Month: January 2017

Having cautioned that the economic macro surprise rally of the past three months…

… has been mostly based on the back of “soft data” surprises, in other words, hope and moistly animal spirits, which “are driving the bulk of the US data surprises”…

 

… today, RBC’s head of cross-asset strategy Charlie McElligott looks at the first sharp selloff, coupled by a vol spike and observes that one week after the first Trumpflation jitters, the Trump trade on Monday appears to be losing policy momentum, and as a result “profit-taking of longs ensues.”

As McElligott notes, it has been an agitated market to start the week, with VIX seeing its largest intraday move so far in 2017 as we see thematic winners of the past three months being unwound.

It’s not a puke just yet, as we are “still not getting that ‘FTQ’ bid we’d come to expect in the old “risk-OFF” regime, with USTs (and Dollar) essentially unch.  This says to me that it is STOCKS which have discounted the most +++ inputs of potential Trump policy (see last Wednesday’s price-action), and is thus the most ripe for a re-pricing of his ability to ‘steady the ship’ with suddenly-waning policy momentum.“

The good news for bulls hoping that BTFD will quickly reemerge, is that much of this move is long overdue, and is likely not the precursor of a sharp move lower:

“today’s story feels much like that overdue selloff with nervy profit-taking and some recent risk “renters” tapping quickly on tight-stops.  From a ‘sustainability of the drawdown’ perspective, this quick blast of volatility off of a historically low-base isn’t enough to trigger much if any mechanical deleveraging from the mechanical ‘vol control’ community in-and-of itself, with 20 day S&P historical vol still sitting (laughably) with a 7-handle.”

Unless, of course, it is.

So what does the RBC strategist say to expect from markets in the coming days? The following 4 points summarize his views:

1) Stocks—much more so than FX or rates—are the asset-class bearing the majority brunt of this weekend’s chief geopolitical consternation.  It ‘seems’ that the discombobulated implementation of Trump’s immigration orders has ‘furthered’ the market concerns on protectionism and the potential for Trump’s usage of “executive orders”  to have “jumped the shark” just a few weeks into his tenure.  The growing list of fellow-Republicans lashing-out at the immigration order—as well as the obvious lack of cohesion with the messaging even with the Trump administration–are raising concerns on ‘lost momentum’ with regards to what the stock market really wants from POTUS: tax policy clarity.  As stocks have been the area “quickest” to discount expectations of lower corp tax rates, they “wear it” when markets now begin to reprice Trump’s ability to “get deals done.”

As has been stated over the past week in “RBC Big Picture” there is now growing speculation that the tax plan won’t be clarified until well through the Summer (Reuters this weekend http://reut.rs/2kFdaSF), especially as the ‘funding’ side of a BAT remains yet to be seen—which means it currently isn’t ‘revenue neutral’ which is a demand from many GOP lawmakers.  As forward earnings estimates are increasingly-contingent upon the ‘corp tax rate cut’ and ‘dereg’ components of his policy, there is thus mounting nervousness about recent buyers at all-time highs in US stocks turning tail (note: Asset Managers are now notionally long $80B of US equity futures <S&P, Nasdaq, Russell and Dow>, making year-and-a-half cumulative highs) if ‘reality’ weren’t to meet the heavy ‘expectation’ on policy which has been incorporated into current pricing.

* * *

2) Today’s particulars show something interesting: both the thematic “reflation” and “Trump winners” (most clearly expressed in 4Q16—border tax beneficiaries, dereg beneficiaries, infrastructure beneficiaries, security beneficiaries, domestic-gearing beneficiaries) and 1Q17’s “mean-reversion” leaders are under pressure.  This means that today we see both the “‘cyclical beta’ / ‘small cap’ (large IWM downside trades today) / ‘value’ / ‘high beta’” cohort is trading-off IN CONJUNCTION WITH “‘secular growers’ / ‘momentum’” Q1 leadership selling-off as well (tech sector specific concerns on H1-B impact for workers).  What is working should of course not surprise: ‘low vol’ / ‘quality’ / ‘defensives’ / ‘anti-beta.’  Basically, longs are being sold while shorts are added / pressed—thus, today is NOT a ‘gross-down’ or ‘wholesale de-risking’ day.  

Less tactically / away from the ‘now’ of today’s ugly tape…

* * *

3) As has been discussed since mid-December—when anticipation of a “January Effect” saw funds putting on “reversal strategies” in equities factors earlier than usual—“Growth” and “Momentum” factors have been significant outperformers, with both leading all factor market-neutral strategies YTD.  The interesting thing here is that this comes following 2016 where “Growth” and “Momentum” were the two worst-performing factor m/n strategies YTD…confirming another victory for the January mean-reversion strategy.

More granularly, the performance of “Growth” has helped drive the large YTD gains in Tech and Consumer Discretionary sectors against lagging (former high-flyer) “Value” and “Anti-Beta” factor m/n (representing cyclicals and defensives, respectively).  The performance of 1m “Momentum” factor m/n would reasonably reflect this same “Growth vs Value” reversal, as ‘momentum longs’ are led by Tech, Materials (S&P’s best performing sector YTD), Consumer Disc and Industrials, while ‘momentum shorts’ are heavily represented by Cons Disc as well as Healthcare, Tech and Energy (S&P’s worst performing sector YTD, after being last year’s “value” darling). 

This also highlights the significant move higher in dispersion (or correlation breakdown) as we see sectors representing across both momentum leaders and laggards.

* * *

4) On that note, an interesting anecdote picked-up from an astute client and friend this weekend regarding the extreme nature of increasing single-stock dispersion currently being experienced in the market-place, which I will paraphrase: “For over the last month plus, watching our portfolio grind higher it feels like 10- to 20- some basis points on the majority of days, which seems kinda sleepy…but when I look at the individual names in our long and short books, I am seeing HUGE moves daily.  Both books at times are riddled with many stocks seeing 2 and 3 standard deviation moves….it is CRAZY what is going on “under the hood,” when on the index level, it’s so optically calm.” 

Idiosyncratic stock-risk is returning, and that is a sign of a market normalizing from years of central bank volatility suppression = score one for active management.

* * *

While that would be great news for hedge funds if true, we look forward to learning from bulge bracket prime brokers in a few days time if hedge funds finally managed to outperform the S&P, or if 2017 has started off in familiar fashion, with the “smart money” once again nothing but heavily levered beta.

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Submitted by Michael Shedlock via MishTalk.com,

Inquiring minds are taking a flashback look at the Secure Fence Act of 2006, signed by president Bush.

The Secure Fence Act of 2006’s goal is to help secure America’s borders to decrease illegal entry, drug trafficking, and security threats by building 700 miles (1,100 km) of physical barriers along the Mexico-United States border. Additionally, the law authorizes more vehicle barriers, checkpoints, and lighting as well as authorizes the Department of Homeland Security to increase the use of advanced technology like cameras, satellites, and unmanned aerial vehicles to reinforce infrastructure at the border. Congress approved $1.2 billion in a separate homeland security spending bill to bankroll the fence, though critics say this is $4.8 billion less than what’s likely needed to get it built.

The final roll call shows both Barrack Obama and Hillary Clinton voted for the bill.

In 2008, Obama, Clinton Backed Off Border-Fence Law

In a CNN debate in Austin, Texas, Democratic presidential candidates Barack Obama and Hillary Clinton agreed Thursday night that the Secure Border Fence Act of 2006, which directs the secretary of Homeland Security to construct 700 miles of double border fencing along specific sections of the U.S.-Mexico border, should not be enforced as written.

 

Stressing her desire to be deferential to the views of people who live along the border in Texas — which on March 4 will hold a primary that is widely viewed as a must-win event for the New York senator — Clinton said of a border fence, “there may be limited places where it would work. But let’s deploy more technology and personnel, instead of the physical barrier.”

 

“Well, I think both Senator Obama and I voted for that as part of the immigration debate,” she started. “And having been along the border for the last week or so–in fact, last night I was at the University of Texas at Brownsville — and this is how absurd this has become under the Bush administration. Because, you know, there is a smart way to protect our borders, and there is a dumb way to protect our borders. And what I learned last night when I was there with Congressman [Solomon] Ortiz [D.-Texas] is that the University of Texas at Brownsville would have part of its campus cut off.

 

“This is the kind of absurdity that we’re getting from this administration,” Clinton continued. “I know it because I’ve been fighting with them about the northern border. Their imposition of passports and other kinds of burdens are separating people from families, interfering with business and commerce, the movement of goods and people. So what I’ve said is that I would say, wait a minute, we need to review this. There may be places where a physical barrier is appropriate.

 

“I think when both of us voted for this, we were voting for the possibility that where it was appropriate and made sense, it would be considered,” said Clinton. “But as with so much, the Bush administration has gone off the deep end, and they are unfortunately coming up with a plan that I think is counterproductive.

When King then asked her whether she now thought her vote for the border fence was wrong, she did not give a yes-no answer. Instead, she suggested using more manpower and technology, instead of fencing, to secure the border.

 

“But, you know, John,” she said, “there’s a lot we’ve learned about technology and smart fencing. You know, there is technology that can be used instead of a physical barrier. It requires us having enough personnel along the border so that people can be supervising a certain limited amount of space and will be able to be responsive in the event of people attempting to cross illegally.”

That has to be one of the lamest of lame reversals in history. Somehow it is counterproductive to have a fence, but not counterproductive to create a wall of people to keep immigrants out.

And Hillary moaned about Bush “absurdity”.

via http://ift.tt/2kN1V9S Tyler Durden

While low VIX levels may not, at least historically, suggest an impending market decline; Goldman Sachs are sympathetic to the argument that the VIX seems low. That begs the question, what has tended to get the VIX off the couch and moving again?

Historical perspective: VIX < 11 on 1.8% of trading days since 1990

The VIX closed at 10.6 last Friday, its third consecutive close below 11. Sub-11 VIX levels are actually pretty rare. We estimate that only 1.8% of VIX observations back to 1990 have dropped below 11 with less than 1% falling below last Friday’s closing level of 10.6.

• For historical perspective, we look at the percentage of time the VIX has close at various levels in the past in Exhibit 1.
• While most investors think of typical VIX levels being around 20, the distribution of closing VIX levels shows that a large chunk of VIX levels actually occur when the VIX is in the low teens.
• If we look at fairly granular one unit increments, we estimate that the VIX has closed between 10 and 11 about 1.7% of the time back to 1990.
• The largest bucket in our histogram is the 12-13 range where the VIX has spent 8.6% of its time.

The case for higher volatility

• The economy will eventually need to confirm the recent optimism in asset prices: While the “soft” survey data has been on the stronger side, the “hard” economic data will need to improve in order to justify the recent advance in risky assets as highlighted by Charles Himmelberg. That may be a tall order at a stage of the business cycle where growth headwinds could stem from limited spare capacity.
• Policy uncertainty is high: As argued by our economists, while the political and policy outlook for 2017 has started to take shape in the past few weeks, many details remain unclear at this early stage of the Trump administration.

In fact, VIX is over 40 points underpriced relative to policy uncertainty…

The case for low levels of volatility

• Policy is a process not an event: Legislation takes time. If Brexit and the US election taught us anything it may be that unexpected political outcomes may not in and of themselves lead to higher volatility. It takes time for actual legislation to be written, passed and implemented. Options require a path (puts vs. calls) and a timeframe (they expire). With no clear cut policy initiatives yet on paper and no idea of a potential timeframe, the market seems to be willing, over the short run, to give the new administration some time.

Exhibit 3 shows that most VIX spikes have either been unpredictable major geopolitical events or adverse economic or financial shocks.

via http://ift.tt/2kHEX55 Tyler Durden

It took Obama ten days since he departed the White House one final time to break his promise that he would “stay on the sidelines” regarding Trump’s policies…

Earnest says Pres Obama wants to afford his successor the same customs and courtesies he received from Pres GWBush – staying on sidelines.

— Mark Knoller (@markknoller) January 4, 2017

… and in his first public statement, the former president the charge that the Trump administration had based his immigration executive order on a policy adopted by his own administration, and endorsed the protests that have been taking place across the country in response to the new restrictions.

Kevin Lewis, Obama’s spokesman, said rejected Trump’s insistence that the decision to temporarily halt refugees from seven Muslim-majority countries and stop all Syrian refugee resettlement in America is similar to a 2011 decision by Obama. “With regard to comparisons to President Obama’s foreign policy decisions, as we’ve heard before, the President fundamentally disagrees with the notion of discriminating against individuals because of their faith or religion.”

As a reminder, over the past 24 hours, Trump has compared his actions to Obama’s 2011 moves to restrict entries from Iraq after two Iraqis were arrested in Kentucky on terrorism charges.

Former Obama administration officials have denied that there was ever a halt to the awarding of visas to Iraqis, though the processing of these applications slowed after they were subject to more intense scrutiny.

Obama’s decision to step back into the public light comes just 10 days after he left office. He joins the chorus of Democrats and mostly tech CEOs criticizing Trump for his decision to temporarily halt refugees from seven Muslim-majority countries and stop all Syrian refugee resettlement in America.

Obama also encouraged ongoing protests against Trump’s immigration policies: “President Obama is heartened by the level of engagement taking place in communities around the country. In his final official speech as President, he spoke about the important role of citizen and how all Americans have a responsibility to be the guardians of our democracy–not just during an election but every day,” Lewis said.

“Citizens exercising their Constitutional right to assemble, organize and have their voices heard by their elected officials is exactly what we expect to see when American values are at stake.”

As The Hill notes, former presidents often give their replacements a wide berth in office, rarely weighing in to criticize their actions out of respect for the office. While Obama served as a vocal critic to Trump on the campaign trail, he told reporters during a trip to Peru last November that he wanted to give Trump the chance to lead without Obama “popping off.”

But Obama added that he wouldn’t unilaterally remain quiet, and today he held true to that loophole.

“As an American citizen who cares deeply about our country, if there are issues that have less to do with the specifics of some legislative proposal or battle, but go to core questions about our values and our ideals, and if I think that it’s necessary or helpful for me to defend those ideals, then I’ll examine it when it comes,” Obama said.

The full statement from Kevin Lewis, spokesperson to Former President Barack Obama, is below:

President Obama is heartened by the level of engagement taking place in communities around the country. In his final official speech as President, he spoke about the important role of citizen and how all Americans have a responsibility to be the guardians of our democracy–not just during an election but every day.

 

Citizens exercising their Constitutional right to assemble, organize and have their voices heard by their elected officials is exactly what we expect to see when American values are at stake.

 

With regard to comparisons to President Obama’s foreign policy decisions, as we’ve heard before, the President fundamentally disagrees with the notion of discriminating against individuals because of their faith or religion.

via http://ift.tt/2k9TcPU Tyler Durden

After exposed Obama, Bush, and Clinton's previous anti-immigration actions amid the backlash against President Trump's executive orders, administration senior adviser Kellyanne Conway appeared on CNBC this morning and was visibly angry at the "information underload" from the mainstream media and bullhorn-touting, crying politicians.

"The media and politicians have an obligation to calm the public [with facts] about what this policy does, and more importantly does not, do… this is why [Trump] has to tweet, so that the media will cover the tweet [facts]"

It's pretty clear Conway's frustration is growing (and who can blame her)…

Additionally, in an effort to dispel some more misinformation, Breitbart offers seven inconvenient facts about Trump's refugee actions…

1. It is NOT a “Muslim ban.” You will search the Executive Order in vain for mentions of Islam, or any other religion. By Sunday morning, the media began suffering acute attacks of honesty and writing headlines such as “Trump’s Latest Executive Order: Banning People From 7 Countries and More” (CNN) and printing the full text of the order.

Granted, CNN still slips the phrase “Muslim-majority countries” into every article about the order, including the post in which they reprinted its text in full, but CNN used the word “Muslim,” not Trump. The order applies to all citizens of Iraq, Iran, Syria, Libya, Somalia, Sudan, and Yemen. It does not specify Muslims. The indefinite hold on Syrian refugees will affect Christians and Muslims alike.

As Tim Carney at the Washington Examiner points out, the largest Muslim-majority countries in the world are not named in the Executive Order.

More countries may be added to the moratorium in the days to come, as the Secretary of Homeland Security has been instructed to complete a 30-day review of nations that don’t provide adequate information for vetting visa applicants.

It’s also noteworthy that the ban is not absolute. Exceptions for “foreign nationals traveling on diplomatic visas, North Atlantic Treaty Organization visas, C-2 visas for travel to the United Nations, and G-1, G-2, G-3, and G-4 visas” are expressly made in the order. The Departments of State and Homeland Security can also grant exceptions on a “case-by-case basis,” and “when in the national interest, issue visas or other immigration benefits to nationals of countries for which visas and benefits are otherwise blocked.”

There is a provision in the Executive Order that says applications based on religious persecution will be prioritized “provided that the religion of the individual is a minority religion in the individual’s country of nationality.”

This has been denounced as a “stealth Muslim ban” by some of the very same people who were conspicuously silent when the Obama administration pushed Christians – who the most savagely persecuted minority in the Middle East, with only the Yazidis offering real competition — to the back of the migration line.

2. The order is based on security reviews conducted by President Barack Obama’s deputies. As White House counselor Kellyanne Conway pointed out on “Fox News Sunday,” the seven nations named in Trump’s executive order are drawn from the Terrorist Prevention Act of 2015. The 2015 “Visa Waiver Program Improvement and Terrorist Travel Prevention Act of 2015” named Iraq, Iran, Sudan, and Syria, while its 2016 update added Libya, Somalia, and Yemen.

“These are countries that have a history of training, harboring, exporting terrorists. We can’t keep pretending and looking the other way,” said Conway.

3. The moratorium is largely temporary. Citizens of the seven countries named as security risks are banned from entering the United States for the next 90 days. Refugee processing is halted for 120 days. The longest-lived aspect of the ban may prove to be the halt on Syrian refugees, but that isn’t given a time frame at all. It will last “until such time as I have determined that sufficient changes have been made to the USRAP to ensure that admission of Syrian refugees is consistent with the national interest,” as President Trump wrote.

4. Obama banned immigration from Iraq, and Carter banned it from Iran. “Fact-checking” website PolitiFact twists itself into knots to avoid giving a “true” rating to the absolutely true fact that Jimmy Carter banned Iranian immigration in 1980, unless applicants could prove they were enemies of the Khomenei theocracy.

One of Politifact’s phony talking points states that Carter “acted against Iranian nationals, not an entire religion.” As noted above, Trump’s Executive Order is precisely the same – it does not act against an “entire religion,” it names seven countries.

As for Barack Obama, he did indeed ban immigration from Iraq, for much longer than Trump’s order bans it from the seven listed nations, and none of the people melting down today uttered a peep of protest. Richard Grenell summed it up perfectly in a Tweet:

Obama took 6 months to review screening for 1 country. Trump will take 3 months for 7 countries. #MAGA @realDonaldTrump

— Richard Grenell (@RichardGrenell) January 29, 2017

 5. Trump’s refugee caps are comparable to Obama’s pre-2016 practices:  David French, who was touted as a spoiler candidate to keep Donald Trump out of the White House during the presidential campaign – in other words, not a big Trump fan – wrote a lengthy and clear-headed analysis of the Executive Order for National Review. He noted that after the moratorium ends in 120 days, Trump caps refugee admissions at 50,000 per year… which is roughly the same as President Obama’s admissions in 2011 and 2012, and not far below the 70,000 per year cap in place from 2013 to 2015.

Obama had fairly low caps on refugees during the worst years of the Syrian civil war. He didn’t throw open the doors to mass refugee admissions until his final year in office. Depending on how Trump’s review of Syrian refugee policy turns out, he’s doing little more than returning admissions to normal levels after a four-month pause for security reviews.

6. The Executive Order is legal: Those invoking the Constitution to attack Trump’s order are simply embarrassing themselves. The President has clear statutory authority to take these actions. As noted, his predecessors did so, without much controversy.

Most of the legal arguments against Trump’s order summarized by USA Today are entirely specious, such as attacking him for “banning an entire religion,” which the order manifestly does not do. Critics of the order have a political opinion that it will in effect “ban Muslims,” but that’s not what it says. Designating specific nations as trouble spots and ordering a pause is entirely within the President’s authority, and there is ample precedent to prove it.

It should be possible to argue with the reasoning behind the order, or argue that it will have negative unintended consequences, without advancing hollow legal arguments. Of course, this is America 2017, so a wave of lawsuits will soon be sloshing through the courts.

7. This Executive Order is a security measure, not an arbitrary expression of supposed xenophobia. Conway stressed the need to enhance immigration security from trouble spots in her “Fox News Sunday” interview. French also addressed the subject in his post:

When we know our enemy is seeking to strike America and its allies through the refugee population, when we know they’ve succeeded in Europe, and when the administration has doubts about our ability to adequately vet the refugees we admit into this nation, a pause is again not just prudent but arguably necessary. It is important that we provide sufficient aid and protection to keep refugees safe and healthy in place, but it is not necessary to bring Syrians to the United States to fulfill our vital moral obligations.

French’s major objection to the Executive Order is that applying it to green-card holders is “madness,” but unfortunately many of the terrorists who attacked Americans during the Obama years were green-card holders. Daniel Horowitz and Chris Pandolfo addressed that subject at Conservative Review:

Both liberals and conservatives expressed concern over hundreds of individuals going over to fight for ISIS. We are already limited in how we can combat this growing threat among U.S. citizens. Given that it is completely legal to exclude non-citizens upon re-entry, Trump extended the ban to legal permanent residents as well.

 

If a Somali refugee is travelling back to Somalia (so much for credible fear of persecution!), government officials should have the ability to prevent that person from coming back when necessary. Obviously, there are some individuals from these seven countries who already have green cards and we might not want to exclude. That is why the order grants discretion to the State Department to issue case-by-case exemptions for “religious persecution, “or when the person is already in transit and denying admission would cause undue hardship.” A CBP agent is always stationed at any international airport from which these individuals would board a direct flight to the United States (Paris and Dubai, for example). That individual would not allow anyone covered by this ban onto a U.S.-bound flight unless he grants them a hardship exemption.

Indeed, it appears that green card holders returning yesterday from those seven countries were all granted entry.

Because he is a progressive globalist, Obama deliberately blinded us to security threats, in the name of political correctness and left-wing ideology. Ninety or 120 days isn’t much time for Trump to turn all that around, especially because it is unlikely much will change in the seven countries Trump named.

The hysterical reaction to Trump’s order illustrates the very thing that worries advocates of strong immigration security: Americans’ security is the lowest priority, far below progressive ideology, crass political opportunism, and emotional theater.

We’re being effectively told by the theatrical class to tolerate a certain amount of Islamic terrorism because their feelings would be hurt by the tough measures we need protest ourselves from a tough enemy. But this time, President Trump is proving tough enough to push our security up into the top priority.

via http://ift.tt/2jw2unz Tyler Durden

The ECB’s nationalization of the European corporate bond sector continues. In the ECB’s latest update, the six central banks acting on behalf of the Euro system provided an update on the list of corporate bonds they bought. They bought into 810 issuances with a total of €573bn in amount outstanding. For the week ending 27th January, the bond purchases stood at €1.9bn across sectors. This increases the number of securities held by the ECB to 813, and lift the ECB’s total corporate bond holdings to €58.82b, which means that as of the latest weekly data, the ECB now owns 10.2% of the total €575.42BN in European corporate debt outstanding.

Since one month ago, the ECB owned 9.2% of the corporate bond market, the rate of nationalization of the private, outstanding corporate bonds is roughly 1% per month. Tangentially, 52 or 6.4% of the 813 securities held by the ECB are negative yielding.

Which corporate bonds did Mario Draghi generously subsidize this week? According to the ECB’s holdings, utilities remain the largest industry group with 215 securities, while according to Bloomberg, in the latest week  the ECB bought bonds issued by Atlantia, BASF, Carmila, Enel, Fresenius, Italgas, LEG Immobilien, Linde, Legrand, RTE, Snam and Telefonica Emisiones. The complete list of ECB holdings by ISINs can be found here.

While there was some market concern in December that the ECB may be tapering its CSPP program, when it purchased just €4 billion in corporate bonds in the month, less than half the recent runrate from the September-November period, this appears to have been calendar driven, as in January the ECB is back to its aggressively purchases and through the last week, it purchased €7.8 billion in corporate bonds for January, nearly a 100% increase from the prior month.

Corporate purchases began on June 8, 2016, with the weekly average of ~€1.7bn per week and total corporate bond holdings of €58.8bn (as of 27-Jan-17), or roughly €6.8bn a month. ECB purchased bonds have gained 0.60% in Dec vs -1.25% in Nov. The bonds purchased under CSPP have marginally outperformed the broad index that gained 0.57% in December. Last week, total EUR issuances worth €21.2bn were issued in the primary market, of which ~ €5.2bn were CSPP eligible. For the month ending December, total CSPP holdings stood at €51.1bn, with 86% of the purchased amount coming from the secondary market.

A breakdown of which countries’ bonds the ECB bought into:

Looking at the break up country wise, French and German issuers continue to dominate the ISIN count (417 issuances worth €309bn in amount outstanding). Bonds from non- Eurozone corporates were also on the list, with the bulk from Switzerland (25 issuances worth €18bn). When looking at the purchases by sector, Utilities remains at the top (215 issuances worth €143bn), while non-cyclical consumer is a distant second (118 issuances, €91bn in amount outstanding).

Mostly belly of the curve, not averse to negative yields

In terms of duration, while the ECB has bought across the curve, it has avoided going very long (12+yr). Bulk of the purchases has occurred in 3-7yrs region (349 issuances worth €242bn). By rating, it’s clear that the ECB hasn’t been reluctant from taking credit risk as they have bought into overall 185 BB rated and non-rated bonds. By yield, the ECB has already bought into 96 negative yielding bonds (€75bn, average yield of – 0.09%). By issuer, the ECB has bought into 810 bonds from 233 issuing entities. The bond with the longest maturity that was purchased was the 20 year EDF 1.875% 13/10/36 from the Electricite De France.

Finally, stepping back from just the CSPP program, as of the latest week, total purchases under the ECB’s various asset purchase programmes rose to €1,610 billion…

… bring the ECB’s balance sheet to over €3.72 trillion, or over 36% of the total Eurozone GDP.

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Submitted by Charles Hugh-Smith via OfTwoMinds blog,

You want to fix the economic system, reduce political bribery and reduce rising income inequality? Shut off the cheap unlimited credit spigot to banks, financiers and corporations.

Cheap credit–newly issued money that can be borrowed at low rates of interest–is presented as the savior of our economic system, but in reality, it's why our system is broken. The conventional economic pitch goes like this: cheap credit enables consumers to buy more goods and services (and since the system needs growth or it implodes, that's good).

Cheap credit also enables companies to invest in new productive assets (capital).

Last but not least, low rates of interest enables the government at all levels to borrow money at relatively low cost.

That all sounds good in theory, but let's see how cheap credit works in the real world.

The first thing we observe is those closest to the central bank credit spigot get the lowest rates and nearly unlimited lines of credit. J.Q. Citizen may be thrilled to get a 4% annual-rate mortgage, but the mega-millionaire closer to the credit spigot can borrow 10 times as much as J.Q. can, and at half the rate of interest.

Mega-corporations and financiers can borrow billions at rates as low as 1%, which given an official inflation rate of 2%, is actually a negative rate of real interest.

Money-center banks own the credit spigot, so they can create money out of thin air at .5%.

In other words, cash isn't king in this perverse system: cheap credit is king. Those with access to cheap unlimited credit can scoop up all the productive assets, greatly increasing their wealth–and they can buy the political class, too, with campaign contributions and donations to false-front foundations.

Here's an example of the perverse incentives and unintended consequences this unlimited credit unleashes in the real economy. Let's say I'm a financier who is close to the credit spigot. I borrow $100 million at 1.25% (or sell $100 million in bonds yielding 1.25%) to buy a company that yields 4.25% in after-tax profits.

Buying the $100 million company costs me nothing but the monthly interest payments. Since the company yields 4.25%, I am already netting a 3% return.

But why settle for a meager annual income of $3 million for doing absolutely nothing? If sell 80% of the company to pension funds and other institutions for $100 million, I can pay off the $100 million I borrowed to buy the company and keep the 20% I now own free and clear. This transaction nets me $20 million profit for doing nothing but leveraging my access to cheap credit to buy real assets.

If I hold my $20 million stake, it earns a hefty $850,000 annually–once again, for doing nothing but accessing cheap unlimited credit.

In other words–anyone who can borrow $100 million at low rates of interest is instantly wealthy because they can outbid everyone who has to pay higher rates to buy productive real assets.

This is why our system is broken: cheap credit has enabled the rich to become immensely richer while producing nothing of value–no additional goods or services have been produced by these financier skims. My example is just one example of many such skims: corporations borrowing billions on the bond market to buy back shares is another.

Compare J.Q. Public's struggle to buy a home with the ease of financiers buying hundreds of homes. After years of scrimping and saving, J. and Suzy Q. have saved up the 20% needed to buy a $200,000 home with 20% down ($40,000). Careful analysis of local rents and other methods of valuing housing suggest the house would be a bargain at $180,000 and a bit rich at $220,000–above that, it isn't worth buying as the costs of the mortgage are too high compared to the rent that the house would fetch.

The financier with $100 million in cheap credit has no such difficulties. He doesn't need any cash down–he borrows $100 million from a money center bank or from the bond market. Since his borrowing costs are half of J. Suzy Q's mortgage expenses, he can bid $250,000 for the home, blowing J. and Suzy completely out of the bidding.

And since the financier knows the central banks are busy spewing trillions in new cheap credit to those closest to the credit spigot, he knows he can flip the house to another institutional owner for a hefty profit. Cheap unlimited credit inflates asset bubbles, which benefit those who bought the assets cheap with cheap borrowed credit.

So the house is sold for $350,000 a few years later to an institutional buyer. J. and Suzy Q. are now completely priced out of the market; they now need $70,000 down, and they remain at a disadvantage because their mortgage has a much higher rate than the debt of the financiers who are competing with them.

Cheap unlimited credit for financiers and corporations has incentivized parasitic, zero-productive churning of credit and capital and inflated bubbles that enriched the wealthy. Sure, the top 5% who own stocks, shares of enterprises and homes in left and right-coast hot-spots have done very, very well for themselves–but nowhere near as well as those at the top who have leveraged cheap unlimited credit into billions in risk-free profits.

You want to fix the economic system, reduce political bribery and reduce rising income inequality? Shut off the cheap unlimited credit spigot to banks, financiers and corporations. If everyone with good credit had to pay 6% to borrow money, regardless of their position in the wealth-power pyramid, perverse incentives for parasitic skimming would take a major hit.

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via http://ift.tt/2kkaQ5Y Tyler Durden