abroad, to 40%. Although the outlook for many emerging markets is more mixed than it was just a couple of years ago, troubles at home may push rising multinationals to globalise more rapidly.

The second factor is the rise of high-tech companies in both the West and the East. These firms have acquired large numbers of customers in the blink of an eye. Facebook boasts as many users each month as China has people: 1.4 billion. Tech giants can use their networks of big data centres rapidly to colonise incumbents’ territories; China’s e-commerce giants Alibaba, Tencent and JD.com are doing this in financial services. Such firms can also provide smaller companies with a low-cost launching pad that allows them to compete in the global market.

MGI does not dwell on it, but the political environment is also becoming more hostile. Populists on both the left and the right rage against corporate greed. In America, presidential hopefuls Bernie Sanders and Donald Trump both criticise companies for exploiting tax loopholes. Even middle-of-the-road politicians are sounding a more anti-corporate note. Angela Merkel introduced Germany’s first minimum wage in 2014; and in Britain David Cameron is phasing in a “living wage”.

Companies may find themselves under pressure to “give back” to wider society.

How can Western companies navigate these threats to their rule? MGI advises them to focus on the one realm where they continue to have a comparative advantage—the realm of ideas. Many companies in labour- and capital-intensive industries have been slaughtered by foreign competitors, whereas idea-intensive firms—not just companies in obvious markets such as the media, finance and pharmaceuticals, but in areas such as logistics and luxury cars—continue to flourish. The “idea sector”, as MGI defines it, accounts for 31% of profits generated by Western companies, compared with 17% in 1999.

Capitalist redemption
 
The relative decline of the Western corporation could also lead to a rethinking of some of the long-standing assumptions about what makes for a successful business. Public companies may lose ground to other types of firm: in America the number of firms listed on stock exchanges has fallen from 8,025 in 1996 to about half that number now. The cult of quarterly earnings may lose more of its following. A striking number of the new corporate champions have dominant owners in the form of powerful founders.

They are willing to eschew short-term results in order to build a durable business, such as Mark Zuckerberg at Facebook, the Mahindras and other assiduous families in India, and private-equity firms. Gibbon’s great work was a tale of decline and fall, as classical civilisation gave way to barbarism and self-indulgence. With luck, the tale of the relative decline of the Western corporation will also be a tale of the reinvention of capitalism as new forms of companies arise to seize opportunities from the old.