The Fed's QE Exit Will More Than Quadruple Interest Costs For The US Submitted by Tyler Durden on 05/01/2013 15:27 -0400 Bond Japan Treasury Borrowing Advisory Committee With the Fed now openly warning that there may actually come a time when the 'flow' stops; the most recent Treasury Borrowing Advisory Committee (TBAC) report has some concerning statistics for those change-ridden hopers who see a smooth Fed exit, deficit-reduction, and blue skies ahead. While they are careful not shout 'sell' in a crowded bond market; hidden deep in the 126 page presentation are two charts that bear significant attention. The first shows what TBAC expects (given the market's expectations) to happen to interest rates in the US as the Fed 'exits' its QE program (taper, unwind, hold) - the result, the weighted-average cost of financing for the US government will almost triple from around 1.6% to around 4.3% over the next ten years. But more problematic is that even with CBO's rather conservative estimates of the growth in US debt over the next decade the USD cost of financing will explode from around $205bn (based on TBAC data) to over $855bn . Still convinced the Fed can exit smoothly? As TBAC warns: Treasury yields could reprice notably when the market is convinced that policy tightening is imminent There is a risk that markets may overshoot to higher-than-fair yield levels due to: Concerns about Fed portfolio unwind Inadequate interest hedging in certain asset classes Portfolio rebalancing by retail investors Annual interest cost on public debt to increase more than 400% (from $205 bn in 2013 to $855 bn in 2023) Main driver : Increase in WAC from 1.7% to 4.3% Secondary factor : ~ 65% increase in stock of debt Given the market's expectations for Fed tapering (or gradual tightening)... The marginal cost of financing will rise significantly... but with the sheer size of debt now (and growing), that will balloon the absolute cost of servicing US debt to over $850bn per year... And just what happens to all those retirees - who need yield - who are being herded into stocks when Treasuries pay over 4.5%? Would seem bullish for bond flows... think Japan... Charts: TBAC Average:
Physical Gold Vs Paper Gold: Waiting For The Dam To Break Submitted by Tyler Durden on 04/27/2013 13:14 -0400 Australia Bank of England Bear Market Capital Markets Central Banks China Commitment of Traders Eurozone Exchange Traded Fund Guest Post India Investor Sentiment Japan Market Conditions Middle East Moving Averages Precious Metals Switzerland Technical Analysis United Kingdom Submitted by Alasdair Macleod, via GoldMoney.com , Introduction In this article I will argue that the recent slide in the gold price has generated substantial demand for bullion that will likely bring forward a financial and systemic disaster for both central and bullion banks that has been brewing for a long time. To understand why, we must examine their role and motivations in precious metals markets and assess current ownership of physical gold, while putting investor emotion into its proper context. In the West (by which in this article I broadly mean North America and Europe) the financial community treats gold as an investment. However, of the global pool of gold, which GoldMoney estimates to be about 160,000 tonnes, the amount actually held by western investors in portfolios is a very small fraction of this amount. Furthermore investor behaviour, which in itself accounts for just part of the West’s bullion demand, is sharply at odds with the hoarders’ objectives, which is behind underlying tensions in bullion markets. To compound the problem, analysts, whose focus incorporates portfolio investment theories and assumptions, have very little understanding of the economic case for precious metals, being schooled in modern neo-classical economic theories. These economic theories, coupled with modern investment analysis when applied to bullion pricing, have failed to understand the growing human desire for protection from monetary instability. The result has for a considerable time been the suppression of bullion prices in capital markets below their natural level of balance set by supply and demand. Furthermore, the value put on precious metals by hoarders in the West has been less than the value to hoarders in other countries, particularly the growing numbers of savers in Asia. These tensions, if they persist, are bound to contribute to the eventual destruction of paper currencies. The ownership of gold The amount of gold bullion that backs investor-driven markets is not statistically recorded, but we can illustrate its significance relative to total stocks by referring back to the time of the oil crisis of the mid-1970s. In 1974 the global stock of gold was estimated to be half that of today, at about 80,000 tonnes. Monetary gold was about 37,000 tonnes, leaving 43,000 tonnes in the form of non-monetary bullion, coins and jewellery. Let us arbitrarily assume, on the basis of global wealth distribution, that two thirds of this was held by the minority population in the West, amounting to about 30,000 tonnes. This figure probably grew somewhat before the early 1980s, spurred by the bull market and growing fear of inflation, which saw investors buy mainly coins and mining shares. Demand for gold bars was driven by the rapid accumulation of dollars in the oil-exporting nations, as well as some hoarding by wealthy investors from all over the world through Switzerland and London. The sharp rise in global interest rates in the Volcker era, the subsequent decline of the inflation threat and the resulting bear market for gold inevitably led to a reduction of bullion holdings by wealthy investors in the West. Swiss and other private banks, employing a new generation of fund managers and investment advisors trained in modern portfolio theories, started selling their customers’ bullion positions in the 1980s, leaving very little by 2000. In the latter stages of the bear market, jewellery sales in the West became a replacement source of bullion supply, but this was insufficient to compensate for massive portfolio liquidation. So by the year 2000, Western ownership of non-monetary gold suffered the severe attrition of a twenty-year bear market and the reduction of inflation expectations. Portfolios, which routinely had 10-15% exposure to gold 40 years ago even today have virtually no exposure at all. Given that jewellery consumption in Europe and North America was only 400-750 tonnes per annum over the period, by the year 2000 overall gold ownership in the West must have declined significantly from the 1974 guesstimate of 30,000 tonnes. While the total gold stock in 2000 stood at 128,000 tonnes, the virtual elimination of portfolio holdings will have left Western holders with little more than perhaps an accumulation of jewellery, coins and not much else: bar ownership would have been at a very low ebb. Since 2000, demand from countries such as India and more recently China is known to have increased sharply, supporting the thesis that gold has continued to accumulate at an accelerating pace in non-Western hands. Western bullion markets have therefore been on the edge of a physical stock crisis for some time. Much of the West’s physical gold ownership since 2000 has been satisfied by recycling scrap originating in the West, suggesting that total gold ownership in the West today barely rose before the banking crisis despite a tripling of prices. Meanwhile the disparity between demand for gold in the West compared with the rest of the world has continued, while the West’s investment management community has been actively discouraging investment. The result has been that nearly all new mine production and Western central bank supply has been absorbed by non-Western hoarders and their central banks. While post-banking crisis there has presumably been a pick-up in Western hoarding, as evidenced by ETF and coin sales and some institutional involvement, it is dwarfed by demand from other countries. So it is reasonable to conclude that of the total stock of non-monetary gold, very little of it is left in Western hands. And so long as the pressure for migration out of the West’s ownership continues, there will come a point where there is so little gold left that futures and forwards markets cease to operate effectively. That point might have actually arrived, signalled by attempts to smash the price this month. This admittedly broad-brush assessment has important implications for the price stability essential to bullion banks operating in paper markets as well as for central banks attempting to maintain confidence in their paper currencies. Precious metals in capital markets In the West itself, the attitudes of the investment community are fundamentally different from even those of the majority of Western hoarders, who are looking for protection from systemic and currency risks as opposed to investment returns. Western investors are generally oblivious to the implications, the most fundamental of which is that falling prices actually stimulate physical demand. Before the recent dramatic slide in prices the investment community undervalued precious metals compared with Western hoarders, let alone those in Asia, encouraging physical bullion to migrate from financial markets both to firmer hands in the West as well as the bulk of it to non-West ownership. There is now irrefutable evidence that these flows have accelerated significantly on lower prices in recent weeks, as rational price theory would lead one to expect. Pricing bullion is therefore not as simple as the investment community generally believes. It is being put about, mostly on grounds of technical analysis, that the bull markets in gold and silver have ended, and precious metals have entered a new downtrend. The evidence cited is that medium and longer-term moving averages have been violated and are now falling; furthermore important support levels have been breached. These developments, which arise out of the futures and forward markets, have rattled Western investors who thought they were in for an easy ride. However, a close examination of futures trading shows the bearish case even on investment grounds is flawed, as the following two charts of official statistics provided by weakly Commitment of Traders data clearly show. The Money Managers category is the clearest reflection in the official data of investor portfolio positions, representing sizeable mutual and hedge funds. In both cases, the number of long contracts is at historically low levels, and shorts, arguably the better reflection of money-manager sentiment, remain close to high extremes. On this basis, investor sentiment is clearly very bearish already, with the investment management community already committed to falling prices. Put very simplistically there are now more buyers than sellers. Money Managers are in stark opposition to the Commercials, who seek to transfer entrepreneurial risk to Money Managers and other investor and speculator categories. The official statistics break Commercials down into two categories: Producer/Merchant/Processor/User, and Swap Dealers. Both categories include the activities of bullion banks, which in practice supply liquidity to the market. Because investors and speculators tend to run bull positions, bullion banks acting as market-makers will in aggregate always be short. A successful bullion bank trader will seek to make trading profits large enough to compensate for any losses on his net short position that arise from rising prices. A bullion bank trader must avoid carrying large short positions if in his judgement prices are likely to rise. He will be more relaxed about maintaining a bear position in falling markets. Crucially, he must keep these opinions private, and the release of market statistics are designed to accommodate these dealers’ need for secrecy. Bullion banks’ position details are disclosed at the beginning of every month in the Bank Participation Reports, again official statistics. They are broken down into two categories, based on the individual bank’s self-description on the CFTC’s Form 40, into US and Non-US Banks. Their positions are shown in the next two charts (note the time scale is monthly). In both gold and silver, the bullion banks have managed to reduce their exposure from extreme net short over the last four months. The reduction of their market exposure suggests that they have been deliberately transferring this risk to other parties, and is consistent with an anticipation that bullion prices will rise. It is the other side of the high level of bearishness reflected in the Money Manager category shown in the first two charts. The bullion banks control the market; the Money Managers are merely tools of their trade. There has been little reduction in open interest in gold and it has remained strong in silver, because risk has been transferred rather than extinguished. Daily official statistics on open interest are provided by the exchange and summarised in the next two charts (note that data is daily). From these charts it can be seen that recent declines in the gold price are failing to reduce open interest further, and in silver open interest remains stubbornly high. Therefore, attempts by bullion banks to reduce their net short exposure by marking prices down are showing signs of failure. We can therefore conclude that investor sentiment is at bearish extremes and the bullion banks have reduced their net short exposure to levels where it risks rising again. Therefore the downside for precious metals prices appears to be severely limited, contrary to sentiments expressed by technical analysts and in the media. This market position is against a background of a growing shortage of physical bullion, which is our next topic. Physical markets Casual observers of precious metal prices are generally unaware that the headline writers focus on activity in the futures markets and generally ignore developments in physical bullion. This is consistent with the fact that market data is available in the former, while dealing in the latter is secretive. However, as with icebergs, it is not what you see above the water that matters so much as that which is out of sight below. It is not often understood in investment circles that gold and silver are commodities for which the laws of supply and demand are not overridden by investor psychology. Therefore, if the price falls, demand increases. Indeed, the increase in demand has far outweighed selling by nervous investors; even before the price-drop, demand for both silver and gold significantly exceeded supply. Evidence ranges from readily available statistics on record demand for newly-minted gold and silver coins and the net accumulation of gold by non-Western central banks, to trade-based information such as imports and exports of non-monetary gold as well as reports from trade associations reporting demand in diverse countries such as India, China, the UK, US, Japan and even Australia. All this evidence points in the same direction: that physical demand is increasing on every price drop. There is therefore a growing pricing conflict between futures and forward markets, which do not generally involve settlement but the rolling-over of speculative positions, and of the underlying physical metal. Furthermore, analysts make the mistake of looking at gold purely in terms of mining and scrap supply, when nearly all gold ever mined is theoretically available to the market, in the right conditions and at the right price. The other side of this larger coin is that if the price of gold is suppressed by activity in paper markets to below what it would otherwise be, the stimulus for physical demand, being based on a 160,000 tonne market, is likely to be considerably greater on a given price drop than analysts who are myopic beyond 2,750 tonnes of annual mine production might expect. The numbers that are available confirm this to have been the case, particularly over the last few weeks, with reports from all over the world of an unprecedented surge in demand. This is at the root of a developing crisis of which few commentators are as yet aware. Demand for physical has accelerated the transfer of bullion from capital markets to hoarders everywhere and from the West’s capital markets to other countries, which has been the trend since the oil crisis in the mid-Seventies. This is what’s behind an acute shortage of physical gold in capital markets, explaining perhaps why bullion banks feel the need to reduce their short positions. While we can detail their exposure in futures markets, meaningful statistics are not available in over-the-counter forward markets, particularly for London, which dominates this form of trading. Forwards are considerably more flexible than futures as a trading medium, generating trading profits, commissions, fees and collateralised banking business. The ability to run unallocated client accounts, whereby a client’s gold is taken onto a bank’s balance sheet, is in stable market conditions an extremely profitable activity, made more profitable by high operational gearing. The result is that paper forward positions are many multiples of the physical bullion available. The extent of this relationship between physical bullion and paper is not recorded, but judging by the daily turnover in London there is an enormous synthetic short physical position. For this reason a sharply rising price would be catastrophic and any drain on bullion supplies rapidly escalates the risk. Overseeing this market is the Bank of England co-operating with other Western central banks and the Bank for International Settlements, whose combined interest obviously favours price stability. They have been quick to supply the market if needed, confirmed by freely-admitted leasing operations in the past, and by secretive supply into the market, which has been detected by independent supply and demand analysis over the last 15 years. Furthermore, as currency-issuing banks, central banks are unlikely to take kindly to market signals that suggest gold is a better store of value than their own paper money. We can only speculate about day-to-day interventions by Western central banks in gold markets. In this regard it seems that the slide in prices on the 12th and 15th April was triggered by a very large seller of paper gold; if this market story and the amount mentioned are correct, it can only be central bank intervention, acting to deliberately drive prices lower. Given the market position, with Money Managers in the futures markets already short and highly vulnerable to a bear squeeze, the story seems credible. The objective would be to persuade holders of physical ETFs and allocated gold accounts to sell and supply the market, on the assumption that they would behave as investors convinced the bull market is over. Conclusions For the last 40 years gold bullion ownership has been migrating from West to elsewhere, mostly the Middle East and Asia, where it is more valued. The buyers are not investors, but hoarders less complacent about the future for paper currencies than the West’s banking and investment community. There was a shortage of physical metal in the major centres before the recent price fall, which has only become more acute, fully absorbing ETF and other liquidation, which is small in comparison to the demand created by lower prices. If the fall was engineered with the collusion of central banks it has backfired spectacularly. The time when central banks will be unable to continue to manage bullion markets by intervention has probably been brought closer. They will face having to rescue the bullion banks from the crisis of rising gold and silver prices by other means, if only to maintain confidence in paper currencies. Any gold held by struggling eurozone nations, theoretically available to supply markets as a stop-gap, will not last long and may have been already sold. This will likely develop into another financial crisis at the worst possible moment, when central banks are already being forced to flood markets with paper currency to keep interest rates down, banks solvent, and to finance governments’ day-to-day spending. Its importance is that it threatens more than any other of the various crises to destabilise confidence in government-backed currencies, bringing an early end to all attempts to manage the others systemic problems. History might judge April 2013 as the month when through precipitate action in bullion markets Western central banks and the banking community finally began to lose control over all financial markets. 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Some Taxing Questions About (Not So) Record Corporate Profits Submitted by Tyler Durden on 02/13/2013 12:03 -0500 Apple David Einhorn GAAP Gross Domestic Product Housing Bubble Ireland Netherlands Recession Tax Revenue Treasury Borrowing Advisory Committee One of the recurring memes of the now nearly 4 years old "bull market" (assuming the recession ended in June 2009 as the NBER has opined), is that corporate profits are soaring, and that despite recent weakness in Q4 earnings (profiled most recently here ), have now surpassed 2007 highs on an " actual" basis. For purely optical, sell-side research purposes that is fine: after all one has to sell the myth that the US private sector has never been healthier which is why it has to immediately respond to demands that it not only repatriate the $1+ trillion in cash held overseas, but to hand it over to shareholders post-haste (see recent "sideshow" between David Einhorn and Apple). However, a problem emerges when trying to back this number into the inverse: or how much money the US government is receiving as a result of taxes levied on these supposedly record profits. The problem is that while back in the summer 2007, or when the last secular peak in corporate profitability hit, corporate taxes peaked at well over $30 billion per month based, the most recent such number shows corporate taxes barely scraping $20 billion per month! Does this mean that when one excludes all the usual non-cash exclusions, and all the endlessly recurring non-recurring items, all of which which feed the EPS line from a GAAP, and non-GAAP basis, and focuses solely on actual earnings generated by US companies, which form the basis for tax accounting purposes, that the real profitability of the US private sector, and by implication, the SP, is at best two thirds of where it was at its peak in 2007, and if so does this mean that the actual earnings multiple applied to true recurring earnings is some 50% higher than where the sellside brigade wants to retail investor to believe it is? We don't know, but we do know that while Individual Income taxes have returned to their 2007 peak as per the latest quarterly Treasury Borrowing Advisory Committee presentation (blue line chart below), Corporate Taxes still have some 50% to go before the prior peak is regained (green line). There is also another explanation. US Companies have built up their massive cash hoards over the past 5 years due to an even more aggressive pursuit of tax shelter and loophole strategies, as well as an even more aggressive use of deferred tax assets and NOL carryforwards, meaning that all the cash that they have not paid to the US government, has ended up on their balance sheet, and which cash shareholders are now demanding be dividended or used to fund buybacks (preferably with leverage). While the first explanation is relevant from a valuation standpoint, implying that corporate profitability is far lower than conventional wisdom believes to be the case and thus the market is widely overvalued, the second explanation goes straight to the most sensitive issue facing the administration currently: namely deficit reduction. Because while the administration does everything to "close the spending hole" by hiking income taxes on the wealthiest, what happened to any discussion about corporate taxes especially on those megacorps who pay zero domestic taxes and barely any tax in offshore shelters like Ireland, the Netherlands or the Caymans? Because something tells us if indeed Corporations are rolling in record profits, they should at least be paying the same amount of taxes as they did during the last credit and housing bubble, instead of 66% of it. Finally: if corporations were to simply catch up to where tax payments were in the summer of 2007, this would imply an annualized government tax revenue difference of some $120 billion. While hardly a massive sum in the context of the US $1+ trillion deficits, it would take some pressure off the US consumers, be they rich or poor, and actually stimulate the one driver that at last check still accounted for some 70% of US GDP: consumption. Average: 5 Your rating: None Average: 5 ( 4 votes) Tweet - advertisements - Login or register to post comments 5521 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: 2012 Year In Review - Free Markets, Rule of Law, And Other Urban Legends Taibbi: "Goldman Raped The Taxpayer, And Raped Their Clients" iTax Avoidance - Why In America There Is No Representation Without "Double Irish With A Dutch Sandwich" Taxation No Record Profits For Old Assets: Jim Montier On Unsustainable Parabolic Margin Expansion For Dummies Is JPMorgan About To Take Over America, Again?
Charting US Debt And Deficit Since Inception Submitted by Tyler Durden on 12/17/2012 23:00 -0500 Alan Greenspan Budget Deficit Central Banks Congressional Budget Office Federal Reserve Gross Domestic Product Japan Layering Lehman Lehman Brothers Monetization Mutual Assured Destruction Shadow Banking Sovereign Debt In the recent aftermath of the US just concluding its fourth consecutive fiscal year with a $1 trillion+ deficit, we have been flooded with requests to show how the current fiscal situation stacks up in a big picture context. Very big picture context . For all those requests, we present the following chart showing total US Federal debt/GDP as well as Deficit/(Surplus)/GDP since inception, or in this case as close as feasible, or 1792, which appears to be the first recorded year of historical fiscal data. We can see why readers have been so eager to see the " real big picture " - the chart is nothing short of stunning. Some observations: Beginning with the Anglo-American war of 1812, and continuing through the US civil war, World War I and World War II, the major military shocks to the US fiscal system are clearly obvious. Just as obvious is the impact of not only The Great Moderation which started in the early 1980s just before the 1987 arrival of Alan Greenspan at the helm of the Fed, which allowed the US to exchange fiscal prudence for ever cheaper debt which could and would be used to fund an ever greater budget deficit, and lead to a surge in the Federal debt. The increasingly more unstable system, which saw the additional layering of another $23 trillion in shadow banking debt at its peak in 2008, as well as countless trillions in household, corporate and financial debt, as well as hundreds of trillions in underfunded welfare liabilities, led first to the Internet bubble, then the Housing and Credit bubble, and finally, to the Great Financial Crisis of 2008 which climaxed with the failure of Lehman brothers, and resulted in the central bank bailout of every developed bank, and shortly thereafter, the backstop of every peripheral country in Europe. The gravity and impact of the Great Financial Crisis on the US economy is stark, very visible, and can only be compared to previous instances of destructive military conflict in terms of lost output and impact on the US economy. Total US Debt/GDP is currently just over 103%. This number is expected to rise to 125% by the end of 2016, which will eclipse the peak debt/GDP seen in World War II, and be the highest in US history. Whereas in the past episodes of fiscal catastrophe were accompanied not only by a surge in debt (black line), but by a parallel explosion in fiscal deficits (red bars), this time the deficit spike has been more modest (peaking at about 10% of GDP), but more protracted, with even the CBO expecting deficits of around $1 trillion to last for the next several years. One possible interpretation is that due to the Fed's relentless interest rates intervention, the polarized US government feels no burning desire to promptly balance its budget, and even overshoot, and through a combination of aggressive spending cuts and/or revenue increases, result in a much needed surplus which would be used to reduce the sovereign debt. This is graphically seen in the ongoing Fiscal Cliff debate, when any proposal for substantial spending cuts - the true problem at the core of America's deficit habituation and welfare statism - is greeted with shrieks of Mutual Assured Destruction. This is not a political issue: politicians on both sides of the aisle are perfectly aware that setting the US on a sustainable fiscal course would mean massive pain for the common citizen, and an immediate termination of all existing political careers: after all the myth of the welfare state is at stake. It is in everyone's interest - both GOP and Democrat - to perpetuate the unsustainable deficit status quo indefinitely. Any theatrics out of the GOP demanding fiscal conservatism are therefore just that - theatrics. There is no question that it is unsustainable: US GDP is currently growing at a pace of 1.5%-2.5% at best. Total 2012 US debt will have risen at a rate of 8%, and will continue rising in the 6%-8% range. More disturbing is the influence of the Fed, whose policy of ZIRP and outright debt monetization (recall even JPM has now admitted the Fed will monetize all US debt issuance in 2013) is the only permissive factor that has allowed the US to delay the inevitable moment of reckoning as long it has. Indicatively, a modest rise in the average US interest rate, which is currently at all time blended lows, to just 5%, would mean that in 3 years the US would spend, pro forma, $1 trillion in cash interest each year . At that point the US will approach Japan status, where the government needs to borrow just to fund interest outlays. Actually, instead of Japan, Weimar would be a better analogy. Finally, on all previous historical occasions, there was at least one backstop of last reserve, a central bank, standing ready to step in and provide the necessary liquidity, and monetize the needed debt to keep the show running. Since 2009, all the central banks have also gone all in on the Keynesian endgame: at this point the next shock to the status quo system will be the last, as there is no more backstops. At that point the only two options will be outright monetary devaluation, though not relative in the closed monetary loop of modern monetarism, but absolute , where every currency is concurrently devalued against a hard asset (potentially with the forceful concurrent confiscation of said hard asset by the host government, think Executive Order 6102), in order to generate a terminal currency and debt debasement, or outright global debt moratoria, and the end of the modern financial system as we know it (but not before the financial "leaders" of our time have converted enough of their paper wealth into hard asset format and transferred it to more peaceful, more "gun-controlled", non-extradition territories). And there you have it. Oh, and whoever said the advent of the Federal Reserve, or the end of "hard money" standard courtesy of Richard Nixon, made catastrophic or systematically shocking events less frequent, probably should have their head examined. Average: 5 Your rating: None Average: 5 ( 13 votes) Tweet Login or register to post comments 5750 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: IMF Says Japan And Spain Are Done, "Debt Ratio Will Never Stabilize" A Mushroom Cloudy Future: In 2016 Japan, Net Debt Per Capita Will Be $140,000 As US Closes June With $15,856,367,214,324.44 In Federal Debt, US Debt/GDP Hits Post WWII High Of 101.5% UBS Issues Hyperinflation Warning For US And UK, Calls It Purely "A Fiscal Phenomenon" Deja 2011 Vu Part 2: Goldman Sees Another US Downgrade In 2013
What Do High Yield Bonds Know That No One Else Does? Submitted by Tyler Durden on 10/26/2012 14:20 -0400 Barclays Bond CDS High Yield Wizened old market participants are often heard mumbling into their cups of green tea that "credit anticipates, and equity confirms" and so it is once again that the credit markets - fresh from the exuberance of endless technical flows, CLOs, and PIK-Toggles - has made a rather abrupt U-Turn in recent weeks. As Barclays points out, the ratio of High-Yield bond spreads to Investment-Grade bond spreads is its highest in three years as IG has been dragged lower by QEtc's impact on MBS and rotation up the spread spectrum. Typically, this kind of push would mean high-beta credit would outperform but far from it as cash bond markets have gapped out very recently. With call constraints (thanks to ZIRP) on high-yield bonds, the extreme price dislocation (given HY's inability to rally 'enough') will likely drag IG credit out - and that is a very crowded trade. Just one more unintended consequence from the Fed. HY bond spreads are pricing in considerably more pain than IG bond spreads - what do they know? CDS markets are not moving as much - having short-squeezed recently and just reracking with stocks. Bonds - real money accounts - are in trouble here...if this differential remains... but it seems that the crap-end of the credit quality spectrum remains active with new issuance. Average: 5 Your rating: None Average: 5 ( 4 votes) Tweet Login or register to post comments 9255 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: CDS Market Begins Trading Imaginary Credit With LIBOR-Style Fixings 8 Ways Of Looking At A High Yield Bond Selloff What Does High Yield Credit Know That Stocks Don't? Why The High-Yield Market Won't See A Performance-Chasing Rally Dow Closes At Highest Since 2007 As High Yield Outperforms
Many Americans are not buying the recent stock market rally. This is being reflected in multiple polls showing negative attitudes towards the economy and Wall Street. Wall Street is so disconnected from the average American that they fail to see the 27 million unemployed and underemployed Americans that now have a harder time believing the gospel of financial engineering prosperity. Americans have a reason to be dubious regarding the recovery because jobs are the main push for most Americans. A recent study shows that over 70 percent of Americans derive their monthly income from an actual W-2 job. In other words, working is the prime mover and source of their income. Yet the financial elite have very little understanding of this concept. Why? 42 percent of financial wealth is controlled by the top 1 percent. We would need to go back to the Great Depression to see such lopsided data. Many Americans are still struggling at the depths of this recession. We have 37 million Americans on food stamps and many wait until midnight of the last day of the month so checks can clear to buy food at Wal-Mart . Do you think these people are starring at the stock market? The overall data is much worse: Source: William Domhoff If we break the data down further we will find that 93 percent of all financial wealth is controlled by the top 10 percent of the country. That is why these people are cheering their one cent share increase while layoffs keep on improving the bottom line. But what bottom line are we talking about here? The Wall Street crowd would like you to believe that all is now good that the stock market has rallied 60+ percent. Of course they are happy because they control most of this wealth. Yet the typical American still has negative views on the economy because they actually have to work to earn a living: The above daily poll asks Americans about their view on the health of the economy. Only 13 percent believe the economy is good or excellent. Funny how that correlates with the top 10 percent who control 93 percent of wealth. Many Americans were sold the illusion of the bubble. They were sold on the idea that their homes were worth so much more than they really were. And many used this phony wealth effect to go out and spend beyond their means. They started spending as if they were part of this elite 10 percent crowd. But once the tide rolled out, it was clear they were not. And the horribly built bailouts demonstrate who is controlling our political system. This was not the rule of a capitalist system but a corporate run government . Just think about the bailouts and which companies were saved. We ended up bailing out the worst performing and troubled companies thus keeping alive companies that should have completely failed. Did we bail out Google? Proctor and Gamble? Of course not. These companies actually produce something that people want. Banks and especially the Wall Street kind merely keep that 42 percent happy by making sure their stock values stay high so they can keep on making money while the average Americans is sold up the river. Yet many were brought into the easy money fold by going into massive amounts of debt. And who has most of the debt? That is right, the average American : The bottom 90 percent have been saddled with 73 percent of all debt. In other words much of their so-called wealth is connected to debt. Debt is slavery for many especially with egregious credit card companies taking people out with absurd credit card tricks and scams . Yet the corporate propaganda machine is strong and mighty. Have you ever received an inheritance? A large one? Probably not because only 1.6% of all Americans receive an inheritance larger than $100,000. If this is the case, why in the world do politicians worry so much about the tax impacts of this? Because they want to keep the corporatocracy alive and well so their spawn can get a piece of their pie. They give the illusion to average Americans that if you only work hard enough you too can join this elusive club of cronies. The data shows otherwise. But if we start looking at investment assets, the true wealth in the country, we start realizing why Wall Street is all giddy about the recent stock market government induced rally: Of investment assets 90 percent of Americans own 12.2 percent. The rest goes to the top 10 percent. Welcome to the new serfdom. The bailouts that went out to the filthy rich were more about protecting their tiny corner of the world than actually making the economy better. That is why it is interesting to see companies fire people and Wall Street cheer for the increase in earnings per share. Good for the few at the expense of the many. Yet the propaganda out of Wall Street and our government is what is good for Wall Street is good for you. Just like that 1.6% inheritance issue, the vast majority of Americans won’t deal with that and their primary concern is simply a job. A job that has provided stagnant wages for a decade while the ultra wealth get richer and richer in a phony form of corporate socialism. If you break down the data you realize that most Americans don’t have time to speculate in stock markets: Only 34% of U.S. households make more than $65,000 per year. What is that after taxes? Let us use a state like California for example: Now if we breakdown this data further you will realize that most of the money is consumed by cost of living necessities, not Wall Street speculation. Just to show this example let us look at a family budget for someone in California making $100,000: Notice after running the budget we are in the hole for $1,000? That is because of many costs that typical families have. We can debate the merits of where they are spending money but the point is this; are these people really making beaucoup money from the stock market? They are putting away $12,000 a year into their 401k. As we have now found out, 8 percent a year is never guaranteed in the stock market although the corporate powers would like you to believe that so they can have other suckers to unload stocks onto. “Yet the median household income in the U.S. is $50,000 and not $100,000. They have even less to invest.” They are more concerned on working to have a paycheck to pay for necessities. They are more concerned about paying their house off by the time they retire and hopefully, have a little bit of retirement funds coming in. The sad fact is most Americans rely on Social Security when they retire. All those ads of unlimited golf and daily trips to Tahiti are propaganda of how Wall Street lives and they want to sell you the sizzle, and clearly not the steak. They live their lives paper pushing and sucking the life out of the productive part of our economy. The average American should now realize this since this financial crisis was primarily caused by them. They are now on a massive campaign to blame Americans for this. This is hypocrisy to the next level. Many Americans have paid for their mistake by losing their home through foreclosure. We have 300,000 foreclosure filings a month. Many have taken a hit to their overall stock portfolio (if they have one). Yet the corporate cronies have protected their horrible economy crushing debts at the taxpayer expense. Unlike you, many hold bonds on the companies and not common stock like many Americans. Bondholders have been protected at all costs during this crisis. Goldman Sachs through AIG received 100 cents on the dollar for their horrible bets. The banks have unlimited back stops thanks to taxpayers. This is how the top 1 percent rule the new feudal state. Welcome to the 2010 serfdom. Time to wake up and restructure the system. Many people are starting to wake up to this massive scam. If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!
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