PIMCO Rehires Paul McCulley As Its “100 Days Per Year” Chief Economist

Four years after he left the firm, PIMCO is hiring back Paul McCulley to save its brand and provide just enough ammo to defend its bullish/bearish positions now that El-Erian's disagreements have left. Unlike some firms who believe that 'chief economists' must be full-time – adding value each and every day with their extrapolations of every macro tick – McCulley will spend up to 100 days per year working in PIMCO offices. Bearing in mind McCulley's previous lazer-like focus on Capex (which is dismally flat still) and his belief in a "W" shaped recovery not a "U" or a "V", we suspect the bearded prognosticator will have a bullish bond bias – especially as the trillions of ticking time bombs in the shadow banking system remain as incendiary as ever.

McCulley's Global Macro Chessboard:

 

Full PIMCO Statement:

PIMCO, a leading global investment management firm, has hired Paul McCulley as a Managing Director and the firm's Chief Economist, a new role for the firm. Mr. McCulley will be a member of PIMCO's Investment Committee and will report to Bill Gross, Founder and Chief Investment Officer. 

As Chief Economist, Mr. McCulley's responsibilities will include chairing the Investment Committee several times monthly to lead discussion on global macroeconomic issues and central bank policy, writing and publishing commentary, and speaking with PIMCO's clients around the world. He will not manage client portfolios or serve as a portfolio manager.

Said Mr. Gross: "Paul is an experienced and respected thought leader on macroeconomic issues and central banks and he will be an important contributor to our investment process. During his previous years at PIMCO, he played an instrumental role in anticipating and understanding economic dynamics that led to the global financial crisis. Our clients will benefit from Paul's tremendous knowledge as we identify and capitalize on opportunities in PIMCO's New Neutral."

Said Douglas Hodge, PIMCO's Chief Executive Officer: "Bill Gross is one of the most talented and successful investors of our time, and he has built PIMCO over the past 43 years by attracting world-class talent such as Paul to become part of our team. We are excited to have Paul join the firm in his new role and we appreciate Bill's personal leadership in recruiting Paul to the firm."

Over the past three years, Mr. McCulley, 57, has been chair of the Global Society of Fellows at the Global Interdependence Center, where he published two path-breaking papers on monetary and central bank policy. Both papers can be accessed here:

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http://ift.tt/1wfNmgu

Mr. McCulley first joined PIMCO in 1990 as an account manager. He left two years later to become Chief Economist for the Americas for UBS. He returned to the firm in 1999 as a portfolio manager, and became the head of the firm's Short-Term desk and a member of the Investment Committee, and also led PIMCO's Cyclical Forum.

A prolific author of thought leadership, economic and market commentary, Mr. McCulley coined the term "Shadow Banking System" to refer to the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks, and which played a role as catalysts for the global financial crisis. He also developed the concept of a "Minsky Moment," referring to a sudden major collapse of asset values as part of a credit or business cycle.

Said Mr. McCulley: "I look forward to working side by side with Bill as economic counselor and interacting with the Deputy CIOs. I anticipate writing frequent scholarly essays, as well maintaining a robust calendar of speaking engagements. PIMCO will always be Camelot to me."

Mr. McCulley will spend up to 100 days per year working in PIMCO offices around the world, and he will also continue to dedicate a portion of his time to activities outside of the firm, including leading the Morgan le Fay Dreams Foundation, as well as academic activities.

Bio of Mr. McCulley:
Prior to joining PIMCO in 1999, Mr. McCulley was Chief Economist for the Americas for UBS, and also Head of Fixed Income Strategy. While there, he was recognized for his work by being named to six seats on Institutional Investor Magazine's All America Fixed Income Research Team, in three different specialties. He wrote a widely read weekly research publication, Strategic Economic Perspectives, and visited with clients around the world, with extensive interaction with central banks in the emerging world, especially the Middle East and Asia, as well as Latin America.

Mr. McCulley received an MBA from Columbia University Graduate School of Business, where he was a member of the honor society Beta Gamma Sigma, with a triple concentration in finance, money and financial markets, and economics. He received his BA in economics, with honors, from Grinnell College in Grinnell, Iowa, where he is now a Trustee.

Since leaving at the end of 2010, Mr. McCulley has complemented his scholarly work with the Society of Fellows with extensive involvement in the activities of his personal charitable foundation, Morgan le Fay Dreams, which he founded and endowed in 2006. His foundation focuses on charities devoted to young adults and education, including serving as executive producer of acclaimed documentaries.

Except for the historical information and discussions contained herein, statements contained in this news release constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the performance of financial markets, the investment performance of PIMCO's sponsored investment products and separately managed accounts, general economic conditions, future acquisitions, competitive conditions and government regulations, including changes in tax laws. Readers should carefully consider such factors. Further, such forward-looking statements speak only on the date at which such statements are made. PIMCO undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.




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JPMorgan’s Advice To College Students: “Saving Is Not Enough: You Need To Invest”

Now that the rigged market jig is up, and the aging Baby Boomers – those who had some stocks in their discretionary accounts to begin with – have turned to outright sellers of equities (and in fact are doing so “in droves” as reported last week), primary dealers and hedge funds – tired of tossing overvalued hot potatoes among themselves and with the Fed gradually phasing out its daily market goosing – are in desperate need of a new buyer. They may have just found their mark. According to JPMorgan‘s sage advise to wannabe students, “it is not enough to save for college anymore, you need to invest.

So if grandma and Joe Sixpack refuse to enter the rigged casino, the one remaining “investor” is clear: those that have a record $1.1 trillion in student debt already. Because at the end of the day, what is a few more trillion in government-funded loans – which will clearly never be repaid – to buy stock purchases at the all time highs?

Source: JPM, h/t @noalpha_allbeta




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Obama To Authorize Weapons Training Of Syrian “Rebels”

This will end well. President Obama is, according to WSJ, close to authorizing the US military to train “moderate” Syrian rebels. The move – clearly expanding Washington’s role in the conflict and a subtle side-swipe at Putin – is aimed at providing a seemingly arbitrary group of rebels with weapons training to fight against both Bashar al-Assad’s regime’s army as well as Al-Qaeda-linked groups. One quick question – how will Obama determine who is ‘moderate’ and who is full Al-Qaeda-tard?


As WSJ reports,

A new military training program, if implemented, would supplement a small train-and-equip program led by the Central Intelligence Agency which Mr. Obama authorized a year ago.

 

U.S. officials said the new military program would represent a significant expansion of Washington’s public efforts. U.S. officials don’t discuss the CIA’s limited training program because it is covert.

Only supporting the moderates – not the real crazies?

The president will make clear his intention to expand our support to the moderate Syrian operation and increase our support to Syria’s neighbors, who are dealing with the terrorist threats emanating from the situation Assad has created in Syria,” a senior administration official said.

 

The proposed military training mission has been the subject of a nearly yearlong Obama administration debate pitting top American diplomats seeking leverage to pressure Mr. Assad against Pentagon leaders wary of open-ended commitments that risk deepening U.S. involvement in another messy Middle Eastern conflict.

 

Defense officials said it was unclear when training, which would be undertaken by U.S. special-operations forces, would get under way, citing obstacles that include how the Pentagon will vet prospective rebels for the program.

We are sure they will figure it out?

And here comes the Middle East pressure…

The move toward deeper U.S. involvement reflects a growing realization within the White House that more needs to be done to build up the capabilities of a proxy force inside Syria capable of challenging al Qaeda. Washington increasingly fears al Qaeda’s network of foreign fighters in Syria and Iraq will become capable of threatening U.S. allies in the region, including Jordan.

 

The move also comes in response to mounting pressure on the White House from Middle Eastern allies who say Mr. Obama’s reluctance to support moderate fighters has allowed al Qaeda-linked groups to now dominate the opposition.

 

 

The Western-backed Free Syrian Army has been fighting a two-front war, against Mr. Assad and his allies on one side, and against al Qaeda and its allies on the other, but commanders say they have received scant support from the U.S.

 

During his visit, Mr. Jarba met with Mr. Obama and top officials at the White House and the State Department. Mr. Jarba also requested a meeting with Mr. Hagel, but a senior defense official said the Pentagon chief’s schedule at the time was booked. “There was not a concerted effort not to meet with him,” the senior defense official said. “It was a scheduling thing.”

But…

Administration lawyers have raised other legal concerns about the proposed military program, holding up its final approval, officials said.

And…

Jordanian officials have privately told their American counterparts that they are worried a large overt training program on their territory could prompt the Assad regime or al Qaeda to retaliate against the Hashemite Kingdom.

This has always worked so well in the past and we are sure this administration will execute flawlessly. One quick question… will “Hijacking airplanes for disgruntled Al Qaeda operatives 101”, pardon, Syrian rebels, be on the curriculum?




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The New Normal In One Sentence: “In The US Equity Market, The Worse A Company’s Finances, The Better It’s Doing”

It was just last Friday when we updated our list of the most hated, i.e., most shorted, stocks which are so critical in the New Normal because as we have reported constantly since 2012, going long the most shorted names remains the best alpha-generating strategy, outperforming the broader market by orders of magnitude. Today, it is Bloomberg’s turn to recap just how broken the market is with an article that highlights the “balance sheet bombs” rallying by 94%. The lede: “In the U.S. equity market, the worse a company’s finances, the better it’s doing.” Because there is nothing like rewarding failure and capital misallocation to promote economic growth and employment recovery.

Here is what the outperformance of garbage companies looks like:

Regular readers will know the story but here it is once again because it somehow manages to get funnier with every read:

Stocks with the weakest balance sheets have climbed more than 8 percent in 2014 and 94 percent since the end of 2011, generating almost twice the gain in the Standard & Poor’s 500 Index (SPX) over that period, according to data compiled by Bloomberg and Goldman Sachs Group Inc. Shares in the category this year are beating those that most investors consider the bull market’s leaders, such as small caps and biotechnology, which tumbled in March.

Goldman, whose year end S&P price target is 1900 and which see the S&P at 1950 not on Friday but on June 30, 2015, adds the following value:

“Having a weaker balance sheet isn’t a liability or a drag on potential company performance at this point,” David Kostin, chief U.S. equity strategist at New York-based Goldman Sachs, said in a May 20 phone interview. “In an economy that’s getting better, you can operate perfectly fine with a little more leverage.”

And here is why we periodically update our list of 50 most shorted stocks:

A basket of 50 companies that rank lowest in measures comparing equity to total liabilities and earnings to assets, compiled in a gauge known as the Altman Z-Score, has increased 8.3 percent in 2014 after climbing 50 percent last year. The highest-rated group is up 3 percent since December after rallying 28 percent in 2013, according to data compiled by Goldman Sachs.

So what exactly are algos rewarding? Why the relentless releveraging of these companies with debt which once the rate cycle turns will promptly crush them all:

Junk-rated borrowers from Oklahoma City-based Chesapeake Energy Corp. to Netflix Inc. in Los Gatos, California, issued a record $380 billion of speculative-grade bonds in the U.S. last year, data compiled by Bloomberg show. While the pace has slowed in 2014, a monthly average of $29.5 billion is still 13 percent higher than during the previous four years.

But the real reason is simple: dash for trash, New Normal style, thanks to the Fed of course:

“There’s insatiable demand for high-yielding, lower-quality instruments, and companies are taking advantage of that to get money,” John Carey, a Boston-based fund manager at Pioneer Investment Management Inc., which oversees $220 billion worldwide, said in a May 22 phone interview. “The market is rewarding the kind of short-term behavior and earnings enhancement that this kind of financial strategy can provide in a low-interest-rate environment.”

 

Better returns from companies with the weakest balance sheets are also being aided by a shift in investor demand for stocks trading at lower valuations. Equities in the Goldman Sachs basket with the lowest Altman Z-scores, such as Natick, Massachusetts-based Boston Scientific Corp. and Time Warner Inc. in New York have an average price-earnings ratio of 21. That compares with 31 for the Facebook Inc.-led strong balance sheet category.

Not everyone is buying the Koolaid…

The outperformance of weak balance sheet companies “may be a head fake,” Mortimer, the Boston-based director of investment strategy for BNY Mellon Wealth Management, which oversees about $185 billion, said in a May 21 phone interview.

… But once the specter of losing out on his year end bonus rears its ugly head, because everyone else is outperforming BNY, it will be: Buy, Mortimer. Buy!

In the meantime, don’t expect the dash for trash to end any time soon:

Fed Chair Janet Yellen suggested on March 19 that the central bank might raise U.S. interest rates by the middle of next year, six months after bond purchases end.

 

Relaxed lending standards have led to a reduction in corporate defaults. Eight U.S. companies failed to meet debt obligations through April 24, compared with 19 over the same period in 2013, according to a S&P Ratings Services report.

Finally, what is the overarching objective of the central planners:

The Fed is “trying to allow otherwise shell-shocked or risk-avoidant investors to participate in this economic expansion,” Stephen Wood, the New York-based chief market strategist at Russell Investments, which oversees more than $259 billion, said in a May 21 phone interview. “We’re not approaching a credit-constrained environment, at least from a policy perspective.”

What expansion: that of the Fed’s balance sheet? But yes, the Fed would certainly want everyone to participate in this late stage ponzi scheme: after all the banks, which are the entities doing the bulk of the buying, need to sell to someone before even the most optimistic permabulls who confuse 5+ years of Fed intervention and micromanagement with actual sustainable growth pull a “nervous” Tepper and just admit the market is too manipulated and rigged even for them.




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Richmond & Dallas Fed Miss; Manufacturing Outlook Plunges

With all eyes firmly focused on housing data that is adjusted beyond belief and a confidence print that merely met expectations, both the Richmond and Dallas Fed just missed expectations with some very concerning data under the hood. In no particular order – Dallas Fed outlook plunged from 14.5 to 11.8; Dallas employees plunged from 13.9 to 2.8 (and the workweek collapsed); New Orders and production also slumped as any post-weather bounce is buggered. For Richmond, new order volume plunged from 10 to 3 and capacity utilization dropped back below 0; and the outlook for shipments also slid to 3 month lows with employees expected to drop. In short – a total disaster…

 

While both headlines missed…

 

The real disaster is under the covers…

 

So major declines in Production, Capacity Utilization, New Orders, Growth Rate of Orders, Unfilled Orders, Delivery Time, Inventories, Employment, Wages and benefits, Employment and Hours Worked. The offset: a surge in Prices Paid for Raw Materials – more margin pressure…




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“The Market’s Not There” – One World Trade Center Lowers Asking Rents By 10%

With the housing purchase market for everyone but the wealthiest stagnating (confirmed by today’s sliding “plans to buy a home” indicator), forcing Americans to scramble for rental properties and pushing residential asking rents to fresh record high quarter after quarter, the same can not be said for the commercial sector. In fact quite the opposite: according to the WSJ the owners of the towering 3.1 million square foot One World Trade Center, which at last check was 55% leased, have been forced to cut asking rents by 10% from 75% to $69. Why? “The market’s not there,” said Mr. Durst, whose Durst Organization bought a stake in the tower from the Port Authority in mid-2011. “When we started in 2011, everybody expected the economy to take off, and obviously that hasn’t happened.”

 

As WSJ reports, things are not going well for One World Trade Center…

No private office tenant has signed a lease at One World Trade Center in nearly three years. The 3.1-million-square-foot skyscraper, formerly named the Freedom Tower, is 55% leased.

 

The owner—a venture of developer Douglas Durst and the Port Authority of New York and New Jersey—is cutting asking rents nearly 10% to $69 a square foot for larger tenants on the building’s middle floors, down from $75 a square foot, Mr. Durst said in an interview Friday.

The reason appears to be a total lack of real demand despite all the mal-investment -driving indicators of economic health that a trillion dollars here and there can create…

“The market’s not there,” said Mr. Durst, whose Durst Organization bought a stake in the tower from the Port Authority in mid-2011. “When we started in 2011, everybody expected the economy to take off, and obviously that hasn’t happened.”

 

“We have a lot of people looking at the space, but because of the asking rent, we are not able to really put anything over the finish line,” Mr. Durst said.

 

 

But leasing has been slow. One World Trade has one major private tenant, Condé Nast, which took about 1 million square feet in 2011. Meanwhile, 4 World Trade is 51% leased to two government agencies. Mr. Silverstein has been asking in the $70s and $80s a square foot, comparable to the rents at One World Trade, before the latest price cut.

If you build it – they will come… unless the entire recovery is a mirage… in whch case you roll your debt once again and keep your fingers crossed…




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China Launching “Global Gold Exchange” In Shanghai

Today’s AM fix was USD 1,283.00, EUR 940.48 and GBP 762.87 per ounce.
Yesterday, U.S. & UK markets were closed yesterday for a national holiday.
Friday’s AM fix was USD 1,292.00, EUR 948.61 and GBP 767.18 per ounce. 


Gold in U.S. Dollars, Daily, 6 Months – (Thomson Reuters)

Gold is testing the lower level of support of the unusually tight range seen in recent days between $1,284/oz and $1,306/oz. Below that the next level of support is at $1,250/oz and below that the low seen on December 31st at $1,190/oz. Overnight, gold in Singapore gradually traded lower from a high of $1,293/oz to a low of $1,282.81/oz.

The price weakness comes despite continuing bullish developments for the gold market. These  include geopolitical risk as Ukraine lurches into a civil war, tensions between Vietnam and China in the Far East and China’s push to make Shanghai a “Global Gold Exchange.”

Ukraine launched air strikes and a paratrooper assault against pro-Russian rebels who seized an airport on Monday. Its newly elected leader rejected any talks with “terrorists” and said a robust military campaign in the east should be able to put down a separatist revolt in “a matter of hours”.

Even as the fighting was getting under way, Poroshenko held a news conference in Kiev and said that  the government’s military offensive needed to be “quicker and more effective”.

A Vietnamese fishing vessel capsized in disputed waters in the South China Sea on Monday after “harassing and colliding” with a Chinese fishing boat, the official Xinhua news agency said on Tuesday.

China has approached foreign banks and gold producers to participate in a global gold exchange in Shanghai, as the world’s top producer and importer of gold seeks greater influence over pricing and  the global gold market.


Shanghai Gold Exchange – China Foreign Exchange Trade System

The Shanghai Gold Exchange got the go ahead from the central bank last week to launch a global trading platform in the city’s pilot free trade zone. SGE is looking to launch physical contracts of gold, silver and platinum group metals denominated in Chinese yuan on the international exchange.

According to Reuters:

“For gold, they are looking to launch three yuan-denominated physical contracts, of 100 grams, 1 kg and the bigger London good delivery bar weighing 12.5 kg.

Beijing’s plans to open up gold trading comes at a time when the benchmark price-setting process for precious metals is under scrutiny. Barclays Plc became the first bank to be fined over manipulation of the 95-year-old benchmark London gold market daily “fix” last week.

State-backed SGE has asked bullion banks such as HSBC , Australia and New Zealand Banking Group (ANZ), Standard Bank, Standard Chartered and Bank of Nova Scotia to take part in the global trading platform, two people approached by the exchange said.

SGE, the world’s biggest physical gold exchange, where domestic banks, miners and retailers buy and sell gold, could also open up the international platform to foreign brokerages and gold producers, they said.

“China wants to have more voice in gold prices,” said Jiang Shu, an analyst with Industrial Bank, one of 12 banks allowed to import gold into China. “The international exchange is the first step towards gaining a say in gold pricing.”

“If you don’t allow foreign players to participate in your market actively, or do not push Chinese financial institutions to participate in the international market, then China’s strong gold demand is only a number, not a power,” he said.

HSBC and Standard Bank declined to comment, while the other banks and SGE were not immediately available for comment.

The global platform will first host spot physical contracts for gold and other precious metals, before aiming to launch derivatives down the line, said a third source who is directly involved in the launch of the international exchange.

“We are not just encouraging foreign banks but also producers and other entities,” added the source.

China, the world’s biggest buyer of raw materials from copper to coal, is pushing hard to establish pricing benchmarks for a number of commodities.

Gold, along with oil, could be among the first to be opened up to foreign players. The free trade zone in Shanghai is set to see international energy trading by hosting the country’s first crude oil futures.

Contract specifications for silver, platinum and palladium were also being discussed, though the sources said specifications and participants had not yet been finalized. The exchange is expected to be launched by the fourth quarter.

Even if China lures foreign players, the exchange would still need to see full convertibility of the yuan and enough liquidity on the exchange before it can be considered to operate on a par with other hubs.

Currently, the London gold “fix” is the benchmark for spot prices, while New York’s COMEX contract sets the futures’ benchmark. SGE prices are tracked to gauge Chinese demand as reflected in premiums or discounts to spot rates.

Earlier this year, China’s ICBC – in conjunction with its acquisition target Standard Bank – indicated interest in buying Deutsche Bank’s seat on the London gold fix but it is not interested anymore, sources previously told Reuters.

The influx of gold has made SGE the biggest physical exchange, with a turnover of 10,000 tonnes for its immediate and deferred delivery contracts, according to Thomson Reuters GFMS.

The Shanghai Futures Exchange has the world’s second-most traded gold futures contract, though trading is largely limited to the domestic market with volumes of about 41,176 tonnes last year, still well behind COMEX’s 147,083 tonnes.

The SGE’s international board and the main exchange could eventually be merged when the yuan is fully convertible, Albert Cheng, managing director of the World Gold Council’s far east region, said.

“That would become a very important exchange in the world, and Shanghai will truly become one of the three international gold centres after New York and London,” he said. “No doubt, the participation in the international market is the key effort of the SGE and the current administration.”
Read the full story here.

Conclusion
Banks, global producers, refineries and mints will be hesitant to embrace the new Chinese exchange, especially in the short term. However, once the new exchange achieves critical mass in China and Asia, the exchange will be embraced by western institutions and could become the most important gold exchange in the world.

The move will challenge the dominance of New York and London as global precious metal hubs, as centres of the gold trade. It will also challenge their influence on pricing. Physical demand provides underlying support to gold prices and ultimately dictates the price.  Speculative trading and manipulation can and has affected prices in the short term.

With China’s push for an international physical exchange, physical demand will begin to have a stronger influence, thereby ending gold manipulation. This will allow gold to rise to a more appropriate price given the scale of macroeconomic, systemic, geo-political and monetary risks of today.




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Consumer Confidence Falls Short Of Weather-Peak; Plans To Buy A Home Drop

Following last month’s drop and missed expectations – just when a post-weather bounce was hoped for – May’s 83.0 print (in line with expectations) is disappointing to those seeing all-time highs in stocks. As  reminder, the US consumer decided they were most confident in March – amid the shitty weather and stumbling stock market – and now with warm weather and record highs, things are less exuberant. Looking forward, plans to buy an appliance dropped as did plans to buy a home (even as rates drop).

 

 

As plans to buy a home plunge…




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US Service PMI Surges Near Record High As Margin Pressures Appear

Markit’s US Services PMI soared to 58.4 in April – blowing away the expectations of 55 – just shy of the record high 58.5 seen in March 2012 and early 2010. All sub-indices rose providing just enough comfirmation that all is well in the world.. but one has to ask whether the fastest rise in new work orders in 3 years is sustainable or simply a post-weather bounce. Input prices are up once again though even as output charges dropped – so much for the dream of ever-expanding margins. Is good news bad?

We have seen this level of exuberant activity before… it has not led to follow through…

 

The sub-index breakdown…

 

As Markit notes,

Meanwhile, input price inflation picked up for the second month running and was the fastest since January. Higher cost burdens in turn led to another robust increase in prices charged by service providers during May. That said, the rate of output charge inflation eased since April




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