Picking up where he left off last week, when Bill Gross told Bloomberg that U.S. markets are at their highest risk levels since before the 2008 financial crisis “because investors are paying a high price for the chances they’re taking”, in his latest monthly investment outlook, the Janus Henderson bond manager says that investors should be wary as low interest rates, aging populations and global warming which inhibit real economic growth and intensify headwinds facing financial markets:
Excessive debt/aging populations/trade-restrictive government policies and the increasing use of machines (robots) instead of people, create a counterforce to creative capitalism in the real economy, which worked quite well until the beginning of the 21st century. Investors in the real economy (not only large corporations but small businesses and startups) sense future headwinds that will thwart historic consumer demand and they therefore slow down investment.
Lamenting the onset of the new normal era, Gross says that “because of the secular headwinds facing global economies, currently labeled as the “New Normal” or “Secular Stagnation”, investors have resorted to “making money with money” as opposed to old-fashioned capitalism when money and profits were made with capital investment in the real economy”
Two weeks ago we asked a question: maybe behind all the rhetoric and constant (ab)use of sophisticated terms like “gamma”, “vega”, CTAs, risk-parity, vol-neutral, central bank vol-suppression, (inverse) VIX ETFs and so forth to explain why despite the surging political uncertainty in recent years, and especially since the US election…
… global equity volatility, both implied and realized, has tumbled to record lows, sliding below levels not even seen before the 2008 financial crisis, there was a far simpler reason for the plunge in vol: trading was slowly grinding to a halt.
That’s what Goldman Sachs found when looking at 13F filings in Q1, when it emerged that the gross portfolio turnover of hedge funds had retreated to a record low of just 28%. In other words, few if any of the “smart money” was actually trading in size.
With the Fed contemplating whether to hike again next month and start “normalizing ” its balance sheet before the end of 2017, the two other major central banks are facing far bigger problems.
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Two months after the BOJ quietly started tapering its QE program, when it also hinted it may purchase 18% less bonds than planned…
… Governor Haruhiko Kuroda admitted last week that the Bank of Japan’s bond holdings are currently growing at an annualized pace of only ¥60 trillion ($527 billion), 25% below the bottom-end of its policy range, and confirming that without making any formal announcement, the BOJ has quietly followed the ECB in aggressively tapering its bond buying program.
It may be too soon to say that glimmers of hope can be seen in the quality of Chinese bank assets, considering they have off-balance-sheet assets that are collectively larger than the world’s fifteenth-largest economy.
The country’s six biggest commercial banks revealed this week that their off-balance-sheet assets — likely held through trusts and wealth management products — were worth 7.78 trillion yuan ($1.13 trillion) as of March — more than Mexico’s 2016 nominal gross domestic product of $1.06 trillion, or about a tenth of China’s economy.
Bringing these previously hidden assets to light immediately boosts their already substantial balance sheets by 7-9%, and smaller banks’ by 11-13%.
The six are Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China (ABC), Bank of China (BOC), Bank of Communications, and Postal Savings Bank of China.
Yet these “second” balance sheets also prompt questions on the significance of banks’ reported declines in nonperforming loan ratios as well as the sufficiency of their capital, since they were all under pressure to set aside more provisions for losses on impaired loans.
Citigroup’s crack trio of credit analysts, Matt King, Stephen Antczak, and Hans Lorenzen, best known for their relentless, Austrian, at times “Zero Hedge-esque” attacks on the Fed, and persistent accusations central banks distort markets, all summarized best in the following Citi chart…
… have come out of hibernation, to dicuss what comes next for various asset classes in the context of the upcoming paradigm shift in central bank posture.
In a note released by the group’s credit team on March 27, Lorenzen writes that credit’s “infatuation with equities is coming to an end.”
What do credit traders look at when they mark their books? Well, these days it is fair to say that they have more than one eye on the equity market.
Understandable: after all, as the FOMC Minutes revealed last week, even the Fed now openly admits its policy is directly in response to stock prices.
As the credit economist points out, “statistically, over the last couple of years both markets have been influencing (“Granger causing”) each other. But considering the relative size, depth and liquidity of (not to mention the resources dedicated to) the equity market, we’d argue that more often than not, the asset class taking the passenger seat is credit. Yet the relationship was not always so cosy. Over the long run, the correlation in recent years is actually unusual. In the two decades before the Great Financial Crisis, three-month correlations between US credit returns and the S&P 500 returns tended to oscillate sharply and only barely managed to stay positive over the long run (Figure 3).”
Tax authorities around the world will soon get a powerful new weapon in the fight against tax avoidance.
Next year will see the launch of the Common Reporting Standard, a new global system for the automatic exchange of financial account information between national revenue bodies. Set for launch in September 2018 the CRS has already been hailed as a game-changer.
The system represents the international community’s response to criticism of rampant tax avoidance through offshore accounts in the Panama Papers.
“Assets held by wealthy people will become fully visible,” said senior Japanese tax official. “Its power will be tremendous.”
That view appears to be no exaggeration.
Established by the Organization for Economic Cooperation and Development, the system automatically provides for the exchange of information on accounts across jurisdictions.
The data will include the names and addresses of account holders as well as the account balances and interest and dividends earned on the holdings.
Weak asset quality will continue to plague credit profile of banks, with their profitability remaining under pressure till the next fiscal, says a report.
“Asset quality will remain a negative driver of the credit profiles of most rated banks in the country and the stock of impaired loans. Non-performing loans and standard restructured loans will still rise during the horizon of our outlook that lasts till the next financial year,” Alka Anbarasu, a vice-president and senior analyst at Moody’s, said in a report today.
The report is jointly penned by Moody’s and its domestic arm Icra Ratings. The report said the pressure on asset quality largely reflects the system’s legacy problems, as relating to the strong credit growth seen in 2009-12, when corporate investments rose significantly.
It, however, said aside from the legacy issues, the underlying asset trend for banks will be stable because of a generally supportive operating environment.
“While corporate balance sheets stay weak, a further deterioration in key credit metrics such as debt/equity and interest coverage ratios has been arrested,” the report said.
Vanguard has topped a table of the bestselling fund managers globally for 2016 after drawing nearly $200bn from investors, eclipsing the total amount of new money raised by its 10 nearest competitors.
The Pennsylvania-based asset manager has benefited from the runaway success of its low-cost sales strategy, which has dealt a serious blow to pricier rivals in the active investment industry.
Amundi, the French fund house, was the second-bestselling asset manager, pulling in $35bn over the same period — roughly a sixth of Vanguard’s haul, according to figures compiled for FTfm by Morningstar, the data provider.
Timothy Strauts, markets research manager at Morningstar, said: “Vanguard is eating the rest of the US fund industry. It is dominating completely. Both its active and passive businesses are doing very well, mainly because [it charges] very low fees.
Vanguard is eating the rest of the US fund industry. The US market is all about fees and if you don’t have low fees, you don’t get flows
Timothy Strauts, Morningstar
“I can guarantee you Vanguard will be the biggest selling [company] of 2017. The US market is all about fees and if you don’t have low fees, you don’t get flows.”
Dimensional, the Texas-based asset manager, was the third-bestselling fund house, with $23bn of inflows, according to the data, which excluded flows to exchange traded funds. Including ETFs, Vanguard’s total was even bigger at $288bn.
China will raise the sales tax on small cars to 7.5% in 2017.
New methodology used by Turkstat to measure Turkish GDP has led to significant upward revisions.
Turkish authorities are growing more concerned about the weak lira.
Fitch moved the outlook on Chile.
Chile’s central bank shifted to an expansionary policy bias.
Colombia selected Juan Jose Echavarria to be the new central bank governor.
Fitch revised the outlook on Mexico’s BBB+ rating from stable to negative.
Banco de Mexico hiked rates by a larger than expected 50 bp.
In the EM equity space as measured by MSCI, Hungary (+4.3%), Russia (+3.2%), and Turkey (+2.3%) have outperformed this week, while Brazil (-3.8%), China (-3.6%), and Chile (-3.5%) have underperformed. To put this in better context, MSCI EM fell -2.3% this week while MSCI DM fell -0.1%.
In the EM local currency bond space, Poland (10-year yield -15 bp), Korea (-4 bp), and Czech Republic (-4 bp) have outperformed this week, while the Philippines (10-year yield +41 bp), Indonesia (+32 bp), and Hong Kong (+32 bp) have underperformed. To put this in better context, the 10-year UST yield rose 12 bp this week to 2.59%.
In the EM FX space, RUB (+1.4% vs. USD), HUF (+0.9% vs. EUR), and PLN (+0.7% vs. EUR) have outperformed this week, while CLP (-2.7% vs. USD), EGP (-2.7% vs. USD), and ZAR (-1.7% vs. USD) have underperformed.
China will raise the sales tax on small cars to 7.5% in 2017. The tax will be increased further to 10%, according to the Finance Ministry. The government cut this tax rate from 15% in October 2015 after lobbying from China’s auto association. Automakers had asked for the tax cut to be made permanent.
Those who think the War on Cash is a new phenomenon are missing the Big Picture.
The War on Cash has been unfolding since at least 2013 if not earlier. And it’s not really a War on Cash… it’s a desperate attempt to prop up failing financial institutions.
Let’s wind back the clocks…
Back in 2013, the small European country of Cyprus implemented a “bail-in.”
This means that the bank STOLE savings (cash) from depositors, to shore up its balance sheet.
You see your cash, the money you keep at a bank, is considered a “liability.” The reason for this is that, technically speaking, you can withdraw this money at any time.
So if the bank has made a bunch of stupid loans to failing businesses… and those loans are defaulted upon… the bank NEEDS your cash to stay afloat. If a large number of depositors were to take their money out during this situation, the bank would quickly go bust.
THIS IS THE REAL WAR ON CASH.
If cash remains solely in electronic form, it never really leaves the financial system. But if you take it out in physical form, it’s out.
This is why whenever the next major banking crisis hits, the next step will be Bank Holidays and Bail-ins.