Danielle DiMartino Booth, Money Strong, Writing on the Wall

The Writing on the Wall

“Mene, Mene. Tekel, Parsin”

Appearing from nowhere came a disembodied hand. To the disbelief of a petrified King Belshazzar, the hand began to write words of unknown meaning on his wall. ‘Harried’ can’t begin to describe the king’s state of mind. He just had to know and promised the position of the third highest ruler in his kingdom to whom among his enchanters, astrologers and diviners could unravel the riddle of the seemingly indecipherable words. No such luck.

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ICYMI.ddb, In Case You Missed It — August 4, 2017

In Case You Missed It — July 28, 2017

Dear friends,

Calling turning points can be a fool’s game. But there is something to be said for the deathly quiet we’ve seen in the jobs market. Jobless claims volatility is at a postwar low even as companies have begun to cite cost cutting as the major driver behind job cut announcements. Is that ‘something’ finally about to give in this recovery that has left so many behind?

I’d love your feedback on my latest Bloomberg Prophets column, linked here:

Bloomberg Prophets — Like Markets, Jobs Are Due for a Jolt
Volatility for labor has reached its lowest in postwar history. What’s next?

I was also in New York ever so briefly as it was the day Fed officials met. Janet Yellen et al took the opportunity of a lame duck meeting to toughen up their language on Quantitative Tightening despite there being np press conference to explain themselves.

Will the Fed begin to shrink its mammoth balance sheet as early as September? Will the opposite of Quantitative Easing have no effect at all on markets? We will all tune in to FedSpeak in the weeks and months to come. The debate will no doubt continue to rage on.

You may be asking why I included a Bill Gross segment. As I was informed shortly after I left the set, CNBC’s Brian Sullivan gave self-deprecation new meaning when he claimed he was not as smart as me. I can assure you after many interviews sitting to his left, Brian is one smart cookie and a might bit smarter than yours truly.

A Few TV Stops in New York on Fed Day

Expert: Fed Fires ‘Shot Across the Bow’ on Balance Sheet Reduction
CNBC The Fed — Danielle DiMartino Booth

No One Knows How the Markets Will React to the Federal Reserve’s ‘Quantitative Tightening’
The Street — Danielle DiMartino Booth

Fed is Shifting its Focus to Balance Sheet Reduction instead of Interest Rates
CNBC The Fed — Bill Gross

On a personal note, I am delighted so many of you have subscribed. Next Wednesday marks the onset of a new journey and I am gratified to have you along. Bottoms up, friends and new subscribers! I raise my glass to you!

If you have not yet subscribed, please email subscription@dimartinobooth.com and type ‘Subscribe’ in the title line.

This weekend and next, wishing you well,

 

Danielle

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Moderation, Money Strong, Federal Reserve, Economy, Danielle DiMartino Booth,

The Greater Moderation

5:12 am, April 18, 1906. A foreshock rocked the San Francisco Bay area followed 20 seconds later by one of the strongest earthquakes in recorded history. The quake, which lasted a full minute, was felt from southern Oregon to south of Los Angeles and inland as far as central Nevada.

In the aftermath, the shock to the financial system was equally violent. Precious gold stores were withdrawn from the world’s major money centers to address the City by the Bay’s devastation. What followed was a run on liquidity that culminated in a recession beginning in June 1907. A decline in the U.S. stock market, combined with tight credit markets across Europe and a Bank of England in a tightening mode, set the stage.

Against the backdrop of rising income inequality spawned by the Gilded Age, distrust towards the financial community had burgeoned among working class Americans. Into this precarious fray, a scandal erupted centered on one F. Augustus Heinze’s machinations to corner the stock of United Copper Company. The collapse of Heinze’s scheme exposed an incestuous and corrupt circle of bank, brokerage house and trust company directors to a wary public. What started as an orderly movement of deposits from bank to bank devolved into a full scale run on Friday, October 18, 1907. Revelations that Charles Barney, president of Knickerbocker Trust Company, the third largest trust in New York, had also been ensnared in Heinze’s scheme sufficed to ignite systemic risk. Absent a backstop for depositors, J.P. Morgan famously organized a bailout to prevent the collapse of the financial system. Chief among his advisers on aid-worthy solvent institutions was Benjamin Strong, who would become the first president of the Federal Reserve Bank of New York.

Nearly 100 years later to the day, on May 2, 2006, California-based subprime lender Ameriquest announced it would lay off 3,800 of its nationwide workforce and close all 229 of its retail branches. There’s no need to rehash what followed. It remains fresh in many of our minds. Still, as we few skeptics who were on the inside of the Federal Reserve at the time can attest, that watershed moment also shattered the image of the false era that had sowed so many doubts, dubbed simply, The Great Moderation.

It is said that the Great Inflation gave way to the Great Moderation, so named due to the decrease in macroeconomic volatility the U.S. economy enjoyed from the 1980s through the onset of that third ‘Great,’ The Great Financial Crisis.

This from a 2004 speech given by none other than Ben Bernanke, who presided over this magnificent epoch:

“My view is that improvements in monetary policy, though certainly not the only factor, have probably been an important source of the Great Moderation.”

How very modestly moderate of him. To be precise, standard deviation gauges the volatility of a given data set by measuring how far from its long-run trend it swings; the higher the number, the more volatile, and vice versa. According to Bernanke’s own research, the standard deviation of GDP fell by half and that of inflation by two-thirds over this period of supreme calm.

In late 2013, Fed historians published a retrospective on The Great Moderation, which concluded as such:

“Only the future will tell for certain whether the Great Moderation is gone or is set to continue after the harrowing interruption of recent years. As long as the changes in the structure of the economy and good policy explained at least part of the Great Moderation, and have not been undone, then we should expect to return at least partially to the Great Moderation. And perhaps with financial stability being a more prominent objective and better integrated with monetary policy, financial shocks such as those seen over the past several years will be less common and have less severe impacts. If the Great Moderation is still with us, its reemergence in the aftermath of the Great Recession will be as welcome now as its first emergence was following the turbulence of the Great Inflation. As for its causes, economists may disagree on the relative importance of different factors, but there is little question that ‘good policy’ played a role. The Great Moderation set a high standard for today’s policymakers to strive toward.”

Strive they have, and succeeded spectacularly, by their set standards.

It matters little. Insert the observable phenomenon with anything that pertains to the macroeconomy and the financial markets, and you will see that volatility is all but extinct.

The volatility on stocks, as gauged by the VIX index, hit its lowest intraday level on record July 25 of this year. As for how much stocks are jostling about on any given day, that’s sunk to the lowest in 50 years. Treasury market volatility is at a…record low. A lack of volatility in the price of oil is peeving those manning the commodities pits. Even go-go assets are dormant. The risk premium, or extra compensation you receive to own junk bonds, is negative. Negative!

But this non-news spreads far beyond asset prices and presumably hits policymakers’ sweetest spot. According to some excellent reporting by the Wall Street Journal’s Justin Lahart, “Over the past three years, the standard deviation of the annualized change in U.S. gross domestic product…is just 1.5 percentage points, or about as low as it has ever been. It is a trend that is being matched elsewhere, with global GDP exhibiting the lowest volatility in history.”

Lahart goes on to add that job growth and corporate profits also seem stunned into submission. And then he goes for the jugular: “In the years since the financial crisis, the Federal Reserve and other central banks have acted like overprotective parents of a toddler, rushing in whenever the economy looks as if it might stumble. That risk-averse behavior has extended to businesses, making them unwilling to take chances.”

The WSJ goes on to report that at no time in at least 30 years has not one of the three major stock indexes in the U.S., Asia and Europe avoided a five percent decline in a calendar year…until what we’ve seen thus far in 2017, that is.

Is it any wonder the ranks of those who would profit from stocks declining have fallen to a four-year low? Why bother in such a perfect world?

In other words, we’ve never had it this good, or perhaps this bad. In that case, this must be The Greater Moderation. And by the looks of things, it’s gone global.

It’s no secret that the Bank of England, Bank of Japan and European Central Bank have been aggressively flooding their respective economies and in turn, the global financial system, with liquidity in some form of quantitative easing. If there is one lesson to be learned from The Great Moderation, it is that liquidity acts as a shock absorber.

In a less liquid world, the crash in oil prices would have resulted in a bankruptcy bloodbath. In a less liquid world, the bursting of the housing bubble would have led to millions of foreclosed homes clearing at fire sale prices. In a less liquid world, highly leveraged firms would have been rendered insolvent and incapable of covering their interest costs.

In short, a less liquid world would be smaller, for a time. But when the time came to allow nature to take its course, central bankers could not bear the pain, nor muster the discipline, to allow creative destruction to cull the weakest from the herd. Their policies have forced us to pay a dear price to maintain a population of inefficient operators.

The Economist recently featured a report on “corporate zombies”, firms that in a normal world would not walk among the living. Defining a ‘zombie’ as a company whose earnings before tax do not cover its interest expenses, the Bank for International Settlements placed 14 developed countries under the microscope. On this basis, the average proportion of zombies among publicly listed companies grew from less than six percent in 2007 to 10.5 percent in 2015.

So we have one-in-ten firms effectively sucking the life out of the world economy’s ability to regenerate itself. There is no such thing as a productivity conundrum against a backdrop of such widespread misallocation of capital and labor. There is no mystery cloaking the breakdown in new business formation. And there is no enigma, much less any reason to assign armies of economists to investigate, shrouding the new abnormality we’ve come to know as a low growth world.

There is simply no room for an economy to excel when its growth potential is choked off by an overabundance of liquidity that is perverting incentives. What is left behind is a yield drought, one that has left the whole of the world painfully parched for income and returns and yet too weary to conduct fundamental risk analysis.

You have Greece returning to the debt markets after a three-year exile and investors falling over themselves to get their hands on the junk-rated bonds; the offering was more than two times oversubscribed. Argentina preceded this feat, selling the first-of-its kind, junk-rated 100-year-maturity, or ‘century’ bond; it was 3.5 times oversubscribed.

Closer to home, Moody’s reports that lending to corporations has gone off the rails. Two-in-three loans offer no safeguards to lenders in the event a borrower hits financial distress; that’s up from 27 percent in 2015. Meanwhile, the kingpins of private equity have assumed such great powers, they’ve built in provisions that prohibit secondary market buyers of loans from assembling to make demands on their firms’ managements. Corporate lending standards in Europe are looser yet.

What are investors, big and small, to do? Apparently, sit back and do as they’re told to do: Buy in, but passively, and let the machines do their bidding. For institutions, add in alternative investments at hefty fees and throw in leverage to assist in elevating returns.

In late June, the recently retired Robert Rodriguez, a 33-year veteran of the markets, sat down for a lengthy interview with Advisor Perspectives (linked here). Among his many accolades, Rodriguez carries the unique distinction of being crowned Morningstar Manager of the Year for his outstanding management of both equity and bond funds. He likens the current era to that of the nine years ended 1951, a period during which the Fed and Treasury held interest rates at artificially low levels to finance World War II. His main concern today is that price discovery has been so distorted by the Fed that the stage is set for a ‘perfect storm.’ His personal allocation to equities is at the lowest level since 1971.

The combination of meteorological forces to bring on said storm, you ask? It may well be an act of God, an earthquake. It could just as easily be a geopolitical tremor the system cannot absorb; it’s easy enough to name a handful of potential aggressors. Or history may simply rhyme with the unrelenting shock waves that catalyzed the subprime mortgage crisis, coupled per chance with a plain vanilla recession.

We may simply and slowly wake to the realization that the assumptions we’ve used to delude ourselves into buying the most expensive credit markets in the history of mankind are built on so much quicksand.

The point is panics do not randomly come to pass; they must be shocked into existence as was the case in advance of 1907 and 2007.

One of Rodriguez’s observations struck a raw nerve for yours truly, who prides herself on being a reformed central banker: “The last great central banker that we had in the last 110 years other than Volcker was J.P. Morgan. The difference is, when Morgan tried to contain the 1907 crisis, he wasn’t using zeros and ones of imaginary computer money; he was using his own capital.”

It is only fair and true to honor history and add that Morgan’s efforts rescued depositors. Income inequality in the years that followed 1907 declined before resuming its ascent to its prior peak, reached at the climax of the Roaring Twenties.

The Fed’s intrusions since 2007, built on the false premise of a fanciful wealth effect concocted using models that have no place in the real world, have accomplished the opposite. Income inequality has not only grown in the aftermath of The Great Financial Crisis and throughout The Greater Moderation; it has long since smashed through its former 1927 record and kept rising. The Fed’s actions have not saved the little guy; they’ve skewered him.

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The Time Has Come…

Dear Friends,

It’s hard to believe, but the time has come. This Wednesday’s edition of Money Strong will be your last, unless you decide to accompany me on this next leg of my post Federal Reserve journey, and continue as a Money Strong subscriber!

As mentioned in my last few preambles, the move to a paid subscription service begins in August.  I can only hope that you have enjoyed reading my weekly insights as much as I have enjoyed providing them for you.

I would like to thank you for our time together and hope that it will continue through a subscription. Your feedback, guidance, and above all, inspiration have been tremendously supportive and appreciated.

Here are the details:

Rates –

 – Individual subscriptions are $150 per month plus tax.  We also offer an annual subscription rate of $1,500 plus tax for those of you wishing to pay in advance.  Please contact us at subscription@dimartinobooth.com for institutional group pricing.

       Terms –

– Money Strong is published every Wednesday.  Should you have any questions during your subscription, you are welcome to send them to us via email at subscription@dimartinobooth.com

– Money Strong is intended for the sole use of subscribers, and it may not be distributed to any third party, in whole or in part, in any form and by any means.  Thus, it may not be forwarded to clients, colleagues, friends, family etc.

If you would like to begin a subscription, please email subscription@dimartinobooth.com. We will contact you with our subscription agreement and any additional information you may require.

That, friends, is pretty much it! I hope my opinions and insight have proven their value and that you find Money Strong valuable enough to subscribe going forward.

 

As will always be the case, wishing you well,

 

Danielle

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The Smell of Dry Paint in the Morning, Danielle DiMartino Booth, Money Strong LLC

The Smell of Dry Paint in the Morning

Irish Playwright Oscar Wilde defied Aristotle’s memorable mimesis: Art imitates Life. In his 1889 essay The Decay of Lying, Wilde opined that, “Life imitates Art far more than Art imitates Life.” Jackson Pollock, the American painter, aesthetically rejected both philosophies as facile. We are left to ponder the genius of his work, which in hindsight, leaves no doubt that Art intimidated Life.

Engulfed in the flames of depression and the demons it awakened, Pollock’s work is often assumed to have peaked in 1950. The multihued vibrancy of his earlier abstract masterpieces descends into black and white, symbolically heralding his violent death in 1956 at the tender age of 44. Or does it? Look closer the next time you visit The Art Institute of Chicago. Greyed Rainbow, his mammoth 1953 tour de force, will at once arrest and hypnotize you. As you struggle to tear your eyes from it, you’ll ask yourself what the critics could have been thinking, to have drawn such premature conclusions as to his peak. Such is the pained beauty of the work. Rather than feign containment, the paint looks as if it will burst the frames’ binding. And the color is there for the taking, if you have the patience to slow your minds’ eye and see what’s staring back at you.

Perhaps it was the being written off aspect that drove Pollock to embark upon the final leg of his tour de force. We’ll never know. Renaissances to sublimity are the preserve of those with gifts beyond most our grasps. Hence the curious hubris driving so many pensions to reinvent themselves to full solvency by taking on undue risks. Heedless of what should be so many warning signs, so many managers continue to herd blindly into unconventional terrain hoping to find that perfect portfolio mix. The more likely upshot is their choices will drive them straight off a rocky cliff.

For now, the craggy landscape of pension canvases continue to be painted. Or in the case of the country’s largest pension, the stage continues to be set. This from Ted Eliopoulos, chief investment officer of the California Public Employees Retirement System (CalPERS): “We will be conducting quite elaborate choreography, looking at asset allocation, our liabilities and the risk tolerance of our board in conjunction with our expected rates of return for our various candidate portfolios.”

Oh, but for the days of antiquated notions such as matching assets to liabilities. But that’s so 80s. Today, a given public pension’s portfolio is anything but dominated by the Treasury bonds once held to satisfy its future liabilities. Rather, half of a typical portfolio’s assets are invested in stocks, a quarter in bonds and cash, and the balance in ‘alternative investments,’ including private equity, hedge funds, real estate and commodities. (Yes, we are still on the subject of matching current and future retiree paychecks to appropriate investments.)

To CalPERS credit, this ‘elaborate’ mix turned in stellar performance in its most recent fiscal year ended June 30. The $323 billion fund generated a net 11.2 percent return buoyed by a 19.7 percent return on its stocks. Returns of 14 percent on its private equity holdings and 7.6 percent on real estate rounded out the outperformance.

Eliopoulos stressed that, “as pleased as we are with this one-year return, our focus is always on the long-term. We invest for decades, not years.”

As pointed out in Barron’s, it’s been touch and go for the past few decades. CalPERS returned 4.4 percent compared to the S&P 500’s 7.1 percent, and over the past 20 years, 6.6 percent vs. the market’s 7.1 percent. Neither achieved return, it should be pointed out, exceeds the fund’s currently assumed rate of return of 7.5 percent or the assumed rate to which it will be lowered, seven percent, by the end of 2019.

The ultralow interest rate environment engineered by the Federal Reserve and unattained return goals leave CalPERS 68 percent funded. That puts it just about in line with Wilshire Consulting’s most recent calculations, which found the average aggregate funding ratio for state pension plans to be 69 percent.

So very few pensions are where they need to be. And fewer still will ever get there. Pension managers are deluding themselves into believing creativity in asset allocation holds the key to greatness in the after-working-life.

Afraid to say the miracle of alternative investments cannot make up for the average four-percent differential required to make pensions whole – just this year. How so on the math? A blended portfolio of cash, investment-grade and junk bonds today earns 3.5-percent; this compares to pensions’ average assumed rate of return of 7.5 percent. Of course, this gap has been widening for years care of dim-witted central bankers who excel at calculus but can’t manage simple math.

How unfair is it to leave out portfolios’ spice girls of equities and alternatives? Hate to turn down the party music, but starting points do matter. So do fees (hold that thought).

There’s nothing to say pensions won’t eke out another exceptional year of stock gains. The Fed could well be tantalizing investors with chatter of QE4 if the economic data continue to soften. But there’s no silver lining in that potential outcome. Remember that rocky cliff over which current reckless allocations can drive returns? Let’s just say the cliff gets taller, and the fall longer, for every year into which this aged-bull-market rally stretches.

As for those alternatives, for better or for worse, commodities are passé. Meanwhile, pensions have been abandoning hedge funds for years as passive investing takes victim active managers who dare value an asset and invest accordingly. And real estate is on fire. As in, valuations have never been this steep in the history of mankind. You can draw your own conclusions on that front.

That leaves us with private equity, that darling of asset classes and the issue of those pesky steep fees. According to the Pew Charitable Trusts, states bled $10 billion in fees and investment-related costs in 2014, the latest year for which data are available. Not only is this lovely line item funds’ largest expense; fees are up by about a third over the past decade, which conveniently coincides with the greater adoption of alternatives. Gotta love being a taxpayer!

But surely pensioners are privileged to have access to these tony private equity funds? Over the long haul, PE always outperforms those stodgy asset classes every Tom, Dick and Harry can buy online. So what if they’re illiquid. Right?

It’s hard to imagine the shivers sent down the spines of many pension fund managers when they heard the news that EnerVest Ltd, a $2 billion PE fund, had lost all its value. “Though private-equity investments regularly flop,” the Wall Street Journal reported, “industry consultants and fund investors say this situation could mark the first time that a fund larger than $1 billion has lost essentially all of its value.”

Well at least the oil bust is long over. Ill-fated, ill-timed, ill-valued energy investments are to blame for EnerVest’s demise. And surely that’s a comfort. It positively proves the fund’s evisceration is an isolated idiosyncratic incident.

Those other Wall Street Journal (WSJ) headlines don’t mean a thing. Why worry that, “Shale Produces Oil, So Why Doesn’t It Produce Cash, Too?” To wit, over the past decade, eight of the most established shale players have generated a respectable $414 billion in revenue but nary a penny in free cash flow. In fact, this eightsome has had negative cash flow of $68 billion.

Still think EnerVest will be a one-off event? Try this other WSJ headline from early July: “Wall Street Cash Pumps Up Oil Production Even As Prices Sag,” an article that went on to cite one analyst’s observation of, “insufficient discrimination on the part of sources of capital.”

Why, the question must be posed, bother discriminating when you’re sitting on $1.5 trillion in dry powder? Wait, are we still talking about energy? Well, no. That’s the point.

Go back to that last WSJ article for a moment, to what the reporters wrote: “Wall Street has become an enabler that pushes companies to grow production at any cost, while punishing those that try to live within their means.”

Set aside the fact that the analogy strikes closely to that of a drug dealer. Now nix the word, ‘production’ and fill in the blank with whatever your heart desires. THAT is the power of $1.5 trillion in private equity dry powder in all the forms it has the capacity to assume.

Again, starting points matter. That is, unless you are a deep-pocketed price agnostic buyer, one that collects fees for assets under management, regardless of how well the investment decisions fare. Being valuation-insensitive, however, also means you can incinerate your investors, especially pensions, and still walk away all the richer for it.

To its credit, Pew expressed particular concern with respect to desperate pensions playing the game of returns catch-up, as in those that have most recently plowed headlong into alternatives. No surprise, they happen to be one in the same with those sporting the weakest 10-year returns.

Ever heard someone tell you to not put all of your eggs in one basket? This rule of thumb applies in spades to pensions, or at least it should. While alternatives may provide a degree of diversification, Pew reports that that the use of alternatives among the nation’s 73 largest state-sponsored pension funds ranges from zero to over 50 percent.

Arizona tops the far end of that range, with 56 percent of its assets in alternatives. Missouri and Pennsylvania are not far behind with over 50 percent in this ‘basket,’ and Illinois, Michigan, Ohio, South Carolina and Utah stand out as having close to 40 percent in alternatives. Click for link to PEWTrusts.org report.

In the weeks to come, many pensions will excel in the back-slapping department, reporting double-digit returns for the fiscal year ended June 30th. Please keep your salt shaker handy.

For the third time, starting points matter. In late June, Moody’s ran some figures and scenarios to quantify where pensions are today, and where they’re headed. In 2016, total net pension liabilities (NPLs) surpassed $4 trillion. Looking ahead, Moody’s expects reported NPLs to fall one percent by 2019 in an upside scenario, but rise 59 percent in a downside scenario.

Perhaps the fine folks at Moody’s have contemplated what happens when, not if, pensions’ liquid equity and bond holdings lose 20 percent. Maybe they’ve even taken their scenarios one step further and envisioned the return implications for all of these elegant alternatives when a liquidity freeze takes hold amid plummeting valuations.

What’s a pension to do? Fraught managers are apt to throw more of your money at alternatives as tax revenues rise to compensate for what pensions cannot make up in returns. Know this: the more that $1.5-trillion store of dry powder grows, the more it devolves into that much napalm in the morning. The conflagration that spreads will not be containable, and you won’t be able to tear your eyes from it. As the tragic Pollock said of his paintings, and we will one day say of pensions, they have no beginnings or endings, they have lives of their own.

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ICYMI.ddb, In Case You Missed It — August 4, 2017

In Case You Missed It — July 15, 2017

Dear friends,
 
Janet Yellen headed for the Hill this past week for what could be her last appearance before Congress. Of course, that prompted me to grace sweltering Manhattan with my presence to chime in and opine on her viewpoint of the world. As you will see in more than a few of the links below, Yellen’s confusion left me scratching my head.
 
The job market continues to strengthen and wage growth still can’t get off the floor. The economy has withstood as much as it can in the form of interest rate hikes and it’s time to get busy shrinking the balance sheet ‘appreciably,’ to borrow her term? ‘Egregious and unacceptable’ practices have occurred on her watch and yet no action has been taken.
 
The sensation was akin to being swallowed whole by inconsistency itself. If you have a moment, enjoy my jaunt across media outlets. Some are longer than others. But those asking the questions had done their homework and that’s always a plus for the gal on the receiving end.
  
The TV Parade 

CNBC World Exchange — Janet Yellen returns to the Hill
  

Now that we’ve got your Saturday covered, add to your lazy afternoon at the beach Sunday reading the interview Economics Wire posted Friday. It’s a keeper.

In-Depth Interview
 
Economy Wire :  Is the Federal Reserve Bad for America? A Conversation with Danielle DiMartino Booth
 
 
Hoping your feet are in the sand and wishing you well,

Danielle
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DiMartino Booth, Fed Up, Will Corporate Bonds Cross Over?

Will Corporate Bonds Cross Over?

It started out kinda ‘Crazy,’ in 1961 to be exact. A 20-something-year-old bass player by the name of Willie Nelson had written a song which he generously offered up to country singer Billy Walker. Walker, however, perceived the lilting lyrics to be a bit too feminine, so he passed. The late Patsy Cline would be forever grateful to Willie for ‘Crazy,’ which she sultrily sang to stardom, and in doing so, founded a movement.

We’re familiar with what followed, from the hobo portrayed as ‘King of the Road’ to the petulant moment, ‘The day my momma socked it to the Harper Valley PTA.” Even the most vacuous pop music acolytes couldn’t help but to let Olivia Newton John know they loved her. Did they ever let her know! And who didn’t want to emulate Glenn Campbell? Even those 1975 disco divas velvet-roping at Studio 54 dreamed of landing the perfect Rhinestone Cowboy.

Year in and year out, Crossover Country hits made traitors of pop purists. Even Willie finally got his mainstream due, with 1982’s No. 5 pop chart hit, “Always on my Mind.” It wasn’t until 1983, when Dolly Parton & Kenny Rogers met on “Islands in the Stream,” taking the hit all the way to No. 1 on the charts, that crossover crossed back over to strictly Country terrain.

And now there is Sam Hunt. Never heard of him? Chances are you can recite a line or two from ‘Body Like a Back Road,’ Hunt’s Crossover Country megahit that recently landed at No. 6 on the Billboard 100. Even if you choose to be obtuse about what the song is about, you can’t help but roll the windows down and sing about “Doin’ 15 in a 30.”

That is, unless you’ve recently hit our country’s byways and all but screamed at that infuriating Sunday driver who only adheres to half the law, that is, doesn’t comprehend Slower Traffic Keep Right (!)

Unbeknownst to unassuming corporate bond holders, they too will soon be forced into the slow lane. For the moment, the vast majority fancy themselves that equally exasperating driver who won’t get out of the fast lane, determined to bully their way to their damned destination. As for the perils of tailgating, they’re for the other guy, the less agile driver with rubbery reflexes.

That’s all good and well and has been for many years. Bond market fender benders are nearly nonexistent. The question is: Will central bankers worldwide turn placid parkways into highways to hell as they ‘remove accommodation,’ to borrow from their gently genteel jargon? That’s certainly one way to interpret Federal Reserve Chair Janet Yellen’s latest promise to shrink the balance sheet ‘appreciably.’

Care for a translation? How easily does “Aggressive Quantitative Tightening” roll off the tongue? Perhaps you’ve just bitten yours instead.

Enter the International Monetary Fund (IMF), The Institute of International Finance (IIF), The Bank of International Settlements (BIS), and by the way, the Emerging Markets complex including and especially China.

As a former central banker, it is with embarrassing ease yours truly can bandy about fantastic figures. No surprise that nary an eyebrow was raised at the latest figures out of the IIF that aggregate global debt is closing in on $220 trillion, as touched on last week. Consider that to be the broad backdrop.

Now, narrow in on the IMF’s concerns that financial stability could be rocked by a rumble in US corporate debt markets. Using firms’ capacity to service their debts from current earnings as a simple and elegant yard stick, the report warned that one in ten firms are failing outright.

The last two years of levering up have exacted rapid damage: earnings have fallen to less than six times interest expense, this during an era of unprecedented low interest rates. And as record non-financial debt as a percentage of GDP quickly approaches 50 percent, the share of income required to service this mountain is at a seven-year high. Should financial conditions tighten (the report was published in April prior to the Fed’s June rate hike), one-in-five firms are likely to default, which rises to 22 percent if rates continue to rise.

A separate signal of distress flickers into focus when one considers the sectors most at risk. Add up energy, real estate and utilities and you get to about half of the at-risk debt. And we wonder why Boston Fed President Eric Rosengren is perturbed about commercial real estate (CRE) and the risks it poses to the banking system.

A few bullets on CRE:

  • Smaller banks with less than $50 billion in assets hold $1.2 trillion of the $3.8 trillion in outstanding CRE debt. Larger banks are relatively less exposed, with $767 billion. This begs the question why the Fed chose this year to not stress test the smaller banks?
  • Bank holdings of CRE have risen nine percent over the last year; multifamily is up 12 percent.
  • Despite skyrocketing rents, multifamily prices have risen so much faster that “cap” rates (net operating income divided by the property price) have sunk to a 16-year low.

Why deviate to a CRE chit-chat in the middle of a corporate bond discussion? In so many words, financing is financing. Whether it’s the capital markets the Fed has kept wide open or banks, companies need access to sources of leverage, especially in times of need and extra especially in times of illiquidity. Stressed smaller banks in particular will be inhibited in their ability to extend lifelines to smaller companies in the coming years.

Speaking of illiquidity but not of small banks, over the past seven years, assets on the biggest banks’ balance sheets have fallen from $5 trillion to $3 trillion. Zero in on corporate bond inventories and you find that dealer holdings have collapsed by 75 percent since the onset of the financial crisis.

Who’s taken up the slack? Whom, pray tell, do you, Joe Q Bond Fund Manager, ping when you need to offload a few billion in bonds? Let’s just say the nontraditional entrants who provide bond market liquidity during the next rout won’t be nearly as polite when it comes to maintaining market stability and pricing. They might even behave a bit like vultures. The more you need to sell, the lower the price.

For this neat noose secured round our necks, we have the regulators to thank. Will bond investors sing along to the greatest hit that has yet to be released by those Rocking Regulatory trio of Dodd, Frank & Basel? Tossing tomatoes onto the stage will more likely be the case.

In the event you’ve begun to sweat, you might want to reach for more than a Kleenex. In a normal world, the bulk of the risk inherent in owning bonds was credit-related. But years of distortive low-interest rate policy have flipped bonds’ risk/return dynamic on its head. Using Barclays US-dollar Aggregate Corporate Bond Index, ‘duration’ now accounts for 90 percent of the risk of holdings bonds, with the balance related to credit; that’s up from 37 percent in 2013. Think of duration as your bonds’ sensitivity to interest rate risk. Kind of gives a whole new meaning to no sudden moves.

Thank heavens for geographic diversification? Ah, you must refer to those essential emerging markets (EM) bond holdings, a must have for any discerning investor. No doubt, they’re the ‘it’ girl. Dollar-denominated EM debt sales were already up 160 percent through May over 2016 to $160 billion, marking the fastest annual start to the year since 1999.

Let’s just say the Bank of International Settlements (BIS) isn’t quite so enthusiastic. The BIS is often referred to as the central bank to central banks. In its estimation, there is a total of $3 trillion in dollar-denominated EM credit worldwide. The BIS’ chief economist Claudio Borio warned in the BIS’ recently released annual report that, “dollar funding remains a potential pressure point in the international monetary and financial system.”

The IMF concurred, warning that in a tightening environment, “the weak tail of emerging economy firms” would be highly vulnerable. The report added that, “A sustained reversal of capital inflows would put pressure on countries with high external financing and/or low reserve adequacy.”

At least China’s got that going for it, as in $3 trillion in foreign reserves. The problem is that only a trillion is considered to be truly liquid, while another trillion is earmarked to build that expanse of infrastructure connecting China to the western world once and for all. After all, you don’t become dominant by being isolationists. Oops, well you get the point.

The BIS estimates that Chinese corporate debt is 169 percent of its GDP. Would you believe that eye-watering and disconcerting figure is realistically on the light side? My good friend Leland Miller sagely suggests one apply the apropos grain of salt to what Chinese statisticians generously refer to as ‘GDP.’ So round down the denominator, way down. Add in the fact the corporations might not be fessing up to what their liabilities really are (who wants to be Debbie Downer?) and or never repay it so why report it? So round up the numerator, way up.

And, you guessed it, who in the world can say with any authority how buried in debt Chinese corporations are? So there’s that lovely black box to ponder.

The takeaway is that ‘bonds’ just ain’t what they used to be. Don’t be comforted by your broker telling you they help you diversify or that they carry bullet proof credit ratings. Sit him or her down instead and warn of the real risks of swollen durations, of bonds of all stripes slipping into rusty junkyards, of our portfolios’ safest holdings crossing over, and not in the good way those country hits do for us pop enthusiasts.

Do yourself a favor. Have a listen to Body like a Back Road. It’s easy enough to find in your car, on that mean machine at the gym, or wherever you prefer to slow down and have a listen. You’ll be grateful you did as summer drags on, closing your eyes and imagining the luxury of going 15 in a 30. It beats the heck out of what your bonds are apt to do when inclement weather hits, which will feel more like going 100 in a 50 on bald tires. And who wants to listen to that?

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In Case You Missed It — July 10, 2017

Dear friends,

It is my hope that you received an email that looked like what I’ve pasted below. While it doesn’t resemble the communique you normally receive from me, I assure you I am the sender. Please login as directed and you will transition yourself onto new platform.

 

On 07/6/2017, you successfully activated your trial subscription to Money Strong written by Danielle Dimartino Booth. During your trial subscription, you will receive an email containing a link to the most recent issue of Money Strong published every Wednesday. You may also view recently archived issues of Money Strong at the subscriber website (Subscribers Home).

To access Money Strong, you may login via the link in our notification email or via the login button on our website. On the login screen, please enter the below username and password below for access. To avoid errors in the login process we recommend typing in your email address and then copying and pasting the password from this email:

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In the meantime, we’ve got one more payroll report under our belt. The headlines made a splash with job growth appreciably stronger than expected as a surge of sidelined laborers rejoined the workforce. Wages remain soft, which is intuitive given the type of jobs created – home health care workers led the month’s gains, a demographic sign of the times we are in.

For more on the outlook for baby boomers’ retirements, please have a look at my latest Bloomberg column, which focuses on the implications of boomers’ increasing exposure to passive and so-called ‘alternative investments.’ Below the Blomberg piece are three of my earlier missives on the implications of the tremendous build in private equity dry powder and pensions’ prospects. Hard to believe I started writing on this subject two years ago.

 

Private Equity and Passive Investors Are on a Collision Course

Bloomberg View — Danielle DiMartino Booth, July 6, 2017

Money Strong Archive Pull

The Smell of Dry Powder in the Morning 

What if Charlie Munger is Right?

The Smell of Dryer Powder in the Morning

In other In Case You Missed It

The Lance Roberts Show — July, 6, 2017

FED Players Receive Special Treatment

FX Street — EUR/USD and Fed: Levels, Ranges, Targets

As many of you hit the road back home, wishing you well,

 

Danielle

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Central Banks to Investors: I Know Nothing

Central Banks to Investors: “I Know Nothing!”

“I know nothing! I see nothing! I hear nothing!”

So light was Hogan’s Heroes, one could easily forget the sitcom, which debuted September 17, 1965, was set in a Nazi P.O.W. camp. More than any one character, Sergeant Schultz deserves credit for the show’s laughable levity. His gregarious girth, sincere sympathy and wonderful weakness for tempting treats — let’s just say Shultz had anything but steely resolve, convincing affable audiences that war could be whimsical. For the prisoners of the Luft Stalag 13, Schultz made an ideal witness to their eternal escape endeavors. His robustly repeated response, “I know nothing!” faithfully failed to fulfill his German superiors’ suspicions.

One can only imagine the proliferation of late 1960s era’s pretentious political philosophers chafing at the bemusement beckoned by Schultz’s channeling Socrates. The Socratic paradox, “I know that I know nothing,” back-translated to Katharevousa Greek, was relayed by Plato in Apology.

Apparently, Socrates attributed his wisdom to not imagining that he knows what he does not. At the intersection of Schultz and Socrates, humility and hilarity collide.

It was neither humor nor humbleness, but rather hubris, being highlighted in London on June 27, 2017 when Federal Reserve Chair Janet Yellen managed to make light of a heavy subject in a live televised Q&A with British Academy President Lord Nicholas Stern. Chuckling in response to one query, Yellen offered up the following on our collective financial future:

“Would I say there will never, ever be another financial crisis? You know probably that would be going too far. But I do think we’re much safer and I hope that it will not be in our lifetimes, and I don’t believe it will be.

It was these last few words that ignited the ire of so many central banking detractors. Was she hoping we’d come to see the softer side of central banking?

Clearly, she takes faith in the radiation detection facilities the Fed has installed in the years since the worst of the financial crisis engulfed the global financial system. If not, why would she have also offered up these words of reassurance, that those at the Fed, “are doing a lot more to try to look for financial stability risks that may not be immediately apparent … in order to try to detect threats to financial stability that may be emerging.”

Though this particular quote got much less in the way of play in the media, marrying the two threads of thought helps explain why Yellen, who no doubt means well, was able to strike a jovial tone at the prospect of future financial crises. Blind faith in those who’ve been assigned tasks has long handicapped Fed leadership.

On a deeper level, one has to question the qualifications of the architects who’ve built out the risk monitoring system in recent years. The February 2015 McKinsey report Debt and (Not Much) Deleveraging did not gain the rank of ‘seminal’ without captivating most front-line veterans of the financial crisis.

The study’s findings were startling in their simplicity: Rather than address the underlying over-indebtedness that detonated systemic risk and culminated in a full-blown catastrophe, policy had simply catalyzed further indebtedness.

The numbers, with which we are all familiar, are as follows. From a starting point of the end of 2007 through mid-year 2014, global debt rose by $57 trillion to $199 trillion. As a percentage of global gross domestic product (GDP), global debt had risen to 286 percent from 269 percent.

Though deleveraging had indeed occurred in some corners (referred to in America as defaulted mortgages), the overabundance of liquidity generated by central banks’ machinations had simply found new places to stoke unquantifiable risks. In the case of the seven years through 2014, some usual suspects made their presence known on the leveraging-up-to-their-eyeballs scale such as Greece and Ireland.

But it was China that stood out in the McKinsey study, specifically, “the quadrupling of China’s debt, fueled by real estate and shadow banking, in just seven years.”

McKinsey was also kind enough to offer a bit more historic perspective for those of us rookies who might have thought this type of perverse approach to treat over-indebtedness novel. It all started at the end of 2000, just about the time investors were reeling from Internet bubble implosion portfolio losses. In the seven ensuing years, global debt rose to $142 trillion from $87 trillion. As a percentage of global GDP, debt had grown ‘smartly,’ to 269 percent from 249 percent. (Lest you’ve forgotten the name of that starlet in the annals of dumb debt, it was referred to as the subprime housing bubble).

Conclusion: Do NOT attempt to resolve over-indebtedness by applying more debt to the problem.

Presumably the task force monitoring the global financial system for signs of building dangers was armed with this simple guiding tenet.

It follows that our protectors were blindsided by yet another report released the very same day Yellen made her fate-tempting London remarks about how much safer we are.

The Institute of International Finance (IIF) is a Washington, DC-based global tracker of capital flows with a stellar reputation for sniffing out risks. In its newest report, the IIF warned of the risks posed by global debt levels that had ballooned to $217 trillion. In the event you are about keeping score, the math works out to 327 percent of global GDP.

The good news:  Developed economies continue to delever; in the past year, they’ve offloaded some $2 trillion in debts. The not-so-good news:  Central banks’ manning the printing presses 24/7 necessitate their crisp, fresh product find a home, fungible as global quantitative easing has proven to be. Enter developing countries, where debt has grown by $3 trillion over the past year to a new record of $56 trillion.

Filling in the blank with the main driver is akin to gaming a multiple-choice test for which you’ve not studied. When in doubt, choose ‘C,’ as in China, which accounted for 2/3rds of last year’s debt growth. Chinese debt now stands at $33 trillion. This most recent spurt of growth has been led both by households and companies.

At least Uncle Sam has that in common with his Red Dragon counterpart. Household debt has recaptured its record high levels led by unsecured debt (lovely). And corporate debt stateside is now at record levels, even when compared to earnings and cash flow, which remain strong. (Note to Fed: tightening into a weakening economy when debt burdens are at record highs has yet to end well.)

The IIF shrewdly expressed unease that all of this debt could pose “headwinds for long-term growth and eventually pose risks for financial stability.” Party poopers.

For good measure, the International Monetary Fund and Bank of International Settlements share the IIF’s concerns. But what do they know?

In the event you sense tongue squarely in cheek, hence the cheekiness, you are correct.

Either you laugh and channel Sargent Schultz. “In (currency) wars, I do not take sides! I see nothing! I know nothing! I didn’t even wake up this morning!” You pray God central bankers are making the best of a gravely unstable situation by making light of it to calm the masses. If you present a strong face, the minions will hopefully buy into your outward confidence.

Well played? Consider the alternative.

What’s worse than the monetary myopia that’s blinded central bankers into believing moral suasion can resolve the teensiest $217 trillion problem?

What if they believe what they are saying in the face of irrefutable evidence to the contrary? Socrates’ self-discovery followed a journey wherein he tried to find a wiser man than himself, whether it be politician, poet or craftsman. His findings were as follows: Politicians boast wisdom without knowledge (some things never change). Poets, for their part, touch people with their words, but don’t grasp their meaning. Finally, craftsmen claim knowledge but it is restricted to too narrow a field.

Socrates concluded that there was no such thing as indelible intellect, but rather ingrained ignorance. Recognizing your fallibility was thus the secret to achieving greatness, to know in your very soul, “I know that I know nothing.”

Future generations across the globe would be well served by central bankers of the strongest constitutions, those who are neither politicians, nor poets, nor craftsmen who bow to econometric models that have scant application outside tight academic circles. May they rather live by Socrates’ humble mantra, may they know they know nothing, and nothing more.

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Will US Drillers Drive Oil Prices into the Ground?

Asian Fusion’s got nothin’ on Chef Caveman.

At least Stone Age culinary connoisseurs knew enough to grease rocks before using them as cooking apparatus. You might concur that logical leap would make hot-rock table-cooking tuna a might bit easier. The question is, would you have ordered what was on the menu back then? The main ingredients alone might give you pause. A fine flour ground from ferns and cattails? A touch of water for that just-so batter consistency? Maybe it was the grease that made the difference. If that’s the case, it’s true — some things never change.

Some 30,000 years on, pancakes remain a hot hit with a hip history. In Neolithic times, einkorn wheat was all the rage in the Italian Alps. The Ancient Greeks added sweets, as in honey, to augment the allure. The French put pancakes on a diet; their “panne-quaiques” required thinning the batter, and voila, thus was created the crepe. As for us red-blooded Americans, let’s just say we rejected fancy flapjacks for puffier pancakes, preferably piled one on top of each other, slathered in melting butter and smothered in sticky syrup.

The Saudis are discovering the hard way that we also prefer our shale formations to be served up in tall stacks. Just a guess here, but there might even be a pattern: the taller the shale stack, the shorter the store of OPEC’s patience. It turns out that strong-mouthing oil prices upwards in crude form, the old-fashioned way, by announcing pared production, isn’t nearly as efficacious when those other announcements, that of deep discoveries, outweigh output cuts.

One can only imagine the dismay at the Wolfcamp Shale’s shooting to stardom last November. Though the formation is not a new discovery per se, the statistics released by the U.S. Geological Survey obliterated precedent. At 20 billion barrels, the recoverable oil is nearly three times that of the Bakken-Three Forks formations, which catapulted North Dakota into the energy hall of fame.

As one gourmet geologist explained: Think of a typical shale formation as a short stack of layers that can be drilled horizontally. The Wolfcamp lies at the outer edge of petroleum potential; it’s such a tall stack, the layers could number into the double digits.

The relationship between supply and demand has a funny habit of holding true to form. Though a matter of pure coincidence, it is telling that the Wolfchamp news roughly coincided with oil price’s most recent peak. Since then, its per-barrel price has fallen by about a fifth to $44-ish despite the Saudi’s best efforts to push the price back towards $60, which is still down 60 percent from 2014 highs.

It’s fair to ask if $60 is an arbitrary target? Think of it as the least sweet, sweet spot that enables the planned initial public offering of state-owned Saudi Arabian Oil (Aramco) to well, work, mathematically-speaking. You can bet your bottom petrodollar the very idea of taking the crown jewel public stirred a bit of controversy.

Consider Aramco’s IPO the brain child of 31-year old Mohammed bin Salman. By relative ruling royals’ age standards, the newly elevated crown prince is literally a child. That’s a good thing as he’ll need youthful verve and more to implement his ambitious plans to diversify the Saudi economy away from its oil dependence, the seed money for which is the planned proceeds of the IPO.

A little economic diversification could go a long way for Saudi Arabia, the region’s largest economy whose GDP is forecast to barely register in the positive this year. That’s a far cry from Iran, its geopolitical nemesis that’s expected to generate economic growth north of four percent this year.

Oil’s stubborn refusal to stage a compliant rebound is partially responsible for the accelerated announcement that Prince Mohammed would succeed his father to the throne. In his prior role as chairman of the country’s Council for Economic and Development Affairs, he pushed against his elders, jockeying for the IPO to be listed expeditiously exhibiting an appreciation for how fickle markets can be.

Of course, demographic challenges and political posturing with neighboring nations that support the Saudi’s enemies are also at work. But it’s hedge funds that could pose the greatest impediment to Saudi Arabia’s aspirations. Some of those cowboys manning their screens are a might bit more piqued than even the Saudis at crude’s refusal to rebound to even half its peak.

As reported by the Financial Times, hedge funds’ patience with OPEC’s assurances that prices will rise is effectively tapped out. Short positions that profit as oil prices fall stand near record highs, equivalent to 162 million barrels. (A word of caution to the shorts: Squeeze hurts. See 6/27/17 trading if you harbor doubts.)

Unlike prior episodes of bait and switch, though, OPEC has stood and largely delivered. It must be salt in the wound to trim two percent of global supply out of production and not even get a rise out of prices.

Afraid that’s just the way things go in a world saturated with supply, supply that keeps building despite OPEC’s opposite obstruction. Exempted OPEC members Nigeria and Libya have tacked on some 600,000 barrels-per-day (b/d) to supplies since the fourth quarter. And US-based shale producers look to drive another 700,000 b/d by this time next year, pushing total production to a record 10 million b/d. Yours truly was all of three months old when the last record of 9.94 million b/d was set in December 1970. Imagine that.

Tack on prospects for natural gas production and growing export activity and the US looks prime to dominate on the production stage for the foreseeable future. The question is at what price?

While it’s true, that some existing wells in the Permian Basin can break even with oil barely above $20 a barrel, even the leanest frackers would prefer a price with a $50-handle. That makes it much more attractive to tap new wells, which typically begin to break even when oil prices cross the $50 threshold.

Perhaps the most problematic platitude, for those who recall all too vividly the last time prices were this low, is that the current rut is a pure supply story and therefore none too knotty for the financial markets. OK, so developed world inventories are nearly 300 million barrels above their five-year average. And, yes, Europe and Japan are not in economic sinkholes. And, no, the Chinese economy has not withstood a hard landing (do they even allow that?). Still, there’s just something about conventional wisdom that never sits right…

It may not feel like it but there have been 225 bankruptcy filings in the oil patch since 2015. According to the theme of the recent Wall Street Journal story that featured that stat, energy producers have “adapted” to the new low-price world. “Companies say they are focused on living within their means at even this price,” so says the Journal.

There’s no doubt operators are lean. But does that alone justify their share prices trading close to where they were from 2011 to 2014, when oil traded north of $100 a barrel? Apparently so. As the article went on to say, “Companies have driven down costs by squeezing suppliers and contractors, trimmed less profitable projects and tackled a once spendthrift culture.” Heck, they don’t even want to see triple-digit prices again. (Can someone please cue an eyebrow lift??)

Maybe we’d best not use the stock market as a guiding light, which leads us to bonds. As awash as the world is in oil, its oversupply has nothing on the mountains of private equity dry powder that have piled up. The overabundance of capital looking for a home helps explain why there were so few – yes, few – bankruptcies across the energy sector. No doubt, fresh debt infusions have bought many flailing companies a lifeline. That’s a great thing if they’ve become more efficient and profitable operators as a result.

But it’s dangerous to assume all will be well regardless of how low oil prices go, which the high yield market has already refuted. Deutsche Bank’s Oleg Melentyev is a veteran of bond cycles and an authority on when break evens break down, leading to break points. He’s also a great friend whose guidance has yet to fail.

In Oleg’s estimation, debt levels among high yield energy issuers have yet to present a challenge. So long as oil stays above $40 a barrel, some form of stasis will prevail, albeit with the prospect that yields continue to rise. Appreciate that you know this, so consider the following public service announcement to be Pavlovian after years of writing Federal Reserve briefing documents: Bond yields move opposite price. There, said it.

Should that old West Texas Intermediate drop below $40, or worse, flirt with $35 a barrel…well then, things could get testy, shall we say. For the moment, the not-transitory decline in oil has acted as a deterrent against sudden moves by hawkishly-inclined central bankers. In other words, more justification yet for the complete complacency that’s comatosed the markets.

If there’s one quibble with Oleg’s observations, it’s that we’re now in the process of double-netting-out. Like it or not, “ex-energy” is back. Listen, it’s the bulls’ jobs to net out nastiness; they invented one-time charges that recur in perpetuity. The fact that they quit reporting all that netting when the skies clear is also what makes them bulls, or possibly full of bull. Besides, who wants to know what S&P 500 earnings growth would be if you netted out the massive rebound in energy shares?

So you’re down with the vernacular: “ex-energy.” But what about “ex-energy and ex-retail”? You’d better get used to it as the retail sector is in deeper distress in junk bond land than energy. “Of course ex-energy and ex-retail, the high yield market has nary felt a flutter over the last two weeks!” How’s that working for you?

For the time being, the hope is US oil supplies will stabilize, relieving the downward pressure on prices. A pause would certainly mark a shift after a frenetic year at the drill bit: Total rig count in North America – the US and Canada – ended the week of June 23rd at 1,111, more than double the count from a year ago of 487. The rig count has risen for a remarkable 23 consecutive weeks.

It could be a novel approach is what’s needed to stabilize prices at a level that allows bond investors and so many other interested parties to sleep at night. Maybe the solution is moving up Shrove Tuesday. As of now the calendar calls for the day, also known as Pancake Day, to arrive on February 13, 2018, the day before Ash Wednesday. Why not hit the confessional early, deplete all those fattening ingredients from the cupboard as was customary among the old English, and call a moratorium on drilling? Think of it as the oil market’s answer to Lent, That is unless you’d prefer oil prices continue to fall. It all depends on the position you’ve assumed and whose side you’re on.

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