structural shift increases corporate bond risk premium--this is not priced in

Spotting structural shifts in financial markets is difficult to pinpoint and describe but it seems regulations are finally affecting the world banking system and we will now see how this new financial system reacts under stress.

Market makers, speculators, short sellers all help with price discovery and liquidity in most markets, and traditionally in stocks & bonds.

How will bonds and stocks react under a panic now? Derivatives, MBS, CDO, CDS that were illiquid to begin with, froze during the last panic while stocks and bonds declined, they were still liquid. I've never seen a market were corporate and high yield bonds was frozen and/or illiquid (at least not for longer than a day and, never, one were the FED didn't step in and effectively unfreeze those markets).

As market players, speculators and, dare I say it, banks exit the corporate bond market, the makings of a bubble are set in place with no bears all bulls--this is a structural shift not based on speculation but because regulation has reduced liquidity by basically forcing out banks and other participants.

"The 21 primary dealers that do business directly with the Fed reduced their balance sheets to $56 billion at the end of March from $235 billion in October 2007, New York Fed data show. They were holding $7.9 billion of investment-grade bonds as of Aug. 7, Fed data shows, about 0.2 percent of the market for the dollar-denominated notes.

That’s led to a concentration of credit risk in funds that take bullish positions on corporate debt, leading to more of a one-sided market than in the past, Citigroup credit strategists led by Antczak wrote in a report this month"



Bond Trading Hampered as Buyers Retreat to Crowded Exits

By Lisa Abramowicz - 2013-08-21T09:55:04Z

The lowest volumes for U.S. corporate-bond trading since 2008 are underscoring the potential for market disruptions as regulations prompt dealers to retreat.
August trading volumes have plummeted to a daily average of $14.1 billion, down 9 percent from the corresponding period last year, even as the amount of company debt outstanding has soared by 12 percent. Bonds have lost 5 percent since the end of April on the Bank of America Merrill Lynch U.S. Corporate Index, the worst stretch since the credit crisis as the Federal Reserveconsiders curtailing its record stimulus.

5:55

Aug. 19 (Bloomberg) -- Rick Rieder, chief investment officer for fundamental fixed income at BlackRock Inc., talks about investment strategy and Federal Reserve policy. Rieder speaks with Tom Keene, Sara Eisen and Scarlet Fu on Bloomberg Television’s “Surveillance.” David Plouffe, a former adviser to U.S. President Barack Obama and a Bloomberg contributor, also speaks. (Source: Bloomberg)

Exiting from fixed-income securities is getting tougher as the world’s biggest bond dealers respond to new capital standards, reducing inventories of the debt by 76 percent since the peak in 2007. Even as lenders from Goldman Sachs Group Inc. to UBS AG create electronic-trading platforms, investors are failing to find relief from waning liquidity, according to a July report by the Treasury Borrowing Advisory Committee.
“You’ve got to be very wary of getting into a crowded position,” Stephen Antczak, the head of U.S. credit strategy at Citigroup Inc. in New York, said in a telephone interview. “If everybody has the same mandate, who’s going to take the other side of the trade? If far more guys are mark-to-market sensitive than they used to be and you overlay the lack of liquidity, that kind of exacerbates the problem.”

Basel Committee

Investors are souring on the debt after pouring almost $950 billion into corporate-bond mutual and exchange-traded funds in the wake of Lehman Brothers Holdings Inc.’s collapse in 2008, when the Fed started expanding its balance sheet to suppress borrowing costs, Citigroup data show.
The unprecedented growth of funds that publish market prices of their assets daily has changed the dynamic of credit markets, with investors more inclined to redeem funds as sentiment deteriorates, Antczak said. The funds now account for more than 40 percent of the debt’s owners from about 25 percent in 2007, Citigroup data show.
While the biggest banks used to provide a cushion from plunging debt values, they’re less willing to fill that role after the 27-country Basel Committee on Banking Supervisionraised minimum capital standards, boosting the cost of owning riskier assets.

Abbey National

“You can see the price swings being correlated to flows, with inflows and outflows showing up real time in performance,”said Jeff Meli, co-head of fixed-income, currencies and commodities research at Barclays Plc in New York. “The dealer community buffered against those swings at one point and they aren’t there anymore.”

European iTraxx
The Markit iTraxx Europe Index of credit-default swaps tied to the debt of 125 companies with investment-grade (NTMBIV) ratings increased 1.1 basis points to 103.6 at 10:47 a.m. in London. In the Asia-Pacific region, the Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan rose 1.8 to 159.5.
The indexes typically fall as investor confidence improves and rise as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The Standard & Poor’s/LSTA U.S. Leveraged Loan 100 indexdeclined 0.09 cent to 97.77 cents on the dollar, the biggest drop since June 26. The measure, which tracks the 100 largest dollar-denominated first-lien leveraged loans, has returned 2.97 percent this year.
Leveraged loans and high-yield bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at S&P.

BlackRock, Ares

BlackRock Inc., Ares Management LLC and other firms have refinanced more than $2 billion of CLOs this year, and an additional $8 billion sold in 2011 will be able to cut interest payments by the end of 2013, according to Royal Bank of Scotland Group Plc. Restrictions preventing more than $40 billion of 2012 investments from doing the same will be lifted in 2014, according to the bank.
In emerging markets, relative yields widened 7 basis points to 354 basis points, or 3.54 percentage points, according toJPMorgan’s EMBI Global index, which has averaged 302.4 this year.
Daily trading volumes in high-yield bonds have decreased to $4.3 billion on average this month through Aug. 19, compared with $5 billion in the corresponding period in 2012, Trace data show. Investment-grade volumes fell to $9.8 billion from $10.5 billion.
The decline marks a reversal from the first five months of this year, when average trading volumes for debt of corporate borrowers from the riskiest to the most creditworthy of $19.4 billion were 8 percent higher than last year’s pace.

Fund Outflows

While market turnover has, if anything, increased since the financial crisis, “liquidity is about much more than turnover”and has the “tendency to disappear abruptly when really needed,” according to a presentation to the Treasury Borrowing Advisory Committee that sought to assess liquidity in the fixed-income market.
Buyers pulled $7.4 billion from investment-grade funds in July, Bank of America Corp. data show, after Fed Chairman Ben S. Bernanke said the central bank could start curtailing the current pace of debt buying if growth is in line with central bank estimates. The Fed will likely reduce the central bank’s $85 billion in monthly bond purchases next month, according to 65 percent of economists surveyed by Bloomberg.
A 2.8 percent loss this year on dollar-denominated corporate debt compares with a 7.1 percent gain in the corresponding period last year, Bank of America Merrill Lynch index data show.

$5.3 Trillion

Corporate borrowers racing to lock in borrowing costs that averaged 4.3 percent as of Aug. 19, compared with a 10-year average of 5.82 percent, have sold $975 billion of the debt this year, expanding the size of the market to $5.3 trillion, according to Bloomberg and Bank of America data.
BlackRock’s $17.8 billion investment-grade bond ETF has eliminated 7.3 million shares this month, equal to about $825.6 million, data compiled by Bloomberg show. Its $14.6 billionhigh-yield ETF reported an outflow of 3.6 million of shares on Aug. 19, the biggest daily withdrawal on record.
“We expect outflows to accelerate,” Bank of America credit strategists led by Hans Mikkelsen in New York wrote in an Aug. 19 report. “With poor summer liquidity and hedging needs we retain our hedge against a disorderly rotation with wider credit spreads.”
Wall Street dealers traditionally act as middlemen by warehousing bonds until customers seek to buy them. That model is changing as U.S. and international rules meant to make the banking system safer have prompted dealers to cut the amount of debt they hold.

Risk Concentration

The 21 primary dealers that do business directly with the Fed reduced their balance sheets to $56 billion at the end of March from $235 billion in October 2007, New York Fed data show. They were holding $7.9 billion of investment-grade bonds as of Aug. 7, Fed data shows, about 0.2 percent of the market for the dollar-denominated notes.
That’s led to a concentration of credit risk in funds that take bullish positions on corporate debt, leading to more of a one-sided market than in the past, Citigroup credit strategists led by Antczak wrote in a report this month.
Goldman Sachs spent a year developing an electronic trading system for corporate bonds called GSessions that started operating in 2012. UBS, Switzerland’s biggest bank, has directed more debt trading onto its Price Improvement Network, which lets customers directly post prices with a so-called order-book model where bids and offers are shown before the trade.
While there’s been “massive growth” in electronic price inquiries, much of it is small in size, leading to little extra depth in trading, according to the Treasury Borrowing Advisory Committee report.
“Liquidity has deteriorated overall,” Barclays’ Meli said. “Transaction costs remain high. In periods of low liquidity, the cost of transaction goes up more than we used to see in similar periods before 2011.”
To contact the reporter on this story: Lisa Abramowicz in New York at labramowicz@bloomberg.net

The Blip

By Benjamin Wallace-Wells
New York magazine, July 21, 2013
What if everything we've come to think of as American is predicated on a freak coincidence of economic history? And what if that coincidence has run its course?
Picture this, arranged along a time line.
For all of measurable human history up until the year 1750, nothing happened that mattered. This isn't to say history was stagnant, or that life was only grim and blank, but the well-being of average people did not perceptibly improve. All of the wars, literature, love affairs, and religious schisms, the schemes for empire-making and ocean-crossing and simple profit and freedom, the entire human theater of ambition and deceit and redemption took place on a scale too small to register, too minor to much improve the lot of ordinary human beings. In England before the middle of the eighteenth century, where industrialization first began, the pace of progress was so slow that it took 350 years for a family to double its standard of living. In Sweden, during a similar 200-year period, there was essentially no improvement at all. By the middle of the eighteenth century, the state of technology and the luxury and quality of life afforded the average individual were litt le better than they had been two millennia earlier, in ancient Rome.
Then two things happened that did matter, and they were so grand that they dwarfed everything that had come before and encompassed most everything that has come since: the first industrial revolution, beginning in 1750 or so in the north of England, and the second industrial revolution, beginning around 1870 and created mostly in this country. That the second industrial revolution happened just as the first had begun to dissipate was an incredible stroke of good luck. It meant that during the whole modern era from 1750 onward – which contains, not coincidentally, the full life span of the United States – human well-being accelerated at a rate that could barely have been contemplated before. Instead of permanent stagnation, growth became so rapid and so seemingly automatic that by the fifties and sixties the average American would roughly double his or her parents' standard of living. In the space of a single generation, for most everybody, life was ge tting twice as good.
At some point in the late sixties or early seventies, this great acceleration began to taper off. The shift was modest at first, and it was concealed in the hectic up-and-down of yearly data. But if you examine the growth data since the early seventies, and if you are mathematically astute enough to fit a curve to it, you can see a clear trend: The rate at which life is improving here, on the frontier of human well-being, has slowed.
If you are like most economists – until a couple of years ago, it was virtually all economists – you are not greatly troubled by this story, which is, with some variation, the consensus long-arc view of economic history. The machinery of innovation, after all, is now more organized and sophisticated than it has ever been, human intelligence is more efficiently marshaled by spreading education and expanding global connectedness, and the examples of the Internet, and perhaps artificial intelligence, suggest that progress continues to be rapid.
But if you are prone to a more radical sense of what is possible, you might begin to follow a different line of thought. If nothing like the first and second industrial revolutions had ever happened before, what is to say that anything similar will happen again? Then, perhaps, the global economic slump that we have endured since 2008 might not merely be the consequence of the burst housing bubble, or financial entanglement and overreach, or the coming generational trauma of the retiring baby boomers, but instead a glimpse at a far broader change, the slow expiration of a historically singular event. Perhaps our fitful post-crisis recovery is no aberration. This line of thinking would make you an acolyte of a 72-year-old economist at Northwestern named Robert Gordon, and you would probably share his view that it would be crazy to expect something on the scale of the second industrial revolution to ever take place again.
"Some things," Gordon says, and he says it often enough that it has become both a battle cry and a mantra, "can happen only once."
Gordon assumed his present public identity – as a declinist and an accidental social theorist, as a roving publicist of depressing PowerPoints – last August, when he presented his theory in a working paper titled "Is U.S. Economic Growth Over?" He has held a named chair at Northwestern for decades and is one of the eminent macroeconomists of his generation, but the scope of his bleakness has given him, over the past year, a newfound public profile. It has been a good time to be bleak, and Gordon, bleaker than everyone else, commands attention. "Very impressive," the former Treasury secretary Larry Summers wrote Gordon from his iPad the day after the paper appeared. Ben Bernanke, the Federal Reserve chairman, delivered a commencement address this spring considering the paper's implications, and the financial press has weighed in vociferously for and against.
Gordon has two predictions to offer, the first of which is about the near future. For at least the next fifteen years or so, Gordon argues, our economy will grow at less than half the rate it has averaged since the late-nineteenth century because of a set of structural headwinds that Gordon believes will be even more severe than most other economists do: the aging of the American population; the stagnation in educational achievement; the fiscal tightening to fix our public and private debt; the costs of health care and energy; the pressures of globalization and growing inequality. Over the past year, some other economists who once agreed with Gordon – most prominently Tyler Cowen of George Mason University – have taken note of the recent discoveries of abundant natural-gas reserves in the United States, and of the tentative deflation of health-care costs, and softened their pessimism. But to Gordon these are small corrections that leave the basic story unchanged. He believes we can no longer expect to double our standard of living in one generation; it will now take at least two. The common expectations that your children will attend college even if you haven't, in other words, or will have twice as rich a life, in this view no longer look realistic. Some of these hopes are already outdated: The generation of Americans now in their twenties is the first to not be significantly better educated than their parents. If Gordon is right, then for all but the wealthiest one percent of Americans, the rate of improvement in the standard of living – year over year, and generation after generation – will be no faster than it was during the dark ages.
Gordon's second prediction is almost literary in its scope. The forces of the second industrial revolution, he believes, were so powerful and so unique that they will not be repeated. The consequences of that breakthrough took a century to be fully realized, and as the internal combustion engine gave rise to the car and eventually the airplane, and electricity to radio and the telephone and then mass media, they came to rearrange social forces and transform everyday lives. Mechanized farm equipment permitted people to stay in school longer and to leave rural areas and move to cities. Electrical appliances allowed women of all social classes to leave behind housework for more fulfilling and productive jobs. Air-conditioning moved work indoors. The introduction of public sewers and sanitation reduced illness and infant mortality, improving health and extending lives. The car, mass media, and commercial aircraft led to a liberation from the narrow confines of geogra phy and an introduction to a far broader and richer world. Education beyond high school was made accessible, in the aftermath of World War II, to the middle and working classes. These are all consequences of the second industrial revolution, and it is hard to imagine how those improvements might be extended: Women cannot be liberated from housework to join the labor force again, travel is not getting faster, cities are unlikely to get much more dense, and educational attainment has plateaued. The classic example of the scale of these transformations is Paul Krugman's description of his kitchen: The modern kitchen, absent a few surface improvements, is the same one that existed half a century ago. But go back half a century before that, and you are talking about no refrigeration, just huge blocks of ice in a box, and no gas-fired stove, just piles of wood. If you take this perspective, it is no wonder that the productivity gains have diminished since the early seventies. The socia l transformations brought by computers and the Internet cannot match any of this.
But even if they could, that would not be enough. "The growth rate is a heavy taskmaster," Gordon says. The math is punishing. The American population is far larger than it was in 1870, and far wealthier to begin with, which means that the innovations will need to be more transformative to have the same economic effect. "I like to think of it this way," he says. "We need innovations that are eight times as important as those we had before."
There are many ways in which you can interpret this economic model, but the most lasting – the reason, perhaps, for the public notoriety it has brought its author – has little to do with economics at all. It is the suggestion that we have not understood how lucky we have been. The whole of American cultural memory, the period since World War II, has taken place within the greatest expansion of opportunity in the history of human civilization. Perhaps it isn't that our success is a product of the way we structured our society. The shape of our society may be far more conditional, a consequence of our success. Embedded in Gordon's data is an inquiry into entitlement: How much do we owe, culturally and politically, to this singular experience of economic growth, and what will happen if it goes away?
There are some people, scattered around this planet, for whom the question of economic growth many years hence is urgently important, for whom it seems to blot out all other matters. Economists, and think-tankers, and environmentalists concerned with climate change, and the dreamier kind of CNBC host, yes. But also ordinary people – liberals alarmed about their children's student debt or conservatives outraged about the national deficit – who are not convinced that we will grow rich enough to pay these bills in the future, who hold ambient anxieties that things are getting not better but worse.
Among growth-worriers, there is a science-fiction streak. To be possessed by nightmares about the future requires that one be dreaming about the future in the first place. I don't think I have had a single conversation about long-term economic growth that did not involve a detour into the matter of robots. Not robotization, but robots: how their minds worked, their strategies when engaged in a game of chess.
Very strong and well-defended opinions about the driverless car are held. People in this camp are open to the possibility that the future could be very different from the present, and so robots, evocative of a wholly transformed world – perhaps for good, perhaps not – are of special interest. One leading theorist in the Gordon camp urged me to read a Carter-era text called The Zero Sum Society, which suggests a grim dystopia that emerges once economic growth hits zero point zero, at which moment to gain anything requires that you take it from somebody else. "Once you start to think about growth," the Nobel laureate Robert Lucas has said, "it is hard to think about anything else."
Earlier this year, Gordon flew out to Long Beach to give a TED talk detailing his theory and its implications. TED's audience is so primed for optimism about the future that Gordon, a rebuker of futurists, knew before he began that he'd lost the room – not in a Seth MacFarlane–at–the–Academy Awards way, but in a Bill O'Reilly–at–Al Sharpton's–political–group kind of way, as a matter of tribal identity. TED had invited MIT's Erik Brynjolfsson, an expert in the economics of technology and a known optimist about future breakthroughs, to give the counterpoint address. Gordon (short, round, and earnest) projects a donnish air; Brynjolfsson (tall, redheaded, bearded), the kind of cocky casualness that in Silicon Valley scans as cool. Gordon gave his account; introduced his graph; emphasized the abject poverty of life at the turn of the twentieth century; demonstrated how each American deficiency in educati on, inequality, demographics limited how much our economy might grow – and then, sensing that the crowd was not all that much moved, sat back to watch Brynjolfsson make the case against.
Brynjolfsson let a long beat elapse. "Growth is not dead," he said casually, and then he grinned a little bit, and the audience laughed, and the tension that had lingered after Gordon's pessimism dissipated. Brynjolfsson had the aspirational TED inflection down cold: "Technology is not destiny," he said. "We shape our destiny."
The second industrial revolution itself, he said, proved the point. After factories were electrified, Brynjolfsson explained, "the amazing thing is productivity didn't increase in those factories for 30 years – 30 years!" It sometimes take a while for humans to figure out how to use innovations, he said, and perhaps we are just now beginning to comprehend the full possibilities of computerization. In Brynjolfsson's view, we are now in the beginnings of the new machine age, an extended moment of revolution in artificial intelligence. "A child's PlayStation," he said, is more powerful than a military supercomputer from 1996; a chess program contained on a cell phone can defeat every grandmaster. Brynjolfsson pointed out that Watson, the IBM AI project, having successfully amassed enough everyday knowledge to defeat the grand champions on Jeopardy!, was "now applying for jobs at call centers, and getting them. In finan ce, and in law, and getting them."
Economists often note that even experts are very bad at predicting the world to come and constantly underestimate it. Optimists like Brynjolfsson say that though productivity gains from computer technologies have declined since 2004, that's no reason to expect the decline to continue. They see prospects. A recent McKinsey report detailing economic sectors that might grow found, for instance, great possibilities in intelligent machines: trillions of dollars in the so-called Internet of Things, for instance, and 3-D printing.
I called Brynjolfsson at his office at MIT to try to get a better sense of what a roboticized society might look like. It turns out the optimist's case is darker than I expected. "The problem is jobs," he said. Sixty-five percent of American workers, Brynjolfsson explained, occupy jobs whose basic tasks can be classified as information processing. If you are trying to find a competitive advantage for people over machines, this does not bode well: "The human mind did not evolve to multiply triple-digit numbers," he told me. The robot mind has. In other words, the long history of Marx-inflected pleas, from "Bartleby" through to Fight Club, that office work was dehumanizing may have been onto something. Those jobs were never really designed for the human mind. They were designed for robots. The existing robots just weren't good enough to take them. At first.
At opposite ends of the pay scale, there are jobs that seem safe from the robot menace, Brynjolfsson said – high-paying creative and managerial work, and non-routine physical work, like gardening. (The smartest machines still struggle to recognize an ordinary kitchen fork if it is rotated by 30 degrees.) As for the 65 percent of us who are employed in "information processing" jobs, Brynjolfsson said, the challenge is to integrate human skills with machine capacities – his phrase is "racing with machines." He mentioned a biotech company that relied on human workers to refine the physical shapes of synthetic proteins, jobs at which the most sophisticated algorithms remain hopeless. I expressed some doubts about how many jobs there might be in endeavors like this. "The grand challenge is: Can we scale them up?" Brynjolfsson said. "We haven't seen that yet. Otherwise, employment would be going up rather than down."< /p> Even among the most committed stagnation theorists, there is little doubt that innovation will continue – that our economy will continue to be buttressed by new ideas and products. But the great question at the center of the growth argument is how transformative those breakthroughs will be, and whether they will have the might to improve human experience as profoundly as the innovations of a century ago. One way to think about economic growth is as a product of human capital and technology: At moments like this, when human capital is not growing much (when the labor force is unlikely to grow, when it is not becoming more educated), all of the pressure rests on technology. For this reason, some economists who think Gordon greatly understates the potential of computers still agree that it will be hard for technology to sustain the growth rates we've become accustomed to. "We're not going to get to 2.25 percent GDP growth – that's way out on the tail," Dale Jorgenson of Harvard told me. "There's going to be a slowdown. It's not a secular stagnation. It's a change in demography. And this is a watershed event."
Provoked by Gordon's paper, Daniel Sichel of Wellesley and a team of collaborators have worked out a model by which future U.S. growth might match the rates it has historically achieved. It was not a science-fiction scenario, Sichel explained to me; it required a faster rate of improvements in microprocessor technology, and new computer technologies to be adopted quickly by sectors (education, health care) that have tended to move more slowly. But this is Sichel's optimistic model; his median projection – his sense of what is most likely to happen – isn't much more hopeful than Gordon's. That we might continue to experience the kind of growth we've enjoyed for the past several decades remains a defensible possibility. But so does Gordon's idea, that something great is gone.
In 2007, Mexicans stopped emigrating to the United States. The change was not very big at first, and so for a few years it seemed like it might be a blip. But it wasn't. In 2000, 770,000 Mexicans had come across the Rio Grande, but by 2007 less than 300,000 did, and by 2010, even though violence in Mexico seemed ceaseless, there were fewer than 150,000 migrants. Some think that more Mexicans are now leaving the United States than are coming to it. "We're never going to get back to the numbers we had in the late nineties," says Wayne Cornelius, a political scientist at UC–San Diego who has spent the past 40 years studying this cross- border movement. A small part of this story is the increase in border protection, but the dominant engine has been the economic shifts on both sides of the border – it has become easier for poor Mexicans to improve their quality of life in Mexico and harder to do so in the United States. Because migrants from a particular Mexican village often settle in the same American place, they provide a fast conduit of economic information back home: There are no jobs in construction or housing. Don't come. The Pew Hispanic Center has traced the migration patterns to economic performance in real time: a spike of migration during 1999 and 2000, at the height of the boom; a brief downturn in border crossing after the 2001 stock-market crash followed by a plateau; then the dramatic emptying out after the housing industry gave way in 2006. We think of the desire to be American as a form of idealism, and sometimes it is. But it also has something to do with economic growth. We are a nation of immigrants to the extent that we can make immigrants rich.
These hingelike mechanisms, in which social changes depend upon the promise of rapidly escalating well-being, are studded throughout the aftermath of the second industrial revolution. The United States did not really become a melting pot until the 1880s, when the economy was beginning to draw on the breakthroughs of electricity and the engine and attract migrants from Southern and Eastern Europe. The labors that housework required in the nineteenth century were so consuming that housewives in North Carolina walked 148 miles a year carrying 35 tons of water for nonautomated chores. It took until the fifties for household appliances to decline so much in price that they were ubiquitous; the next decade was the one of women's liberation. The prospects for African-American employment increased most dramatically during World War II and in the period just after: 16.4 percent of black men held middle-class jobs in 1950; by 1960 it was 24 percent; by 1970, 35 percent. Progressives will often describe the history of social liberation by quoting Martin Luther King Jr.'s line that the arc of the moral universe bends toward justice; the implication is that metaphysics are somehow involved. But this history has also taken place during unique economic times, and perhaps that is not coincidence.

important development in markets - hedge funds to advertise publicly

Hedge funds and other companies seeking private investments would be freed to advertise publicly for funding under a rule set for a vote tomorrow by the U.S. Securities and Exchange Commission.
The rule is the first of those required by last year’s Jumpstart Our Business Startups Act to be approved by the SEC, the vote coming more than a year after a deadline set by Congress.
The rule would lift an 80-year-old regulatory practice that has restricted advertising outside of a public offering in an effort to protect small investors from inappropriate risks. Under the new rule, startups and other small companies would also be able to use advertising to raise unlimited amounts of money.
“It changes the whole paradigm of who you can talk to,”said Brian J. Lane, a former division director at the SEC and now a partner at Gibson, Dunn & Crutcher LLP in Washington.“Hedge funds will benefit because they have the most restrictions on their ability to communicate more broadly about different funds coming to market.”
The rule affects how companies raise money through so-called “private offerings,” which are exempt from requirements to publicly report financial statements. Private offers are restricted to wealthier investors, who are considered better positioned to understand the risks of investing with less information.

Raising Capital

Companies raised $899 billion through private offers last year, compared to $228 billion through registered sales of stock and $976 billion through sales of public debt, according to the SEC. Firms raising capital through private offers decide what information to share with investors.
State securities regulators say private offers were the most common product leading to enforcement actions in 2011. TheNorth American Securities Administrators Association protested the SEC’s plan for lifting the advertising ban after it was proposed in August 2012. The state regulators said the SEC’s plan failed to provide guidance to companies about appropriate advertising and didn’t include any investor protections.
The proposal also divided the five-member commission. Two Republican commissioners have said the proposed rule should be completed as written. Democratic Commissioner Luis A. Aguilar said in April that a rewrite is needed because last year’s proposal resulted from an “aggressive effort to exclude pro-investor initiatives.”

Changes Recommended

An SEC advisory committee recommended in October that the commission rewrite the proposal while seeking to insure better compliance with a required form that tracks the initial offer. The committee also said the SEC should restrict the number of people eligible to invest by refining the definition of an“accredited investor,” or those considered rich enough to understand the risks and withstand an adverse outcome.
The limit to sell only to accredited investors explains why many hedge funds probably won’t respond to the rule change by taking out print and television ads seeking new investors, said David S. Guin, a partner at Withers Bergman LLP whose clients include hedge funds.
Instead, the rule may free up hedge fund managers to communicate more freely at conferences and to offer more information about fund performance on their websites, Guin said in a phone interview.
“You wouldn’t expect the type of person who is typically sought as an investor to be investing off of an ad in a newspaper or magazine,” Guin said.
Operating companies also will be able to advertise for investors after the ban is lifted. They’ll benefit because they’ll be able to reach “a much broader audience than they would be able to with their own contacts,” Guin said.

Ads Monitored

In an effort to address questions about fraud, the SEC also will vote on a new proposal that seeks to monitor how advertising is used and whether it is contributing to more fraud.
The SEC’s meeting notice didn’t disclose details of the proposal, but the document states the commission will consider changes to a rule that holds investment companies accountable for their sales literature. Investor advocates such as theConsumer Federation of America have expressed skepticism about whether the proposal will ever be adopted.
A third rule scheduled for a vote today would block felons and others found culpable of securities-law violations from marketing private offers, which are more lightly regulated than public offers of stock or debt.

Financial status July 2013

-financial repression from low interest rates
Effects of 1% jump in interest rates in US and China credit squeeze:
-TIPS yields jumped recently after falling non stop for years
-LQD - corp bonds 3.5%,
-HYG - High yield bonds 6%? not so high
-HYD - high yield munis 5.51% after tax ~ 7% for 28% tax bracket
-EEM, Brazil, and many Latam countries stock and bond markets down hard
How are high yield emkts bonds doing now?
Pimco total return down 6% this month (PTTAX) a BOND fund!

it's a complicated world, are we now a global country, is the US devaluation showing up as inflation and currency appreciation elsewhere? Brazil went from currency appreciation to inflation and from inflation to protests to currency depreciation and higher inflation
China from inflation to currency appreciation with tamer inflation and now currency depreciation and higher inflation? Will China sell treasuries and the dollar to deal with inflation or currency devaluation?

ADD IT to the FED speak glossary: TAPER and conundrum jaja

TAPER & TIGHTEN

Greenspan: Taper Now, Even If Economy Not Ready


DON'T TAPER

Chairman Ben S. Bernanke needs to see four months of job growth averaging at least 200,000 to justify reducing the pace of asset purchases, according to Vincent Reinhart, a former director of the Fed’s Division of Monetary Affairs. Roberto Perli, a former researcher in the division, said the central bank would need to see that pace “through the summer.”

Bernanke said at a March 20 press conference that before curbing purchases, the FOMC seeks “sustained improvement across a range of indicators” including payrolls, wages, claims for unemployment insurance, quit rates and economic growth.

How could we get to lower profit margins, wage inflation, higher commodity prices?

Indeed!

"The bullish case for equities now seems to hinge on the new paradigm thinking that profitability will stay historically high while the Fed keeps bond yields low well into a recovery."

"Maybe this shouldn’t be surprising, given the weight central bankers have put on wealth effects to lift their domestic economies, and, once again, the Federal Reserve has thrown itself behind the bull case. A paper earlier this month by Fernando Duarte and Carlo Rosa of the New York Fed, “Are Stocks Cheap? A Review of the Evidence,” came out with a pretty unequivocal “yes.” Yes, they are cheap.
The Fed researchers look at 29 economic models that estimate the equity risk premium–the expected excess return equities deliver over safe bonds. The average risk premium at the end of December was 5.4%, about as high as it’s ever been since the early 1960s. The only two previous periods when the risk premium was this high were back at the end of 1974 and just before the market hit its post-crisis low in 2009."

Reversion to the Mean is a nasty thing:



Now why would profit margins fall to more normal i.e. (6% long term average)?

Unemployment is high and commodity prices are low and productivity is at all-time highs, the main inputs towards profitability are all favorable towards continuing high profits!

Maybe not:


Fewer people are working, they have left the labor force, retired, live with parents, on the street or have gone into an underground economy:


Yet positions are harder to fill.


Companies have squeezed workers to become more productive and have lean labor forces but they are not prepared for any kind of recovery. Who will they hire? The long-term unemployed? the retired? The homeless?


"We see evidence of this happening system-wide in the data showing lower hourly wages and a reduced number of hours in the work week. And those trends seem to be stabilizing. We are seeing the creation of a two-tier market, an upper tier for those with skills in demand and a lower one for those whose skills just do not command a premium in today's marketplace.

Rosie makes the argument that there is a shortage of skilled labor and that the price for those workers is going to rise, surprising the Federal Reserve, which still looks at historical data from a world that no longer exists. And he says this segment of the labor market is going to be large enough to create wage-push inflation."

"The crucial change that has taken place over the past decade or so is that wages in low-cost countries have soared. According to the International Labour Organisation, real wages in Asia between 2000 and 2008 rose by 7.1-7.8% a year. Pay for senior management in several emerging markets, such as China, Turkey and Brazil, now either matches or exceeds pay in America and Europe, according to a recent study by the Hay Group, a consulting firm. Pay in advanced economies, on the other hand, rose by just 0.5% to 0.9% a year between 2000 and 2008, says the McKinsey Global Institute. In manufacturing, the financial crisis actually reduced pay: real wages in American manufacturing have declined by 2.2% since 2005.

By contrast, pay and benefits for the average Chinese factory worker rose by 10% a year between 2000 and 2005 and speeded up to 19% a year between 2005 and 2010, according to BCG. The Chinese government has set a target for annual increases in the minimum wage of 13% until 2015. Strikes are becoming more frequent, and when they happen, says one executive, the government often tells the plant manager to meet workers’ demands immediately. Following labour unrest, wages at some factories have gone up steeply. Honda, a Japanese carmaker, gave its Chinese workers a 47% pay rise after strikes in 2010. Foxconn Technology Group, a subsidiary of Hon Hai Precision Industries, a Taiwanese firm that does a lot of manufacturing for Apple and other big technology firms, doubled pay at its factory complex in Shenzhen after a series of suicides. Its labour troubles are still continuing."

Japan has shouldered the weight of a global beggar-thy-neighbor currency battle and trade rebalancing since 2009 with a stronger currency and resulting trade deficit:

Until recently when Abe said, enough and quickly undid years of a strengthening Yen:

US econ stats update

latam developments

May 16 (Reuters) - Mexico state oil monopoly Pemex said on Thursday it has found "clear indications" of light crude at its ultra-deepwater Maximino well.
The 9,515-foot well makes the third such find in the Perdido Fold Belt, located in Mexican territorial waters in the Gulf of Mexico.

Pemex says there are up to 29 billion barrels of crude equivalent in the Gulf, more than half of Mexico's potential resources.

The company has said it is interested in contracting private companies to help it tap the deepwater riches, but current legal restrictions prohibit it from engaging in joint ventures or signing production-sharing contracts.

Mexico, the world's No. 7 oil producer, has seen output drop to around 2.5 million barrels per day from a peak of 3.4 million bpd in 2004. If it cannot find and exploit new discoveries to replace declining output at its largest, aging fields, the country risks becoming a net importer of crude within a decade.

President Enrique Pena Nieto has said he will seek a sweeping energy reform aimed at boosting production by loosening restrictions on private capital in the country's oil industry. The reform proposal is expected by September.

By ROBERT KOZAK in Lima and DARCY CROWE in Bogota

Presidents of some of the most economically dynamic countries in Latin America are looking to promote a new trade group as an alternative to other regional blocs that have become more protectionist in recent years.

At a meeting this week of the Pacific Alliance, which includes Mexico, Chile, Colombia and Peru, leaders planned to work on decreasing trade barriers for goods and services, linking their stock markets and finding common ground on issues such as currency fluctuations. Their main goal is to increase trade with fast-growing Asian nations.

The leaders also will likely try to send the message that their countries are a safe place to invest in a bid to differentiate themselves from Mercosur, the South American trade bloc that includes Brazil and Argentina.

Venezuela joined Mercosur in 2012 after expropriating numerous foreign-owned firms in sectors such as food production, which relies heavily on imports. The country is now facing shortages of basic goods amid high inflation.

Mercosur frequently engages in trade squabbles and has adopted some protectionist measures in recent years. The member countries of the Pacific Alliance, meanwhile, have a strong track record of welcoming foreign investment.

"Anything that irons out the differences, that clears away overlapping rules and regulations, and makes investors more comfortable with their economic trajectory will help boost investments," said Barbara Kotschwar, a research fellow with the Peterson Institute for International Economics.

Analysts say the Pacific Alliance grew out of the failure of the earlier Free Trade Area of the Americas, which attempted to link the economies of North, Central and South America.

"It is the first time in Latin America that nations in the area have taken a leadership position on trade. It stems from a position that they took that said, 'We can do this and we need to do this,' " said Eric Farnsworth, vice president of the Council of the Americas and the Americas Society.

Enrique Peña Nieto of Mexico, Juan Manuel Santos of Colombia, Sebastián Piñera of Chile and Ollanta Humala of Peru will meet in Cali, near Colombia's Pacific coast, on Wednesday and Thursday.

Nine nations will participate as observers: Canada, Spain, Australia, New Zealand, Uruguay, Japan, Guatemala, Costa Rica and Panama.

"Its central purpose is really to enhance a common position regarding trade with Asia," said Michael Shifter, president of The Inter-American Dialogue, a Washington-based think tank.

Trade analysts say the Pacific Alliance could end up growing along the lines of the Trans-Pacific Partnership, a trade-liberalization group that started out with four countries in Asia and Latin America and now includes 12, including the U.S. and Japan. Costa Rica and Panama are candidates to join.

The alliance, which was founded in June 2012, aims to carry out an integration to allow free circulation of goods, services, capital and people. Some of the member countries have already lifted requirements for travel visas among them.

"They have been trying to avoid political rhetoric and are trying to make real advances," Mr. Shifter said.

Pacific Alliance members represent a large portion of the economy in Latin America and have posted solid economic indicators even as some of their neighbors grapple with high inflation and a significant slowdown in growth.

Data from the summit organizers shows that Mexico, Peru, Colombia and Chile account for about 35% of Latin America's combined gross domestic product. The average economic growth for the four nations was 5% in 2012 while inflation stood at 3.2%.

The four countries represent 33% of the total trade in the region and take in about a quarter of all the foreign direct investment coming into Latin America, the figures show.

"These countries share most of the same economic principles," Mr. Shifter said.

Private businesses have also taken steps toward broader integration within the member countries of the Pacific Alliance. An example is a common trading platform that has linked the bourses of Chile, Colombia and Peru. Mexico is expected to become a part of the trading system, known as MILA, in 2014.

Write to Robert Kozak at robert.kozak@dowjones.com and Darcy Crowe atdarcy.crowe@dowjones.com

A version of this article appeared May 22, 2013, on page A12 in the U.S. edition of The Wall Street Journal, with the headline: Latin America Seeks Asian Trade.

A chronicle of the changes in investment attitudes, investment flows, and valuation changes across asset classes - May 2013:


#1

America’s very wealthy have a new investment goal: asset appreciation. That’s a significant change in investor sentiment since last year, when extreme caution ruled the day.

U.S. Trust, the private banking arm of Bank Of America (BAC), is in the process of releasing its comprehensive 2013 study of 711 folks with more than $3 million in investable assets.

A robust 88% of those surveyed claimed they now felt “financially secure,” with 48% actually insisting they feel more financially secure today than they did five years ago. Six in 10 of these investors say that growth is now a “higher priority” than asset preservation, a significant reversal in objectives from just a year ago, when 58% said preserving assets was their overriding goal. The study supports a recent Barrons.com story on how the market keeps climbing as the wall of worry tumbles.

But life wouldn’t be interesting without a bit of dissonance: 63% also said reducing risk and achieving a lower rate of return was more important than pursuing higher returns by increasing risk. That’s wishful thinking. There are few investments where lowering your risk tolerance will result in higher asset appreciation. As Leon Cooperman of Omega Overseas Partners points out in our Penta magazine cover, the hunt for higher returns means, “Everyone is in the process of moving up the risk curve.”

#2

Signals that the Federal Reserve remains far from winding down its bond purchases, combined with a bullish outlook from Goldman Sachs, GS +1.20%helped push stocks toward another winning Tuesday.

The Dow Jones Industrial Average gained 68 points, or 0.4%, to 15404 in late-afternoon trading, putting the blue-chip measure on pace for another record high—and an unprecedented 19th consecutive Tuesday of gains. The Standard & Poor's 500-stock index, meanwhile, added five points, or 0.3%, to 1671, while the Nasdaq Composite climbed 10 points, or 0.3%, to 3507.

Gold falls, leveraged funds get margin calls and triggers Apple sell off?

Spurious correlation? or something else, imagine telling someone, "Hey I have a great idea, let's short Gold and Apple, the world is in a deep recession, those securities are the worst."

 



 All kidding aside, I am wondering if some large players are getting creamed on lower gold prices and are selling Apple stock to meet margin calls. The definition of forced selling and maybe what you could call panic selling. If the price of a metal gets high enough it is just as easily in a bubble as housing was (or Tulips). Strange world.

For example:

Appaloosa Management LP, the hedge-fund manager run by billionaire David Tepper, cut its stake in Apple Inc. by 41% last quarter as the computer maker slumped while stock markets rallied.

Appaloosa held 540,000 shares of the Cupertino, California- based technology company at the end of March, valued at US$239-million, down from 912,661 shares at the end of last year, according to a regulatory filing today. Apple extended losses after the filing, declining the most in three weeks.
Tepper, who had been investing in the stock since the end of 2010, pared his stake as Apple declined 17% in the first three months of the year, even as U.S. stocks added 10%. Tepper said in an interview with CNBC yesterday that he sold Apple shares because the maker of the iPhone and iPad devices hasn’t been “evolutionary” or “revolutionary” recently."

Of course Tepper is telling everyone the truth about why they sold Apple (sarcasm). If they'd lost money on a bad bet on Gold you think he'd go on CNBC and say, "Hey we got into some deep #$@! We're levered up the arse and had some margin calls and well we had to sell the the largest and most liquid asset we had to raise cash and not move the market."

Wage Inflation in the US?

I've thought about the same topic David writes about below. Good to see I'm not absolutely mad and that this may actually happen.

David Rosenberg: A Bond Bull Turns Bearish

How do we get to full employment and improved national education from the launching point of David Rosenberg's very recent call (at the conference and elsewhere) that we will soon see inflation and the onset of a bond bear market? I must say that he surprised a few of us with his conversion from bond bull to bond bear. But the reason why he converted surprised us even more. I am not going to be able to do justice to his impeccably reasoned, highly detailed presentation in this short space, but let me hit some highlights.
Specifically, Rosie thinks that the Fed is going to be surprised by wage-push inflation. How could we see inflation in wages in such a soft labor market? That was the first question in my mind, and the following charts give me some reasons for my question.
The present unemployment rate is still higher than at any time in the last 60 years, except after recessions. The Great Recession ended four years ago, and unemployment is still stubbornly high. Indeed, this is the slowest "jobs recovery" we have ever experienced. The current level of unemployment has never been seen four years after the end of a recession.

And those who lose their jobs are staying unemployed longer. The fact is that the mean duration of unemployment is still almost double what it has ever been. Average length of unemployment is 37 weeks. When the recession ended, it stood at 23 weeks. This is structural, not frictional, unemployment. Ninety million American adults now subsist outside the official labor force –It could be there's an underground economy that we need to capture. The pool of available labor for the business sector is shrinking 2% per year.

Worse yet, the unemployment rate is still stubbornly high in spite of an unprecedented rise in the number of people who are no longer counted as being in the labor force. These are people who are no longer looking for jobs.We are back to workforce participation levels not seen since the 1970s. A good 5% of US citizens who are able to work are no longer are looking for work. Part of this trend is due to alternatives to employment becoming easier to pursue. Millions have been added to the disability rolls – some 4 million since the beginning of this century and almost 2 million since the beginning of the Great Recession (and still rising at an alarming rate!). Others have gone back to school, borrowing money in the form of student loans, which have topped over $1 trillion and are the only form of consumer credit that has been on the increase.
As a quick aside, we are also seeing skyrocketing rates of late payments as student loans overwhelm the ability of borrowers to pay. This is a true crisis brewing, as student loans are the only type of debt that cannot be discharged in bankruptcy. Student loans can make you an indentured servant for a very long time.
Some would-be workers find that in some states they can collect more on government assistance than they can earn by working lower-wage jobs, and thus they have no economic incentive to look for jobs that would actually lower their income. As I wrote in a recent letter, this is why we are seeing a large rise in non-reported incomes and jobs. And finally, there are those who are just discouraged. Jobs seemingly do not exist for their skill sets and in places where they can access them.
With so many people not participating in the labor market, isn't it reasonable to assume that if jobs again ever become available, these people will rejoin the official workforce? And wouldn't that create a shadow supply of workers that would keep wages suppressed for a long time?

Wage Inflation?
Maybe yes and maybe no. Rosie makes the case that there are numerous jobs available and that the numbers are rising, and there is data that supports his argument. I will reproduce here a few of his charts (out of the 59 he showed!). Job openings are on the rise and are back to levels last seen in the middle of the previous decade.
And what about all the businesses that have jobs on offer but can't find people to fill them? The following chart is from Rosie's and my mutual friend William Dunkelberg, chief economist for the National Federation of Independent Businesses. While job openings are not at all-time highs, the trend is encouraging.


The next chart shows the ratio of job openings to new hires. It is at a six-year high. As Rosie stated (inexact quotes, from my notes):

Looking for labor? Labor demand is not weak – JOLTS survey shows job openings up 10%, employers can't find qualified applicants. Firings plunge, layoffs 10% lower than in 2007. Number of job quitters rises – people leaving jobs to go to new ones, the 'take this job and shove it index.' 7.5% unemployment is actually the new 4.4%.

What are companies doing? More overtime, longer work week. Combination of rising wages, productivity growth heading lower. We've taken a lot of inventory out of the labor market. Keep your eye on unit labor costs. Correlation with inflation – unit labor costs are on the rise.

Employees are increasingly willing to leave a job and go to another one, yet productivity has recently begun to fall.
Yet young people are having increasing difficulty landing jobs. People aged 20-24 are still unemployed at levels not seen unless a recession is involved (see chart below). And research keeps coming in that more than 50% of college graduates are stuck in jobs for which a degree is not needed.

Even though the headline unemployment rate is falling, a large part of that drop is due to the precipitous plunge in the participation rate, as well as a rise in low-paying jobs. Curiously, it now seems a disproportionately high level of temporary jobs is no longer a precursor to economic recovery but is a new structural fixture.
Part of the responsibility for that increase in temporary employment can readily be laid at the feet of the Affordable Healthcare Act (Obamacare). Employers do not have to pay health insurance for temporary employees; that burden falls on the employee.
Healthcare for lower-wage employees can be a huge percentage of overall labor costs. While you may argue that employers should cover workers at all levels, the data coming in says that is not happening – thus the rise in temporary workers. Even an established employer like UPS is hiring new temporary employees in low-skill jobs at low wages without health insurance for their first year and cutting back on employees with major seniority (who cost more than double what new employees do), not giving them enough hours to survive and forcing them into the temporary market to meet their basic living needs.
We see evidence of this happening system-wide in the data showing lower hourly wages and a reduced number of hours in the work week. And those trends seem to be stabilizing. We are seeing the creation of a two-tier market, an upper tier for those with skills in demand and a lower one for those whose skills just do not command a premium in today's marketplace.
Rosie makes the argument that there is a shortage of skilled labor and that the price for those workers is going to rise, surprising the Federal Reserve, which still looks at historical data from a world that no longer exists. And he says this segment of the labor market is going to be large enough to create wage-push inflation.
It is an interesting argument, and contradicting David Rosenberg is generally not a good idea, although he did not convince Lacy Hunt or Gary Shilling, at least not at the conference. But at any turn there is always someone who has to lead the way. His arguments are something we must pay attention to.
In the panel discussion later in the day, I agreed that there are two labor markets, but the divide is between workers with skills that are in demand and workers whose jobs require no special experience or education.

the warning signs of an asset bubble - bonds, stocks & the search for yield redux

May 16, 2013 - Investors are searching for yield and returns, this happened in 2007 and we've all been warned about inflation but what happened in 2007 was that a bubble formed in housing and if you remember, inflation was stable as far as the government measures it through CPI core and CPI including food & energy. When housing was in a bubble, people denied, it failed to deflate, it seemed like the party would never end. Today, in the absence of demand and revenue generating enterprises and cheap money it makes sense to lever up and invest in the largest most liquid markets on earth treasuries, bonds, then high yield bonds, then finally dividend yielding stocks.

The financial markets in the US are an asset bubble in 2013. Real GDP for the US and Europe are forecast to remain low and downright negative respectively in 2013 and possibly 2014. While China struggles to rebalance in a lower demand world towards a consumer led economy or at least more consumer based. The rise in asset prices do not reflect current fundamentals or even 1 or 2 years out. Commodity prices have declined in pace with slower global demand, a downright recession. On top of this there was probably a bit of oversupply and now it is a lot of oversupply, thus commodity prices are forecast to continue to remain flat, despite all the money printing.


Valuation: Impossible to Properly MeasureWhile market sentiment and valuation are separate constructs, they are both affected by the Fed's monetary policy. Continuing to use traditional Wall Street axioms on valuation without considering the current environment is inane. It is impossible to see clearly by looking at theS&P(INDEXSP:.INX) through the lens of Price to Earnings without factoring in the Fed buying of $85 billiona month in debt. We are not saying that stocks are expensive or cheap. Rather, we are saying that traditional valuation analysis has been rendered impossible by the Fed.

Furthermore, we believe the ferocious buying back of shares by companies from issuing cheap debt is thetruelow valuation story. However, it is a story that is anchored on a historically unprecedented and unsustainable catalyst of Fed bond market manipulation.

These are negative short term fundamentals on a global and macro scale. This is an asset bubble built to combat deflation. This was Bernanke's specialty and PHD thesis. If the asset bubble pops the underlying deflationary current will join the bursting current from the deflating asset bubble.  This asset bubble is in financial assets as opposed to the last bubble that was in housing. Asset inflation encourages those with stocks/bonds/ financial interests to spend more as their apparent wealth increases. It's the same story as the credit crisis except instead of housing, financial assets are at the center of this story this time around. In 2007 subprime borrowers took equity out of homes and spent. As long as house prices rose this party went on.As fund managers run out of BONDs to invest in at reasonable prices they're rushing into high yielding dividend stocks at low trailing P/FCF and imo (were) good value stocks = MSFT LXK AAPL.

Debt: Connection with Equity Markets and Divergence from IssuanceIt is also important to look at the market structure issues within the debt markets. Corporate issuance had its busiest January ever with $412.3 billion vs. the all-time high January issuance of $407.2 billion in January of 2009. The obvious difference is the massive narrowing of spreads from historically wide levels in 2009 to all-time lows today. We believe the Fed's QE programs have turned equity markets into expressions of "bond yield complacency" and therefore the two markets are inextricably linked. This link manifests itself in the capital market phenomenon of Profit and Loss (PnL). For any market participant, whether institutional like a pension or hedge fund, or an individual, it's the loss of principal that causes aggressive net selling.

The real risk here is the global margin call that can occur from simply too much long leverage chasing artificially low yields. The bloat in the system on the long side in bonds is now associated with long bloat on the equity side. Margin calls and selling in junk bonds and down bond funds will bleed over into equity funds and vice versa. The Fed would have zero control over a global PnL margin call on bond principal scenario.

Read more: http://www.nasdaq.com/article/us-stocks-overleveraged-markets-at-risk-of-global-margin-call-cm238313#ixzz2SXP7un6C

http://etfdailynews.com/2013/04/17/the-great-duration-rotation-continues-but-for-how-long/


UPDATE - 5/29/13 approximately 13 days later:

This chart



now looks more like:

and the culprit?

The Chart below is concerning because it looks as if hedge funds also joined the fun in 2013 and have been trying to play catch-up with the S&P 500, couple this with record high profit margins, high valuations, and a flood of money into dividend yield stocks, you have a crowded trade. Who else is coming?