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David Fuller and Eoin Treacy's Comment of the Day
Category - Fixed Income

"The Fed is Clueless"

Thanks to a subscriber for this interview of Bob Rodriguez who has exhibits a thorough understanding of the market environment. It appears in Advisor Perspectives and may be of interest. Here is a section:

Negative yielding debt is a concept that could only be considered rational by an academic. Given 4,000 years of human history, I’ll bet this is as faulty an idea as there ever has been and that it will be proven to be 100% hokum. Negative yields distort the entire capital asset pricing model. They undermine financial company profit models, pension fund liability assumptions, and seriously work to reduce the attractiveness of lending money and financial liquidity by eliminating the ability to do repo finance. But don’t worry, since the central banks will save the day by buying corporate debt. Isn’t that what the Japan’s central bank did, as well as the ECB? And what have these policies achieved in terms of real economic growth? Very little! And now we have members of the Fed actually discussing and agreeing that a negative rate can be effective and appropriate. In other words, penetrating the zero-rate boundary will broaden their policy options. Again, the Fed is clueless and is working with inadequate and ineffectual sets of econometric models.

Negative rate policies distort the economic and financial market systems. The unintended consequences from these policies will be significant and harmful. To deploy capital successfully, the potential list of companies is most likely very limited. At the very minimum, potential target companies should have extremely strong balance sheets to weather the oncoming economic and financial market tsunami. They should also have strong market positions. My guess few companies, with this limited set of criteria, would be attractively priced. Thus, a high level of liquidity is necessary. Finally, escaping to long-term bonds is similar to investing in equites, since their effective durations have volatility characteristics like those of equities.



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Why 47,000 grocery workers in California may go on strike

This article from CNN may be of interest to subscribers. Here is a section:

He makes $21 an hour, but his wages have not risen in five years. He hopes a new contract will help him and his co-workers keep pace with California's cost of living increases. Prices in California are rising nearly twice as fast as the rest of the country, according to the Labor Department.

"We're on the front lines. We work in the stores. We're pulling in the money," Escarcega said. "We're not being taken care of so that's why we're here."

Escarcega said that going on a strike would be a "last resort" for employees, but that "everybody wants to speak up and get what we deserve."

Grocery workers often have more leverage in negotiations with employers than other retail workers because groceries are perishable and companies can ill-afford work slowdowns, experts say.



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ECB Needs a Bazooka to Validate Richness of Bund Valuations

This note by Tanvir Sandhu for Bloomberg may be of interest to subscribers.

Concerns about ECB underdelivering keeps the pressure on bunds. A wide range of possible outcomes from Thursday’s meeting slants towards near-term profit taking of very rich valuations.

ECB speakers have been trying to dial back the extreme easing expectations priced by markets to give Draghi some room to surprise, but the hurdle still remains high

Policy makers will need to be aggressive on rates and keep the future path suppressed otherwise a modest depo rate cut risks seeing EUR rates continue to sell off in the near-term given the impact of the lower bound on the curve

From a macro valuation perspective there is room to sell off (with fair value of -0.43%)

Setting the path to go deeply negative on rates and lifting the buying limits on any QE announcement to make it scalable is key to seeing bunds extend the rally in the short term; however, positioning for a disappointment via options is still worth looking at given the difficulty for Draghi to engineer a dovish surprise



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U.S. Stocks Rise After Jobs Report, Before Powell: Markets Wrap

This article by Randall Jensen and Vildana Hajric for Bloomberg may be of interest to subscribers. Here is a section:

U.S. stocks edged higher, and Treasuries inched lower after a mixed jobs report fueled bets the Federal Reserve will cut rates in two weeks. The dollar declined.

The S&P 500 headed for its second weekly gain as investors keyed on underlying strength in the report that signaled a solid labor market that isn’t too strong to deter further central bank easing. Megacap technology stocks weighed on benchmarks after New York opened an antitrust probe into Facebook Inc.

The 10-year Treasury yield erased most of its earlier gains, while the dollar headed for its fourth straight fall following the payroll numbers. Chairman Jerome Powell is set to make public remarks Friday. Crude sank toward $55 a barrel in New York.



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WeWork Is Said to Target IPO Valuation Far Below Last Round

This article by Michelle F. Davis, Giles Turner and Gillian Tan for Bloomberg may be of interest to subscribers. Here is a section:

The outlook for the public debut of WeWork, which has racked up billions of dollars in losses in recent years as the company funds grand ambitions, is cooling after the disappointments of other major IPOs this year such as Lyft Inc. and Uber Technologies Inc. That could put pressure on WeWork, which has a mammoth credit line tied to the success of the IPO, as well as SoftBank Group Corp., which invested at a $47 billion valuation earlier this year.

“They would probably price this thing at the more conservative end, maybe in the $20 billion range, given that the company is trying to raise more money,” said Phil Haslett, co-founder of EquityZen, a marketplace for private stock sales.

Potential terms for the share sale are still being discussed, and the eventual valuation could change depending on investor demand, said the people, asking not to be identified because the information is private. A representative for WeWork, whose parent is The We Co., declined to comment.



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Apple Leads Corporate Bond Bonanza

This article by Matt Wirz and Nina Trentmann for the Wall Street Journal many of interest to subscribers. Here is a section:

Apple Inc. on Wednesday joined U.S. companies including Deere & Co. and Walt Disney Co. in a recent sprint to issue new bonds, taking advantage of the steep decline in benchmark interest rates and a surge in investor demand.

Apple launched its first bond deal since 2017, selling $7 billion of debt. All three companies issued 30-year bonds with yields below 3%, a first for the corporate debt market.

Twenty-one companies with investment-grade credit ratings issued bonds totaling about $27 billion on Tuesday, said Andrew Karp, head of investment-grade capital markets at Bank of America Corp. “That’s equivalent to a busy week for us—in one day,” he said. About 20 more companies were expected to issue investment-grade bonds Wednesday.

The issuance boom is one consequence of a rally in debt that has driven down Treasury yields, which fall as bond prices rise, to near-record lows. Spurred by concerns that slowing growth and a mounting trade conflict will end the decadelong global economic expansion, investors have swept up government bonds around the world, pulling yields in many countries into negative territory. Bonds issued by name-brand corporations give investors a relatively safe alternative that still pays more than government bonds.



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The Unlikely Chinese Cities Where House Prices Rival London

This article from Bloomberg News may be of interest to subscribers. Here is a section:

 

London, Seattle, Manchester and, um, Xiamen. Some of the world’s priciest housing markets aren’t where you might think. A four-year property boom in China has elevated a collection of little-known cities and turned them into real estate gold.

While that’s been great news for speculators, it’s raising concern about whether China’s educated middle-class is quickly being priced out of these so-called second-tier cities, undermining Beijing’s goal of making them home to the millions moving from rural areas. Another risk is increasingly stretched family budgets: The average household debt-to-income ratio in China soared to a record 92% last year from just 30% a decade ago.

“A property bubble is foaming up in many places in China,” said Chen Gong, the chief researcher at independent strategic think tank Anbound Consulting. “Prices are starting to look
abnormal when compared to residents’ income.”



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Is an inflation resurgence credible?



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Email of the day - on how to trade a bubble and its impact on gold

What is likely to happen to the price of precious metals if a bubble in equities arises for all the reasons that you have stated. Precious metals appear to fall each day that equities perform well. Which sectors/countries are the likely leaders If there is an equities bubble or will we need to wait for the charts to tell us?



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RBA Says Household Debt Could Complicate Future Rate Decisions

This article by Chris Bourke for Bloomberg may be of interest to subscribers. Here is a section:

Reserve Bank of Australia comments in 2019/20 corporate plan released on website Friday.

“Over 2019/20 to 2022/23, the structure of the Australian economy will continue to evolve and economic shocks -- which, by definition, are not forecastable -- will occur. Movements in asset values and leverage may be more important for economic developments than in the past given the already high levels of debt on household balance sheets”

“Especially in the context of weak growth in household income, high debt levels could complicate future monetary policy decisions by making the economy less resilient to shocks”

“The flexible medium-term inflation target is the centerpiece of the monetary policy framework in Australia and has been well established for more than two decades. Since the early 1990s, it has provided the foundation for the bank to achieve its monetary policy objectives by providing an anchor for inflation expectations. The bank will remain alert to new developments that may have a bearing on the framework for monetary policy”



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