Category: fixed income

Is Mario Draghi pulling away the punch bowl?

“Draghi hints ECB may start winding down QE,” read the MarketWatch headline this morning:

European Central Bank President Mario Draghi hinted on Tuesday that the ECB might start winding down its large monetary stimulus as the eurozone economy picks up speed, even as he warned against an abrupt end to years of easy money.

The comments, at the ECB’s annual economic-policy conference in Portugal, come as investors watch closely for a sign that the world’s second most powerful central bank is preparing to withdraw controversial policies such as its EUR60 billion ($67.52 billion) a month bond-buying program.

Mr. Draghi said the ECB’s stimulus policies are working and will be gradually withdrawn as the economy accelerates. However, he warned that “any adjustments to our stance have to be made gradually, and only when the improving dynamics that justify them appear sufficiently secure.”

With the Fed now talking about contracting its balance sheet and the BOJ and ECB doing the heavy lifting, this seems like a big deal, yet equity markets have barely noticed.  The Euro Stoxx index was -0.13% while S&P 500 futures are currently -0.07%.  3-month VIX futures (Oct contract) stand at just 14.25. The eurozone sovereign debt markets are a different matter:

Germany 10-year = -0.56% (0.32% yield-to-maturity)

France 10-year = -0.59% (0.69% ytm)

Italy 10-year = -0.80% (1.98% ytm)

“Today Draghi moved his first step towards indicating that ECB monetary policy will become less [stimulative] in 2018,” said Marco Valli, an economist with UniCredit in Milan.

Mr. Valli said the ECB might reduce its monthly bond purchases to EUR40 billion in the first half of next year, followed by a further reduction to EUR20 billion per month in the second half of the year. That would be a slower pace of stimulus reduction than many analysts had been expecting.

Keep in mind, the ECB and Bank of Japan have been doing the heavy lifting as year-over-year growth in total assets shows:

Fed = 0%

ECB = +36.7%

BOJ = +20.0%

The bond markets are starting to pay attention (though still wildly delusional). Perhaps the equity markets should as well.

Global asset deflation: nowhere to run, nowhere to hide

Over the past several months global stocks, bonds and currency markets have hit a wall.  Just 6-8 months earlier the central banks of Europe, Japan and the US were signaling endless monetary accommodation which initially emboldened global speculators and their reach-for-yield mantra.  Now we look around for evidence or confirmation that the four year stimulus experiment is DOA.

First, emerging market stocks, bonds and currencies have all dropped somewhere between 7% and 12% the last few months as the carry trade (borrowing in low cost currencies in order to buy higher returning risk assets, thus capturing the spread) comes off the boil.  Second, political commentary out of China confirms our earlier thoughts that a credit bubble for the ages has begun to burst.  Since the central banking talking heads opened their mouths last month, Shibor rates (Chinese overnight unsecured lending rate amongst 16 largest banks)  have spiked to levels not seen since 2004:

Shibor-overview

Here is the latest on the Chinese banking system from Bloomberg:

Policy makers could be taking advantage of tight funding to “punish” some small banks, which previously used low interbank rates to finance purchases of higher-yielding bonds, Bank of America Merrill economists led by Lu Ting wrote in a report. Tight interbank liquidity could last until early July, according to the report.

‘Warning Shot’

“The PBOC [People’s Bank of China] clearly has an agenda here,” said Patrick Perret-Green, a former head of Citigroup Inc.’s Asian rates and foreign exchange who works at Mint Partners in London. “To fire a massive warning shot across the banks’ bows and to see who is swimming naked. Moreover, it fits in well with the new disciplinarian approach” adopted by the government, he said.

Chinese regulators are forcing trust funds and wealth managers to shift assets into publicly traded securities as they seek to curb lending that doesn’t involve local banks, so-called shadow banking, according to Fitch Ratings.

The tightening is “emblematic of some of the shadow banking issues coming to the fore as well as some of the tight liquidity associated with wealth management product issuance, and the crackdown on some shadow channels,” Charlene Chu, Fitch’s head of China financial institutions, said in a June 18 interview. She earlier estimated China’s total credit, including off-balance-sheet loans, swelled to 198 percent of gross domestic product in 2012 from 125 percent four years earlier, exceeding increases in the ratio before banking crises in Japan and South Korea. In Japan, the measure surged 45 percentage points from 1985 to 1990, and in South Korea, it gained 47 percentage points from 1994 to 1998, Fitch said in July 2011. [Emphasis mine.  Japan and South Korea experienced bubble economies during these periods which both burst.]

Look at the massive growth in nonbank (shadow) lending in China post 2008 credit crisis while keeping in mind most of this was indirectly backed by the largest banks under the “wealth management” label:

Chinese shadow banking

Maybe this is why China made the news last week when a proposed 15.5 billion renminbi bond offering failed (for the first time in nearly 2 years), receiving only 9.5 billion renminbi.

Over in Russia and Korea we see even more instability permeating the credit landscape.

Romania’s Finance Ministry rejected all bids at a seven-year bond sale yesterday because of market volatility, while South Korea raised less than 10 percent of the amount planned in an auction of inflation-linked bonds. Russia scrapped a sale of 15-year ruble-denominated bonds June 19, the second time it canceled an auction this month, and Colombia pared an offering of 20-year peso debt by 40 percent. A cash shortage led to failures last week of China Ministry of Finance debt sales.

More than $6.9 billion left funds investing in developing-nation debt in the four weeks to June 19, the most since 2011, according to Morgan Stanley, citing EPFR Global data. The exodus is reversing the $3.9 trillion of cash that flowed into emerging markets the past four years as China’s annual economic growth averaged 9.2 percent and spurred demand for Brazilian iron ore, Russian oil and gas and Chilean copper.

Romania rejected all 688 million lei ($200 million) of bids at a bond sale yesterday because of “unacceptable price offers,” according to an e-mailed statement from the central bank. It was the first failure since August.

South Korea sold just 9 percent of the 600 billion won ($524 million) it targeted from 10-year inflation-linked bonds this week. Colombia’s government pared an auction on June 19 of 20-year inflation-linked peso bonds by 40 percent, to 150 billion pesos ($77 million).

Russia canceled planned sales of 10 billion rubles ($311 million) of notes this week, citing a lack of demand within an acceptable yield range of 7.70 percent to 7.75 percent. Yields on ruble bonds due in 2028 jumped 30 basis points, or 0.30 percentage point, yesterday to 8.1 percent, the highest level since the debt was sold in January.

After endless monetary interventions the prior 3-4 years governments around the world temporarily created the illusion that interest rates would stay below nominal GDP growth targets.  The sleight of hand only lasted this long because so many of the “professional money managers” never questioned the actions of central bankers (a.k.a. asset inflationistas) .  As currencies, bonds and stock markets decline in unison around the world, one might pose the question “Have central bankers lost control of their monetary experiment?”  Or better yet, why would so many “investors” believe that a group of central banks with combined reserves of $11.5 trillion could levitate with over $240 trillion in global assets?   Which then begs the question,  where does one hide?

Worst investments of the next 5 years?

With so many qualified candidates, the challenge is to narrow down to our ten least-favorites, but here goes:

10.  VelocityShares Daily Inverse VIX ST ETN (XIV)  – Volatility measures such as the VIX are at their lowest levels since the top of the 2007 credit bubble.  This ETN is short.

9.  PIMCO California Municipal Income Fund II (PCK) – The bonds in this closed-end fund yield a tempting 6.8% for a reason: California is a fiscal mess.  Even worse, yield-chasers bid the fund’s shares to a 20% premium over net asset value.

8.  iShares iBoxx $ Invest Grade Corp Bond ETF (LQD) – With an average yield of 3.79% and weighted average maturity of 11.8 years, this ETF offers what Jim Grant derides as “return free risk.”  Worse, one-third of the portfolio is invested in bonds of financials: mostly mega-banks and investment banks.  LQD has attracted nearly $8 billion in inflows the past 2 years.

7.  iShares Dow Jones US Real Estate ETF (IYR) – Powered by investors reaching for yield, this ETF boasts a total return of 25.9% per year over the past 4 years.  Unfortunately, valuations are stretched: current yield is just 3.2% and REITs typically trade at 20 x FFO (funds from operations), at the high end of their range.  Worse, access to cheap capital has translated into acquisition binges at some of the portfolio companies.

6.  30-year U.S. Treasury bonds – When entitlements are included, the U.S. government’s debt/GDP is estimated at over 600%, in all likelihood the highest in the world.  For this elevated risk, bondholders are locking in all of 3.18% interest for 30 years.  A default is coming within the next 5 years, either openly by default or insidiously via the printing press.

5.  PIMCO High Income Fund (PHK) – The current yield is 11.5%, but a good chunk of this is being paid out of principal as high yield bonds yield close to 5%.  The portfolio is loaded with financial and mortgage-related paper.  For this, closed-end investors are paying a 45% premium to NAV.

4.  iShares FTSE China 25 Index Fund (FXI) – Call us skeptical of the Chinese miracle with its central planning, cronyism, loose lending, artificial booms in housing, infrastructure and commodities, empty cities, rampant waste, and conspicuous consumption.  This popular ETF has a 57% weighting in financials, mostly large domestic banks.

3.  PIMCO Global Stocksplus & Income Fund (PGP) – This closed-end fund boasts a seductive 10.7% current yield and 30.8% compounded annual return over the past 4 years.  Investors may or may not realize returns have been turbo-charged with 50% leverage coming from S&P 500 stock index futures.  Either way, they don’t seem to care, bidding up the shares to a 58% premium over NAV.

2.  Global “Too Big to Fail” bank/investment bank stocks – Fractional reserve banking + moral hazard of TBTF = toxic combination.  The 2008 meltdown claimed its share of these political capitalists always teetering on insolvency (Bear Stearns, Lehman, Citigroup, et. al.).  What sins have the survivors committed during this epic stimulus/sovereign debt/reach-for-yield bubble?  We’re about to find out.

1.  10-year Japanese government bonds – Japan has the second highest debt in the world behind the U.S. with an economy one-third the size.  Debt/GDP is the highest in the world at over 220%, well ahead of #2 Greece and #3 Zimbabwe.  Thanks to the kindness of domestic savers (burned by the bursting stock bubble of the late 1980s), the 10-year yields just 0.83%.  In an effort to stimulate its economy, the Bank of Japan is hell bent on creating 2% inflation.  (We’re guessing they’ll succeed.)  So far, selling by bondholders planning for their golden years has been orderly.  As the government strains to meet higher interest payments, these patriotic creditors could turn tail and run.

Let the race to the bottom begin!

Yield-chasers line up to buy Bolivian bonds

Under the You-Can’t-Make-This-Up category of sovereign debt insanity, the May 17th Grant’s Interest Rate Observer files this report:

Many these days are picking the poison of foreign places – Bolivia, for instance.  Last fall, the scenic, private-property expropriating, contract-abrogating and formerly hyper-inflating South American nation issued its first international sovereign debt since 1920.  And the Bolivian 4 7/8s of 2022 this year have rallied by 57 basis points, “the most among sovereign bonds with BB-minus ratings tracked by Bloomberg.” [according to Grant’s analyst Evan Lorenz]

The Great Bond Bull Market began in September, 1981 (over 31 years ago) with U.S. T-bond yields over 15%.  Yields on the 10-year now stand just a shade below 2%.

Precisely 2 years ago, Jim Grant was quoted in an Associated Press interview:

I think it’s useful to imagine how things might look ten years hence.  What will one’s children, heirs or successors think about a purchase  today of ten-year Treasurys at 3.25 percent? They’ll look back and say,  “What were they thinking?”  The (federal deficit) was running at 10  percent of GDP, the Fed had pressed its interest rates to zero, it had  tripled the size of its balance sheet, and they bought bonds?  Treasurys  are hugely uninteresting, as is similar government debt the world over.

Today the Bolivian government can borrow for 9 years at 4 1/2%.  Have bond investors completely lost their minds?

Japanese government bonds take biggest 2-day hit in 5 years

As Tyler Durden of Zero Hedge reported, 10-year JGBs took their worst 2-day plunge since the financial meltdown of Q4, 2008:

The last 2 days have seen JGB prices plunge at the fastest rate since the post-Lehman debacles in Sept/Oct 2008 smashing back to 13 month highs.  5Y yields are surging even more – trading above 34bps now (up from 9.9bps on March 5th). These are simply astronomical moves in the context of JGB history and strongly suggest Abe & Kuroda are anything but in control of the quadrillion Yen domestic bond market as they jawbone inflation expectations into the psychology of the people.

Meanwhile, the Japanese yen has fallen off a cliff as the Bank of Japan (BoJ) opens the monetary floodgates:

Jeff Berwick, editor of The Dollar Vigilante Blog weighs in on the bond vigilantes calling the BoJ’s bluff:

Traders should take note of Japanese Government Bond prices.  On April 4th the Bank of Japan made the announcement that they intended to DOUBLE the money supply and buy government bonds roughly equaling $80B a month.  Does this number sound familiar?  It should since the US Federal Reserve’s own quantitative easing program is roughly $85 B a month.  An important data point to remember here is that the Japanese economy is only 1/3 the size of the US economy, but its own quantitative easing program equals that of the US.   To say Japan is “doubling down” on the same failed policy approach it has taken for the last 20 years would be a bit of a misnomer.  This is Japan’s “all in” move as I try to keep the gambling metaphor rolling.  A gamble is exactly what this is, a very big gamble with no precedent in economic history.

What are the consequences of rapidly increasing government spending, monetizing $80B a month in debt, and flooding the market with yen?  It is hard to miss the headlines as the Yen on the futures exchange is now trading at below 100 yen to the USD for the first time in four years.

Berwick offers an explanation as to why bondholders are beginning to act more rationally:

Why are bonds trading lower?  Think about this from a prudent lender’s point of view and you will have your answer.  If I give you yen, and you give me a security (bond) that says you will give me back my yen with interest in 10 years, then why would I sit with that security and let you pay me back with a devalued currency?  Well, in Japan bondholders appear to be speaking with their market participation.  Bond holders are doing exactly what they should be doing.  Bond holders should be liquidating bonds and converting money out of yen into non-yen denominated securities and investments (note all the M&A activity from Japanese companies in the last seven months as the smart money runs and not walks out of Japan and the yen).

How can the savers in Japan be sitting idly by and watching the purchasing power of their savings being destroyed?  We are on the first chapter of a very ugly time in Japan where policy makers decisions will strain the very social fabric of the country.  We will have a front row seat to the failings of the Keynesian economic philosophy.  It will not be pretty for Japan. And it could very well be the first major event in The End Of The Monetary System As We Know It.

Last Friday, in his Daily Rap, Bill Fleckenstein mentioned the possibility of a Japanese canary in the sovereign debt coal mine:

Japan was the epicenter of fireworks that spread around the world, as last night their equity market rallied 3% even as their debt market had a bit of a nasty spill. However, it must be kept in perspective that the change was rather small and rates have only backed up to where they were in February. So it is not exactly huge trouble, but it could be the start of a shift. At the moment, the bond and currency markets are declining in Japan. Should that continue and should the bond market worsen materially, it would be an early sign of what an eventual funding crisis would look like.

Of course, as long as Japan’s central bank is buying such huge amounts of paper it can thwart that for a time, but it could be the first sign of a bond market anywhere revolting against the printing press. As I say, it is very early days and I don’t want to make too much of it, but a trickle can eventually become a flood, and a trickle has to start somewhere.

Over three weeks ago, in our Q1 letter to investors, we mentioned the possibility of a “Wizard of Oz moment” as the BoJ accelerated its monetary experiment:

Two weeks ago, the Bank of Japan announced a doubling of its asset purchase program.  In Pavlovian response, speculators bid up Japanese government bonds strongly, with the 10-year yielding just under 0.40%.  The following day those gains completely evaporated.  Had the BoJ lost control and the market called its bluff?

For now Goldilocks prevails, but for how long?  Fleckenstein considers the glaring (and widening) disconnects:

So we continue to be in the most perverse sweet spot in the history of the money-printing era that began over 20 years ago. Between the BOJ and the Fed, we are printing about $1.8 trillion a year, along with massive deficit spending, and those policies are regarded as a panacea for equities and just fine for bonds, but horrible for assets that protect one against inflation. Of course, that makes no sense, but when you are in a warped environment (and this is the most warped ever), crazy things not only happen, they lead to even crazier outcomes until the madness finally stops, after which all hell breaks loose.

So much for the notion that central bankers are in control.  Did the global reach-for-yield bubble just go “pop”?

How Will Japan’s Largest Pension Fund Find Room To Maneuver?

The WSJ is out with a short piece about new rumblings coming from Japan’s $1.43T public pension fund, Japan’s Public Pension Weighs New Investments. If I may be so bold as to impersonate the Japan deflation-blogger Mish for a moment, let’s take a look at a few of the dynamics at play as reported by the WSJ. I’ll provide some commentary along the way:

Japan’s public pension fund—the world’s largest with assets totaling 123 trillion yen ($1.43 trillion)—is weighing the controversial idea of investing in emerging-market economies as a way to gain higher returns as it faces a tsunami of payout obligations over the next several years.

The conservative Government Pension Investment Fund, which alone is larger than India’s economy, has a staggering 67.5% of its assets tied up in low-yielding domestic bonds. The fund plans to sell off a record four trillion yen in assets by the end of March 2011 to free up funds for payouts to Japan’s rapidly aging population. By the year 2055, 40% of Japan’s population is expected to be over the age of 65.

There’s a lot to discuss but before I do I want to clarify an error I believe the journalists who wrote this piece made.

The comparison between the size of the GPIF and the size of India’s “economy” is not a meaningful one because the GPIF is a “stock” while the aspect of India’s economy being referred to, GDP, is a “flow”. At $1.235T (2009 estimate, Wiki), India’s GDP is supposed to measure the total monetary value of output of all goods and services for a particular period of time, in this case one year. Meanwhile, GPIF’s asset base is a static measurement of current asset valuation. I’ll avoid the bath tub analogy and instead refer to public company financial accounting: GPIF’s asset size is like examining an entry on the asset side of a company’s balance sheet; India’s economic “size” is like examining an income statement for the revenue or earnings generated in the period in question.

One other minor quibble– the “2055” statistic is completely irrelevant to telling this story because the GPIF is not going to last that long, at least not in its present form and at its current levels of funding.

With the fur out of the way, let’s dig into the flesh of the matter. First things first: the GPIF is another Ponzi-finance scheme, much like the US Social Security Administration system. I think Takahiro Mitani, president of the GPIF, explained the predicament all Ponzi-finance schemes eventually find themselves in best in this recent WSJ interview:

Mr. Mitani: Baby boomers are now 60 years old or older, and have started receiving pension. In the meantime, the number of people who pay a pension premium is smaller. What’s more, pension premium is determined by wage, which has been on decline. So, pension special account overseen by the health ministry is having a tough time.… More outlay than income in the pension system means that they need to tap into the reserve we have. [emphasis added]

Long-term, the GPIF and SSA will always be running up against a potential demographic problem like this, where the amount promised to past generations of present retirees is greater than the amount being contributed by present workers. Therefore, there will come a time in every Ponzi-pension fund’s life during which the managers of the fund will be forced to go out on the risk curve in a search for yield. And as luck would have it — or rather, as generations of inflationary central planning schemes would have it — the very time these demographic trends reach an apex, so, too, do long-running financial trends on which the fund’s internal rate of return projections have been built. In other words, the perfect financial storm, a “liquidity event” of colossal proportions, metaphorically and literally-speaking.

Unfortunately for Mr. Mitani and his loyal horde of investment management professionals (you did know that scams like the GPIF also serve as lucrative government-sponsored subsidies to investment banks like BlackRock, Morgan Stanley and State Street, Mitsubishi UFJ Financial Group and Mizhuo Financial Group, didn’t you?) there’s more than just wind and noise coming out of those storm clouds in the form of macro demographic and economic trends, though they are all related in a way. Another problem facing the GPIF is political and is tied up in the composition of the GPIF’s portfolio:

The GPIF holds the lion’s share of its assets in low-yielding Japanese government bonds. (The yield on the 10-year JGB is currently a paltry 1.07%.) Roughly 67.5% of its assets are parked in domestic bonds, including government and corporate bonds; the rest are spread among Japanese stocks, overseas shares and foreign bonds.

The GPIF is a Ponzi, wrapped in a Ponzi, inside an enigma. If you take a look at the investment results for the first quarter of fiscal 2010[PDF] provided by the GPIF, you’ll see that the “domestic bonds” portion is split roughly 76% into “market investments” (JGBs of varying maturities) and the remaining 24% into “FILP bonds”.

FILP bonds, issued by the Japanese Ministry of Finance’s Fiscal Investment Loan Program, are similar to agency debt and municipal/public works bonds floated by US state and federal government agencies (think FRE/FNM, FHLB, New York MTA bonds, DOT/highway bonds, public school and university bonds, etc.). According to the Japanese MoF’s own online resource page, which I encourage you to click and skim-read in its entirety for yourself, FILP bonds can be issued to fund nearly anything the Japanese government might deem worthy of funding, including “housing construction, small and medium-sized businesses, roads, railways and subways, airports, water and sewerage [sic], education, medical care and social welfare, agriculture, forestry and fisheries, industry and technological development, regional development” and let’s not forget “international cooperation.”

Like I said, nearly anything. And with Japan’s bubble-fueled reputation for being a corrupt, greasy-handed place to get business done, you can bet that at least one of almost everything in Japan’s economy (and other countries’ economies!) has been funded exactly this way. The FILP is like a giant government-sponsored slush fund for amakudari, Japan’s version of the “golden parachute” for its fascistic, entitled union bosses-cum-career public servants[PDF].

Back to the Ponzi within a Ponzi. One reason that Japan’s central government has been able to issue so much debt ($10.55T and rising as of the end of June) without blowing yields sky-high is due to the phenomenon of captive finance, an ugly cousin of vendor financing, of which government managed pension funds like GPIF are a facilitator. It works like this: the Japanese government issues debt, the Japanese worker is forced to contribute to a government pension fund such as GPIF, and the GPIF buys the Japanese government’s debt because it’s “safe”. Hopefully you can see it now. The Japanese government must keep rolling over debt into new debt just to stay afloat which is purchased by the GPIF, while the GPIF must keep milking workers to pay off the retirees. Ponzi within a Ponzi.

Something’s gotta give. But there’s the rub– it can’t. According to the WSJ article, 67.5% of GPIF’s funds are committed to JGBs and FILP bonds (the allocation as of the Q1 investment results[PDF] linked to above was 68.14%) with the remaining portion divided up approximately 9% international stocks, 8% international bonds and 11% domestic stocks. It can’t easily touch that 67.5% allocation without experiencing stern consternation from Japanese politicians who see their Ponzi-scheme unravelling before their very eyes.

That means the search for yield will have to come from elsewhere in the portfolio, and anywhere else it might come from means potential pain for the supplier. Think the Nikkei can’t go lower? Think the US Treasury has enough problems? Think the S&P 500 has been beat up enough already? Think again. Meanwhile, wherever the GPIF potentially re-places the funds could see a nice little second-wind. Good-bye SPY, hello EWZ!

I’m being facetious but hopefully my point is clear. Of course, where government is concerned, “can’t” doesn’t always mean “won’t”:

Regarding its four-trillion-yen selloff this year, Mr. Mitani said: “We won’t only target [selling] domestic bonds. It could be [Japanese] stocks or foreign-currency-denominated securities or stocks,” depending on market conditions.

At the end of the day, Japanese politicians can kick and scream but the GPIF has to meet its liquidity needs and one way to do that is to suck it up and kick some JGBs and FILPs out the door. Again, this is a problem and it will be chronic until it is terminal. Pay attention those of you long JGBs.

John Vail, chief global strategist at Nikko Asset Management, echoed that sentiment. “They need to take on more risk. As a long-term investment, equities will nearly always outperform JGBs,” he said “Global equities are a wise investment for the GPIF—especially with equities being so inexpensive.”

Mr. Mitani said he is aware of such opinions, but his mandate is to invest in “safe” assets with a long-term view. “In 2008 after the collapse of Lehman, while we posted a negative result we were relatively better than overseas pension funds thanks to our conservative, cautious stance. We posted only single-digit [percentage] loss while others posted double-digit loss,” he says.

In the U.S., the California Public Employees’ Retirement System, known as Calpers, is the nation’s largest with assets of $200 billion. Calpers reported a 23% slump in the year ended June 30, 2009, marking its worst year ever. Some of the biggest hits were from private or alternative investments such as real estate. Calpers has since begun pulling back on such exposure. In comparison, the GPIF reported only a 7.6% slump in the fiscal year ended March 31, 2009.

That list bit about comparative slumps should clue you in as to where the GPIF is going to want to go to first when it comes to meeting liquidity needs. Why sell volatile equity securities and potentially lock-in another loss when you can sell some ultra low-yield JGBs and FILPs, perhaps even turning that ROI-frown, upside-down in the process?

A special thanks, by the way, to John Vail of Nikko Asset Management, for providing some much-needed “useful idiot” stock-jobber equity permabull nonsense encouraging the GPIF to go out on the risk curve a bit more. Over the long-term, equities will “nearly-always” outperform JGBs… except for the past 30 years (image pulled from Mish):

Dang, looks like the long-term can be very long, indeed.

Meanwhile, Mr. Mitani seems fairly confident that the Ponzi-scheme will be kept up a bit longer:

Mr. Mitani expects the 10-year JGB yield to mostly stay below 1.5% for the next two to three years, though it may break above that point temporarily. He added that he isn’t too concerned about the risk that JGB prices will plunge due to fears about increasing JGB supply, creating a Greek-style fiscal crisis.

“If financial firms keep receiving ample funds from [the Bank of Japan], if companies remain reluctant to borrow, and if individuals keep savings at banks, there’s no choice but to purchase government bonds,” Mr. Mitani said.

Maybe. Hayman Capital Advisors’ Kyle Bass doesn’t seem to think so. Either way, it’s not a popularity contest. Just keep in mind that that’s a lot of “Ifs”. The other thing to remember is that the GPIF may be the biggest fund facing this kind of problem, but it is far from being the only one, in Japan and around the world. As discussed above with the Ponzi within the Ponzi, there are a lot of moving pieces in these deadly contraptions and this type of intertwined financial structure has been rigged, Rube Goldberg-style (you’re going to have to click the link and watch the 2min vid to the end to see just how ironic a choice it was given the subject matter at hand), across the world’s pension and financial systems as well as governments.

I know not when it will end, but I do know this– when these things end, they don’t end well.

High yield bond offerings set record in January

According to an article in today’s Bloomberg, “corporations sold $25.9 billion of junk-rated debt in 2010, the fastest start to a year on record.” The market for riskier debt has since cooled:

“Three months ago, every piece of spaghetti stuck to the wall,” said Jason Brady, a managing director who invests $54 billion at Thornburg Investment Management Inc. in Santa Fe, New Mexico. “Now it seems, the market is more price sensitive.”

The securities slid 1.16 percent this month after gaining 1.52 percent in January and 57.5 percent in 2009, according to Bank of Merrill Lynch data. Merrill Lynch’s Global Broad Market Corporate Index showed.

The extra yield investors demand to own high-yield debt instead of Treasuries has grown to 688 basis points from this year’s low of 599 basis points, or 5.99 percentage points, on Jan. 11, according to the Bank of America Merrill Lynch U.S. High-Yield Master II Index.

One of the many disastrous consequences of the Fed’s zero interest rate policy is the enticing of investors to reach for yield. Last year $460 million fled money market funds for riskier pastures, even high yield debt. As the old Wall Street saying goes, “more money is lost reaching for yield than at the point of a gun.”

Corporate debt déj

As the WSJ reported yesterday in an article titled, “Borrowing for Dividends Raises Worries,” Fed chairman Bernanke’s zero interest rate policy (ZIRP) has given new life to old habits:

Borrowing from bondholders to pay shareholder dividends is “a hallmark of an earlier credit era,” Jeffrey Rosenberg, head of credit strategy at Bank of America Merrill Lynch, wrote in a report Friday. Such deals were popular in 2003 and 2004, the last time the Federal Reserve lowered its benchmark interest rate to historically low levels, keeping it at 1% for more than a year.

In fact, under captain Alan Greenspan, the Fed began its historic and fatal maiden voyage towards ZIRP in January, 2001. As the corporate credit spigot opened up, such luminaries as Tyco, Enron, and WorldCom rushed to raise money. In fact, WorldCom’s pulled off a record-breaking $11.9 billion debt offering in May, 2001. The company, with $103.9 billion in assets, was sunk 14 months later. Only the women and children were saved.

Of course, there were more serious consequences to the Fed artificially lowering rates in order to contain the tech bust, such as lighting a fuse under the housing and credit bubbles, encouraging recklessness, punishing thrift, and putting off the day of reckoning. Human nature being what it is – especially within the power elite – nothing was learned.

As Mark Twain remarked, “history doesn’t repeat, it rhymes.”

(Thanks to Sal Pramas.)

Corporate debt déj

As the WSJ reported yesterday in an article titled, “Borrowing for Dividends Raises Worries,” Fed chairman Bernanke’s zero interest rate policy (ZIRP) has given new life to old habits:

Borrowing from bondholders to pay shareholder dividends is “a hallmark of an earlier credit era,” Jeffrey Rosenberg, head of credit strategy at Bank of America Merrill Lynch, wrote in a report Friday. Such deals were popular in 2003 and 2004, the last time the Federal Reserve lowered its benchmark interest rate to historically low levels, keeping it at 1% for more than a year.

In fact, under captain Alan Greenspan, the Fed began its historic and fatal maiden voyage towards ZIRP in January, 2001. As the corporate credit spigot opened up, such luminaries as Tyco, Enron, and WorldCom rushed to raise money. In fact, WorldCom’s pulled off a record-breaking $11.9 billion debt offering in May, 2001. The company, with $103.9 billion in assets, was sunk 14 months later. Only the women and children were saved.

Of course, there were more serious consequences to the Fed artificially lowering rates in order to contain the tech bust, such as lighting a fuse under the housing and credit bubbles, encouraging recklessness, punishing thrift, and putting off the day of reckoning. Human nature being what it is – especially within the power elite – nothing was learned.

As Mark Twain remarked, “history doesn’t repeat, it rhymes.”

(Thanks to Sal Pramas.)

Corporate debt déj

As the WSJ reported yesterday in an article titled, “Borrowing for Dividends Raises Worries,” Fed chairman Bernanke’s zero interest rate policy (ZIRP) has given new life to old habits:

Borrowing from bondholders to pay shareholder dividends is “a hallmark of an earlier credit era,” Jeffrey Rosenberg, head of credit strategy at Bank of America Merrill Lynch, wrote in a report Friday. Such deals were popular in 2003 and 2004, the last time the Federal Reserve lowered its benchmark interest rate to historically low levels, keeping it at 1% for more than a year.

In fact, under captain Alan Greenspan, the Fed began its historic and fatal maiden voyage towards ZIRP in January, 2001. As the corporate credit spigot opened up, such luminaries as Tyco, Enron, and WorldCom rushed to raise money. In fact, WorldCom’s pulled off a record-breaking $11.9 billion debt offering in May, 2001. The company, with $103.9 billion in assets, was sunk 14 months later. Only the women and children were saved.

Of course, there were more serious consequences to the Fed artificially lowering rates in order to contain the tech bust, such as lighting a fuse under the housing and credit bubbles, encouraging recklessness, punishing thrift, and putting off the day of reckoning. Human nature being what it is – especially within the power elite – nothing was learned.

As Mark Twain remarked, “history doesn’t repeat, it rhymes.”

(Thanks to Sal Pramas.)

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