Merkel and Hollande“Great Moderation”: Tell That To Emerging Markets And Sub-Prime Lenders

The Economist says we are back in the age of Great Moderation (alt) thanks to “glacial” GDP growth, the death of volatility (alt) and the relentless bid of the markets.  “Certainty about monetary policy has stripped volatility out of bond yields which in turn has drained a major source of uncertainty out of stock prices.  At root, volatility simply represents uncertainty about the value of an asset’s cash flows, so when volatility falls, the risk premium required to hold the asset also falls, driving price-earnings ratios for stocks up and bond yields down…One reason folks on Wall Street are deeply skeptical, if not downright hostile, to the Fed’s policies is that they believe volatility is the natural order of things and artificially suppressing it via monetary policy is morally equivalent to price fixing, and more practically, bound to end in tears when the system’s natural instability returns…the big question is whether the return of the Great Moderation has also prompted a return of the sort of risk-taking that produced the crisis.  There are troubling signs.  Issuance of poorly-rated ‘junk’ bonds has risen sharply, as have loans to already highly indebted firms; former pariahs like Greece can now borrow at single-digit rates.”  Meanwhile, at least one market researcher sees volatility on the horizon: “basically, as central banks start to leave the zero bound, it’s going to be increasingly hard for them to provide concrete guidance.  So they won’t.  They have no intention of going back to the kind of transparency they were doling out in 2013 — where once you had numerical thresholds now you have a plethora of indicators (the conveniently organized dashboard) and no specific targets (um…6 months?).”  Furthermore, as central banks start to raise rates, “some investors will be anxious to sell bonds, especially if they think the initial rate increase marks the first of many.  EMs could also come under renewed pressure.  And, as the 2013 experience showed, this could happen even if policymakers merely move in line with current market expectations.”  Meanwhile, penny stock boiler rooms are doing just fine without Jordan Belfort (alt): “average monthly trading volume [in the “penny stocks”, “over-the-counter”, “pink slips” market] has risen 40% this year in dollar terms from a year ago.”  It should be noted, however, that the recent rise in trading activity in Fannie and Freddie common shares probably has an outsized impact on the OTC market.  Also, many European companies trade on the OTC market, and with every institutional investor on the planet piling into European equities at the beginning of the year, well…you get it.  Also, the former wolves of Wall Street are now the wolves of sub-prime business lending: “our industry is absolutely crazy…there’s lots of people who’ve been banned from brokerage.  There’s no license you need to file for.  It’s pretty much unregulated.”  David Glass, a sub-prime business lender “still on probation for insider trading,” says “it’s a lot easier to persuade someone to take money than to spend it buying stock.”  Meanwhile, as the froth builds around the ever-extending reach for yield, Average Joe still doesn’t care about stocks.  Also, here’s a great chance for climate change deniers to put their money where their mouth is reach for yield.

Germany’s Rebalance

“The German economic model has been one of relentless drive to grow exports.  Until the euro-zone crisis, Germany’s partners in the single currency region were the ones on the other side of that trade.  Since then, German export focus has turned to the rest of the world.  But the German PMIs highlighted an interesting development.  In May, manufacturing undershot expectations but services were strong.  If this hints at the beginnings of a shift in the balance of the economy towards domestic demand, that’ll be good news for the rest of the euro zone, including France.  The other economies will then have the potential to generate some much-needed growth by boosting their exports to Germany.”  Meanwhile, Germany “apparently insists on toughness when it comes to the choices that must be made by other nations.  But for its own citizens — already comfortable off, in comparison to many in Europe — it sweetens the deal still further, while paying no heed to cost or sustainability.”  This is all in response to the new coalition government’s decision to reduce the age requirement for pension benefits to 63 (alt) despite its already high dependency ratio (inactive pensioners as a percentage of workers) and a population aging even more rapidly than the United States (actually, the US is looking pretty youthful by comparison to basically every other country).  Also, “a closely watched survey shows that German business confidence has dipped, with companies less optimistic about both their current situation and the outlook for the next six months.”  Meanwhile, “Standard & Poor’s raised Spain’s sovereign debt rating on Friday by one notch to BBB with a stable outlook, the third agency to do so in recent months in response to the country’s improving economic fortunes.”  Also, Italy’s GDP is on cocaine the up and up.

The Federal Reserve Really Truly Doesn’t Give A Crap About Emerging Markets

It’s been a really rough week for Christine Lagarde.  You know how the Fed just doesn’t wanna hear it from emerging markets?  Well, they’re doubling down on the whole “big bully” thing: “the Fed’s swap lines are available only to a select group of countries, and according to some former Fed officials, also come with unwritten strings attached.  While U.S. allies South Korean [sic] and Mexico have been given access to Fed swap lines, the U.S. has rejected requests from Turkey, Peru, Indonesia, India and other countries.”  Swap lines provide “quick assistance, quick liquidity at times of crises to well-managed countries without conditionality.”  Meanwhile, “for the eighth straight week in a row, emerging market debt funds enjoyed inflows last week, with $500 million heading into the asset class… emerging-markets bonds denominated in dollars are up by over 7% since the start of the year.”

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