Mohamed A. El-Erian says “the high-consensus trade in financial markets today is to reach for yield, almost any type of yield…it is driving significant flows of investor funds into “carry strategies,” including high yield corporate bonds…Today’s generalized carry trade will remain in favor until investor comfort about central bank policy effectiveness starts to evaporate and/or there are clear indications of a global economic breakout…Realizing this, central banks are also likely to try to delay interest rate volatility as long as possible, also risking to overstay their own welcome in their current policy stance. Ironically, this also serves to increase the risk of disrupted markets down the road.” Speaking of which, “risky corporate debt in emerging economies has surpassed levels seen before the 2008 financial crisis, threatening to further jeopardize growth prospects in those countries…In a stress test of 15,000 firms across 15 major emerging-market economies, the IMF said nearly a third of corporate debt could be at higher risk of default if borrowing costs rise 25% and earnings fall by a similar amount.” Meanwhile, “EM volatility may be more reflective of Western interests desperately wanting ‘in’ on sustainable EM growth at any cost — via the forced transformation of those economies into consumers — than EM states depending on foreign investment for their growth.” Furthermore, “as long as western investors [are] happy to provide EM businesses with cheap funding, which [is] indirectly channeled back towards both purchases of western products and luxury goods, then the developed-emerging market relationship [proves] favourable to the West. But now that money is being pulled back, the symbiotic vendor relationship facilitated by these flows could be threatened, with painful consequences for the developed countries that have become dependent on that consumption.” Also, “when investors buy bonds sold by sleaze-ridden governments, it is surely as dubious as giving a bottle of whisky to a known alcoholic. It is not against the law. But at best it is unethical and immoral, and the giver is complicit in the consequences.”
US Equities Volatility Fairly Normal; Even Harvard Professors Need Financial Coaching
Despite its recent “jitters”, the Nasdaq is experiencing pretty average volatility right now, and is nowhere close to the amount seen during the summer of 2011. However, “this month’s selloff has come amid economic data that would normally be highly supportive for stocks,” which has a lot of people scratching their heads. Furthermore, “the stocks that have fallen the most have generally been the ones that had been registering the most upward momentum over the past year…usually there is some event that can be pointed to — a bad economic report, a big earnings miss, a fight in Washington — that explains why stocks have fallen. Share prices crumbling just because prices have reached a point that investors can no longer stomach them can signal real trouble.” Then again, the selloff could be tax-driven: “2013 was a very good year for most investors, and active investors would likely have found themselves with a series of short and long term gains, and thus a hefty tax bill due next week…investors race to sell their winners to raise money to pay taxes.” Meanwhile, “the selloff on April 4 boosted options trading as investors looked for strategies to protect equity holdings from declines and speculate on future swings. More than 2 million contracts on the PowerShares QQQ Trust changed hands on April 4, the most since Lehman Brothers Holdings Inc. filed for bankruptcy in 2008.” Finally, here’s a solid overview of some key behavioral mistakes investors can make. It goes to show that even Harvard Law professors can use a trusted wealth management advisor to help guide them to a brighter financial future!
More Chinese Reforms; IMF Is Really Into Telling People How To Do Their Job
China has approved reform “to partially relax mergers and acquisition rules in the insurance industry could see global insurance firms expand their footprint in the $288 billion market…’The new rules allow foreign insurers to acquire domestic Chinese insurers with a nationwide license, a highly attractive way of achieving target distribution scale’…Europe’s Axa and Allianz, and Canada’s Manulife Financial Corp are among the global insurers operating in the world’s second-biggest economy via domestic joint ventures.” Meanwhile, the IMF would like to see “more aggressive action by authorities to rein in borrowing,” including “removing the government’s implicit guarantees for the financial system.” The National Development and Reform Commission in China, however, says that “against the backdrop of rising local government debt burdens, high debt ratios and rapid money supply growth and excessively large social financing, room for simply using fiscal and monetary policy to manage demand and promote economic growth is getting smaller and smaller.”
USA: Mile Wide, Inch Deep
Mostly I’m including this for its artistic merit: look at how the whole thing flows together! That being said, it’s basically an argument for “the ice cream layer (dealers) of the bond market ice cream sandwich (stay with me) has melted, making for a less appetizing dessert of just two crispy wafers (bond issuers/investors with no liquidity).” So now “the whole market may need to evolve,” presumably into a self-serve FroYo bar (BlackRock’s Aladdin bond-trading platform?).
“A White House climate initiative has boosted a quixotic search for the ‘cow of the future’, a next-generation creature whose greenhouse gas emissions would be cut by anti-methane pills, burp scanners and gas backpacks.”