BIS: The Opening Riposte, Yellen’s Counter-Riposte

BIS: The Opening Riposte, Yellen’s Counter-Riposte

strongman Abdel Fattah as-Sisia as president, was deemed most bullish for Africa….

Meanwhile, in the corporate credit markets, covenant-lite loans now represent half of all corporate bonds outstanding, according to Barclays. And in ABS land the spread between AAA and subprime auto loans is the narrowest since 2007. “People just have to reach further and further,” says fund manager David Schawel to Bloomberg. “The objective now is to reach a certain yield target instead of feeling good about the underlying credit.”

Credit markets aren’t the only ones blurring the “gross yields” with net expected return, a different thing entirely. The insurance market is caught up in the same mass distortion. Catastrophe bonds, in which the investor loses his entire principal in the event of the specified catastrophe occurring, now trade at the lowest spread to the treasury since 2005, according to Bloomberg, at around 4.7%. The narrative is that it’s worth paying up for their low correlation to other assets, but Warren Buffett, himself no stranger to shrewd bond investments, is steering clear. “If you charge an inadequate premium you will get creamed over time,” he points out.

PIMCO’s Johnson, GMO’s LeGraw and DWS’ Rudy at Morningstar on how to hedge inflation

InflationInflation has been a big focus of Wall Street in recent months, and it won't go away any time soon. But where do we stand with inflation? Has it peaked, or will it continue higher? Q2 2021 hedge fund letters, conferences and more Nic Johnson of PIMCO, Catherine LeGraw of GMO, and Evan Rudy of Read More

French ten-year bonds (OATS) are paying 1.7%. Spanish (2.68%) and Italian (2.83%) debt are paying roughly the equivalent of US debt. German debt, at 1.27%, pays less than half of US debt at 2.64%. Somewhere in that equation, sovereign debt is spectacularly mispriced. Rated ten-year corporate bonds are paying between 3% and 3.4%. That is less than a 1% premium for bonds that are only single-A. Seriously?

The life insurance market is creating special-purpose vehicles (SPVs) for offloading their risk that are then guaranteed by the parent company. This is the subject of a very sobering report from the Minnesota branch of the Federal Reserve. Up to 25% of such debt may be subject to self-guarantees, and this debt is getting very high ratings. Whom are we kidding? (This is actually a very serious problem and needs an entire letter devoted to it. There’s just not enough time on a Friday afternoon, with the grill beckoning.)

And we are going to have to deal with a run on everything, very similar to what happened last time, armed only with “macroprudential policy”? Precisely what additional rules are we going to enact? You are not allowed to sell what you own? Except if you say “Mother may I, with sugar on top?” A liquidity crisis cannot be dealt with by means of any regulatory policy I can think of, short of draconian limits on markets – really nasty limits, which sort of undermines the whole concept of a free market. But then, maybe I just have no imagination.

If I could sit down with Chairwoman Yellen and ask her a few questions, chief among them would be: “What can macroprudential policies do in a liquidity crisis brought on by a reach for yield encouraged by your bank? Can you tell me exactly what those policies are?”

There is a bull market in complacency. As Dylan goes on to say, the illusion of central bank control is in full force. And one of the chief ironies is that a bull market can last longer than any of us can reasonably expect – and then end more abruptly than even the most cautious bulls suspect. The St. Louis Fed Financial Stress Index is at its lowest ebb since they began calculating the index. How much lower can it realistically go? The answer is that no one really knows.

BIS: The Opening Riposte, Yellen’s Counter-Riposte

I don’t know what the trigger for the next debt crisis will be, but whatever it is, it will result in an even deeper liquidity crisis than we saw in ’08. That is just the nature of the beast.

You need to look into your portfolios, deep into your portfolios, and see what your various investments did back in 2008-09. Then take a deep, long, serious look in the mirror. Ask yourself, “Can I withstand another shock like that?” Do you think you are smart enough to pull the trigger to get out in time? Do you have automatic triggers that will cause you to exit without having to be emotionally involved? Are there illiquid assets in your portfolio that you want to own right on through the next crisis? (Let me note that there are a lot of assets about which you might answer positively, with a full-throated yes, in that regard.) Would you rather be biased to cash today, when cash is in a true bear market and at its lowest value in years, if that cash will give you the buying power to purchase assets at prices that will once again look like 2009’s? Think about how you will feel in the wake of the next crisis, when cash will be king!

You should be thinking of cash not as cash per se, but as an option on future deep-value trades. There are few truisms in the investment world that are really valid, but one of them is that you make your money when you buy. That you sold at a profit is just another way of saying that you were smart to buy when you did. There is going to come a time when buying opportunities are once again going to be all around you.

A Few Thoughts on the Nonfarm Payroll Number

First, this was a continuation of a five-month run of relatively good nonfarm payroll numbers. You can see the GDP recession in the January and February reports which gave us lower payroll numbers. That recession is gone away. There are no wage pressures in the latest report, with earnings rising a meager $0.06 an hour, or the more positive sounding 0.2% y/y. Unemployment fell to 6.1%, but the broader unemployment measure, U-6, barely budged, at 12.4%.

Joan McCullough ran U-6 down for us:

Including this from EPI (Heidi Shierholz) who runs this calculation every month called “Missing Workers”, a/k/a/ those who have dropped off the radar screen for a host of reasons.

June 2014:  *5.98 mil (*roughly half of that number are of prime working age.  Aint’ that grand?  SOS.)

UE Rate if you add those back into the labor force:  9.6%

Compare that number to the official rate of 6.1%

Ms. Shierholz also estimates that “even if we saw June’s rate of job growth every month from here on out, we still wouldn’t get back to health in the labor market for another two and a half years.” …

That is still not be enough to take the bloom off the rose, but we should note that buried in the data is something that I’ve noted anecdotally among my own children and their friends (and which Joan again highlighted to me):

Now here’s the big joke of the whole deal:

Employed persons at work part time:

Part time involuntarily                                    +275k

Because hours cut back                                  +72k

Because that’s all they could find                   +111k

Part time voluntarily                                       +840k

That is seriously pathetic and makes me wonder about the Retail adds +40k and the Leisure & Hospitality adds +39k. Low-paying, less than 40 hour a week jobs?  You bet.  Ditto Health care and social assistance, which clocked in with a hefty 33.7k.

But it also explains why, with 288k bodies added, the average workweek is not budging.  Translation:  they are hiring more workers instead of increasing the hours of existing workers.  Which suggests that maybe this is more of what we have seen already:   the quest to hire part time employees to avoid the benefits baloney.

Use your head.  If we really created 288k jobs.  And 275k folks were made involuntarily part-time, then this suggests that there are still way more candidates than there are openings.

When some of us pointed out, when the Affordable Care Act (Obamacare) was being debated way back in 2010, that the bill would result in an extraordinarily large number of temporary and part-time workers, we were called delusional and told we were just using that argument to oppose the ACA. It turns out, Mr. Krugman et al., that we were right. An unintended consequence of the ACA is a dramatic increase in part-time employment, especially among young people. There is no disputing this, unless you are willing to ignore the clear data from the BLS.

Precisely when young people are starting their careers and should be able to land “starter jobs” and look forward to establishing themselves, they now have to hold down multiple part-time jobs in order to simply survive. Gods forbid they have a kid or two.

I don’t know when the topic of reform of the ACA will actually be allowed to come up in the House, let alone the Senate. I don’t think there is anyone who thinks the increase in part-time jobs due to the ACA is a good thing. There are at least two or three different ways to fix it, but until both parties are willing to address some seriously needed reforms, we are stuck in a world where our kids will suffer because of the stubbornness of both the Republicans and the Democrats. This is one of those topics where I wish both parties could simply see past the forest to say this particular tree needs to be trimmed, and we will worry about the other trees later when one party gets enough power to adopt some further changes. For now, our kids and those with fewer skills are paying the price.

But it is July 4 as I wrap up this letter, and we are celebrating our independence. From taxation without representation, from overbearing government, from government in some distant locale unconcerned with our local problems and our personal concerns. From a government concerned with its own internal re-election interests rather than with real on-the-ground problems of the people. Sigh.

In any case, it’s time to hit the send button as my family beckons and the grill awaits my magic touch.

Nantucket, New York City, Maine, San Antonio, and China(?)

I leave for Nantucket Island next Wednesday for a private conference. I’ll be there four days and then on to New York City for a little media and lots of meetings, with a few dinners with friends, of course. Then a few weeks later, my youngest son, Trey, and I will head off to Grand Lake Stream, Maine, for our annual fishing trip at Leen’s Lodge and Camp Kotok. This will be our eighth year to attend the gathering and get together with the many old friends who have made this weekend a very special part of their lives. It is hard to believe that Trey was just 12 when we first started going. He has grown up with these guys (and, lately, ladies). I’m sure we will rejoin our traditional fishing duel, which I won for the first time last year (by a rather small fish), but the memories are far more important than the fish.

I’m scheduled to speak at a rather intriguing Casey Research conference up in the Texas Hill Country near San Antonio. It is quite the beautiful venue, and they have a rather remarkable lineup of speakers. I have been a regular there for a few years and enjoy getting to catch up with old friends without having to be responsible for the conference. It is really quite the relaxing time for me, and I actually get to sit down and enjoy some of the other speakers. Join me.

I am thinking about going to China sometime in September or October. I know I have a lot of readers in the region, and I would be interested in meeting key people who can give me insights into what is going on in the country. Drop me a note if you can help.

Sunday night my old friend Tony Sagami arrives in Dallas, and we get to spend the next few days together. I’m sure Tony remembers (he doesn’t ever seem to forget anything) that we met sometime back in the mid-’80s on the conference

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