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Easy money is a curse for capitalism.

Through the first half of August – which is normally a quiet period for the bond market in the US – a total of $56 billion in junk bonds and leveraged loans were issued by junk-rated companies, according to S&P Global. That was nearly 50% higher than the prior records for the same period in 2012 and 2016, and more than double the amount issued in the entire month of August last year.

The Fed’s announcement on March 23rd that it would start buying corporate bonds and bond ETFs set off a huge rally in the bond market, including in the junk-bond market.

The rally started before the Fed ever actually bought the first bond. And then the Fed hardly bought anything by Fed standards. Through the end of July, it bought just $12 billion in corporate bonds and bond ETFs, including a minuscule $1.1 billion in junk bond ETFs. It’s not even a rounding error on its $7-trillion mountain of assets.

But the announcement was enough to trigger the biggest junk-debt chase in the shortest amount of time the world has likely ever seen. And it kept the zombies walking, and it generated a whole new generation of zombies too.

The junk-bond ETFs the Fed dabbled in hold junk-bonds issued by companies that have been taken over by Private Equity firms in leveraged buyouts, where the acquired company itself borrows the money to pay for its own acquisition. Leveraged buyouts produced the first big wave of bankruptcies among retailers that started years before the Pandemic, and included Toys R Us, now liquidated.

The junk bond ETFs that the Fed has bought hold these types of bonds, including bonds by PetSmart, which was taken over in a leveraged buyout by private-equity firm, BC Partners.

…click on the above link to read the rest of the article…

The Fed’s Visible Hand: Powell Buys $305 Million In ETFs In Two Days

May 14, 2020

The Fed’s Visible Hand: Powell Buys $305 Million In ETFs In Two Days

On Tuesday, the US officially crossed over into some bizarro version of a crony, centrally-planned mandated pricing model that is anything but a market when the Fed started buying corporate bond ETFs for the first time ever. Then, moments ago in its latest H.4.1 statement, the Fed – which disclosed that its balance sheet is now a record $6.934 trillion and well on its way to $12 or more than half of US GDP…

… also revealed that in the first two days the program was operational, the Fed purchased $305 million under the Corporate Credit Facility, i.e., the corporate bond ETF buying program, as of EOD May 13, or just two days after the Fed officially gave Blackrock the green light to start waving it in.

Of course, since the transactions were organized by the NY Fed which used Blackrock as agent for the buying, all of the ETFs were parked at the New York Fed.

Bloomberg’s ETF expert, Eric Blachunas, was sure he had observed the Fed in action two days ago when he noticed a jump in both LQD and HYG volumes around mid-day, which appears to be the time Blackrock will be active in the market for all those who feel like frontrunning the world’s largest asset manager, which in turn is frontrunning the world’s largest central bank.

Eric Balchunas@EricBalchunas

HISTORY MADE: Looks like Fed made good on word as $LQD & $HYG both saw volume jumps today (via some sizable trades mid-day). No way to know for sure it was them, but given what they said yest & non-corp bond ETFs like $AGG, $TLT didn’t see similar jump, there’s good chance IMO.

What is a bit concerning is that even after the Fed bought millions in LQD on the 12th, the ETF closed red. However, Blackrock redeemed itself on the next two days when LQD posted a solid rebound, rising above 128 for the first time since May 5.

Bank Of Japan Buys Record Amount Of ETFs, Admits ‘Paper Losses’, Plans Program Expansion

March 10, 2020

Bank Of Japan Buys Record Amount Of ETFs, Admits ‘Paper Losses’, Plans Program Expansion

Having blown over two trillion yen since October in purchasing stocks (ETFs) in the open market to “support Japan’s economy,” markets are rife with speculation the Band of Japan (BoJ) could pledge next week to buy ETFs at a faster pace than the current commitment to do so by roughly 6 trillion yen ($58.12 billion) per year.

Following pressure from Japanese Prime Minister Shinzo Abe,

“Markets are making nervous movements amid uncertainty over the global economic outlook. Based on agreements made among G7 and G20 nations, the government will work closely with the BOJ and authorities of other countries to respond appropriately,” Abe said in a meeting with ruling party executives on Tuesday.

Reuters reports that such a step is among options the central bank may consider if it approaches the ceiling as a result of aggressive purchases, according to sources familiar with the BOJ’s thinking.

In a somewhat surprising moment of transparency for the Japanese central bank, BOJ Governor Haruhiko Kuroda told parliament the BoJ had bought a cumulative 2.04 trillion yen worth of ETFs since October last year.

Kuroda also revealed the BoJ’s own estimate showed its holdings of ETFs may incur paper losses once Tokyo’s Nikkei stock average falls below 19,000 – 19,500. The Nikkei stood around 19,665 on Tuesday after briefly slipping below 19,000 in morning trade.

…click on the above link to read the rest of the article…

Warren Buffet’s Favorite Stock Market Metric Is Signaling Huge Downside Ahead

August 4, 2018

Warren Buffet’s Favorite Stock Market Metric Is Signaling Huge Downside Ahead

Today – Apple became the first public company worth over $1 trillion dollars. . .

Thanks to very low interest rates – the company’s piling on debt and buying their own shares back – shrinking the float.

And because of a worldwide rush into mutual funds and exchange traded funds (ETF’s) – there’s crazy demand for Apple shares.

The king of ‘buy and hold’ investing and a Champion of equities – Warren Buffet – must a have grin on his face from ear to ear. Because Apple’s surge just netted him a huge profit for his company – Berkshire Hathaway – of over $2.6 billion.

Many, now, may be thinking that they should buy Apple and other such stocks – right?

Well, not exactly.

Because according to this favorite Buffet metric – the market looks extremely overvalued and the future looks scary.

The Market Cap-to-GDP metric is a long-term value indicator. And it’s become popular recently thanks to Warren Buffet.

During an interview in 2001 with Fortune – he claimed that this indicator is “probably the best single measure of where valuations stand at any given moment.”

And what his favorite indicator’s showing us today is that stocks are more over-valued than they’ve ever been. . .

So – what is the Market Cap to GDP – aka the ‘Buffet Indicator’?

It’s easy. Just calculate the total market value of all stocks outstanding and divide it by the nations GDP.

When the ratio is greater than 100% – it means that stocks are considered overvalued and have historically less upside going forward.

And when the ratio is less than 100% – it means the opposite. That stocks are considered undervalued and historically have more upside.

I look at it this way: when the ‘Buffet Indicator” is more than 100%, the stock market is negatively asymmetric (high risk, low reward). And when it’s less than 100%, the stock market is positively asymmetric (low risk, high reward).

…click on the above link to read the rest of the article…

Not All Forms Of Gold Ownership Are Equal

June 11, 2018

Not All Forms Of Gold Ownership Are Equal

Ultimately, the value of gold is based on its tangibility. So, why do so many investors assume they’re getting the same protection from investments like gold futures that they’re getting from physical gold: while gold futures and ETFs will fill most of the needs of owning gold in normal circumstances, in extraordinary circumstances, something that’s intangible like a futures contract just won’t do. Because how will you collect your gold from the custody bank when all the banks have failed?

This week, the Goldnomics podcast ranks the safest ways to own gold to the least safe. The safest is, of course, owning physical gold bars. The next safest is to own allocated and segregated gold, which is owning physical gold kept in a separate physical account. The next level of safety is unallocated gold, then there are physically backed-ETFs and non-physically backed ETFs.

Further out the safety spectrum is owning shares of gold miners, which trade like equities (because they are). However, the vast majority of investors own gold via an ETF.

While it’s an easily accessible way of owning gold, it’s not designed for physical deliverability. “The idea of having gold in a systemically linked instrument like that could be convenient in normal times but when things get out of hand, suddenly those contracts don’t bear any weight.”

Like Alan Greenspan said, Gold is trusted by everybody as a form of payment. And indeed, most gold investors own the precious metal for its tangibility. And reading the fine print of these ETFs, the fund manager is protected from ever having to be found liable for delivering its gold. Instead, the gold is stored with large custodian banks, and if there’s ever any serious systemic risk, the owner of the ETF won’t ever be made hole.

“Don’t think you’re checking that hedging box if you own gold through an ETF, or a digital gold provider.”

Listen to the rest of the podcast below:

Quick Take: The Risk Of Algos

April 13, 2018

Quick Take: The Risk Of Algos

“Mike ‘Wags’ Wagner: ‘You studied the Flash Crash of 2010 and you know that Quant is another word for wild f***ing guess with math.’

Taylor Mason: ‘Quant is another word for systemized ordered thinking represented in an algorithmic approach to trading.’

Mike ‘Wags’ Wagner: ‘Just remember Billy Beane never won a World Series .’ – Billions, A Generation Too Late

My friend Doug Kass made a great point on Wednesday this week:

“General trading activity is now dominated by passive strategies (ETFs) and quant strategies and products (risk parity, volatility trending, etc.).

Active managers (especially of a hedge fund kind) are going the way of dodo birds – they are an endangered species. Failing hedge funds like Bill Ackman’s Pershing Square is becoming more the rule than the exception – and in a lower return market backdrop (accompanied by lower interest rates), the trend from active to passive managers will likely continue and may even accelerate this year.”

He’s right, and there is a huge risk to individual investors embedded in that statement. As JPMorgan noted previously:

“Quantitative investing based on computer formulas and trading by machines directly are leaving the traditional stock picker in the dust and now dominating the equity markets.

While fundamental narratives explaining the price action abound, the majority of equity investors today don’t buy or sell stocks based on stock specific fundamentals. Fundamental discretionary traders’ account for only about 10 percent of trading volume in stocks. Passive and quantitative investing accounts for about 60 percent, more than double the share a decade ago.”

As long as the algorithms are all trading in a positive direction, there is little to worry about. But the risk happens when something breaks. With derivatives, quantitative fund flows, central bank policy and political developments all contributing to low market volatility, the reversal of any of those dynamics will be problematic.

…click on the above link to read the rest of the article…

Bank of Japan Buys Record Amount of Equity ETFs: Once Upon a Time

April 6, 2018

Bank of Japan Buys Record Amount of Equity ETFs: Once Upon a Time

The Japanese stock market fell, so the Bank of Japan bought more equity funds.

After cornering the bond market, the Bank of Japan has its sight on the stock market with a Record Buying Binge in March.

The Bank of Japan spent 833 billion yen ($7.8 billion) on exchange-traded funds tracking the country’s shares last month, the largest amount ever according to data back to 2010. The BOJ stepped in as the Japanese market slumped and its benchmark Topix index inked its first back-to-back monthly declines since the start of 2016. Haruhiko Kuroda’s bank is now ahead of its scheduled goal to spend about 6 trillion yen a year on ETFs. “If the market keeps on falling, there will be the problem of what they do next,” said Kazuyuki Terao, chief investment officer for the Japan arm of Allianz Global Investors.

Problem? What Problem?

Just buy them all. 100% of every ETF. Given the Bank of Japan has cornered the bond market, it’s simply the logical next step.

Once Upon a Time

Once upon a time, I seem to recall central banks discussing and setting monetary policy in a very strange way.

For those of you not old enough to remember, the Fed and other central banks actually discussed the growth rate of money supply at monetary policy meetings.

How peculiar, to actually discuss money at monetary policy meetings. Those silly days are gone.

New Normal

Central banks now sponsor negative interest rates, something that could never happen in the real world.
The Bank of Japan and the Swiss National Bank are playing roulette with the stock market.
The Fed embarked on three rounds of QE to force bond yields lower.
The ECB is still at it, in a clear attempt to keep Italy on life support.

…click on the above link to read the rest of the article…

Time to Get Real: Part I

September 10, 2016

Time to Get Real: Part I

In a world where fair value is a central bank veiled enigma it’s frankly a challenge to keep things real, but I’ll have a go at it in what will be a 3 part series covering central banks, the underlying fundamental picture, and a technical assessment of charts. In this part I’ll be covering central banks and putting their actions into context of the realities of a changing world and will aim to address some of the implications.

Part I: Central banks

After years of watching central bankers do their bidding I’ve come to the conclusion that they are the designers of the ultimate Pokemon Go game by leading investors to ever more extreme locations to find little yield nuggets on their screens.

My largest criticism of this game has been that free market price discovery is largely dead and nobody knows what is real any longer, producing a false sense of security as, at any signs of trouble, central banks feel compelled to intervene ever further removing markets from their natural balance. In short: Creating a bubble with devastating consequences we will all end up paying for in one form or another.

For now one may call it a market of pure multiple expansion as GAAP earnings and price have completely diverged in 2016:

Indeed, as earnings have declined since their peak in 2015 we have seen one central bank intervention after another. Just in 2016 alone we have witnessed dozens of new rate cuts, the ECB modified and added to its QE program with QE3 an almost forgone conclusion, Japan added stimulus with the BOJ on track to own 60% of all ETFs in Japan with more to come. China intervened repeatedly, the UK cut rates and re-launched QE as well, and central banks such as the SNB have been busy expanding their share purchases of US stocks.

…click on the above link to read the rest of the article…

The Precious Metals Conspiracy

April 11, 2016

The Precious Metals Conspiracy

Tricky and Dangerous Assumptions

For at least a few weeks now, we have noticed a growing drumbeat from a growing corps of analysts. Gold is going to thousands of dollars. And silver is going to outperform. Reasons given are myriad. Goldman Sachs apparently said to short gold, so if one assumes that the bank always advises clients to take the other side of its trades — a tricky and dangerous assumption at best — then one should buy gold.

Goild conspiracy A metallic conspirator and his flying factotum… Image via sceptic.com

Then there’s the change in ETFs, for example the Sprott Physical Silver Fund has had inflows and Sprott bought more silver. And there’s currency wars, money printing, negative interest rates, etc. Most of these stories are based in fact (well except the belief that Goldman’s research is always wrong).

However, they have little to do with the price of gold. The money supply has grown steadily since 2011 while the prices of gold and silver have not. Hell, the money supply has been growing since forever. And the price of gold has gone up as well as down.

Something tells us that this effort to draw in buyers is concerted. Certainly there has been an 8.4% increase in silver held in trust for SLV. This is the result of relentless buying of SLV shares. When buyers push up the price of SLV relative to the price of silver, that creates an arbitrage opportunity for Authorized Participants.

They buy silver metal, create SLV shares, and sell the newly issued shares. They can do that as much as they want while there’s a profit to do so. But of course this pushes down the price of SLV until it is very close to the price of silver. SLV is somewhere between metal and futures. It can be a speculative play on price, but it’s bought with less leverage and it can also be a long-term holding for many people.

…click on the above link to read the rest of the article…

Mutual Funds, ETFs at Risk of a Run Warns Stockman

February 13, 2016

Mutual Funds, ETFs at Risk of a Run Warns Stockman

In one of his starkest warnings yet, Former White House Budget Director (Office of Management and Budget, OMB), David Stockman has warned that banks and the global financial system remain vulnerable and there is likely to be another global financial crisis which will be worse than the first involving “a run on mutual funds and ETFs.”

Stockman warns in a Bloomberg interview that Deutsche Bank

“has a $2 trillion balance sheet and they have a net tangible equity of $66 billion. So that is 3% – “they are leveraged 30 to 1 in terms of net tangible equity.”

“What is whirling around in that $2 trillion nobody knows but I do think that the banks have unloaded the worst of their stuff and today it is in mutual funds and ETFs, today it is in non bank financial institutions, like all these companies that have come up over night to make auto loans by selling junk bonds as a form of capital.”

This is reminiscent of the first financial crisis and the financial collapse wrought on the world with the subprime mortgage fraud as beautifully illustrated in the must see movie ‘The Big Short’.

Regarding how ‘mom and pop’ investors and pension owners are vulnerable, Stockman says

“The dangers of a run are far more serious now than it was with banks then. Back then, main street banks did not have to mark to market most of their assets and there never was a run on mainstreet banks, it was only on a few hedge funds …

This time you are going to have a run of $5 trillion or $6 trillion of mutual funds. This time you are going to have a run on the ETFs. There were only $1 trillion of ETFs in existence in 2008. There is over $3 trillion now and they are an accelerator mechanism.“

…click on the above link to read the rest of the article…

Anyone Who Believes The COMEX Numbers Is Very Naive (They Are Much Worse!)

September 11, 2015

Anyone Who Believes The COMEX Numbers Is Very Naive (They Are Much Worse!)

“The information in this report is taken from sources believed to be reliable; however, the Commodity Exchange, Inc. disclaims all liability whatsoever with regard to its accuracy or completeness. This report is produced for information purposes only.”

– disclaimer now posted on the Comex gold and silver daily warehouse stock report as of Monday, June 3, 2013 – Investment Research Dynamics – June 4, 2013

Yesterday we published an article detailing the Comex gold futures to deliverable physical gold ratio that is now north of 200:1. But an erudite colleague of mine, John Titus of “Best Evidence,” correctly pointed out that: “**They are probably bluffing. In other words, the real number is significantly higher than 200:1.**”

For the record, John does more thorough research on the economic numbers and reports that he studies than anyone I’ve ever come across. And he does it with the trained analytic eye of a seasoned patent litigation attorney.

Let’s put everything in perspective. The numerical reports from which fancy graphs and and dry detailed data presentations are created originate from the Too Big To Fail Banks. I’ve said for quite some time that IF the bullion banks who control the Comex and the LBMA are submitting honest data reports for the Comex and LBMA, it would be the only business line in which they do not hide the truth and report fraudulent numbers. What is the probability of that?

JP Morgan was recently caught stuffing proprietary Comex futures short-sell trades into the “Managed Money” account category of the COT report. The CFTC scolded JPM and slapped them with a whopping $650,000 – LINK. Does anyone really believe that the CFTC wrist-slapping corrected any fraudulent data reporting by the likes of JP Morgan? Really?

…click on the above link to read the rest of the article…

If History Is Any Indication, Junk Bonds And Copper Are Telling Us Exactly Where Stocks Are Heading Next

August 19, 2015

If History Is Any Indication, Junk Bonds And Copper Are Telling Us Exactly Where Stocks Are Heading Next

Yields on the riskiest junk bonds are absolutely soaring and the price of copper just hit a fresh six year low. To most people, those pieces of financial news are meaningless. But if you understand history, and you are aware of the patterns that immediately preceded previous stock market crashes, then you know how howhuge both of those signs are. During the summer of 2008, junk bond prices absolutely cratered as junk bond yields skyrocketed. This was a very clear signal that financial markets were about to crash, and sure enough a couple of months later it happened. Now the exact same thing is happening again. The following comes from a Wall Street On Parade article that was posted on Tuesday entitled “Keep Your Eye on Junk Bonds: They’re Starting to Behave Like ‘08“…

According to data from Bloomberg, corporations have issued a stunning $9.3 trillion in bonds since the beginning of 2009. The major beneficiary of this debt binge has been the stock market rather than investment in modernizing the plant, equipment or new hires to make the company more competitive for the future. Bond proceeds frequently ended up buying back shares or boosting dividends, thus elevating the stock market on the back of heavier debt levels on corporate balance sheets.

Now, with commodity prices resuming their plunge and currency wars spreading, concerns of financial contagion are back in the markets and spreads on corporate bonds versus safer, more liquid instruments like U.S. Treasury notes, are widening in a fashion similar to the warning signs heading into the 2008 crash. The $2.2 trillion junk bond market (high-yield) as well as the investment grade market have seen spreads widen as outflows from Exchange Traded Funds (ETFs) and bond funds pick up steam.

And right now we are seeing the most volatility in the junkiest of the junk bonds.

…click on the above link to read the rest of the article…

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