GDPNow 05132015

Looking Pretty Calm Up Here You Guys

“Even though the S&P 500 has closed at an all-time high three times in the last week, investors are still waiting for breadth (i.e. more than just Carl Icahn Apple shares moving the market)…the current stretch of 61 trading days without a new high is the fourth longest drought of new highs in breadth for the entire bull market and the longest in nearly three years (December 2013).  At 61 days, though, the current drought of new highs in breadth has a ways to go before getting anywhere near the length of the three prior streaks.”  Meanwhile, “little conviction may actually be a good thing for stocks going forward…According to AAII, periods of unusually high neutral sentiment are typically followed by outsized returns in the equity market over the next six and 12 months…From 1987 until near the end of 2014, there were 71 instances of unusually high neutral sentiment.  Following such periods, the S&P 500 rose 86% of the time and averaged a 7.1% gain.”  Meanwhile, David Rosenberg says the current inflation and growth numbers are virtually perfect for stock investors: “In periods where real GDP growth is running between 2% and 3% at the same time that core inflation is between 1% and 2%, the average annual advance in the S&P 500 is 14.4%…Of course, the first-quarter GDP rate was atrocious, and the second quarter is looking weak as well, putting into doubt whether or not the U.S. economy can [produce] even 2% growth for the entire year  But don’t fret, according to Mr. Rosenberg’s table, the average S&P 500 advance when GDP falls to the 1% to 2% range slips only to about 13.7%.”

 

Under The Surface

“There’s a whiff of inflation in the air, thanks to Friday morning’s release of April’s Consumer Price Index (CPI).  The core CPI rose 0.3% in April, surprising economists and sending bond yields higher Friday morning…Core CPI is now up 2.6% annualized over the past three months…Is it strong enough to convince the Fed it can safely raise interest rates despite other weak recent economic reports?  Probably not, but it does provide some data in that direction.  However, the report also shows a 0% gain in real wages, which doesn’t bolster a case for inflation pressure.  Also, the year-over-year headline number posted a 0.2% decline.”  Meanwhile, “the debt millennials have incurred is a paradox for policymakers: A better educated workforce leads to a more powerful economy, but the rising costs of post-secondary education and inevitable interest rate hikes have created a looming debt trap for borrowers and a potential risk for the taxpayer.”  Meanwhile, next Friday we’ll find out if the Atlanta Fed’s GDPNow forecast is worth its salt.

 

WM: Josh Brown Gets Apocalyptic

 

Global: Academics Argue About War And Peace

Also, Zero Hedge got to use their three favorite words in this headline.

 

USA: BEA Is Looking Into “Residual Seasonality” In Their Data

bill murray

What If There Is No Tomorrow?

There’s been an abundance — nay, “cesspool of rotations” ever since the Fed announced the beginning of the end the tapering.  “Many were positioned this Jan for US macro liftoff.  Once weaker-than-expected Q1 data caused the Fed to ‘blink’ in March, an immediate painful US$ peak, biotech selloff and trough in oil prices ensued.”  Remember that?  About 6 months ago no one felt like chewing Mario Draghi’s grass?  Well: “investor appetite for U.S. stocks has slumped to its lowest level in more than seven years.  Though the S&P 500 has hit three new highs in May, the region has suffered its biggest drop in equity allocation since September 2008, with the number of investors overweight U.S. equities declining to a net 19% in May, according to [Merrill Lynch’s] monthly fund manager survey…Only 7% of those questioned cited the U.S. as the region with the most favorable earnings outlook.  The vast majority prefer Europe and Japan, where central banks are still committed to quantitative easing programs.”  “Not unlike the 1993 comedy ‘Groundhog Day,’…investors are doomed to relive a perpetual daisy chain of mediocre U.S. economic reports and lackluster returns from risky assets…Until (a) the US economy is unambiguously robust enough to allow the Fed to hike and (b) the Fed’s exit from zero rates is seen not to cause a market or macro shock (as it infamously did in 1937-7), the investment backdrop will likely continue to be cursed by mediocre returns, volatile trading rotation, correlation breakdowns and flash crashes.”  And Icahnic tweets: “Amidst this light trading volume environment, it does not take much to get markets moving.”  For example: the “market-moving impact of Carl Icahn, who tweeted on Monday that Apple is worth $240 a share.  That kick-started a rally in [Apple] and, it seems, the entire U.S. stock market…It is surprising to hear so many investors deny the bubbly nature of this market when such moves are now commonplace.”  Meanwhile, Tobin’s Q is getting a lot of attention suddenly: “Valuation tools are being dusted off around Wall Street…If you sold every share of every company in the U.S. and used the money to buy up all the factories, machines and inventory, you’d have some cash left over.  That (literally) is the math behind a bear case on equities that says prices have outrun reality.”  Meanwhile, here are some better questions to be asking yourself.  Also, what if everything started to go right in the world economy?

 

USA: Nah Just Kidding, There’s A Recession Coming

 

What: It’s Up To Us To Understand How The Leap Second Will Impact Our World

Aloe

Data Dependency Feels Bad, And Then It Feels Good, And Then It Feels Bad, And…

“This week’s sell off might have been because too many investors believed bond yields would only go down; crowded positioning left the market vulnerable to small shifts in sentiment.”  Interesting to consider that “when fears about a eurozone break-up rise, German yields generally fall;” therefore, higher yields = less worry about Greece?  Maybe not: “right now (read: Thursday) the market is in a state of shock…A lot of people are staying clear, and that makes the market less liquid, which is helping to exaggerate market moves…the moves have reversed so sharply that [European yields] are back where they were before the stimulus was announced…’In one week we had a total unwinding of all QE-related trades.’”  Speaking of liquidity, Mohamed El-Erian says “tighter regulations and less patient shareholders have restricted the ability of broker-dealers to deploy their balance sheets counter-cyclically.  As such, they have limited appetite when it comes to accumulating inventory in the event that a large chunk of the investor base decides to go the other way.  The result has been a series of sudden out-sized price moves in quite a range of markets, from sovereign bonds to foreign exchange, emerging markets, and high-yield corporates.”  So as you can probably tell, things got a bit panicky this week; we even had a moment with Janet Yellen calling stocks overvalued and prices stretched and all that (very déjà vu).  To be fair, the panic was coming from bond markets, which have this strange ability to convince people of more things than the stock market.  But all of that is going away fast: the April jobs report came out this morning and investors are all like, “oohh…reassuring.”  🙂  “Payrolls rose 223,000 in April, following a 85,000 gain in March…The unemployment rate slid further to 5.4 per cent…more Americans entered the labour force, pushing up the participation rate to 62.8 per cent from 62.7 per cent the previous month.”  “The standard story that economists have been telling is that this is just another messy winter with worse-than-usual weather…But there’s a ‘show me’ dimension to that conclusion…So what the new jobs numbers offer is relief that the crummy first-quarter data was indeed an aberration, not a new trend.  At the same time, they are soft enough that they include no real evidence of an acceleration into a new, stepped-up rate of growth” (read: acceleration into Fed tightening).  Here are the charts.  Also, German bund yields have dropped back down to 0.53bps, and you shouldn’t feel bad if you missed out on the Gross Short of a Lifetime because apparently Bill Gross missed it as well.

 

China: Pinky Swears No QE

 

WM: Risk ≠ Volatility, Maybe

 

WM: Case For Indexing In Bonds Is Far Less Clear Than It Is For Stocks

 

What: The “Cylon Detection” System Finds 10 To 20 Spoofers A Day, On Average

 

WaitWhat: You Know That All Startup Founders Dropped Out Of College And Hate English, Right?

insider tweeting

Thinking Outside Of The Box Border

Russ Koesterich thinks “the good news/bad news dynamics will get worse as the Fed rate hike draws closer.  Watch out for greater amplification of this volatility…markets will probably see more peaks and valleys this year, but for investors with a long time horizon, remaining invested pays off.”  Meanwhile, “the US, the UK and Japan all witnessed sharp equity market rallies when they launched quantitative easing (QE) programs.  The exact same thing has happened in the euro area…equities may no longer be cheap.  But we believe they still look relatively attractive when compared with regional sovereign bonds, which increasingly offer zero or negative yields.”  Also, “the ECB’s elephantine sovereign bond-buying scheme is happening at a time when the big euro area countries have negligible borrowing needs.  But euro area investors that need to own a lot of bonds — banks, insurers, and pension funds, to name a few — have to park their money somewhere.  Nowadays, ‘somewhere’ increasingly means America, in the form of US corporates taking advantage of European desperation for yield…Whether any of this will actually boost investment in the single currency bloc is anyone’s guess, but at least US companies hurting from the stronger dollar can console themselves with the easier financing conditions.”  Meanwhile, Ben Bernanke thinks “the availability of profitable capital investments anywhere in the world should help defeat secular stagnation at home.  The foreign exchange value of the dollar is one channel through which this could work: if US households and firms invest abroad, the resulting outflows of financial capital would be expected to weaken the dollar, which in turn would promote US exports…Increased exports would raise production and employment at home, helping the economy reach full employment.  In short, in an open economy, secular stagnation requires that the returns to capital investment be permanently low everywhere, not just in the home economy.”  Meanwhile, “as developing countries grow more quickly, they will also have to grow more sustainably, [so] leaders in Portland are targeting rapidly expanding cities for exports of sustainable services.  This brought them to Changsha…mayors of the two cities signed a trade partnership that will provide access to ‘green’ services for Changsha, while giving Portland firms a foothold in the challenging Chinese market.”

 

USA: Larry Summers On Ben Bernanke On Larry Summers

Also, John Hussman on eating our seed corn.

Also, Bill Gross on layups and fed funds.

 

USA: Inside Traders Are Using Inside Tweeters As Cover

 

WM: Vanguard’s New DIY Service Targets “Investors Who Don’t Need Or Want” An Adviser

 

USA: Poor Households Spend More On Prom Than Wealthy Households

 

Greece: “Q: Does The Government Have Any Rainy-Day Funds Left?  A: Not A Lot.”

 

What: HFT Firms Are Trading With Themselves To Spoof Markets

POV roller coaster

Oil And Equity Volatility (These Aren’t The Curves That Should Worry You)

WTI Crude oil has catapulted 19% from its intraday low Thursday, booking its strongest four-day winning streak since January 2009.  While the rebound has been steep, not everyone is anticipating recent gains will stick.  Most think the surge is only temporary and oil could fall even further — potentially sliding below $30 before the market balances out.”  Dr. Ed says that despite a 24% decline in US oil rigs over the last four months, “oil field production actually rose to a new high of 9.3mbd during the week of January 23.”  Furthermore, “oil market participants may be starting to price oil based on future shortages caused by today’s low price.  Everyone in the commodity pits knows that low prices are the best cure for low prices, just as high prices are the best cure for high prices.”  Meanwhile, analysts at Credit Suisse say that oil inventory data is having a larger than normal effect on daily volatility in equities: “daily volatility in the stock market throughout the day has been on the rise for months…Volatility typically peaks during the first half hour of trading, before tapering off and then rising again during the final hour before the 4 p.m. close.  One noteworthy change in January, however, was the spike in volatility at 10:30 a.m., coinciding with the weekly release of U.S. oil inventory data.”  Furthermore, the dispersion of equity returns is pretty uneven so far this year.  “The average stock is basically unchanged, up just 0.13%.  However, as you can see from the chart there are plenty of winners and losers.”  Some people are seeing all this volatility and calling for a stock picker’s market.  Eddy Elfenbein has a different perspective: “If we combine all the [S&P 500] days with moves greater than 1.17%, it nets out almost perfectly to zero.  In other words, all those high volatility days add up to nothing.  The market’s entire gain comes on days when the S&P 500 rises or falls less than 1.17%.  The rest is just noise.”

 

Approaching An Inverted Yield Curve (Here You Go)

“The yield curve is historically steep, but I have already seen research claiming that were it to invert as the Fed raises rates over the next couple of years and the term premium shrinks, it would not mean the same thing it always has: a harbinger of recession.  In other words, this time is different.  (It’s always different until it’s not.)…Its track record, should it invert for whatever reason, in forecasting recessions is impeccable.  Bending the curve to fit the forecast has never been a fruitful exercise.”

 

USA: Staples, Office Depot Deal Break Fee Signals Little Antitrust Worry

“This investigation isn’t going to be about where you and I can buy a stapler.  It’s about where a company can buy 10,000 staplers.”

 

Global: The Illusion Of Monetary Policy Independence

 

USA: Disney’s Tent Pole Strategy Is Alive And Well

 

USA: Massive IBM Layoffs Rumors Are Still Rumoring About

 

What: Argentina Is Insane

 

C’mon: Greek Finance Minister Yanis Varoufakis He Who Shall Not Be Named

 

stock-footage-business-man-standing-in-the-ocean-looking-into-the-water

Low Tide In Europe

Fallout from Switzerland’s wildly swinging currency (alt) ricocheted around the world, hitting global banks with tens of millions of dollars in losses and triggering the collapse of some brokerage firms.  Deutsche Bank AG suffered about $150 million in losses on Thursday…Barclays PLC also racked up tens of millions of dollars in losses…a major U.S. currency broker warned its equity was wiped out, a U.K. retail broker entered insolvency and a” — you get the point.  FX brokerages are going under because their clients are going under thanks to leveraged one way trades on the Swissie.  As you might imagine, there is a lot of frustration out there.  Tom Buerkle offers four takeaways: (1) “Draghi’s ECB will not disappoint next Thursday when the governing council meets to decide whether to embark on quantitative easing…the Swiss are expecting a big move and don’t have the stomach for the massive intervention it would take to defend the exchange rate,” (2) currency wars are here to stay, (3) negative deposit rates and an expensive Swiss franc = even more demand for bonds = rates lower for longer, (4) nothing in monetary policy is sacred.  Meanwhile, Izzy Kaminska argues that (4) is precisely the point of all this: “Not only do regulators want to bring caveat emptor back into the markets — especially around the shadow banking periphery — they also want to expose liquidity air pockets that have taken root in the market but which so far have been stubbornly ignored by participants.”  Furthermore, “if you’re strategy is focused on beating your own clients, you should take more care to make sure your clients actually have the capital to pay you.”  Meanwhile, cue the queues!

 

Global: Central Banks/Economies Are Not Isolated Anymore

 

USA: New Cuba Rules Could Flood Island With Teens From The Jersey Shore U.S.-Made Goods

 

Fed: New “Community Advisory Council” Is Looking For Nominations

 

Oil: Schlumberger Cuts 9,000 Jobs As Oil Slump Brings Uncertainty

 

Oil: Bloomberg Is Bad At Explaining Futures Curves, Good At Using The Word “Contango” 13 Times

ps. do yourself a favor and watch this video if contango is something you’re into.  Contango is bearish for futures contracts, and bullish for the current spot price.

 

USA: How The Camera Doomed Google Glass

 

active funds source of returnpassive fund source of return Interest Rate Seers Scramble To Make Sense Of It All As The Economy Shrinks

The yield on the 10-Year fell past its supposed “resistance” level of 2.50% yesterday, landing at 2.44%.  Needless to say, the head-scratching over bonds (alt) is kinda turning into, like, really awkward bloody hair-pulling: “The short answer is that euro-zone bond yields fell on some weak German economic and employment readings and dragged U.S. yields lower too.  The much longer (and scarier) answer is that nobody really seems sure exactly what’s going on.”  Apparently a shrinking economy (alt) isn’t very scary.  Most of the explanations being tossed around are based on technicals and supply/demand analysis.  I like Michael Santoli’s explanation: “‘If I want to give you a list of the countries whose 10-year debt trades at lower yields than the United States, it’s almost all the developed world…the United Kingdom, Canada and Germany are among the countries with lower yields than U.S. debt right now.  ‘Globally, there’s a scarcity of yield.’”  Deutsche Bank has a pretty convincing explanation based on weak supply: “U.S. Treasury net issuance is around $123 billion year-to-date, down 59 percent from a year earlier, while net issuance of corporate paper and mortgage backed securities has also fallen…In addition, [Deutsche Bank] expects net U.S. Treasury issuance will be around three times the January-to-May pace, based on the Congressional Budget Office’s estimates, while at the same time, corporate issuance is likely to pick up as acquisition deals are finalized.”  Meanwhile, gold is super confusing.  Theories as to why the precious metal has fallen to a nearly four-month low range from improving U.S. data, less fear over Ukraine, China buying less gold and US equity indexes at all-time highs.  Apparently “fear is not an asset class” doesn’t do it for people.  Meanwhile, as the stench of dead volatility creeps into the nostrils of oil traders, the Financial Times makes some really good points about the “stability” creeping back into markets: “Fears of ‘QE3 taper tantrums’ in emerging markets appear to have receded, while the probability of a ‘hard landing’ in China is considered low.”  Furthermore, while central banks’ accommodative monetary policies may have resulted in low volatility, or “a regime of fixed prices,” the market is transforming “from a place in which prices reveal information about market imbalances, which then incentivise behavioural changes to deal with those imbalances, to [a market]place where supply and demand adjustments on the sidelines guarantee price stability.”

Beta : Alpha :: Larry Fink : ProShares

Liquid-alternative funds (alt), which frequently mimic hedge-fund strategies, have exploded in popularity in the past year.  Individual investors have poured tens of billions of dollars into the funds, and many big investment firms see them as a growth area…One of the reasons money managers like the funds is the same reason financial advisers don’t: high fees.  Because they use more complicated trades, the average expense ratio for a liquid-alternative fund is 1.9%, compared with 1.3% for a typical mutual fund and 0.8% for an index fund…The revenue potential is important to fund companies that have lost out on fees as investors have moved toward low-cost index funds in recent years.”  Meanwhile, Morningstar has done some great research on measuring portfolio’s alpha, beta and sources of return: “investors should be perfectly content with a fund that provides nothing but beta (returns that are in sync with broad market volatility).  Having exposure to some strategic beta factors can help on the margin.  It is clear that beta provides the majority of return, even among funds that manage to capture significant alpha (outperformance attributed to skillful active management).”  Meanwhile, Larry Fink hates ProShares and so should you!

Concentrated Markets May Have A Secular Impact On Unemployment Recovery

Harvard Business Review has an interesting theory on how unemployment is about to fall a lot faster than we expect: “In past recessions, small businesses fueled early job growth and drove a predictable pattern that is currently used to estimate unemployment.  During the current economic recovery, however, the largest of businesses added to their payrolls first, while small businesses have significantly underperformed in job growth…if small businesses add jobs at the volume suggested by historical averages, the slope will accelerate more quickly.  This can give us all confidence that we will see a steady drop to 5.0% unemployment next year.”  Meanwhile, the Goliaths are everywhere.

Millennials Aren’t Planning On Dying Anytime Soon, Are Planning On A Grande Burrito

“Young adults who wait longer to start families are also putting off death planning…life insurance sales in the U.S. slipped 45 percent to 9.7 million policies in 2012 from a high of 17.7 million in 1983…’I’m not planning on dying any time soon so it’s a waste of money,’” said 30-year old Usman Ahmad while eating lunch “at a food court.”  Meanwhile, “almost a third of the world is now fat, and no country has been able to curb obesity rates in the last three decades, according to a new global analysis.”

USA: The Digital Disruption In Banking

Here are some key findings in Accenture’s latest report on North Americans and their attitudes towards digital banking: 1) 39% of Millennials say that if they were to switch banks, they would consider a bank with no branch location, 2) 74% of Americans say that their relationship with their bank is defined by simple transactions, as opposed to brighter financial future-style advice, 3) 51% of respondents said they “want their bank to proactively recommend products and services for their financial needs,” and 4) 48% of respondents are “interested in real-time and forward-looking spending analysis.”

China: GSK Salesmen Want ‘Bribes’ Reimbursed (Alt)

money exits floating rate funds 05282014It’s Quiet…Just Quiet.

There’s a lot of “complacency in the market” (alt) talk going on these days, which might just be a reflection of journalists’ boredom.  That being said, apparently trading at big banks is pretty boring too: “large investors are retreating from the market, big trades are rare and price swings are shrinking…those factors have combined to reduce trading revenue, particularly in fixed-income, currencies and commodities trading, traditionally a profit engine for large banks…’People lack direction…there just isn’t a lot of movement.’”  Meanwhile, junk bond junkies are riding the risk gravy train to the top (alt): “among the 10 largest U.S. bond funds at the end of 2013, the four with the fastest growth in assets since 2008 held an average of 20% of their investments in bonds rated below investment grade…the chase for yield has pumped junk-bond prices up to near-record highs, leaving them susceptible to selloffs…One concern for regulators is that if hit with a wave of redemptions from investors. the funds could have trouble unwinding their bets in the smaller high-yield markets, where trading can dry up quickly when prices start to fall.”  Speaking of fixed-income, Wells Fargo would like bond investors to know that they’re screwed, no matter what: “if yields rise towards our 3.25 percent target, then Treasury bond returns will be low, if not negative.  But even if this target is not attained, yields are already too low for returns to be attractive, whether the market stays range bound or if the rally can be extended a little further.”  Also, floating-rate debt funds “saw their first outflow in 95 weeks in mid-April, after surging over the past several years as investors have anticipated rising interest rates.”  Meanwhile, Dennis Gartman, “publisher of an eponymous daily investment newsletter,” and “one of those folks calling for [a stock market] pullback,” is throwing in the towel: “It’s so silly for me to think I can call a correction…The market will correct when it corrects.  That’s what I’ve learned in my 40 years in the business.”  Maybe we should just let bulls be bulls?

Onshoring Is Really Real You Guys

“‘The U.S. is now Latin America’s natural supplier of LPG (liquefied petroleum gas).  Venezuela used to supply several Central American and Caribbean countries, but that’s not happening anymore.’…Total U.S. LPG exports rose 482 percent since 2007 to 332,000 bpd last year.  Analysts forecast some 450,000 bpd in exports this year and 800,000 bpd by 2018.”  Meanwhile, fracking in America has lowered the price of natural gas, but “what we haven’t seen yet is the industrialization that has come as a result of these low prices.”  The Wall Street Journal has offered to be your lookout and, hey!  Look at all the industrialization happening in Louisiana (alt): “it’s the tale of a company called Sasol, the former South African state oil company, which is embarking on what could be the single-largest foreign investment project in U.S. history.”  And boy has this remarkable tale got it all!  Exotic Nazi technology, South African apartheidists, Iraniam imams, man camps, bug-eyed economists…”We are building a Qatar on the Bayou.”  Bam.  Onshoring.  Meanwhile, “unfazed by a sharp decline in the yen’s value that makes foreign ventures more expensive, Japanese companies sharply expanded their investments in the world’s major markets, including Southeast Asia, the U.S. and the European Union.  One notable exception was China, where the amount of Japanese FDI shrank by 18%…US-bound FDI jumped 68%…the amount spent in the E.U. rose 32%.”

Drought, Disease And Food Prices

California is responsible for about half of the fruits and vegetables grown in the United States.  That includes 99 percent of all the nation’s almonds, 95 percent of its broccoli, 90 percent of its tomatoes, and 74 percent of its lettuce.”  “With every part of the state facing ‘severe,’ ‘extreme,’ or ‘exceptional’ drought,” many people are wondering when we will see massive food price spikes, especially in fruits and vegetables.  Meanwhile, meat prices continue to climb (alt): “pork prices have surged as a pig virus, which has decimated piglets in North America, has spread to Latin America and Asia.  Beef prices have also jumped as drought in key cattle rearing regions in the US, Australia and New Zealand has cut cattle herds in the face of growing demand.”

Millennials Are Annoyingly Liberal

A new survey suggests that “Millennials have such liberal and contrary views about social responsibility, personal wealth and financial institutions that they stand to reorder the priorities of corporate America and Wall Street…the great recession is likely to remain a formative event in the shaping of views toward Wall Street that will impact their approach as both workers and consumers.”  Meanwhile, you know how Millennials hate investing in stocks but they love being socially responsible?  Millennial bond investors can now sleep at night thanks to green bonds (alt): “fixed-income instruments to fund environmental projects…not only renewable energy projects such as wind farms and hydroelectric plants, but also in energy efficiency projects such as remote (smart) metering and the construction of integrated district heating networks powered by low-emission biomass plants.”  

GOOG: GoogleCar Has No Steering Wheel, No Brakes

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.”

blindfolded dartsOnline Credit Growing; Loan Loss Reserves And Re-Fi Shrinking

“Manually collecting and analysing the information needed to understand whether a business can remain solvent is a costly activity.  That usually makes it uneconomic to lend the small amounts of cash that small businesses need — and explains why many proprietors opt to meet short-term cash needs with their credit cards.”  But several “online credit” startups are changing the landscape (alt): “the ability to pull in accounting data automatically from a borrower’s own books, for instance, has been made easier by the fact that much of that information now resides in cloud services.  Most lenders also draw on other pools of data — from government census surveys to user reviews on online sites such as Yelp — to build their risk models and gather a full picture of a business’s prospects.”  Furthermore, “crunching the data with algorithms, rather than human analysts, has further reduced overheads.”  Meanwhile, JP Morgan didn’t come up with as many cookies as hoped for in Q1: “Ahead of the bank’s earnings report, analysts at KBW had said they expected a reserve release in the first quarter of $1 billion at J.P. Morgan, compared with what it said was management guidance for a release of $400 million.  That could foreshadow a trend that rivals reporting over the next few days could also demonstrate.  Analysts widely expect banks to start building their provisions for potential losses as they start to make more loans.”  Keep this in mind, however: “earnings are viewed by many investors as more repeatable and indicative of a strong financial picture when they don’t’ include big loan-loss reserves.”  Meanwhile, should we put a nail in the coffin of the re-finance boom?  Wells Fargo, “the country’s biggest mortgage lender,” lent “$36 billion worth of mortgages in the first quarter — a big number until you consider that it’s down 67% from a year ago, when the bank originated some $109 billion worth of mortgages.”  Finally, it doesn’t take a Wonkblog to figure out that Jamie Dimon is making the big bucks (then again, maybe it does).

Nasdaq Does The Tax Day Sway; Outlook Bright For Tech, E-Commerce And Trailer Parks

The markets are pretty volatile right now (alt) in case you didn’t notice.  Yesterday, the Nasdaq dropped 3.10 percent, “its worst daily decline since 2011.”  It appears to be a one part Tech, one part Momentum selloff, with a dash of Tax Day sway.  Demand is strong, however, for a good stock market story.  Like this one: “soon there will be more than 6 devices leaking information connected for every man, woman and child on the planet.”  That comes from a Citigroup analysis of the future for cloud computing/IT companies like Cisco.  By 2020, they predict 6.58 small, thinking robots per human.  Here’s the kicker: ~14% growth in online retail sales over the next 3 years.  Meanwhile, you won’t believe this hot new investment “vehicle”!!!  “Trailer parks have unusual economics…It’s a supply and demand curve that’s super attractive to investors…What’s at work here is the shrinking middle class.  People with bad credit and criminal histories are often unable to rent or buy homes, and are forced into trailer parks — where owners are usually willing to overlook credit and criminal activity.”

Trading In The Dark Makes Throwing Darts Only Slightly Worse

This isn’t what Michael Lewis had in mind: “U.S. securities regulators are considering testing a proposed reform that could drive business to major stock exchanges and away from alternative trading venues such as “dark pools” that critics say may be hurting investors by reducing the quality of pricing…They say that the amount of trading being done in the “dark” means that publicly quoted prices for stocks on exchanges may no longer properly reflect where the market is, meaning that investors may not be getting the best prices for their trades.”  Also, SEC Chairwoman Mary Jo White says “high-frequency traders have added liquidity and some price advantages” to the markets.  But its not all bad for Michael Lewis: “If we are setting our agenda by Michael Lewis books, we have to take them as we see them.”  Meanwhile, Fidelity and BlackRock are leading other asset management companies (alt) by “discussing the creation of a joint equity trading venue…that would rival traditional stock exchanges and so-called “dark pools” of liquidity.”

EU: “We Will Do Something” About Low Inflation

Zis is ‘ow you do Forward Guidánce!

China: The Optimist’s Take On Credit In China

USA: Activist Investor Of The Year

That’s an actual proxy statement filed with the SEC by Joseph Stilwell, a shareholder in Harvard Illinois Bancorp, Inc.  Scroll down for the gold.