Tag: finance

Today’s AM fix was USD 1,241.75, EUR 913.11 and GBP 760.45 per ounce.

Yesterday’s AM fix was USD 1,250.75, EUR 923.88 and GBP 773.69 per ounce.

Gold fell $4.10 or 0.33% yesterday, closing at $1,236.33/oz. Silver slid $0.17 or 0.86% closing at $19.68/oz. Platinum fell $19.20, or 1.4%, to $1,352.70 an ounce and palladium fell $2.50, or 0.4%, to $715.95 an ounce.

Venezuela Gold Reserves In Million Fine Troy Ounces (1995 to Today)

Gold is higher today as huge demand from China is believed to be supporting prices.

China has seen a notable pick up in demand this week due to lower prices. Traded volumes of 99.99 percent purity gold on the Shanghai Gold Exchange hit 18.3 tonnes overnight, their highest since October 8, according to Reuters data.

China’s net gold bullion imports from Hong Kong climbed to their second highest on record in October as the country bought more than 100 tonnes of gold for a sixth straight month to meet unprecedented demand.

VENEZUELA HAS DENIED that it is considering a proposal from Goldman Sachs Group Inc. that would allow the government to mortgage its gold reserves to Goldman.

A Venezuelan central bank official, requesting anonymity in keeping with bank policy, said that she had no information about the proposal. The nation’s finance ministry declined to comment according to Bloomberg.

The denial came after media reports of a peculiar gold deal being hatched by Goldman Sachs. The deal is meant to provide Venezuela with $1.68 billion in cash, providing they post $1.85 billion of Venezuela’s gold reserves, documents obtained by Bloomberg News show.

$1.85 billion is equal to some 47 tonnes of gold at today’s prices. Venezuela has nearly 366 tonnes of gold.

Venezuela’s economy is struggling with low economic growth and inflation surging to near hyperinflation levels at over 54%.

Venezuela National Consumer Price Index (CPI) YoY%

At the very least stagflation appears to be taking hold in Venezuela as its economy expanded by just 1.1% in the third quarter, less than half the pace that analysts forecast.

Imports plunged 18%, the central bank said Nov. 26 and its bonds have been sold in recent months resulting in much higher interest rates on its debt.

Yields on the country’s $4 billion of bonds due 2027 have jumped 4.15 percentage points this year to 13.48%, almost three times the average increase in emerging markets.

Venezuela’s foreign reserves sank to a nine-year low of $20.7 billion this month, limiting the supply of dollars in a country that imports about 75 % of the goods it consumes. Some analysts say that the shortage is also exacerbating inflation that reached 54.3% last month, the fastest in the world.

Two weeks ago, government oil producer Petroleos de Venezuela SA sold $4.5 billion of debt to fund currency auctions and food imports from Colombia in the first sale by a state-owned entity since May 2012.

“When I’m hearing that they might sell gold to raise cash, that strikes me as pure desperation,” Robert Abad, who helps oversee $53 billion in emerging-market debt at Western Asset Management Co., said in a telephone interview from Pasadena, California. “How bad can it get until I as a foreign investor have to start worrying about payment capacity?”

Goldman Sachs’s total-return swap would bear interest of 7.5% plus the three-month London interbank offered rate, for $818 million in estimated financing costs over seven years, the documents show.

Michael DuVally, a spokesman at New York-based Goldman Sachs, declined to comment on the proposal. Analysts questioned if the deal made sense and one analyst said that “a seven-year deal does not make any sense, much less at a 7.5% spread when there is collateral involved.”

Goldman’s proposal re Venezuela’s gold is interesting as it comes at a time when Goldman have been extremely vocal about its negative outlook for gold and has predicted loudly that gold is a “slam dunk” sell today and in 2014. Goldman’s crystal ball gazing and price predictions have not been particularly accurate in recent years and many investors have lost money by following their gold price predictions.

“Dictatorship Of The Dollar”

About 70% of Venezuela’s foreign reserves are in gold. Former President Hugo Chavez, who died of cancer in March, secured Venezuela’s patrimony by repatriating its gold reserves from the Bank of England. The move was believed to be an effort to move away from what he called the “dictatorship of the dollar.”

From 1999, Chavez’s first year in office, through 2012, Venezuela bought 75.3 metric tons of gold, according to data on the International Monetary Fund’s website. Those purchases cost $1 billion based on average annual gold prices and would be valued at $3.03 billion at today’s price of $1,251.96 an ounce, meaning the additions would have made $2.03 billion. The country also sold 13.1 tons of bullion during that period, the IMF data show.

“It’s The Economic Reserve For Our Kids”

Venezuela’s gold reserves total 367.6 tons, making it the 14th largest holding by country, according to the World Gold Council. Gold accounts for 70% of the nation’s foreign reserves, compared with 7.6% for Argentina and less than 1% for Brazil.

“It’s our gold,” Chavez, a self-proclaimed socialist who nationalized hundreds of companies and imposed curbs on currency trading, said on state television in November 2011.

“It’s the economic reserve for our kids. It’s growing and it’s going to keep growing, both gold and economic reserves.”

Venezuela’s currency board, known as Cadivi, sells greenbacks at the official exchange rate of 6.3 bolivars per dollar. The government, which devalued the bolivar by 32% in February, has failed to stem the currency’s slide on the black market, where companies and people not authorized to use the official rate pay about 60 bolivars per dollar.

Average prices of Venezuelan crude exports, responsible for 95 percent of the nation’s foreign-currency earnings, fell to a 16-month low this month and ended last week at $93.98 a barrel.

Each $1 dollar decline in a barrel of oil costs Venezuela about $700 million per year, according to estimates from PDVSA, as the state-owned company is known.

President Nicolas Maduro, Chavez’s handpicked successor, seized electronics retailer Daka and warned other businesses to cut prices to “fair” levels earlier this month to tame the highest inflation in 16 years.

“Basic-goods deficits are starting to affect even the poor population”

“We are very negative on the country’s debt,” Marco Aurelio de Sa, the head of fixed-income trading at Credit Agricole SA’s Miami brokerage unit, said in a telephone interview. “Basic-goods deficits are starting to affect even the poor population, and when things get to this point, this type of populist government loses support. You have to analyze the fixed-income market through the political spectrum.”

Francisco Rodriguez, chief Andean economist at Bank of America, said that the decline in imports is helping boost Venezuela’s current-account surplus, bolstering the nation’s ability to service debt.

The government said Nov. 26 that the current-account surplus rose by $1.8 billion from a year earlier to $4.1 billion.

National Gold Reserves

“The country’s ongoing external adjustment is leading to a stabilization of its capacity to service external debt obligations,” Rodriguez said in a report published the same day.

Goldman is suggesting that the proposal is meant to allow Venezuela to keep its national gold reserves, with the nation posting gold bullion or cash to a margin account if the price falls and Goldman posting dollars if it rises, the documents show.

Gold in U.S. Dollars – 5 Year

President Maduro is likely to be reluctant to engage in sales of Venezuela’s gold. He may not want to reverse the strong pro-gold stance of this mentor Chavez and he may realise the importance of gold reserves in protecting countries from systemic and currency collapse.

Venezuela may also be reluctant to do such a deal after seeing the appalling state that Greece and indeed the EU has been left in. This is partly due to Goldman’s ‘creative’ financial wizardry which helped disguise Greece’s debt allowing it to join the European Monetary Union. This action contributed to Greece’s economic collapse.

An important question is what exactly is Goldman’s motivation for the peculiar gold deal? Does it wish to have access to Venezuela’s gold reserves? There are many other innovative ways that Goldman could help Venezuela with its current economic travails that do not involve gold. Were Venezuela to default on the bonds would Goldman become the beneficial owner of Venezuela’s gold reserves?

Venezuela is suffering from inflation at 54%. Given the risks posed to the U.S. dollar and other paper currencies due to currency debasement today, rather than pawning its gold reserves in some debt deal with Goldman, Venezuela would be better served adding to its gold reserves at this time as gold will protect the country from a systemic crisis or currency collapse.

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via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/BznRXCl749c/story01.htm GoldCore

On November 7, when the ECB announced a “surprising” rate cut, 67 out of 70 economists who never saw it coming, were shocked. We were not. As we observed ten days prior, Europe had just seen the latest month of record low private sector loan growth in history. Or rather contraction. Back than we said that “one of our favorite series of posts describing the “Walking Dead” monetary zombie-infested continent that is Europe is the one showing the abysmal state Europe’s credit creation machinery, operated by none other than the Bank of Italy’s, Goldman’s ECB’s Mario Draghi, finds itself in.” We concluded: “we now fully expect a very unclear Draghi, plagued by monetary zombie dreams, to do everything in his power, even though as SocGen notes, he really has no power in this case, to show he has not lost control and start with a rate cut in the November ECB meeting (eventually proceeding to a full-blown QE) in order to boost loan creation.” Less than two weeks later he did just that. The problem, as the ECB reported today, is that not only did M3 decline once more, to 1.4% or the slowest pace in over 2 years and well below the ECB’s 4.5% reference growth value, but more importantly lending to companies and households shrank 2.1% in October – the biggest drop on record! Draghi’s monetary zombies are winning.

This is what Europe’s monetary pipeline zombies look like:

From SocGen:

The European Central Bank reported that money supply growth (M3) in the euro area decelerated further in October, dropping to an annual rate of 1.4% – the slowest pace of increase in two years – well below the ECB’s 4.5% reference target. The flow of credit to the private sector dropped by 1.7% yoy (adjusted for securitization and sales), down from 1.6% in September.

 

While the credit impulse to households remains low but positive (0.1% yoy), the fall of credit to corporates (-3.7% yoy) confirms that we are heading towards a creditless recovery, where investment will not be an engine of growth. Of note, the picture is once again one of fragmentation. While the French corporate sector proved rather resilient to credit crunch, the total amount of loans  to corporates plunged by 5.7% yoy in Italy, 6.6% in Portugal, and 19.3% in Spain.

Buzzzz, wrong. In a Keynesian world there is no such thing as a creditless recovery: something Goldman’s operative in the ECB knows well, and why the ECB may truly use the nuclear option, and opt for negative deposit rates probably after a conditional LTRO or another 15 bps repo rate cut, but potentially as soon in the next month or two, as it has tried everything else, aside from outright QE, which however would mostly benefit Germany’s asset holders and do nothing to stimulate credit growth (see the US for 5 years worth of proof).

As for the European fragmentation in the loan creation department, our condolences to Spain because no amount of employment data falsification or Rajoy propaganda can undo the devastation left from an ongoing 20% crash in credit creation.

In conclusion, even SocGen is now pessimistic that anything the ECB does will have much of an impact on the credit implosion that is Europe: “Yet, it is not clear to us how a movement in overnight deposits would be such as to stimulate investment. What we rather see is that the flow of credit remains negative, which suggests that the strong recovery in investment everyone expects is unlikely to happen for, at least, six to nine more months.”

How surprising: “everyone” as usual has zero understanding of how money and credit creation truly work, and just regurgitates whatever the guy next door has said. Alas, that will not help Draghi in his fight against monetary zombocalypse.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/QyxqLylLQac/story01.htm Tyler Durden

On November 7, when the ECB announced a “surprising” rate cut, 67 out of 70 economists who never saw it coming, were shocked. We were not. As we observed ten days prior, Europe had just seen the latest month of record low private sector loan growth in history. Or rather contraction. Back than we said that “one of our favorite series of posts describing the “Walking Dead” monetary zombie-infested continent that is Europe is the one showing the abysmal state Europe’s credit creation machinery, operated by none other than the Bank of Italy’s, Goldman’s ECB’s Mario Draghi, finds itself in.” We concluded: “we now fully expect a very unclear Draghi, plagued by monetary zombie dreams, to do everything in his power, even though as SocGen notes, he really has no power in this case, to show he has not lost control and start with a rate cut in the November ECB meeting (eventually proceeding to a full-blown QE) in order to boost loan creation.” Less than two weeks later he did just that. The problem, as the ECB reported today, is that not only did M3 decline once more, to 1.4% or the slowest pace in over 2 years and well below the ECB’s 4.5% reference growth value, but more importantly lending to companies and households shrank 2.1% in October – the biggest drop on record! Draghi’s monetary zombies are winning.

This is what Europe’s monetary pipeline zombies look like:

From SocGen:

The European Central Bank reported that money supply growth (M3) in the euro area decelerated further in October, dropping to an annual rate of 1.4% – the slowest pace of increase in two years – well below the ECB’s 4.5% reference target. The flow of credit to the private sector dropped by 1.7% yoy (adjusted for securitization and sales), down from 1.6% in September.

 

While the credit impulse to households remains low but positive (0.1% yoy), the fall of credit to corporates (-3.7% yoy) confirms that we are heading towards a creditless recovery, where investment will not be an engine of growth. Of note, the picture is once again one of fragmentation. While the French corporate sector proved rather resilient to credit crunch, the total amount of loans  to corporates plunged by 5.7% yoy in Italy, 6.6% in Portugal, and 19.3% in Spain.

Buzzzz, wrong. In a Keynesian world there is no such thing as a creditless recovery: something Goldman’s operative in the ECB knows well, and why the ECB may truly use the nuclear option, and opt for negative deposit rates probably after a conditional LTRO or another 15 bps repo rate cut, but potentially as soon in the next month or two, as it has tried everything else, aside from outright QE, which however would mostly benefit Germany’s asset holders and do nothing to stimulate credit growth (see the US for 5 years worth of proof).

As for the European fragmentation in the loan creation department, our condolences to Spain because no amount of employment data falsification or Rajoy propaganda can undo the devastation left from an ongoing 20% crash in credit creation.

In conclusion, even SocGen is now pessimistic that anything the ECB does will have much of an impact on the credit implosion that is Europe: “Yet, it is not clear to us how a movement in overnight deposits would be such as to stimulate investment. What we rather see is that the flow of credit remains negative, which suggests that the strong recovery in investment everyone expects is unlikely to happen for, at least, six to nine more months.”

How surprising: “everyone” as usual has zero understanding of how money and credit creation truly work, and just regurgitates whatever the guy next door has said. Alas, that will not help Draghi in his fight against monetary zombocalypse.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/QyxqLylLQac/story01.htm Tyler Durden

Do you have to VPN in to work today? Or, for the degenerate gamblers out there who just need to put that one trade on, when are your windows of opportunity? The following summary has the answers:

Floor:

• CME/CBOT/NYMEX Closed

Electronic:

• CME Globex –
  • Equity products halted (halted between 1030CST/1630GMT and 1700CST/2300GMT);
  • Interest Rate Products halted (halted between 1200CST/1800GMT and 1700CST/2300GMT);
  • FX halted (halted between 1200CST/1800GMT and 1700CST/2300GMT)
• NYMEX and Comex halted (halted between 1215CST/1815GMT and 1700CST/2300GMT)
• NYSE Closed
• NYSE LIFFE Regular Close
• Eurex Regular Close

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/3KW1MWnWqW8/story01.htm Tyler Durden

European shares remain higher though are off intraday highs. Italian, Spanish markets are the biggest gainers among larger bourses, Swiss the worst. Euro is stronger against the dollar. Commodities decline, with soybeans, zinc underperforming and wheat outperforming. U.S. stock markets closed for Thanksgiving holiday today.

Market recap via Bloomberg

• S&P 500 futures up 0.2% to 1808.5
• Stoxx 600 up 0.3% to 324.9
• US 10Yr yield down 0bps to 2.74%
• German 10Yr yield down 1bps to 1.71%
• MSCI Asia Pacific up 0.6% to 141.9
• Gold spot up 0.4% to $1242.4/oz

EUROPE

• 14 out of 19 Stoxx 600 sectors rise; basic resources, bank outperform, personal & household, autos underperform
• 61.7% of Stoxx 600 members gain, 35.7% decline
• German unemployment change +10k in Nov. vs +0k est.
• Top Stoxx 600 gainers: Thomas Cook Group PLC +13%, Banco Comercial Portugues SA +2.6%, Galenica AG +4%, Boliden AB +3.8%, Booker Group PLC +1.7%, Jeronimo Martins SGPS SA +0.7%, Peugeot SA +1.4%, Hellenic Telecommunications +2.4%, Polymetal International PLC +2.1%, Bankia SA +3.1%
• Top Stoxx 600 decliners: Taylor Wimpey PLC -6.6%, Persimmon PLC -5.6%, Barratt Developments PLC -5.4%, Kingfisher PLC -5.1%, Remy Cointreau SA -5.1%, Bellway PLC -4.4%, Berkeley Group Holdings PLC -3.5%, IG Group Holdings PLC -3.2%, Travis Perkins PLC -2.9%, Imperial Tobacco Group PLC -2.5%

ASIA

• Asian stocks rise with the Nikkei outperforming, Hang Seng underperforming.
• MSCI Asia Pacific up 0.6% to 141.9
• Nikkei 225 up 1.8%, Hang Seng down 0.1%, Kospi up 0.8%, Shanghai Composite up 0.8%, ASX up 0%, Sensex up 0.6%
• 10 out of 10 sectors rise with tech, health care outperforming and energy, utilities underperforming
• Gainers: Adani Enterprises Ltd +8.8%, Toyota Boshoku Corp +7.5%, Jaiprakash Associates Ltd +7.2%, Vanguard International Semicon +7%, Inventec Corp +7%, Energy Development Corp +6%, Seek Ltd +5.9%, Chailease Holding Ltd +5.9%, Sumco Corp +5.6%
• Decliners: Kerry Properties Ltd -9.8%, Bumi Resources Tbk PT -9%, United Tractors Tbk PT -5.4%, Shenzhou International Group -3.9%, Kumho Petro chemical Co Ltd -3.8%, Datang International Power -3.2%, Daphne International Holdings -3%, Indo Tambangraya Megah Tbk PT -2.9%, MMC Corp Bhd  -2.8%, Home Product Center PCL -2.7%

FX/BONDS

• Euro up 0.12% to $1.3595
• Dollar Index down 0.15% to 80.6
• Italian 10Yr yield up 1bps to 4.07%
• Spanish 10Yr yield up 2bps to 4.16%
• 3m Euribor/OIS up 0bps to 11bps

COMMODITIES

• S&P GSCI Index down 0.3% to 620.8
• Brent Futures down 0.3% to $111/bbl, WTI Futures down 0.2% to $92.1/bbl
• LME 3m Copper down 0.4% to $6994.8/MT
• LME 3m Nickel up 0% to $13286/MT
• Wheat futures up 1.1% to 663.5 USd/bu

Key News Links

• The second coming of Obamacare website – will it work? (Reuters)
• Winter Storm Moves North as Macy’s Waits to Make Parade Call (BBG)
• Eyeing holiday sales, more U.S. retailers to open on Thanksgiving (Reuters)
• It’s all Verizon’s fault: H-P Will Replace Verizon in Hosting HealthCare.gov Website (WSJ)
• Bitcoin Service Targets Kenya Remittances With Cut-Rate Fees (BBG)
• Embattled Thai PM easily survives no-confidence vote, protests persist (Reuters)
• For U.S. stores it is ugly out there: in more ways than one (Reuters)
• Japan and S Korea military flout China air zone rules (FT)
• UBS Restructuring Forex Unit (WSJ)
• Trader Messages Scrutinized as UBS Bans Chats Among Firms (BBG)
• ECB warns on external risks to eurozone financial system (FT)

 

Overnight Media Digest

FT

The European Central Bank urged eurozone policy makers to prepare for the scaling down of the U.S. bond-buying programme in its Financial Stability Report. The central bank warned of market shocks from the U.S. Federal Reserve’s “tapering”, which is expected in the coming months.

The German and French governments back UK’s curbs on EU migrants next year. The issue of migration is expected to be discussed by David Cameron in Lithuania, where he will explain his government’s plan of a comprehensive overhaul of the migration policy.

The UK government said on Wednesday the Post Office will get 640 million pounds more over the next three years up to 2018 to modernise its branches.

Deutsche Bank AG is in exclusive talks with private-equity group Permira to sell the loss-making part of its UK wealth management business, sources told the Financial Times.

UBS in an internal memo to its staff banned the use of social chat rooms with immediate effect. The bank said the use of multi-bank and dealer chat room was also prohibited.

British energy retailer RWE npower will announce slashing of 1,400 jobs on Thursday as part of an overhaul of its UK operations. The company is also expected to announce the shutdown of some of its offices and outsource further 570 jobs within the UK.

 

Britain

The Telegraph

BOOTS ‘BROKE’ TAX AND DISCLOSURE RULES CLAIMS UK CHARITY

The owner of high-street chemist chain Boots has been accused by War on Want of “violating” tax and disclosure rules largely to the benefit of its chairman.

YELLOW PAGES PUBLISHER HIBU CALLS IN ADMINISTRATORS

Hibu, the publisher of the Yellow Pages, has gone called in the administrators, ending a long struggle with crippling debts. The administration will be handled by Deloitte and means shareholders will not get to question the management at an emergency general meeting that was scheduled for next week.

The Guardian

TESCO PLANNING SAME-DAY DELIVERY AS IT BATTLES RIVALS

Tesco is preparing to offer same-day delivery for online groceries as it fights to shore up its struggling UK business and take on rival services by Waitrose, Morrisons and Asda.

NPOWER TO CUT 1,400 UK JOBS IN OUTSOURCING TO INDIA

Npower is to close offices and outsource work to India in a move that will see 1,400 UK staff lose their jobs at the energy supplier.

The Times

MORE CASH, BUT UNIONS LASH OUT AT THE NEW POSTAL ORDER

The Post Office said the future of its network of 11,500 outlets had been secured after another 640million pound injection of taxpayers’ money.< /p>

COMPASS FEEDS CASH BACK TO INVESTORS

The world’s biggest catering company is dishing up a further 500million pounds for its investors. Compass has announced its third share buyback in as many years.

Sky News

FUNDS CIRCLE HOVIS AS PREMIER HUNTS NEW DOUGH

A pack of investors are in talks with the owner of Hovis, Britain’s leading bread brand, as it seeks backers to help finance a revival of the struggling division.

RBS-BACKED BANK SHAWBROOK FINDS NEW INVESTOR

A fast-growing UK lender backed by Royal Bank of Scotland has recruited an arm of commodities trading giant Cargill Incorporated to fund an ambitious challenge to Britain’s high street banks.

 

China

CHINA SECURITIES JOURNAL

– China is planning to promote joint-stock reforms in its military industry to encourage companies to list, according to unnamed sources. The measures are intended to support market-orientated advances in the industry.

– The Tianjin Binhai area plans to open a pilot free-trade zone next year, according to information gathered from the city’s congress on Wednesday. The zone will include an international ship registry system and an international shipping tax system, among other things.

CHINA DAILY

– The escalation of the conflict between China and Japan over disputed islands in East China Sea is a result of Tokyo’s brinkmanship, according to an editorial in the paper. The Washington-organised flight of two bombers over China’s East China Sea on Tuesday will not only fuel Tokyo’s dangerous belligerence but may put the United States and China on a collision course, it said.

CHINA BUSINESS NEWS

– The non-performing loan ratio of banks in the eastern city of Wenzhou was 4.31 percent at the end of October, according to official data. The percentage of non-performing loans at both Wenzhou branches of China Merchants Bank and China Construction Bank was over 10 percent.

PEOPLE’S DAILY

– Further to the release of the rule making five-year plan, it is important to focus on strengthening the laws and regulations that build the party, said a commentary in the paper that acts as the party’s mouthpiece.

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/AbBiJzDLZE8/story01.htm Tyler Durden

Based on the Fed’s wealth effect creating surge in stock prices, Guggenheim’s Scott Minerd believes retail sales should be up 5.8% in Q4 2013. However, as we noted before, expectations are for a dismal 1-2% holiday spending growth at best; as 2013 is set to be the worst holiday spending season since 2009. Stores from Tilly’s to Abercrombie and Wal-Mart are warning, the NRF projects the first drop YoY since 2009, and gas prices are set to rise (further pressuring consumers’ disposable incomes). The bottom line – as we already know – is that QE’s effects on the real economy (if there were ever any?) are set to end in the 2013 holidays.

 

A 1-2% spending rise expectation is less than half the S&P’s surge would imply…

 

 

Chart: Guggenheim

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/zGXm-S-2Afo/story01.htm Tyler Durden

Based on the Fed’s wealth effect creating surge in stock prices, Guggenheim’s Scott Minerd believes retail sales should be up 5.8% in Q4 2013. However, as we noted before, expectations are for a dismal 1-2% holiday spending growth at best; as 2013 is set to be the worst holiday spending season since 2009. Stores from Tilly’s to Abercrombie and Wal-Mart are warning, the NRF projects the first drop YoY since 2009, and gas prices are set to rise (further pressuring consumers’ disposable incomes). The bottom line – as we already know – is that QE’s effects on the real economy (if there were ever any?) are set to end in the 2013 holidays.

 

A 1-2% spending rise expectation is less than half the S&P’s surge would imply…

 

 

Chart: Guggenheim

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/zGXm-S-2Afo/story01.htm Tyler Durden

Submitted by Doug French via Casey Research,

On March 16, 2009, the Financial Accounting Standards Board (FASB), a private-sector organization that establishes financial accounting and reporting standards in the US, turned the stock market around and at the same time motivated banks to become the worst slumlords and neighbors imaginable.

Most people believe accounting is conservative, the rules cut and dried. Accountants make economists look frivolous. But accountants are people too, and FASB succumbed to pressure from Capitol Hill in the wake of the 2008 financial crash.

How It All Started

The S&P 500 hit a devilish low of 666 on March 6, 2009. More major bank failures seemed a certainty. Somebody had to do something—and in stepped the accounting board prodded by the House Committee on Financial Services.

The board changed financial accounting standards 157, 124, and 115, allowing banks more discretion in reporting the value of mortgage-backed securities (MBS) held in their portfolios and losses on those securities. Floyd Norris reported at the time for the New York Times,

The change seems likely to allow banks to report higher profits by assuming that the securities are worth more than anyone is now willing to pay for them. But critics objected that the change could further damage the credibility of financial institutions by enabling them to avoid recognizing losses from bad loans they have made.

"With that discretion," fund manager John Hussman writes, "banks could use cash-flow models ("mark-to-model") or other methods ("mark-to-unicorn")."                                                                   

And author James Kwak wrote on his blog "The Baseline Scenario" just after FASB amended their rules: "The new rules were sought by the American Bankers Association, and not surprisingly will allow banks to increase their reported profits and strengthen their balance sheets by allowing them to increase the reported values of their toxic assets."

Banks were loaded with securities containing subprime home loans. When borrowers stopped paying en masse, the value of these securities plunged. Until the change in March 2009, these losses had to be recognized. With financial institutions leveraged at upwards of 30-1 at the time, the sinking valuations made much of the industry insolvent… until March 16, 2009. Since then the S&P has nearly tripled.

Bad-Neighbor Banks

Nobody has more friends on Capitol Hill than bankers, who are not wild about free-market capitalism when it works against them.

"Bankers bitterly complained that the current market prices were the result of distressed sales and that they should be allowed to ignore those prices and value the securities instead at their value in a normal market," Norris wrote for the New York Times on April 2, 2009. 

The change in the rules first of all allowed banks to remain in business. Second, with banks having wide discretion in valuing mortgage-backed securities, they had little incentive to care for the collateral of the loans contained in those MBSs. It may even be in a bank's best interest to leave houses in what the Sun Sentinel newspaper called "legal limbo."

Last year the Florida paper devoted a three-part series to "Bad-Neighbor Banks." When homeowners walk away, one would think it would be in the banks' best interests to gain legal possession as soon as possible and either sell as is, or repair and sell quickly.

Apparently that's not the case. All across Florida, banks "have halted foreclosure proceedings because the remaining equity in the properties is deemed inadequate to cover the banks' costs to reclaim title and maintain, refurbish and sell them," Megan O'Matz and John Maines wrote for the Sun Sentinel.

When pressed about weed- and rodent-infested abandoned properties, banks often pointed the finger at mortgage servicers. South Florida attorney Ben Solomon, who represents condos and community associations in foreclosure cases, stated, "We see bank delays every day. They really continually have been getting worse. More and more time is going by."

As banks sit on assets indefinitely without having to recognize a loss, homes get lost in vast bank bureaucracies. When the banks finally figure out what they have, "lenders also have been walking away from foreclosure actions involving homes with low market values, after their cool-headed calculation that the homes cannot resell for enough to offset the costs of foreclosing, repairing, maintaining and marketing them," O'Matz and Maines wrote.

Now banks have rebuilt their balance sheets and are able to withstand losses from bad property loans. Enough banks are walking away from properties that the Treasury Department issued "guidance" in 2011, advising to do so cautiously.

Banks that do foreclose with tenants living in a property are notorious for not maintaining their newly acquired properties. "Some banks are failing to follow local and state housing codes, leaving tenants to live in squalor—without even a number to call in the most dire situations," writes Aarti Shahani for NPR.  

I'm not sure why anyone would expect banks to be good property managers. "Banks don't want to take your home and own it," Paul Leonard, senior vice president of the Housing Policy Council, told NPR. "They're stuck with plumbing and electrical maintenance that is well beyond their mission. They have to hire a property manager to take care of the property."

Global banking behemoth Deutsche Bank foreclosed on 2,000 houses in the Los Angeles area between 2007 and 2011. The big bank was such a bad landlord, the city filed suit and the bank recently settled the case by paying $10 million—which the bank didn't even have to pay itself. According to Deutsche Bank officials, "The settlement will be paid by the servicers responsible for the Los Angeles properties at issue and by the securitization trusts that hold the properties."

If banks, not to mention Fannie Mae, Freddie Mac, and FHA, had been allowed to fail, the housing market would have cleared and stories like these would be a thing of the past. However, one intervention begets another, and the market is held stagnate.

Auctions: Bids Coming Up Short

While there are housing booms popping up in various cities, Bloomberg just reported a failed auction by the US Department of Housing and Urban Development (HUD).

After successfully selling 50,000 non-performing, single-family FHA-insured loans since 2010, HUD deemed the bids for $450 million too low to accept at their October 30 sale.

(As an interesting aside, the FHA was a product of Roosevelt's administration during the Great Depression and hasn't required the help of taxpayers until this September when the agency asked for a $1.7 billion bailout to keep operating… a piece of news that got drowned out by the looming government shutdown, the slowly developing Obamacare train wreck, and the Breaking Bad series finale.)

HUD has another $5 billion auction scheduled and is currently qualifying bidders. The auctions run through the website DebtX, which has compiled a Bid-Ask Index to compare recent years' buyers' bid performance versus
seller expectations. For the last three years, bids have come up short of sellers' ask prices. The index prior to the failed auction was -5.7%.

Meanwhile, the banking industry purrs right along earning a record $42.2 billion in the second quarter.

The Banks Are the Only Ones Profiting

For the banks, this was the 16th consecutive quarter of year-over-year increases. A primary driver of the record earnings is less money being socked away in loan-loss reserves. Banks put away the lowest loss provision since the third quarter of 2006. The banking industry's coverage ratio of reserves to noncurrent loans is still only 62.3%, far below what was once the standard of greater than 100%.       

Remember when President Obama and the Treasury Department claimed the bank bailouts were generating a profit? Special Inspector General Christy Romero overseeing TARP said, "It is a widely held misconception that TARP will make a profit. The most recent cost estimate for TARP is a loss of $60 billion. Taxpayers are still owed $118.5 billion (including $14 billion written off or otherwise lost)."

Fannie Mae and Freddie Mac have turned things around and are generating huge profits, you say?

Not so fast.

According to bank analyst Chris Whalen, "If we were to implement the guidance from FHFA today, it is pretty clear that the profits of the GSEs [government-sponsored enterprises] would have been largely offset by the allocations needed to replenish the reserves." GSE profits would disappear, and $10 to $20 billion would need to be added to reserves.

"Not only does FNM [Fannie Mae] seem to be unprofitable under the new FHFA guidance, but payments made to Treasury might need to be reversed," writes Whalen.

A zombie government armed with accounting tricks has bailed out a zombie banking industry using even more financial phoniness. A few numbers pushed here and there, and the industry is earning record profits. But out in the real world where people live and work, things aren't so rosy. Zombies make negligent landlords and dangerous neighbors.

Read more from Doug French, former president of the Ludwig von Mises Institute, in the Casey Daily Dispatch—different writers, different topics, different investment sectors each day of the week. Get it free of charge in your inbox, Monday through Friday—click here.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ABwby8ytLDc/story01.htm Tyler Durden

Some clarification from Wu Tang Finance on the ten key principles of economics…

"they ain't no such thang as free lunch... if you haven't figured that out yet in yo life, we is shaking our heads at ya…

 

PV=MV bitches. Velocity of money just not picking up boo. People been deleveraging up in here."

Via @Wu_Tang_Finance

THE TEN PRINCIPLES OF ECONOMICS, REVISITED

1.People Always Facing Tradeoffs.

They aint no such thang as free lunch. If you haven’t figured that out yet in yo life, I’m shaking my head at ya. To get yo hands on one thing, you gotta give up something else in return. Making decisions requires trading off one goal against another. Whether it be fo’ yo goals of wealth, fo’ shawties, drank or food, you gotta give up something in return.

 

2.The Cost of Something is What You Give Up to Get It.

Decision-makers gotta understand both the direct and indirect costs of their actions. Cash rules everything around you, but you best protect ya neck from negative externalities. Sometimes that paper clouds ya judgment. Yo Enron, shawty!! What did dat accounting scandal do to yo reputation? Company? U was chasin that short term gain now look atcha you took down an oil giant and a storied accounting firm with ya sorry ass.

 

3.Rational Dealers Think at the Margin.

True thugs live their lives at the margin (http://rapgenius.com/1148769). A rational gangsta ass banker takes action if and only if (“iff” for you math geeks out there, shoutout & respects to the QED crew) the marginal benefit of such action exceeds dat marginal cost. Don’t hold too much product on ya if the cost of carry be high. Whether if you slanging financial products or if u slanging other “high margin” goods.

 

4.People Respond to Incentives.

Behavior changes when costs or benefits change. This is truuuuuu in all aspects of life. Think bout thatshawty u chasin. Why u in hot pursuit tho? Incentives? Why u working them long nights? To get that cream? Simple shit bruh.

 

5.Trade Can Make Everyone Better Off.

Free trade of goods and services allow individuals to specialize skills, be rewarded economically and benefit others all at once, which gets me moderately turnt. That division of labor be some trill ish. Governments sometimes create disincentives that make people worse off.

 
 
6. Markets Are Usually a Good Way to Organize Economic Activity.

Watchout otherwise that invisible hand gonna slap you hard in the face. Households and firms that are interacting in the free market allocate resources efficiently.

THIS IS A HARD ONE TO COMPARE TO THE REAL WORLD THO. THE GOVERNMENT HAS ITS HANDS ALL UP IN MY PRIVATE MARKETS AND THAT’S NOT COOL DAWG SOME MARKETS IS UNDER 18 YEARS OLD. For real, look at markets where the government is less involved….technology for example. PRICES DECREASE OVER TIME AS RESOURCES ARE ALLOCATED EFFICIENTLY TOWARD PROFIT GENERATIN PRODUCTS. The opposite of this prosperous, tax revenue-generating, catalyst of economic activity is those markets organized by central planners within the government. Think higher education prices (ANNUAL PRICE INCREASES ARE HIGH AF) and healthcare costs (DAMN I GET FADED THINKING BOUT THOSE PRICES). Those markets are controlled by government whether it be credit monopolization or price oversight….

 

7.Governments Can Sometimes Improve Market Outcomes.

NAH JUST KIDDING DUDE WAS FADED WHEN HE THOUGHT OF THIS ONE LOL.

 

8. A Country's Standard of Living Depends on Its Ability to Produce Goods and Services.

What explains these big-ass differences up in livin standardz among countries over time, biatch? Almost all variation in livin standardz be attributable to differences up in countries' productivity (goods and services, yo). Productivitizzle is tha quantitizzle of skillz produced from each unit of a workers time. In *theory*, the growth rate of a nation’s productivity determines tha growth rate of average income.

 

9.Prices Rise When the Government Prints Too Much Money.

In a *simple* supply and demand relationship, if one increases the supply of a good like mad, then the price of that good will have to decrease.
This one trips me out when we consider the past few years of the dollar’s value, B. This is where I need some expert Atlantic-economist-journalist ta tell me why our crazy asses have peeped no "inflation" since embarkin up in all dat asset purchasing, or QE. Put a house up on that ass, that’s an ass-state.
While many worry that tha rapid rise up in tha Fed’s balance sheet (value of securities held at da Federal Resereve) will invariably result in a rapid rise up in tha money supply up in tha real economy, this hasn’t been the mf case. Most of tha purchases intended ta pump money tha fuck into tha real economizzle have straight-up sat idle wit tha Fed as excess reserves. Some shawties would argue that the government’s emasure of inflation is whats really trippin.

PV=MV bitches. Velocity of money just not picking up boo. People been deleveraging up in here.

10. Society Faces a Short-Run Tradeoff Between Inflation and Unemployment.

I AINT GONNA GET INTO THAT DUDE PHILLP’S CURVE AT ALL BRUH.  All I gotta say is dat policymakers can and do exploit this tradeoff rockin various policy instruments, n u can take that all the way to yo bulge bracket bank. For example, by changin the amount it spends, the amount it taxes, n' tha amount of cream it prints, Policymakers can influence the combination of inflation n' unemployment tha economy experiences.

 

‘YELLEN HAVE A DREAMMMMM….. of maximal employment. She is fr
om Brooklyn zoo too…RIP ODB…
 
Peace.
 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ZA_QF3OcGLI/story01.htm Tyler Durden

In Feb 2007, Oaktree Capital's Howard Marks wrote 'The Race to the Bottom', providing a timely warning about the capital market behavior that ultimately led to the mortgage meltdown of 2007 and the crisis of 2008 as he worried about "carelessness-induced behavior." In the pre-crisis years, as described in his 2007 memo, the race to the bottom manifested itself in a number of ways, and as Marks notes, "now we’re seeing another upswing in risky behavior." Simply put, Marks warns, "when people start to posit that fundamentals don’t matter and momentum will carry the day, it’s an omen we must heed," adding that "the riskiest thing in the investment world is the belief that there’s no risk."

Excerpted from OakTree Capitals' Howards Marks most recent letter to investors:

Of all the cycles I write about, I feel the capital market cycle is among the most volatile, prone to some of the greatest extremes. It is also one of the most impactful for investors. In short, sometimes the credit window is open to anyone in search of capital (meaning dumb deals get done), and sometimes it slams shut (meaning even deserving companies can’t raise money).

…

The cycles I describe aren’t predictable as to timing or extent. However, their fluctuations absolutely can be counted on to recur, and that’s what matters to me. I think it’s also what Mark Twain had in mind when he said “History doesn’t repeat itself, but it does rhyme.” The details don’t repeat, but the rhyming patterns are extremely reliable.

Competing to Provide Capital

When the economy is doing well and companies’ profits are rising, people become increasingly comfortable making loans and investing in equity. As the environment becomes more salutary, lenders and investors enjoy gains. This makes them want to do more; gives them the capital to do it with; and makes them more aggressive. Since this happens to all of them at the same time, the competition to lend and invest becomes increasingly heated.

When investors and lenders want to make investments in greater quantity, I think it’s also inescapable that they become willing to accept lower quality. They don’t just provide more money on the same old terms; they also become willing – even eager – to do so on weaker terms. In fact, one way they strive to win the opportunity to put money to work is by doing increasingly dangerous things.

This behavior was the subject of The Race to the Bottom. In it I said to buy a painting in an auction, you have to be willing to pay the highest price. To buy a company, a share of stock or a building – or to make a loan – you also have to pay the highest price. And when the competition is heated, the bidding goes higher. This doesn’t always – or exclusively – result in a higher explicit price; for example, bonds rarely come to market at prices above par. Instead, paying the highest price may take the form of accepting a higher valuation parameter (e.g., a higher price/earnings ratio for a stock or a higher multiple of EBITDA for a buyout) or accepting a lower return (e.g., a lower yield for a bond or a lower capitalization rate for an office building).

Further, rather than paying more for the asset purchased, there are other ways for an investor or lender to get less for his money. This can come through tolerating a weaker deal structure or through an increase in risk. It’s primarily these latter elements – rather than securities merely getting pricier – with which this memo is concerned.

History Rhymes

In the pre-crisis years, as described in the 2007 memo, the race to the bottom manifested itself in a number of ways:

There was widespread acceptance of financial engineering techniques, some newly minted, such as derivatives creation, securitization, tranching and selling onward. These innovations resulted in the creation of such things as highly levered mortgage-backed securities, CDOs and CLOs (structured credit instruments offering tiered debt levels of varying riskiness); credit default swaps (enabling investors to place bets regarding the creditworthiness of debtors); and SPACs (Special Purpose Acquisition Companies, or blind-pool acquisition vehicles). Further, the development of derivatives, in particular, vastly increased the ease with which risk could be shouldered (often without a complete understanding) as well as the amount of risk that could be garnered per dollar of capital committed.

 

While not a novel development, there was an enormous upsurge in buyouts. These included the biggest deals ever; higher enterprise values as a multiple of cash flow; increased leverage ratios; and riskier, more cyclical target companies, such as semiconductor manufacturers.

 

There was widespread structural deterioration. Examples included covenant-lite loans carrying few or none of the protective terms prudent lenders look for, and PIK-toggle debt on which the obligors could elect to pay interest “in kind” with additional securities rather than cash.

 

Finally, there was simply a willingness to buy riskier securities. Examples here included large quantities of CCC-rated debt, as well as debt issued to finance dividend payments and stock buybacks. The last two increase a company’s leverage without adding any productive assets that can help service the new debt.

Toward the end, my 2007 memo included the following paragraph:

Today’s financial market conditions are easily summed up: There’s a global glut of liquidity, minimal interest in traditional investments, little apparent concern about risk, and skimpy prospective returns everywhere. Thus, as the price for accessing returns that are potentially adequate (but lower than those promised in the past), investors are readily accepting significant risk in the form of heightened leverage, untested derivatives and weak deal structures. The current cycle isn’t unusual in its form, only its extent. There’s little mystery about the ultimate outcome, in my opinion, but at this point in the cycle it’s the optimists who look best. (emphasis in the original)

Now we’re seeing another upswing in risky behavior. It began surprisingly soon after the crisis (see Warning Flags, May 2010), spurred on by central bank policies that depressed the return on safe investments. It has gathered steam ever since, but not to anywhere near the same degree as in 2006-07.

• Wall Street has, thus far, been less creative in terms of financial engineering innovations. I can’t think of a single new “modern miracle” that’s been popularized since the crisis.
• Likewise, derivatives are off the front page and seem to be created at a much slower pace. A full resumption of derivatives creation and other forms of financial innovation appears to be on hold pending clarification of the regulatory uncertainty surrounding acceptable activity for banks.
• Buyout activity seems relatively subdued. In 2006-07, it seemed a buyout in the tens of billions was being announced every week; now they’re quite scarce. Many smaller deals are taking place, however, including a large numb
  er of “flips” from one buyout fund to another, and leverage ratios have moved back up toward the highs of the last cycle.
• “Cov-lite” and PIK-toggle debt issuance is in full flower, as are triple-Cs, dividend recaps and stock buybacks.

It’s highly informative to assess how the other characteristics of 2007 enumerated above compare with conditions today:

• global glut of liquidity – check
• minimal interest in traditional investments – check (relatively little is expected today from Treasurys, high grade bonds or equities, encouraging investors to shift toward alternatives)
• little apparent concern about risk – check
• skimpy prospective returns everywhere – check

Risk tolerance and leverage haven’t returned to their pre-crisis highs in quantitative terms, but there’s no doubt in my mind that risk bearing is back in vogue.

…

Perhaps most tellingly, the November 19 Bloomberg story referenced above included the following observation from a strategist whom I’ll allow to go nameless: “The analysis at some point shifts from fundamentals to being purely based on the price action of the stock.” When people start to posit that fundamentals don’t matter and momentum will carry the day, it’s an omen we must heed.

While the extent is nowhere as dramatic as in 2006-07 – and the psychology behind it isn’t close to being as bullish or risk-blind – I certainly sense a significant increase in the acceptance of risk. The bottom line is that when risk aversion declines and the pursuit of return gathers steam, issuers can do things in the capital markets that are impossible in more prudent times.

 

Why Is Risk Bearing on the Rise, and What Are the Implications?

To set the scene for answering the above questions, I’m going to reiterate and pull together some observations from recent memos.

Psychologically and attitudinally, I don’t think the current capital market atmosphere bears much of a resemblance to that of 2006-07. Then I used words like “optimistic,” “ebullient” and “risk-oblivious” to describe the players. Returns on risky assets were running high, and a number of factors were cited as having eliminated risk:

• The Fed was considered capable of restoring growth come what may.
• A global “wall of liquidity” was coming toward us, derived from China’s and the oil producers’ excess reserves; it could be counted on to keep asset prices aloft.
• The Wall Street miracles of securitization, tranching, selling onward and derivatives creation had “sliced and diced” risk so finely – and directed it where it could most readily be borne – that risk really didn’t require much thought.

In short, in those days, most people couldn’t imagine a way to lose money.

I believe most strongly that the riskiest thing in the investment world is the belief that there’s no risk. When that kind of sentiment prevails, investors will engage in otherwise-risky behavior. By doing so, they make the world a risky place. And that’s what happened in those pre-crisis years. When The New York Times asked a dozen people for articles about the cause of the crisis, I wrote one titled “Too Much Trust; Too Little Worry.” Certainly a dearth of fear and a resulting high degree of risk taking accurately characterize the pre-crisis environment. But that was then. It’s different today.

Today, unlike 2006-07, uncertainty is everywhere:

• Will the rate of economic growth in the U.S. get back to its prior norm? Will unemployment fall to the old “structural” level?
• Can America’s elected officials possibly reach agreement on long-term solutions to the problems of deficits and debt? Or will the national debt expand unchecked?
• Will Europe improve in terms of GDP growth, competitiveness and fiscal governance? Will its leaders be able to reconcile the various nations’ opposing priorities?
• Can Abenomics transform Japan’s economy from lethargy to dynamism? The policies appear on paper to be the right ones, but will they work?
• Can China transition from a highly stimulated economy based on easy money, an excess of fixed investment and an overactive non-bank financial system, without producing a hard landing that keeps it from reaching its economic goals?
• Can the emerging market economies prosper if demand from China and the developed world expands more slowly than in the past?

Looking at the world more thematically, a lot of questions surround the ability to manage economies and regulate growth:

• Can low interest rates and high levels of money creation return economic growth rates to previous levels? (To date, the evidence is mixed.)
• Can inflation be returned to a salutary level somewhat above that of today? Right now, insufficient inflation is the subject of complaints almost everywhere. Can the desired inflation rate be reinstated without going beyond, to undesirable levels?
• Programs like Quantitative Easing are novel inventions. How much do we know about how to end them, and about what the effects of doing so will be? Will it prove possible to wind down the stimulus – the word du jour is “taper” – without jeopardizing today’s unsteady, non-dynamic recoveries? Can the central banks back off from interest rate suppression, bond buying and easy money policies without causing interest rates to rise enough to choke off growth?
• How will governments reconcile the opposing goals of stimulating growth (lower taxes, increased spending) and reining in deficits (increased taxes, less spending)?
• Will prosperous regions (e.g., Germany) continue to be willing to subsidize profligate and poorer ones (e.g., Spain and Portugal)?

As to investments:

• When the Fed stops buying bonds, will interest rates rise a little or a lot? Does that mean bonds are unattractive?
• Are U.S. stocks still attractive after having risen strongly over the last 18 months?
• Ditto for real estate following its post-crash recovery?
• Can private equity funds buy companies at attractive prices in an environment where few owners are motivated to sell?

As I’ve said before, most people are aware of these uncertainties. Unlike the smugness, complacency and obliviousness of the pre-crisis years, today few people are as confident as they used to be about their ability to predict the future, or as certain that it will be rosy. Nevertheless, many investors are accepting (or maybe pursuing) increased risk.

The reason, of course, is that they feel they have to. The actions of the central banks to lower interest rates to stimulate economies have made this a low-return world. This has caused investors to move out on the risk curve in pursuit of the returns they want or need. Investors who used to get 6% from Treasurys have turned to high yield bonds for such a return, and so forth.

Movement up the risk curve brings cash inflows to riskier markets. Those cash inflows increase demand, cause prices to rise, enhance short-term returns, and contribute to the pro-risk behavior described above. Through this process, the race to the bottom is renewed.

In short, it’s my belief that when investors take on added risks – whether because of increased optimism or because they’re coerced to do so (as now) – they often forget to apply the caution they should. That’s bad for them. But if we’re not cognizant of the implications, it can also be bad for the rest of us.

Where does investment risk come from? Not, in my view, primarily from companies, securities – pieces of paper – or institutions such as exchanges. No, in my view the greatest risk comes from prices that are too high relative to fundamentals. And how do prices get too high? Mainly because the actions of market participants take them there.

Among the many pendulums that swing in the investments world – such as between fear and greed, and between depression and euphoria – one of the most important is the swing between risk aversion and risk tolerance.

Risk aversion is the essential element in sane markets. People are supposed to prefer safety over uncertainty, all other things being equal. When investors are sufficiently risk averse, they’ll (a) approach risky investments with caution and skepticism, (b) perform thorough due diligence, incorporating conservative assumptions, and (c) demand healthy incremental return as compensation for accepting incremental risk. This sort of behavior makes the market a relatively safe place.

But when investors drop their risk aversion and become risk-tolerant instead, they turn bold and trusting, fail to do as much due diligence, base their analysis on aggressive assumptions, and forget to demand adequate risk premiums as a reward for bearing increased risk. The result is a more dangerous world where asset prices are higher, prospective returns are lower, risk is elevated, the quality and safety of new issues deteriorates, and the premium for bearing risk is insufficient.

It’s one of my first principles that we never know where we’re going – given the unreliability of macro forecasting – but we ought to know where we are. “Where we are” means what the temperature of the market is: Are investors risk-averse or risk-tolerant? Are they behaving cautiously or aggressively? And thus is the market a safe place or a risky one?

Certainly risk tolerance has been increasing of late; high returns on risky assets have encouraged more of the same; and the markets are becoming more heated. The bottom line varies from sector to sector, but I have no doubt that markets are riskier than at any other time since the depths of the crisis in late 2008 (for credit) or early 2009 (for equities), and they are becoming more so.

….

However, Marks has a silver lining,

No, I don’t think it’s time to bail out of the markets. Prices and valuation parameters are higher than they were a few years ago, and riskier behavior is observed. But what matters is the degree, and I don’t think it has reached the danger zone yet.

 

Over the last 2-3 years, my motto for Oaktree has been consistent: “move forward, but with caution."

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/NiQ3WFgVzwI/story01.htm Tyler Durden