Global financial conditions are about as good as they can get. Stock markets are hitting new highs. May has been the busiest month for IPOs in a decade. Lending conditions are easing. Many central banks are again cutting rates while others are still buying up assets as part of their massive quantitative easing programs. Although yields on US government debt have edged up, yields on corporate debt have kept coming down, leaving credit spreads as tight as they have been since before Lehmanâ€™s collapse. US high yield debt is now below 5% for the first time ever. The global stretch for yield has brought emerging market yields down to levels usually associated with developed markets â€“ and in some cases lower.
For borrowers, the drop in interest rates is great news. With mortgage rates so low, housing affordability remains at all-time highs. Corporate issuance has been booming, and even cash-rich companies like Apple are borrowing with rates this low. And Brazilâ€™s Petrobras is about to offer the biggest emerging market bond issue ever.
For central bankers, while low rates can be good for growth and asset prices, some policymakers are starting to voice some concerns about the risk of a new credit bubble forming â€“ but not enough to signal that they intend to reverse course any time soon. The most Ben Bernanke has said is that the Fed is â€śwatching particularly closelyâ€ť for signs of excessive risk taking. Meanwhile, the flood of liquidity is set to get even higher, thanks to the latest rounds of easing led by Japan. In this environment, all asset prices could go higher. According to Lipper, US fund flows are still strong for both stocks and bonds.
For investors, the asset allocation environment is shifting. With bond yields already pancake flat, bond prices are close to being capped out: there is not much more yield to reach for, at least for fixed income. The Barclayâ€™s Aggregate Bond Index has already been lagging the S&P 500 since last November. As the global economy regains momentum and inflation begins to turn up, investors should consider shifting into assets with better total-return prospects like stocks, commodities, and real estate.
International investor Jim Rogers says he’s shorting U.S. Treasuries in anticipation of the Fed-fueled bond bubble bursting. He’s also thinking about buying the rouble as a way to play the Russian markets.
First Business’ Bill Moller talks with Janet Tavakoli, president of Tavakoli Structured Finance, about her new book, The New Robber Barons, a compilation of articles and other pieces she wrote about the global financial crisis.
“What we’ve learned from this crisis is that when you throw trillions of dollars on the table, nobody tells the truth and everyone plays for keeps,” Tavakoli says.
Last Friday the markets cheered news of leadership change in the center of Europeâ€™s debt crisis.Â However, there is reason to believe this wonâ€™t be the end of a thorny problem that will likely add volatility to the markets for decades.Â There is one reason for this:
The debt crisis wonâ€™t end until voters accept sacrifice in the way of budget cuts and revenue enhancements â€“ or the markets force action.Â In fact, if the debt crisis ends quickly, it will mean the markets have forced action.Â The more likely event is a long, political debate over how sacrifice is carved out.Â If you think this is easy or a European problem, look no further than how the U.S. Debt Super Committee is dancing around anything that would jeopardize their re-election efforts.Â Word is that traders have baked debt committee failure into their fundamental analysis of the situation, but never say never.Â Markets frequently surprise even the most astute and seasoned observers.
With government spending is far in excess of revenue in both Europe and the U.S., the changes required to solve the debt problem involve societal change.Â This wonâ€™t be easy.Â Political constituencies might be required to give things up.Â Economists note the hard truth that a culture of government spending, bloated pensions and politically popular tax breaks may be required to give way to budget requirements and a different social atmosphere.
When voters meet difficult austerity measures, get ready for a volatile political environment.Â To assume that the debt crisis is over because a change in leadership occurs is to assume that the budget problems and fiscal austerity required will be able to tucked away without facing voters.Â There will be a point at which voters will be required to face the debt crisis.Â It is when this moment occurs that the rubber meets the road in the government debt crisis.
Government debt crisis discussions have historically been conducted behind closed doors, as if the problems created by politicians can be solved through the same fashion.Â That is unlikely, as the shear numbers behind the debt problem are just too big to achieve a political solution that doesnâ€™t include revenue enhancements and spending cuts.Â Speaking on CNN Money yesterday, Robert Bixby of the Concord Collation said it is better that government shine light on the problem rather than keep it behind a political cloak.Â Efforts from Bixby and various ratings agencies to warn regarding debt should be lauded.Â In fact, S&Pâ€™s â€śfat fingerâ€ť episode where an e-mail warning a potential French bond downgrade is interesting. Â Was it a mistake or a method of the ratings agency warning about the debt truth?Â The fact that S&P might have felt it couldnâ€™t come right out and publically downgrade Eurozone debt, much as it was criticized for downgrading U.S. debt over the summer, shows just how clandestine honest talk about the debt situation has been. However, this secrecy is viewed by many as a major tactical error.Â Voters need to understand the U.S. can easily become the next Italy if solutions and sacrifice are accepted now.Â That is the message voters must understand if anyone is to accept the difficult sacrifices required to keep a great nation great.
As example of the failure of the policy of keeping debt discussions under wraps, one needs to look no Look at the November 8, 2011 vote on collective bargaining in Ohio.Â This is a vote when government, fighting the difficult fight to reduce spending, lost a battle when voters re-affirmed the right of unions to continue to battle politically sensitive government in pension and wage negotiations.Â Voters educated in the budget crisis might have made the logical connection between bloated government pensions and the need for tax increases or spending cuts.Â But when such issues are taken on their own, out of this financial context, voters tend to be soft on human suffering and less sympathetic to very real budget matters.Â This is something political marketers understand and exploit, which is too bad.Â The real issue Ohio voters should have faced: Are you willing to pay higher taxes or cut critical social spending to support government workerâ€™s right to bloated pensions and socialistic work rules? Had the vote been phrased in this fashion the outcome might have been very different, indeed.
It is time the debt crisis is moved from the backroom and into the limelight.Â Only with such transparency into the real issues and problems will solutions be found.Â Qualified investors should recognize the very real nature of the debt crisis and the potential for volatility to the upside and downside and look for new methods of diversification.Â All investors should have a risk management plan that is designed with the goal to hold up under a number of circumstances, particularly at this moment in history.
Mark Melin is currently writing his fourth book on uncorrelated investing. Â He is previous author / editor of three books, includingHigh Performance Managed Futures (Wiley, 2010) and an adjunct instructor in managed futures at Northwestern University. Â He can be reached at email@example.com or visit the book’s web site at www.Go2ManagedFutures.com
Risk Disclosure: Managed futures can be a volatile investment and is not appropriate for all investors. Â Past performance is not indicative of future results.
The opinions expressed in this article are those of the author, may not have considered all risk factors and may not be appropriate for all investors.
The global economy faces a stagnation period in which safe haven protection can only work until western governments get a true grip on their public finances, says Better Capital Chairman Jon Moulton.
“â€¦ [T]he United States spends $1.40 for every dollar of income. The U.K. spends â€¦ GBP1.25 for every pound it gets in,” Moulton says. “Most of Europe’s in a similar sort of state. And it’s not a permanently sustainable model. And most people have worked that out, but they don’t really know what to do about it.” (more…)
The US government is currently exercising the largest amount of leverage usage in the history of civilization. If Uncle Sam were an uncorrelated managed futures investment program he would have received a margin call long ago â€“ and in all likelihood would have already flamed out in a blaze of infamy.
For those unfamiliar with investments uncorrelated to the performance of the stock market, a margin call occurs when an investor has over-leveraged themselves.
To understand the situation, consider the US financial position for a moment from the perspective of a homeowner:
Right now the government is essentially making mortgage payments with a credit card. It issues new bonds to pay interest on old bonds, a ponzi scheme to make Bernie Madoff proud.
Ever since the logical confines of the gold standard were lifted in 1971, and the political establishment began to realize in 1978 it could simply crank up the printing press to give voters what they wanted without raising taxes, our society embarked on a debt party the likes of which have never before been seen.
My father always said there is no such thing as a free lunch. Â The US government has been enjoying their lunch for close to thirty years under the delusion it can simply print free money without consequence. Â But alas, it will learn its lesson the hard way â€“ and unfortunately stock investors might take the fall.
As of this writing the US government is spending nearly twice what it makes â€“ racking up annual debt of $3.8 trillion and bringing in $2.2 trillion in revenue. While that’s been the headline number everyone discusses, its not the real number to pay attention to as it doesn’t include all the government’s liability.
A real number to watch is the projected fiscal gap. Â That’s the massive $211 trillion difference between spending and income that occurs in a few years when baby boomers start to retire and claim their god-given right to government medical benefits. Add to this the fact that interest rates could dramatically rise, particularly with the excessive printing of money. Â Running the printing press overtime could lead to the US Greenback being supplanted as the currency of choice. Â When this happens, watch out. Â The fiscal prospects for the US government, and stock investing, won’t look particularly attractive. It gets even uglier when you consider the political realities required to solve the problems.
This summer, politicians logically tried to close the existing budget gap, but couldn’t even get close. Relying on deeply entrenched Republican and Democratic political agendas to give way to one another could be a tall if not impossible order. Try asking a senior to give up a little Medicare and it’s like you are taking away their birth right. Itâ€™s almost as bad as asking Democrats to end fast and loose social spending or Republicans to tax the rich. Asking people to give something up, to sacrifice, is something our generation is not accustomed to doing. If you think it’s got to be easy to close his budget gap, think again. It will be a constant battle that could generate strong moves stock market moves to the upside and downside.
It is said that identifying the middle of a secular bear market is always difficult. While hindsight is always 20/20, one item to consider is the volatility that can occur in bear markets. Investors have already witnessed significant volatility in 2008, 2009, 2010 during the flash crash, and most recently 2011 when a debt warning shot was fired. Increasingly there could be a cause and effect relationship with such volatility and the loose management of a government printing press for the purposes of political expediency. How do investors know when this could unravel? If the US currency starts losing favor as the reserve currency of choice, something once considered unthinkable, we could be in for rough investing ahead. When US interest rates start to rise precipitously, investors would do well to find a nice investment uncorrelated to the performance of the stock market. But perhaps the real early warning signal is that voters are unwilling to give anything up, and their elected politicians represent their wishes. If a trend follower could somehow arrange an algorithmic formula to monitor public opinion, this might be its sell signal.
At this moment in history, investments unhinged from economic supply and demand at the performance driver level should be given significant consideration. Managed futures is in the right place, providing a needed service at the right time.
About the Author: Mark Melin is author of three books, including High Performance Managed Futures(Wiley 2010), and has taught managed futures at Northwestern University in Chicago. Mr. Melin consults with financial advisors, pension funds, family offices and high net worth investors on developing uncorrelated investments. Â The author is an associated person registered with the National Futures Association NFA ID#: 0348336. For further information visit his web site at www.Go2ManagedFutures.com or via e-mail at info@Go2ManagedFutures.com
Risk Disclosure: Past performance is not indicative of future results. Â There is risk of loss when investing in futures and options. Â Always review a complete CTA disclosure document before investing in any Managed Futures program. Â Managed futures can be a volatile and risky investment; only use appropriate risk capital; this investment is not for everyone. Â The opinions expressed are solely those of the author, they are not appropriate for all investors and may not have considered all risk factors.
The U.S. dollar is reaching a point where if it does not rally soon it is in danger of falling more sharply, says investor Jim Rogers. He also thinks the U.S. Treasury market may be a bubble that is about to burst. (more…)
Maybe the letters “QE” should stand for “questionable endeavor.” Luminous Capital Partner Alan Zafran called our attention via e-mail this morning to comments that Pimco’s Mohamed El-Erian made about the latest round of Fed security purchases, a policy known as quantitative easing. Zafran sent us a Bloomberg story about El-Erian’s op-ed piece in the Financial Times.
El-Erian writes that the Fed’s “QE2″ policy is likely to backfire because it faces three hurdles: 1) the Fed is effectively alone in trying to stimulate the economy; 2) the Fed’s move will likely be viewed by countries facing their own currency inflation as “unnecessarily disruptive”; and 3) the move further weakens the United States’ roles as provider of the world’s reserve currency and keeper of the deepest and most predictable financial markets.
Zafran writes in his note:
“One of the potential, unexpected consequences of the QE2 are laid out in the article below. Namely, excessive liquidity in the U.S. flows to emerging market countries, thereby further inflating the emerging market currencies and potentially leading to an asset bubble in those countries, forcing the emerging countries to impose capital controls (as Brazil has begun to do) or trade protectionism (like China has begun to do) or some other action that will be adverse to global economic growth and stability…
“Think of it this way. Countries have five levers to use when trying to stimulate (or weaken) economic growth:
“a) monetary policy
b) fiscal policy
c) government intervention of capital controls (limiting if/when/how much foreign exchange of currencies is permitted)
d) protectionism of products and services (subsidies on domestic industries; taxes/surcharges on imports; etc.)
e) real currency levels can decline in deficit countries (U.S.) or appreciate in surplus countries (China). This happens either because the nominal currency rate falls or because the inflation rate in a country falls (usually as a result of policies followed by the countries for some period of time)
“So the fed’s actions, focused on the U.S. economic malaise, may have longer-term, adverse global economic consequences…”
Weâ€™ve predicted it last week.
Ben Bernanke has now turned inflation hawk. But can he have it both ways?
So far, the Federal Reserve Board chairman also known as â€śHelicopter Benâ€ť was the champion of monetary easing. These days are over it seems.
In a speech in Massachusetts on Monday [June 9], Bernanke switched gear and made a hawkish comment prompting the dollar to one of its biggest daily gains today up more than 1% against the Euro to $1.55. (more…)
Mohamed El-Erian has a new book coming up this month. The veteran manager is well-known in the alternative investment community as the celebrated ex-president and chief executive of Harvard Management Company (HMC), the entity that manages Harvardâ€™s endowment. He joined Pacific Investment Management Company (Pimco) in December. His book called â€śWhen Markets Collideâ€ť puts the current credit crisis in a global macro-economic context, looking at market issues but also monetary policies. The book, according to an interview, in the latest issue of Barronâ€™s reveals that EL-Erian is not very favorable to the Federal Reserve Boardâ€™s recent actions. Well, he hardly is the only one. We haven’t read his book yet. But the interview provides an interesting aspect of his criticism, and that is the Fedâ€™s radical decision in March to open the discount window to investment banks. (more…)
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