Sep.13 -- Libby Cantrill, Pimco's head of public policy, discusses President Trump's interim debt-limit deal and the implications for tax reform. She speaks with Bloomberg's David Gura on "Bloomberg Markets: Balance of Power."
Authored by Kevin Muir via The Macro Tourist blog, When you see the waft of ICO’s (Initial Coin Offerings) hitting the market, you have to ask yourself what these “investors” are smoking. Let’s put aside whether bitcoin, ethereum, or some other transactional coin, ends up being a medium of exchange with real value. Instead let’s focus on these ICO’s. If cryptocurrencies were not difficult enough to understand, ICO’s have added a layer of complexity that confuses most of the public. ICO’s use blockchain technology, but they are nothing more than digital shares of some enterprise. The attraction is that they allow for the easy raising of money with little regulation, low cost of transaction and ability to trade extremely small units of the offering. Although many of the ICO’s business plans are related to cryptocurrencies, there is no need for that to be the case. Here is an example of a recent ICO that raised money to produce synthetic rhino horn erection pills. Yup, you read that correctly - this “company” is raising money through a sale of an ICO to develop a fake rhino horn pill. The absurdity of these stories are like the OTC pink sheets - only way worse. And the public is gobbling it up at an alarming pace. If you don’t think this mania will not produce a tremendous amount of fraud, you are dreaming. So far in 2017 there has been more than $1 billion of ICO sales. A billion dollars. F’ me. Money is flowing into an asset with absolutely no protection for investors with no regulation. Just dreams. Now they are not all scams. I am sure there are some legitimate companies in here. But the hype surrounding these ICO’s is unbelievable. Paris Hilton is leading the charge of celebrity endorsements. And right behind is Mayweather. “I am going to make a $hit t$n of money on Stox.com ICO” is quite the investment proposition. Or how about this guy (h/t to Jared Dillian of Dirtnap fame for this one)? Over the last couple of years, I have watched all sorts of hedge fund gurus forecast how stocks were in a bubble. During this period, they were actively shorting the market, and often preaching the gospel about the dangers from the frothiness of stock market speculation. I have long been perplexed how it could be a bubble if so many experts were negative. Yet here we have a legitimate bubble, and instead of warning about the dangers, many of these hedge fund gurus are actively encouraging investors to get involved. And yeah, I get it. If you are a crypto believer, you are probably labeling me as some old finance guy who doesn’t understand cryptos. But lest you think me some buffoon that doesn’t know the first thing about bitcoin, we were mining and trading bitcoin well before most of these hedge fund guys were recommending it (My Great Bitcoin Bungle). So no, I am no buffoon - I am the idiot who knew about bitcoin when it was trading at $5 and refused to get long. I am a crypto skeptic, and I have been wrong about the sustainability of this rally, so it is easy to dismiss my opinion. Yet I am a student of the market, and I can assure you, bubbles are never easy to call when you are in them. Most market pundits believe themselves to be contrarians. But so few actually are. Do you think it was easy to be short DotCom stocks in the late 90’s? Not a chance. You were teased as an idiot for not getting it. To get an idea of the sort of thinking that prevailed at the time, here is a Jim Cramer speech from February 29th, 2000: You want winners? You want me to put my Cramer Berkowitz hedge fund hat on and just discuss what my fund is buying today to try to make money tomorrow and the next day and the next? You want my top 10 stocks for who is going to make it in the New World? You know what? I am going to give them to you. Right here. Right now. OK. Here goes. Write them down – no handouts here!: 724 Solutions ( SVNX), Ariba ( ARBA), Digital Island ( ISLD), Exodus ( EXDS), InfoSpace.com ( INSP), Inktomi ( INKT), Mercury Interactive ( MERQ), Sonera ( SNRA), VeriSign ( VRSN) and Veritas Software ( VRTS). We are buying some of every one of these this morning as I give this speech. We buy them every day, particularly if they are down, which, no surprise given what they do, is very rare. And we will keep doing so until this period is over – and it is very far from ending. Heck, people are just learning these stories on Wall Street, and the more they come to learn, the more they love and own! Most of these companies don’t even have earnings per share, so we won’t have to be constrained by that methodology for quarters to come. And before you dismiss Cramer as a shouting nincompoop, don’t think his views were out of the ordinary. During this period there were plenty of serious articles about how Warren Buffett had lost his touch. How he didn’t get it, and his time under the sun was done. It was unbelievably hard to be negative on tech stocks in 2000. Just like it is unbelievably hard to be negative on crypto currencies today. Saying anything less than positive gets you labeled a know-nothing knob who doesn’t get it. Classic bubble stuff. I can just hear the ghost of Joseph Kennedy telling you to get out. The other day, Geroge Pearkes from Bespoke Investments (a must follow on twitter), tweeted out this terrific chart of the Bitcoin bubble. Yet whenever someone uses the word “tulips” to describe the crypto market, the fanatics come out in full force to quash any notion that it is a bubble. Remember the last bubble? US real estate. Well, this guy is so convinced that LiteCoin is the true store of wealth that he is selling his house, and putting it all into LiteCoin. I have to give him credit. He is balls-to-the-wall all in. No one can accuse this guy of being a sally. (Click here to watch the greatest “all in” commercial of all time.) And up until now, anyone who has doubted the staying power of cryptos has just looked like a chump. So who knows? Maybe this dude will get the last laugh. Yet although I am busy splashing cold water on the crypto rally, I haven’t answered any questions about why this is happening. But I have a theory. Remember the terrific gold presentation titled “Nobody Cares” by Grant Williams? Superb analysis that detailed how small the gold market was in comparison to the capital markets, and how a little change in sentiment would create a monster move in gold. It has been one of my main tenants of my gold bull thesis - Pimco, gold bull?. Well, the idea was correct, the asset was wrong. Instead of investors looking at the financial repression and deciding to own a little bit more gold, they chose the new technology, and went with bitcoin. Over the past few months, I have noticed an increased desire by institutional investors to have some exposure to the asset class. It started with Fidelity, but it has spread to normally conservative money managers. Even usually skeptical Reformed Broker Josh Brown has gotten into the action. So you are now free to dump all of your crypto-currencies because this surely marks an all-time top. But I thought I’d mention it anyway. For those who are curious about why and how, I’ll just say the following… I’m old enough to realize that just because I don’t see a use for something, that doesn’t mean I won’t be proven wrong by others who do. At the current moment, I don’t see the financial industry use for Bitcoin other than some marginal activities like settling commodity trades that are very far divorced from my day to day existence. I understand the benefits of these things – the blockchain acting as verification that the counterparty has made payment instantly, etc. I’ve probably read all the stuff that you have. I’m skeptical. I also think it’s hard to imagine the IRS, Treasury etc allowing anonymous transactions without any reporting becoming a global standard for US persons. But I’m willing to look beyond that because the goddamn thing won’t go away. I was talking with Justin Paterno (StockTwits) the other day and his attitude toward it is pretty much where I am – “Anytime something just refuses to die, you probably have to pay attention to it.” Bitcoin, if it were complete and utter nonsense, probably should have died already. But 7 years since it burst into the public consciousness – with all of the attendant volatility and criminal activity you’d expect to come along with something so new and unproven – and it’s still here. Despite the hacking and stealing and malfunctions and crashes, it’s still a thing. It’s the f***ing rooster. Ain’t found a way to kill me yet… Anyway, I’m not a disruption hippie or an early adopter or a visionary or an evangelist. But I’m too curious to not experience Bitcoin ownership for myself. Oh, by the way, I don’t see myself trading it on price swings, more on that in a second. The Information Technology Revolution began in the early 1980’s when the computer became first a ubiquitous business tool and then eventually a household appliance. It should come as no surprise when I tell you that this moment also was the inflation-adjusted high for gold, still unsurpassed almost 40 years later. Blockchain technology may have just permanently disrupted traditional currencies. It’s obvious to me that even if this is true, we will not know it for sure until decades have gone by. Crypto currencies hit a point where it has become more scary to not own any than the other way round. Investors suddenly became worried they were missing “the next big thing.” So they buy a little. And in the grand scheme of things, it’s not a big market. So it went up. And they bought more. And then it fed upon itself, and next thing you know, Paris Hilton is an expert on the next great asset class. I am not afraid to call this a bubble. It’s a bubble. When you get celebrities pumping ICO’s, you know you are in the midst of a mania. More sophisticated investors will correctly point out that ICO’s are not cyrptocurrencies. They are two different things. Yes, that’s true. But it’s only because of the stunning returns of cryptocurrencies that ICO’s are able to raise this sort of money. It’s like at the end of a stock market bubble when the shittiest stocks go public. I don’t doubt that decades from now we will look back at blockchain as a truly revolutionary technology. Much like we did with the advent of the internet during the DotCom bubble. But we still had the 2000 crash to deal with, and although today’s biggest companies were built on the back of that bubble, had you invested in the nasdaq market in 2000 (ala Jim Cramer’s advice), you would have had years of painful capital destruction. I am not sure if today’s bitcoin mania is the equivalent of the year 2000, 1999, or even 1996. Bubbles have a way of going on much longer than anyone expects. It might be only when skeptics like me have thrown in the towel that it will finally top. In the mean time, I am switching back to Instagram to get my next great ICO tip. I hear Drake has a new coin he is about to float.
By Bill Blain of Mint Partners “I’m very well acquainted too with matters mathematical, I understand equations, both the simple and quadratical. About binomial theorem I’m teeming with a lot of news, with many cheerful facts about the square of the hypotenuse…” So much to wonder about this morning… Will we still be smiling after the ECB press conference? I suspect so… relax. In the news this morning we have the remarkable solution to the looming US debt ceiling problem: Trump supported the Democrats’ solution thru to Christmas while snubbing his own party. Smart – a clear signal to Trump’s supporters (remember, if he stood again tomorrow he’d probably win) its politics and not him that’s the problem. It’s a less subtle signal to bickering Republicans about who’s going to keep them on Capitol Hill come elections next year! Get past the noise, and pushing the debt ceiling down the road allows him to focus on immediate issues (policy initiatives) and threats (the hurricane season being just one). Then there is Stanley Fischer’s resignation from the Fed – being seen by many as a loaded message about the dangers of deregulation and Government interference, but it also opens the door for Trump to simply rubber stamp the appointment of The Squid (its shadowy operatives) to run the US central bank. (Loud Dr Evil “Mwhahah” heard in background..) Meanwhile, Theresa May will be debating Brexit.. ah. Bless.. Before scribbling about the ECB, let’s delve into history… Next week, 14th September, marks 10-years since the shocking TV footage of customers queuing outside Northern Rock desperate to get their money out – the first run on a UK bank in 140 years. It was the wake-up-and-smell-the-fear moment. In fact the Global Financial Crisis was already well underway. I’d already seen my attempt to escape investment banking and set up a credit hedge fund collapse as banks “hibernated” the investment funds earmarked for us. It had started in the US sub-prime market early in the year, triggering a redemption stop on Bear Stearns’ bond funds, followed by BNP admitting it didn’t know the value of its CDOs. But the queues outside Northern Rock woke the world to how “Crisis” was going to affect us all! It was the day I started writing the daily Morning Porridge. I seem to remember the first one was a rant about the unforgivable and unfathomable failure of the Bank of England to extend support, control and avoid the run on Rock. For the next 10 years the financial markets have been repeatedly harangued by Politicians and the Authorities – told that too big to fail will never ever happen again. Politicians are still banker bashing and assuring us taxpayers will never pay for the mistakes of bankers again. The entire capital stack has been flipped on its head. I will happily argue markets have been made less efficient, less liquid and less transparent by years of over-regulation and political fiat. Sure.. mistakes were made.. but is what we have today any better? Today, we’re going to see the consequences of Modern Finance in action when Draghi Talks! He is the very model of a modern central banker. He is a highly talented, clever and committed man, but he’ll be juggling words to avoid upsetting whatever balance between the messy convoluted politics of member states and what the ECB thinks it has achieved. A few years ago, despite all the protestations about tax-payers never again paying for banker mistakes, he committed Europe to unlimited financial largesse when he bailed out the banks with free money to go buy government bonds. He said: “WE WILL DO WHATEVER IT TAKES”. The markets absolutely believe he will and will hold him to it. “Whatever it takes” (WIT) has become an article of faith keeping Europe together by papering over its many financial cracks. (I just know that is going to infuriate some of my European readers.. but..) The market buys WIT. Repeatedly – and they know Draghi really has no choice but to deliver. Repeatedly. Without the WIT promise keeping investors in the Euro market, we could be doomed to a repeat of the European Sovereign Debt Crisis – which boils down to a lack of confidence in some European countries (who no longer have access to their own money), and therefore their financial and industrial sectors, can repay their debts. A crisis or default in one EU member will have immediate and terrible contagion consequences across the rest. During the depths of Euro Sovereign Crisis in 2010-2012, the ECB eased these doubts with LTROs and later QE effectively backstopping their debts! (Don’t tell the Germans its defacto debt mutualisation). This is the real reason why Draghi won’t upset us today with details on how the ECB is going to pull the morphine of extraordinary monetary policy from a market addicted to it. He can’t afford the market to cold-turkey and panic. The risks to Italian bond spreads in particular, the entire European corporate bond market, and the exposure of Europe’s multitude of SSA guaranteed borrowers wearing the Emperor’s New Clothes, is just too frightening to contemplate. If, say, European financial policy over the last 10-years had been successful and caused all Euro members to improve productivity, hit debt targets and create sustainable debt loads for the future, then we’d be getting Normalisation. But in Europe, and especially in Italy, very little is fixed… which means pretend and extend is more likely. So what we will get today is soothing talk about how the ECB is thinking about normalisation.. but nothing firm on how or when they are going to do it. There might be some justification about low inflation and the dangers of no-flation pushing back timing – and the ECB’s bond buying will continue. If you don’t believe me, read the following article from the new issue debt team at Bloomberg, It’s a pretty good explanation of why European bond yields are pants. Meanwhile, Pimco were on the tapes saying ECB won’t raise rates till 2019 and will defer balance sheet run off till 2020. I suspect they might be early.. To ice the cake this morning I note that Tajikistan – that well know paragon of central Asian fiscal rectitude - is planning a bond issue to finance a hydro-scheme that will take at least another 15 years to complete. It’s going to upset all their neighbours. As the next crisis in Asia will be water wars, I confidently predict the bond will go swimmingly well. Er.. maybe. Even better, Ukraine is also planning a new bond issue. Regular readers of the Porridge will be familiar with the “Ukrainian Chicken Farm Moment” theory of new issue stupidity.. If you need a refresher course in how this immutable law of bond market physics works, drop me a line.
Authored by Frank Holmes via StockBoardAsset.com, Summary Are government inflation numbers more “fake news”? A falling dollar is good for U.S. trade. Are you ready for a big fight? Here in San Antonio, grocery stores were packed with families stocking up on water and canned food in preparation for Hurricane Harvey, which has devastated Houston and coastal Texas towns. I hope everyone who lives in its path took the necessary precautions to stay safe and dry—this storm was definetely one to tell your grandkids about one day. Similarly, I hope investors have took steps to prepare for some potentially disruptive economic storms, including this past weekend’s central bank symposium in Jackson Hole, Wyoming, and the possibility of a contentious battle in Congress next month over the budget and debt ceiling. As you’re probably aware, central bankers from all over the globe visited Jackson Hole this past weekend to discuss monetary policy, specifically the Federal Reserve’s unwinding of its $4.5 trillion balance sheet and the European Central Bank’s (ECB) ongoing quantitative easing (QE) program. Janet Yellen gave what might be her last speech as head of the Federal Reserve. As I told Daniela Cambone on last week’s Gold Game Film, there are some gold conspiracy theorists out there who believe the yellow metal gets knocked down every year before the annual summit so the government can look good. I wouldn’t exactly put money on that trade, but you can see there’s some evidence to support the claim. In most years going back to 2010, the metal did fall in the days leading up to the summit. Gold prices fell most sharply around this time in 2011 before rocketing back up to its all-time high of more than $1,900 an ounce. Many of the economic and political conditions that helped gold reach that level in 2011 are in effect today. That year, a similar Congressional skirmish over the debt ceiling led to Standard & Poor’s decision to lower the U.S. credit rating, from AAA to AA+, which in turn battered the dollar. The dollar’s recent weakness is similarly supporting gold prices. In August 2011, the real, inflation-adjusted 10-year Treasury was yielding negative 0.59 percent on average, pushing investors out of government bonds and into gold. Because of low inflation, we might not be seeing negative 10-year yields right now, but the five-year is borderline while the two-year is definitely underwater. Bank of America Merrill Lynch sees gold surging to $1,400 an ounce by early next year on lower long-term U.S. interest rates. Are Government Inflation Numbers More “Fake News”? If we use another inflation measure, though, yields of all durations look very negative. For years, ShadowStats has published alternate consumer price index (CPI) figures using the methodology that was used in 1980. According to economist John Williams, an expert in government economic reporting, “methodological shifts in government reporting have depressed reported inflation” over the years. The implication is that inflation might actually be running much higher than we realize, as you can see in the chart below. If you believe the alternate CPI numbers, it makes good sense to have exposure to gold. Recently I shared with you that Ray Dalio—manager of Bridgewater, the world’s largest hedge fund with $150 billion in assets—was one among several big-name investors who have added to their gold weighting in recent days on heightened political risk. That includes Congress’ possible failure to raise the debt ceiling and, consequently, a government shutdown. Dalio recommends as much as a 10 percent weighting in the yellow metal, which is in line with my own recommendation of 10 percent, with 5 percent in physical gold and 5 percent in gold stocks, mutual funds and ETFs. Falling Dollar Good for U.S. Trade Returning to the dollar for a moment, respected CLSA equity strategist Christopher Wood writes in this week’s edition of GREED & fear that it’s “hard to believe that the political news flow in Washington has not been a factor in U.S. dollar weakness this year.” The U.S. media certainly wants you to believe that Trump is bad for the dollar. Take a look at this chart, showing the dollar’s steady decline alongside President Donald Trump’s deteriorating favorability rating, according to a RealClearPolitics poll. However, a weak dollar is good for America’s economy. I’ve commented before that Trump likes a falling dollar, because it is good for the country’s export trade of quality industrial products. It’s also good for commodities, which we see in a rising gold price and usually energy prices. Ready for a Big Fight? You might have watched the Mayweather vs. McGregor fight, but have you been watching the fight between Trump and the Fed? At the symposium in Jackson Hole, Fed Chair Janet Yellen squared up directly against Trump when she defended the strict regulations that were put in place after the financial crisis. Echoing these comments was Dallas Fed chief Robert Kaplan. This is the opposite of what Trump has been calling for, which is the streamlining of regulations that threaten to strangle the formation of capital. It’s important to recognize that the market is all about supply and demand. The number of public companies in the U.S. has been shrinking, with about half of the number of listed companies from 1996 to 2016. Readers have seen me comment on this previously, and I believe that the key reason for this shrinkage is the surge in federal regulations. The increasingly curious thing is that we are seeing the evolution of more indices than stocks, as the formation of capital must morph. As I told CNBC Asia’s Martin Soong this week, there is a huge amount of money supply out there, and investors are looking for somewhere to invest. The smaller pool of stocks combined with the greater supply of money means that the market has seen all-time highs. In addition, major averages were regularly hitting all-time highs not necessarily on hopes that tax reform would get passed, but on strong corporate earnings, promising global economic growth and the weaker U.S. dollar. Meanwhile, small-cap stocks are effectively flat for 2017 and heading for their worst year since 1998 relative to the market, according to Bloomberg. Hedge funds’ net short positions on the Russell 2000 Index have reached levels unseen since 2009. Remember, these are the firms that were expected to be among the biggest beneficiaries of Trump’s “America first” policies. However, the weakness in U.S. manufacturing has a great impact on the growth of these stocks, as indicated by the falling purchasing managers’ index (PMI). The slowdown in manufacturing is offset by strength in services, shown by the Flash composite PMI score of 56.0 which came out this week. Though there is a spread between large-cap and small-cap stocks, historically this strong score is an indicator of growth to come. Some big-name investors and hedge fund managers are turning cautious on domestic equities in general. On Monday, Ray Dalio announced on LinkedIn that he was reducing his risk in U.S. marketsbecause he’s “concerned about growing internal and external conflict leading to impaired government efficiency (e.g. inabilities to pass legislation and set policies).” Pershing Square’s Bill Ackman and Pimco’s Dan Ivascyn have also recently bought protection against market unrest, according to the Financial Times. Chris Wood is overweight Asia and emerging markets. Stay Hopeful It’s important to keep in mind that there will always be disruptions in the market, and adjustments to your portfolio will sometimes need to be made.
Even before Ray Dalio doubled down on his warning that the US has become as dangerously fragmented as during the pre-World War II days of 1937, prompting him to "tactically reduce" risk, some of the biggest names on Wall Street were selling. Two weeks ago, T.Rowe Price made waves when it said that it had cut the stock portion of its asset allocation portfolios to the lowest level since 2000. The Baltimore-based money manager said it also reduced its holdings of high-yield bonds and emerging market bonds for the same reason. Roughly at the same time, in its mid-year review, Pimco said that "with the macroeconomic backdrop evolving in the face of potentially negative pivot points and considering asset prices generally are fully valued, we are modestly risk-off in our overall positioning" adding that “we recognize events could still surprise to the upside, but starting valuations leave little room for error.” This followed a similar preannouncement by DoubleLine's Jeff Gundlach who not only said that he is reducing his positions in junk bonds, EM debt and other lower-quality investments, but predicted - correctly - the volatility spike in the first week of August. Then it was Guggenheim's turn to make a similar warning: in its Q3 Fixed Income Outlook, the asset manager said that "the downside risk of a near-term market correction grows the longer volatilityremains depressed. Asset prices are at record highs while volatility has rarely been lower. Our Global CIO and Macroeconomic and Investment Research team believe these indicators point to a dangerous level of complacency in the market, which has shrugged off the Fed’s guidance that economic conditions support monetary tightening... given where asset prices are, they would have a long way to fall." Guggeneim CIO Anne Walsh also warned that "high-yield corporate bonds are particularly at risk due to their relatively rich pricing, so we have continued to significantly reduce our exposure to that sector. The high-yield corporate bond allocations across our Core and Multi-Credit strategies are now at the lowest level since their inception. The bank loan allocation has also been reduced as a majority of the market is trading at or above par with some loans trading at negative yields to call." The list above is by no means exhaustive: according to a Bloomberg calculations, investors overseeing a total of over $1.1 trillion have been cutting exposure to junk bonds amid growing concerns about rising rates, central bank policy and general geopolitical uncertainty. Below courtesy of Bloomberg, is the list of money managers who have recently cut holdings of junk debt: JPMorgan Asset Management; AUM: $17 billion (for Absolute Return & Opportunistic Fixed-Income team) In early July told Bloomberg they have cut holdings of junk debt to about 40 percent from more than half. “We are more likely to decrease risk rather than increase risk due to valuations,” New York-based portfolio manager Daniel Goldberg said. DoubleLine Capital LP; AUM: about $110 billion Jeffrey Gundlach, co-founder and chief executive officer, said in an interview published Aug. 8 he’s reducing holdings in junk bonds and emerging-market debt and investing more in higher-quality credits with less sensitivity to rising interest rates. European high-yield bonds have hit “wack-o season,” Gundlach said in a tweet last week. Allianz Global Investors; AUM: $586 billion David Newman, head of global high yield, said in an interview his fund has begun trimming its euro high-yield exposure because record valuations make the notes particularly vulnerable in a wider selloff. Deutsche Asset Management; AUM: 100 billion euro ($117 billion) in multi-asset portfolios Said earlier this month it has reduced holdings of European junk bonds. The funds are shifting focus to equities, where there is more potential upside and higher yields from dividends, according to Christian Hille, the Frankfurt-based global head of multi asset. Guggenheim Partners; AUM: >$209 billion Reduced allocation to high-yield corporate bonds across core and multi-credit strategies to the lowest level since its inception, according to a third-quarter outlook published on Thursday. Junk bonds are “particularly at risk due to their relatively rich pricing,” portfolio managers including James Michal say in outlook report. Brandywine Global Investment Management; AUM: $72 billion Fund has cut euro junk-bond allocations to a seven-year low because of valuation concerns, Regina Borromeo, head of international high yield, said in an interview this month Who knows if these marquee names are right: if it's them against the central banks, all their sales will do is forego potential profits as the world's central banks push yields and spreads to levels that are beyond laughably ludicrous, but such is life in a centrally planned world where nothing makes sense. We do have one question: if asset managers with more than $1.1 trillion in AUM are all selling junk bonds, i) who is buying, and ii) how is it possible that the yield on the Barclays global HY index has barly budged from all time lows?
Well, the "fake news" article that Jeff Gundlach has been quietly - and not so quietly - raging against for weeks on Twitter, is finally out. Readers will recall that DoubleLine's Jeff Gundlach has been engaging in an odd subtweeting campaign on Twitter over the past month with what until recently had been an unnamed media outlet that was allegedly being used by a similarly unnamed Doubleline competitor to accuse Gundlach's fund of doing poorly and suffering outflows, something the "bond king" has said is "false news" to borrow a Trumpism... ... and then last week, Gundlach finally revealed that the "fake news" publication with the imminent hit piece in question was the WSJ: Mutual Fund Wire just put out looong "top influencers" list. Have to laugh competitor in cahoots with WSJ upcoming fake news didn't make it! — Jeffrey Gundlach (@TruthGundlach) August 17, 2017 WSJ desperate to populate "anonymous source" DBL hit piece. Now calling new employees. Even called spouse of one last night. Sad but true. — Jeffrey Gundlach (@TruthGundlach) August 17, 2017 Mutual Fund Wire just put out looong "top influencers" list. Have to laugh competitor in cahoots with WSJ upcoming fake news didn't make it! — Jeffrey Gundlach (@TruthGundlach) August 17, 2017 Meanwhile, Gundlach - having recently turned quite bearish and predicting, accurately, last weeks volatility surge, had done everything in his power to take preemptive damage control and publicize that DoubleLine is in no way in peril, in need of funding, or worried about outflows. In a recent interview with Bloomberg's Erik Shatzker, Gundlach said that he is content with the size of his fund, which he does not want growing too large, and may soon turn new money away: “Gundlach is taking a similarly conservative approach to building his eight-year-old firm. While some competitors embrace the mantra “size matters,” he believes there’s a limit to how much DoubleLine can manage well and says the firm may stop marketing altogether once assets reach $150 billion, up from about $110 billion today. ‘I’ve actually been turning money away in our institutional business,’ Gundlach said. ‘I don’t want to manage $500 billion. I don’t really want to manage $200 billion.’... “I don’t want one $150 billion fund, I want 10 $15 billion funds. A diversified business,” Gundlach said in the interview. “We lose business because our fees are too high and I say, ‘Fine, that’s a way of regulating growth.’” “Bill Gross once managed a single fund with $293 billion in assets, the Pimco Total Return Fund. By comparison, Gundlach, who co-founded DoubleLine in 2009, said he’s debated whether to close the $54 billion DoubleLine Total Return Bond Fund, the firm’s largest, to new money.” The statement echoed what Gundlach said in a tweet from August 2: "DoubleLine Facts: All time high AUM, revenue, headcount. Returns good-to great across funds. CEO never berates employees. Boycott fake news!" Then, as we reported two weeks ago, we suggested that the reason for the recent din over DoubleLine - or rather Total Return Bond Fund - AUM is that Gundlach was anticipating the latest Morningstar fund flow data, reported by Reuters, according to which investors pulled another $200 million from Jeffrey. Gundlach's flagship Total Return Bond Fund in July, extending the outflow streak that began in November to nine consecutive months. So far this year, the fund has posted outflows of $3.6 billion, leaving it with $53.6 billion in AUM as of the end of As Reuters wrote "the withdrawals are notable given that other bond funds are swimming in new cash from investors and at a time when the DoubleLine fund's performance has been strong. Some $203 billion flowed into bond funds in the first half of 2017, and bond funds overall have not recorded a single week of outflows all year, according to the Investment Company Institute, a trade group. The outflows are odd in the context of TRF's YTD outperformance: "DoubleLine Total Return Bond Fund's lower-cost institutional shares were up 3.2 percent this year through Tuesday, beating its benchmark, according to data from Thomson Reuters' Lipper research unit." Preempting the news, Gundlach in a tweet early Wednesday said that DoubleLine is a top-ranked fund company by net cash inflows this year through July. Sure enough, while TRF is seeing outflows, the broader DoubleLine continues to take in cash: overall, the firm pulled $253 million into its mutual funds and ETFs during July and $2.5 billion this year, ranking 24th of 405 fund families, according to Morningstar data. A recent interview with Reuters may explain this discrepancy: Gundlach said DoubleLine was "trying to focus on our strategy: growing our other funds." He was referring to the SPDR DoubleLine Total Return Tactical ETF, DoubleLine Core Fixed Income Fund, DoubleLine Shiller Enhanced CAPE, DoubleLine Low Duration Bond Fund, DoubleLine Infrastructure Income Fund and DoubleLine Flexible Income Fund. Those six funds have attracted $5.8 billion this year, according to Morningstar. "We are marketing our other funds and not DBLTX," Gundlach said. "We are accomplishing exactly what we planned." As we concluded two weeks ago, "it remains to be seen if there is anything more structural within DoubleLine to explain the outflows, or the explanation for Gundlach's recent odd tweeting behavior." * * * And with all that in mind, fast forward to Sunday morning when the long-awaited and much-(pre)publicized WSJ article was finally released. In it, the WSJ's Greg Zuckerman picks up on what we, Reuters and Morningstar previously noted, namely the 9 consecutive months of outflows from DoubleLine's flagship bond fund: Jeffrey Gundlach built one of the most successful new bond funds ever, amassing $61.7 billion of assets at the DoubleLine Total Return Bond Fund over just six years. But during the past year something else happened: Some customers began to leave. Assets under management at the fund dropped 13% from their peak last September to $53.6 billion as of July 31. Investors have pulled $8.5 billion from the fund in that period, Morningstar Inc. says, while funds in the same category took in net inflows of 7.2%. The fund has had outflows in each of the past nine months. Naturally, the WSJ was delighted to take advantage of the massive publicity Gundlach's own tweeting had generated in recent weeks for the coming piece: As performance has slipped and the fund has shrunk, Mr. Gundlach, 57 years old, has turned combative, taking on the media and continuing to taunt a rival. Meanwhile, some within the firm are bracing for what could be a more challenging environment. And here are the "dots" that one can finally connect based on Gundlach's aggressive subtweeting since the start of August: Late last year and earlier this year, some at DoubleLine Capital’s offices in downtown Los Angeles say, they were told bonuses might drop in 2017, according to people close to the matter. The firm says the guidance was aimed at creating a “pragmatic assessment” of 2017 after a big year in 2016. Mr. Gundlach’s fund’s performance has been solid. But some investors say they are leaving because the fund has cooled from its previously white-hot pace. Total Return Bond Fund topped 90% of peer funds over the past three- and five-year periods. In 2017, though, it is besting 59% of competitors, with a 3.15% gain through Aug. 17, Morningstar says. That said, in the the article's weakest link, and rather bizarre argument, one is somehow expected to extrapolate from the behavior of a few investors (in this case a retired orthodontist), what billions in capital will do momentarily. "Among those bailing are individual investors, who helped fuel the fund’s growth but can be quicker than institutions to pull their funds when performance lags. Barney Rothstein, a retired orthodontist in Tucson, Ariz., withdrew $250,000 from the fund over the past 18 months and shifted the money to individual bonds that carry similar yields but can be held to maturity, unlike a bond fund, potentially giving an investor more cushion if the market turns down. “The extra return wasn’t there anymore,” he said." Well, Barney, the only "extra return" these days is if you buy tech stocks on leverage... or Ethereum and Bitcoin, of course. Furthermore, it appears that the WSJ's entire "outflows" thesis is based on the assumption that once a fund reaches a "normalized return"inflection point, investors will flee. We are hardly convinced, especially in a time when 90% of hedge funds can't outperform the S&P: Some investors in Pimco’s once-giant Total Return fund left it in 2013 and 2014 when the fund, led at the time by Bill Gross, stopped trouncing rivals. A spokeswoman for Mr. Gross’s current firm, Janus Henderson Investors, said he outperformed his benchmark during that period. “This is part of having exceptional returns—at some point there will be less-than-exceptional returns,” said A. Michael Lipper, who advises investors in mutual funds. Mr. Gundlach, he said, “wouldn’t like the comparison, but the same thing happened to Bill Gross.” Now investors like Castle Financial & Retirement Planning Associates Inc. in Hazlet, N.J., are shifting to Pimco from DoubleLine. “Performance has been waning,” said Al Procaccino II, president of the firm, which pulled money from the DoubleLine fund this year. Doubleline's response was well-telegraphed, the bond manager said it isn’t troubled by the outflows or the performance of the fund, which is nearly $45 billion larger than DoubleLine’s next biggest fund. “Many well-known, actively managed bond funds that have been around long enough go through periods of net outflows, some far more dramatic than Mr. Gundlach’s fund has experienced,” a DoubleLine spokeswoman said. "There are only so many opportunities for actively managed funds. DoubleLine stopped marketing the fund two years ago, and the firm is pleased with where the asset level is.” Of course, whether DoubleLine's outflows are "controlled" will become obvious shortly: ultimately the single best predictor of future capital flows is today's performance, and for now DoubleLine has nothing to worry about. Perhaps the only interesting aspect in the entire WSJ piece is the additional insight into why Gundlach's twitter account has recently become rather more... colorful: One former employee says Mr. Gundlach aims to stir debate and focus attention on his fund. “Even if the inner Jeffrey is truly composed and collected, the outer Jeffrey is the actor—he’s a rational creation who understands how to rattle the cage,” says Claude Erb, a former portfolio manager at DoubleLine and TCW. “He’s seen client enthusiasm ebb and flow. When it’s waning, you have to redouble your efforts to get the message out.” René Bruer, the co-chief executive at Smith Bruer Advisors, which manages $80 million, withdrew all of his clients’ money from the fund in 2015 partly because of concerns about its reliance on the outspoken manager. “He can create controversy. If that’s what floats his boat, great,” Mr. Bruer says. “But for my clients and for me, I can’t take much of that.” Quoted by the WSJ, Jordan Edwards of Avier Wealth Advisors in Bellevue, Wash., which keeps about 10% of clients’ bond allocation in the fund, cited Mr. Gundlach’s investing skills and said, “I would prefer that he would not be as provocative as he is.” And yet, Jordan - and most other investors- will gladly keep their funds with Gundlach as long as he continues to outperform, which is why the whole point behind this "fake news" article is quite lost on us.
The following article by David Haggith was published on The Great Recession Blog: August is a sultry month for stocks as markets thin out during the dog days of summer. Everyone leaves investing for a break from the heat. Statistically, August is the worst month for overall stock performance, while September delivers more of whatever August sends its way or brings its own dark surprises. After that, October loves a surprise and is the worst for having the most major crashes. As markets now slide into their toughest time of the year, they also also face a major war of words that may quickly become more than words. The days of market calm appear now to have ended. $500 billion worth of supposed US market “value” just cascaded into oblivion last week. (Over a trillion worldwide. Of course, it could reappear tomorrow.) Markets crawling under the clouds of war One place where August is living up to its reputation is in volatility. August is usually the most volatile month of the year. The US stock market’s volatility index (VIX) became eerily placid for many weeks this summer, but this past week the VIX rose 70%. Of course 70% from a position so small and calm is not a lot, but it’s an awakening. And there appear to be many people and institutions now awakening. PIMCO, as one big example, began loading up on puts to hedge against a market plunge while building up a strong cash position, suspecting the highly unusual calm is the kind that comes before a big storm. PIMCO’s chief investment officer said that Pimco “has been taking profits [a nice way to say selling off its stock holdings] in high-valued corporate credits and built cash balances for when better opportunities arise.” That’s also a cautious way of saying, “We’re getting liquidity higher,” Ivascyn told Reuters in a phone interview. “If we see actual military altercation, markets can go a lot lower. And at the same time, volatility has been so low for so long that it doesn’t take much for markets to get worked up.” The PIMCO CIO said that although the market has yet to panic, “you will certainly see panic if all of this turns into a sustained military encounter.” (Zero Hedge) So, not everyone in high places sees the market’s languor as good. Now, under the clouds of war with North Korea, the calm is giving way. Trade war with China on horizon Not all wars that can damage an economy or a stock market involve weapons of mass destruction. While Trump and Kim Jong-Un are going nuclear with their rhetoric as well as their actual war footing (“Military solutions are now firmly in place … our nuclear arsenal … now far stronger and more powerful than ever before,” Trump tweeted), Trump has also declared trade war on China, saying such a war will be launched in a week. As if there weren’t enough geopolitical and social stress points in the world to fill a lifetime of “sleepy, vacationy” Augusts, late on Friday night President Trump spoke to Chinese President Xi Jinping and told him that he’s preparing to order an investigation into Chinese trade practices next week, according to NBC. Politico confirms that Trump is ready to launch a new trade crackdown on China next week…. It is also an escalation which most analysts agree will launch a trade war between Washington and Beijing…. Should Trump follow through, the move will lay the groundwork for Trump to impose tariffs against Chinese imports, which will mark a significant escalation in his efforts to reshape the trade relationship between the world’s two largest economies. In other words, even if there is now conventional war announced with either North Korea or Venezuela, Trump’s next step is to launch a trade war against China. (Zero Hedge) The near inevitability of both wars Both wars may be next to inevitable and were certainly not unforeseeable (black swans) when I said the economy would crash this summer. They are those dark clouds among a whole horizon of storm clouds that I’ve been pointing out — the clouds that I’ve been saying have been growing closer to us and would be here by summer, making a summer economic storm almost inevitable, too. The US government under Obama refused to take military actions against North Korea while it was becoming a nuclear power, so now North Korea is a nuclear power. Surprise! Not really. Who couldn’t see this coming for more than a decade? The now global known reality forces the US to a worse conundrum — wage a war with an unstable nuclear nation run by a lunatic or let an unstable nuclear power with an insane leader achieve a great deal more nuclear capability. (Some might wonder which nation I’m speaking of.) That’s what inaction on tough problems for too long brings you — worse problems. The US kicked the can down the road when there was no real threat of nuclear retaliation; now there is a clear and credible threat of nuclear retaliation. The same is true with Chinese trade. The US government under Obama turned a blind eye to Chinese trade practices that fly in the face of truly “fair trade,” again kicking the can down the road for years, rather than confronting the problem head on. So, now the US faces the risk of starting a trade war at a time when it may be starting a military war and at a time when it needs China to remain neutral with respect to North Korea if there is a war or to be an ally in getting North Korea to change (an unlikely prospect). Congress and Obama kicked the can down the road with respect to needed economic reforms, Korean nuclear armament, and unfair Chinese trade practices, always preferring to “talk about it,” and each problem has only become far harder to solve. That, of course, is what I claimed would happen when I started writing The Great Recession Blog: all of the government’s weak-kneed, temporary solutions would push the nation’s economic problems ahead, making them much harder to face in the future. That future is here. President Trump, Secretary of State Tillerson and Defense Secretary Mattis have all made it clear that a nuclear-armed North Korea with ICBMs that can hit the United States will not be allowed. If North Korea persists, this means war with the U.S. There’s only one problem: North Korea thinks we’re bluffing. North Korea believes that the U.S. is bluffing based in part on the prior failures of the U.S. to back up “red line” declarations in Syria over its alleged use of chemical weapons. Their belief is also based on the horrendous damage that would be inflicted on South Korea. China also believes the U.S. is bluffing. (–Jim Rickards in The Daily Reckoning) They probably do … after years of just talking about it or applying a smattering of half-hearted sanctions that were largely ignored by China. This is how wars begin: not because anyone wants a war, but because two sides misread each other’s intentions and stumble into one. Make no mistake — Trump is not bluffing. He’s deadly serious about ending the threat from North Korea. And he has support within the national security community. Trump probably is not bluffing when he threatens “fire and fury like the world has never seen.” If he is bluffing and tries to back away, the military industrial complex will tie a knot in his tail to keep him moving forward; but I think they have already fully won him over. Said Nikki Haley, the US Ambassador to the UN, “The time for talk is over.” Flatly stated. North Korea’s response to all this last week was to telegraph to the US its intentions to shoot nuclear-capable missiles over the heads of people in Guam. If it does so, is there anyone who believes the US military (or president) will wait to see if the missiles are armed or if they change course downward once they are over guam? As a number of writers noted last week, this is Trump’s Cuban Missile Crisis. A war of words Markets have not priced in war, but they are starting to now, and now they will have to price in congressional war, too, as congress returns from its summer vacation and starts fighting over the debt ceiling, which is thought to be a greater battle than Obamacare. Some prognosticators, like David Stockman, have been saying for months that congress will end up in an inevitable stalemate over the debt ceiling, leading to a full-on credit crisis. Maybe so, but Republicans have created such stalemates before in the form of government shutdowns and brinksmanship over the debt ceiling, and they might remember it didn’t turn out well for them the last time they created a situation that caused credit agencies to question their resolve to pay the nation’s debts. The nation was not terribly pleased with the resulting credit downgrade, and the market fell off a cliff exactly when I said it would, saved only by the Federal Reserve’s announcement of much more stimulus. As I noted in what seems now like many years ago, the US credit rating would be downgraded because congress knew it wouldn’t take the nation over the cliff of default but no one else knew congress wouldn’t go that far. More than likely, congress will find a way to kick the can down the road with some stop-gap, ill-conceived measures, as they’ve done throughout the Great Recession; but, in the meantime, a heated war of words will assault the stock market amid many other currently heated wars of words … all in the sultry heat of the market’s worst time of year. It doesn’t bode well for stocks. Rudy Penner, former director of the Congressional Budget Office said he anticipates a “very scary” fall in 2017. Fiscal issues will come to dominate, disrupting markets. “There are so many politically hard issues and so little consensus on budget and tax policy. I assume we’ll somehow get through this, but not without getting frightened on a regular basis,” Penner said. “Probably the best we can hope for is muddling through the … budget and the debt limit and getting very limited health, tax, and infrastructure legislation. There is not going to be significant stimulus coming out of Washington in the foreseeable future…. “The markets don’t seem to have absorbed the reality of Washington yet,” he said. “I have an uneasy feeling this will all end badly–that there will be a very major market correction.” (Zero Hedge) Something wicked this way comes Actually, a lot of somethings. Even if the wars simmer down, this is August and then comes September and October — all tending to be bad months for the market. This timing comes as market breadth has been narrowing down to fewer and fewer stocks carrying the main bullish action, usually a bearish sign. The action is now extremely narrow. In the latest part of the Nasdaq’s gains, the number of stocks seeing new lows increased — an even more bearish sign that overall movement is shifting downward. Finally, while market sentiment has recently been euphoric, in the past week it has started turning openly sour and worried — usually the last of signs before the market plunges. People start to visibly move toward the exits, and the noise of the crowds starts to grow. Formerly very bullish voices start to worry that something is about to give … because it is. It’s not panic yet, but the stock market has built up near-record levels of margin debt, and volatility is stirring again at last. The margin departments in brokerages are historically far more likely to give margin calls when volatility is rising, forcing those who have shorted stocks to pony up more collateral, which usually means selling stocks to raise the cash. That forced selling pushes the prices of stocks down further, creating a meltdown. Thatcreates panic! And all the right chemistry is in place. In the face of all this, the Fed is promising it will unwind its years of money printing, starting in September — something never seen before, which will begin from a height never imagined before the Great Recession. (They may backpedal on that if war gives them cause, or if the market starts to slide badly before they get there because of the growing tensions of nuclear war.) Then there is this little omen: During the past century, almost all years ending in seven have seen the market plunge at the end of summer or in the fall. While that is merely something that can feed superstition, the market has never been immune to human superstition. Then there is Trump’s failing war on crime The war on white-collar crime is a war that never was … and never was going to be. Just like the battle to lock up Hillary never was going to happen. It was total baloney every time he said it, and he knew it. He said it because it effectively stirred the crowds. Under Trump and his cabinet full of Goldman Sachs boys and girls, enforcement of financial regulations has plummeted. Regulatory penalties leveled against Wall Street are down by 60% this year from the same period last year and are on track to be the lowest number of penalties assessed in one year since 2008. Maybe Wall Street has just turned over a new leaf and the boys and girls who gamble in its casinos are behaving better so that fewer penalties are needed. Or maybe things have returned to the same lax deregulation state that helped create the last financial crisis when Greenspan assured congress that banks didn’t need tough regulations because they were naturally self-regulating out of their own self-interest. (Anyone who buys the new-leaf, self-regulating theories, please email me about some land I have for sale on the moon.) Backpedaling on regulations to where we were during the last economic collapse cannot possibly end up good, but it will take time to develop new critical fault lines of corruption deeply enough into the economy to cause new troubles. Does any of that sound like “draining the swamp?” I stopped believing Trump was going to drain the swamp as soon as I saw him putting Goldman Sachs in charge of everything financial. You don’t drain the swamp by putting the alligators in charge. Now Trump is even making love talk to Janet Yellen, having once derided her for supporting Obama and supporting Hillary’s election with a fake economy created through the Fed’s cheap money. Now that the cheap money has continued inflating the stock market while he is president (and at an even faster clip), Trump is all for it. Even though he once claimed Obama would wrongly take the credit on his way to the golf course for the economy’s fake recovery under Yellen’s low-interest policies, that hasn’t stopped Trump from taking the credit and claiming the economy is now doing great just because he was elected. I’m afraid Trump’s war on Washington was all talk as was his war on Hillary and on Wall Street. Talks of those battles was all just campaign puffing and bluffing. Maybe in the same way Trump’s words to North Korea will turn out to be a big military campaign bluff — sounds of fury signifying nothing. Giving him a little more benefit of the doubt, perhaps he is just heightening his rhetoric to get the rest of the world to take the North Korean nuclear problem seriously to try to avoid a military option. Regardless, the stock market is starting to price in the concern that it has been pretending to be unaware of. War appears almost inevitable now. The clouds are directly overhead, and the rumbles of fire and fury are clearly echoing back and forth between the clouds. Will this be one of those dry summer heat storms without rain or one of those deluges that sweeps away entire markets? One thing is certain: summer, so far, is shaping up exactly as I said it would at the start of the year. Nothing has proven those predictions entirely true, but everything is lining up as if it is all going to prove true. You might want to prepare a path to the storm-cellar door.
In the world of giant bond funds, imitation of trades just may be the sincerest form of flattery. Just two days after DoubleLine's Jeff Gundlach told Bloomberg and CNBC that he was taking profits in high risk assets, including corporate profits, building a buffer and loading up on VIX as a surge in volatility was his "highest conviction trade" (and correctly so, as just one day later VIX soared from 10 to 17), that "other" bond titan, Pimco said it was doing precisely the same. Speaking to Reuters, Pimco's chief investment officer, Dan Ivascyn, said on Friday that his firm which which oversees more than $1.6 trillion of assets "has built up an above-average cash position firmwide and has held S&P put options as geopolitical and military risks mount." The former should not come as a surprise: three weeks ago we reported that according to Bank of America, the cash allocation among the bank's high net worth private clients (i.e. rich retail investors) had fallen to the lowest on record as institutions were liquidating stocks to increasingly more euphoria retail investors, which obviously meant that those on the other side of the trade - in this case selling institutions like Pimco - were building up their cash reserves, because contrary to CNBC's constantly erroneous reporting on the topic for nearly a decade, there is no such thing as "cash on the sidelines" and every time someone buys a stock or any other risk assets, someone else sells it and pockets cash proceeds. What was a surprise, however, is that PIMCO had been actively hedging for a sharp market drop by loading up on puts. And while it is unclear if its trade profile was as aggressive as that of Gundlach, PIMCO's admission that it was prepared for a drop comes as a surprise at a time when major institutions are leery of providing a glimpse into their investing philosophy. Ivascyn said that Pimco has been a holder of put options on the Standard & Poor’s 500 "as the VIX remains historically low." The CIO said that, also like Gundlach, Pimco "has been taking profits in high-valued corporate credits and built cash balances for when better opportunities arise." What was even more surprising is how concerned the investing chief of the world's formerly largest bond fund sounded: “We’re getting liquidity higher,” Ivascyn told Reuters in a phone interview. “If we see actual military altercation, markets can go a lot lower. And at the same time, volatility has been so low for so long that it doesn’t take much for markets to get worked up." Echoing yesterday's warning by Ray Dalio, the PIMCO CIO said that although the market has yet to panic, "you will certainly see panic if all of this turns into a sustained military encounter." And if the "sustained military encounter" turns into an all out nuclear war? Well then nobody knows: as the WSJ humorously writes this morning, "analysts are trying to work out what happens to the markets they cover in the event of an all-out nuclear war." Here's an idea: BTFAONW?
European and Asian market and S&P futures have resumed their slide, as geopolitical tensions between North Korea and the U.S. spiked again overnight after Pyongyang responded to the latest set of warnings by Trump, revealing a plan to fire 4 ballistic missiles at Guam by mid-August. Gold gains for a third day while Brent rose above $53. Following de-escalation attempts by Rex Tillerson, and a NYT report that Trump's "fire and fury" statement had been improvised, markets saw a tentative recovery in risk appetite in overnight U.S. and early Asian trading, but a risk off mood returned again as Asian stocks fell back and London, Frankfurt and Paris dropped 0.5-1.2 percent in Europe, spooked by North Korea’s latest response to Trump, which dismissed as a "load of nonsense" warnings by President Trump that it would face "fire and fury" if it threatened the United States and in which a general outlined a detailed plan on state TV to fire four Hwasong-12 ICBM at Guam by mid-August, sending virtually every Asian market lower. "Sound dialogue is not possible with such a guy bereft of reason and only absolute force can work on him" North Korea said of its diplomacy with Trump. Asia took the brunt of tonight's selloff, with Japan’s Topix index ended less than 0.1 percent lower, while South Korea’s Kospi index slid 0.4 percent, adding to a 1.1 percent drop on Wednesday. The Hang Seng Index in Hong Kong fell 1.1 percent. Australia’s S&P/ASX 200 Index lost 0.1 percent. The MSCI Asia Pacific Index fell 0.5 percent. The won dropped to a four-week low and was trading 0.6 percent down, while the Japanese yen rose 0.2 percent to 109.80 per dollar, the strongest in eight weeks. "We saw a tentative recovery in risk appetite yesterday from the sell off inspired by North Korea but I think, justifiably that move is fading a little bit today," said Saxo Bank's head of FX strategy John Hardy. With the escalating war of words rumbling on, Europe's German bund yield held near six-week lows. U.S. and British equivalents were also trading a touch above Wednesday's six-week lows. "We would currently be careful with a whiff of risk aversion in the air and, by extension, also stay away from shorts in the rates market," RBC's global macro strategist Peter Schaffrik said. As a result of the ongoing diplomatic fiasco, the Stoxx Europe 600 Index headed for a second day of declines, following declines in markets from Hong Kong to Tokyo to Sydney, which also pressured S&P index futures fell. The greenback was firmer against most of its G-10 peers. Japan’s yen edged higher, extending yesterday’s increase as havens including gold continued to find support. Oil held gains above $49 a barrel as U.S. production eased and crude inventories extended declines. “The North Korea situation is still unstable and investors are controlling risk and taking profit after recent gains,” said Sam Chi Yung, a Hong Kong-based senior strategist at South China Financial Holdings Ltd. Geopolitical tensions also pushed euro-area volatility sharply higher, with the VStoxx Index surging 27% since Tuesday’s close as European stocks added to their losses. The Stoxx 600 falls 0.6%, set for biggest back-to-back declines in three weeks, as the DAX hits lowest since April 21, down 2% so far this week. All European industry groups declined, with miners and energy shares faring the worst. Utilities outperform selloff, sector is recommended by HSBC as a defensive refuge should European equities undergo a correction In currencies, as noted above, South Korea’s won led losses in emerging Asian currencies as tensions over the peninsula heightened. “USD/Asia should be somewhat supported today given the rise in geopolitical risk as North Korea and Trump keep up their back and forth,” said Julian Wee, a senior market strategist at National Australia Bank Ltd. in Singapore. “The weakness in equity markets suggests that the incendiary rhetoric has spooked the markets.” Traders added to positions in haven currencies such as the yen and Swiss franc, and pushed up the dollar index by unwinding some of the recent bets on the euro; the yen rose for a third day, outperforming all other Group-of-10 currencies. Unrelated to Korea, the NZD was the notable underperformer overnight after the RBNZ monetary policy decision. The rate decision itself was met with choppy price action. However, the downside largely stemmed from comments by RBNZ Assistant Governor McDermott who stated that "NZD needs to adjust lower", which saw NZD break through 0.7300, and was trading at 0.726 last. In China, the onshore yuan rises for 10th straight day vs trade-weighted basket to highest in nearly five months as People’s Bank of China strengthens fixing by most since June. As Bloomberg reports, as global investors turn increasingly risk averse amid tense relations between North Korea and the U.S., China’s currency is becoming an unlikely winner. The yuan is the best performer among 31 major peers since Friday, rising 1.1 percent to 6.6605 against the greenback. That compares with a 1.5 percent tumble by the South Korean won or a 0.5 percent drop by the Australian dollar. While China is North Korea’s key ally, the nation’s central bank has been supporting the yuan with a series of strong fixings, and bearish bets against the currency have receded after it rose above 6.7 per dollar. In addition to geopolitics, some of the biggest names in the asset management industry have already been warning that it’s time to take risk off the table. As reported yesterday, Pimco told investors to pare exposure to U.S. equities and junk bonds, but keep exposure to real assets, including commodities and gold. Separately, T. Rowe Price said it cut its stock allocation to the lowest level since 2000. Morgan Stanley strategists said investors should consider betting against U.S. junk-bonds as recent price weakness may be the beginning of a correction. In commodities, safe haven gold rose 0.1 percent to $1,278.04 an ounce, the strongest in two months. West Texas Intermediate crude climbed 0.4 percent to $49.75 a barrel, the highest in more than a week, while Brent traded 0.8%, to $53.20 Today we get July PPI data (for core, 0.2% mom and 2.1% yoy expected), the monthly budget statement (-$54bn) and initial jobless claims and continuing claims figures. Fed’s Dudley will also speak today. Notable companies reporting include Nvidia, Snap, Macy’s and Newscorp. Bulletin headline summary from RanSquawk Lingering geo-political concerns continue to weigh on Asian equities. NZD underperforms as the RBNZ kept a somewhat dovish-to-neutral tone. Looking ahead, highlights include US PPI and comments from Fed's Dudley. Market Snapshot S&P 500 futures down 0.3% to 2,465.50 STOXX Europe 600 down 0.4% to 378.41 MSCI Asia down 0.5% to 159.73 MSCI Asia ex Japan down 0.7% to 525.33 Nikkei down 0.05% to 19,729.74 Topix down 0.04% to 1,617.25 Hang Seng Index down 1.1% to 27,444.00 Shanghai Composite down 0.4% to 3,261.75 Sensex down 0.5% to 31,644.07 Australia S&P/ASX 200 down 0.08% to 5,760.93 Kospi down 0.4% to 2,359.47 German 10Y yield rose 0.5 bps to 0.433% Euro down 0.3% to 1.1729 per US$ Italian 10Y yield rose 0.8 bps to 1.722% Spanish 10Y yield fell 0.6 bps to 1.424% Brent Futures up 0.6% to $53.03/bbl Gold spot up 0.1% to $1,278.98 U.S. Dollar Index up 0.2% to 93.70 Top Overnight News South Korea and Japan warned North Korea that it would face a strong response if it carried through with a threat to launch a missile toward the U.S. territory of Guam North Korea says ‘sound dialogue not possible’ with Trump; considering plan for striking at Guam through simultaneous fire of four missiles U.S. inflation is finally picking up -- or at least that’s the expectation of economists who have been wrong-footed by sub-par readings four months in a row Glencore Plc built a war chest in the first half of the year, continuing to cut debt as the world’s largest commodities trading house prepares to ramp up acquisitions West Virginia Governor Jim Justice said Donald Trump is “really interested” in his plan to prop up Appalachian mining by giving federal money to power plants that burn the region’s coal U.K. June Industrial Production m/m: 0.5% vs 0.1% est; ONS notes North Sea oil fields did not shut down for summer maintenance as normal, supporting production Norway July CPI y/y: 1.5% vs 1.4% est; core CPI 1.2% vs 1.1% est. RBNZ’s Wheeler: Would like to see a lower exchange rate, intervention in FX market is always open to us; Assistant Governor McDermott says RBNZ changed NZD language in a step toward intervention China Securities Journal: Govt. will soon release a package of measures to reduce leverage of state-owned enterprises; especially investments by central SOEs in financial sector Trump Seen Bypassing Acting FTC Chief in Favor of Outsider Disappointing U.K. Manufacturing, Trade Cap Sluggish Quarter Facebook Introduces Watch as New Platform for Shows NY Orders Con Edison to Take Action on Subway Power Reliability Perrigo Full Year Adjusted EPS Forecast Tops Estimates Monsanto Judge Angered by Lawyer’s Release of Roundup Documents Pepper Group Accepts KKR’s A$3.60-a-Share Cash Offer Facebook’s ‘Dazzling’ Stock May Belie Long-Term Risks: Grant’s MUFG Realizes Money Alone Can’t Build a Truly Global Bank Glencore Slashes Debt as It Positions for M&A in Commodities Asian indices tried to pick themselves up from the recent geopolitical-triggered losses, but failed and the upside gradually fizzled out throughout the session which saw the region's bourses negative across the board. ASX 200 (-0.2%) and Nikkei 225 (-0.1%) failed to sustain the early gains as financials dragged Australia lower, while Japanese stocks reversed ahead of tomorrow's Mountain Day holiday. Markets in China lagged with the Shanghai Comp (-0.4%) dampened by a lukewarm liquidity operation and with China considering measures for deleveraging in state-owned enterprises, while Hang Seng (-1.1%) underperformed as investors used the escalation of global tensions as an opportunity to book profits in the index which had already surged by around 25% YTD. Finally, 10yr JGBs traded flat as the risk sentiment in Japan lacked conviction and with the BoJ's Rinban announcement somewhat tepid. On Thursday, the PBoC injected CNY 50bln in 7-day reverse repos and CNY 40bln in 14-day reverse repos. The PBoC set CNY mid-point 6.6770 at (Prey. 6.7075 Top Asian News Toshiba Reports Loss With Auditor’s Qualified Endorsement China Mobile Shares Surge as Carrier Adds Special Dividend SEC Delays Decision on Chinese Buyout of Chicago Exchange It’s Hard to Price an ‘Extinction Event’ Like a North Korea War South Korea, Japan Warn Kim Against Firing Missile at Guam Philippines Keeps Benchmark Rate at 3%, in Line With Forecasts Natco Tumbles to 6- Month Low on Expected Delay in Sclerosis Drug Malaysia Warns Traders Against Ringgit Derivatives in Singapore Billionaire Wang Plans Overhaul of Property Assets, Wanda Unit Another morning of declines in Europe with geo-political tensions at the forefront of investors' minds. Slight underperformance in the FTSE 100 amid a slew of Ex-Divs from a number of large cap names taking off roughly 40ppts. On a stock specific basis, much of the price action has been dictated by earnings with Adecco, Lanxess and Henkel among the worst performers following soft financial reports. Very quiet on this front with yields ticking up slightly across the German curve, peripheral spreads wider, albeit mildly so. Top European News Prudential Interim Dividend Per Share 14.5p Thyssenkrupp Debt Soars on Negative Third-Quarter Cash Flow Zurich Insurance CEO Greco Sees ‘Positive’ Signs for Dividend Dong Sees Early Shareholder Returns as Offshore Costs Tumble Adecco Slides as Sales Miss Estimates Amid Downturn in Hiring Mail.ru’s Russian Food Deliveries Surge as Sales Beat Estimates U.K. Homebuilders Slip as Residential Price Growth Slows Further Russian Gas Link Offshoot Taps Investors as Sanctions Swirl Shopping Cart Shows ECB Buying Italy Over France as Bonds Mature In currencies, the NZD was the notable underperformer overnight post the RBNZ monetary policy decision. The rate decision itself was met with choppy price action. However, the downside largely stemmed from comments by RBNZ Assistant Governor McDermott who stated that "NZD needs to adjust lower", which saw NZD break through 0.7300. USD at better levels against its counterparts today, tensions remain at elevated levels between the US and North Korea, although focus is slightly edging towards key US data with US CPI figures to be released tomorrow. But, before that we get the PPI numbers out at midday. GBP saw a brief uptick to pare some of its losses this morning following firm than expected industrial output figures, however much of the other data had been erring to the softer side with the trade balance showing a wider deficit than analysts had expected. In commodities, oil prices up this morning with Brent breaking through USD 53 for the first time since May, however failed to consolidate above and has since retraced some of its gains. Precious metals also hovering at elevated levels. Gold rose 0.1 percent to $1,278.04 an ounce, the strongest in two months. US Event Calendar 8:30am: Initial Jobless Claims, est. 240,000, prior 240,000; Continuing Claims, est. 1.96m, prior 1.97m 8:30am: PPI Final Demand MoM, est. 0.1%, prior 0.1%; Ex Food and Energy MoM, est. 0.2%, prior 0.1%; Ex Food, Energy, Trade MoM, est. 0.2%, prior 0.2% 8:30am: PPI Final Demand YoY, est. 2.2%, prior 2.0%; Ex Food and Energy YoY, est. 2.1%, prior 1.9%; Ex Food, Energy, Trade YoY, prior 2.0% 9:45am: Bloomberg Consumer Comfort, prior 49.6 2pm: Monthly Budget Statement, est. $52.0b deficit, prior $90.2b deficit Looking at the day ahead, there is the July PPI data (for core, 0.2% mom and 2.1% yoy expected), the monthly budget statement (-$54bn) as well as the initial jobless claims and continuing claims figures. Fed’s Dudley will also speak today. Notable companies reporting include Macy’s and Newscorp. DB's Jim Reid concludes the overnight wrap Over the last few days we've been wondering what it would take to knock the S&P 500 out of its 90 year record low trading range of no moves of bigger than 0.3% in either direction. After yesterday we can possibly rule out the threat of nuclear war as a catalyst as despite a sudden end to the peaceful markets of late, and a fairly notable global risk aversion, the S&P 500 managed to close only -0.04% lower and extend the daily record to 15 days without a closing move of bigger than 0.3%. Before we sound the all clear though as we'll see below, Asia is having a difficult session after markets initially opened up stronger. They have been seemingly tracking North Korea’s response to Mr Trump. According to the FT they have outlined a detailed plan on state TV to fire four Hwasong-12 ICBM at Guam by mid-August. As we type, the Nikkei is slightly lower (-0.2%), and the Kospi (-1%), Hang Seng (-1.6%) and Chinese bourses between -1% and -1.2% lower. The Hang Seng is on course for its worst day of 2017. The Korean Won has dipped a further 0.2% this morning and S&P futures -0.25% lower. This follows a day of relatively large intra-day moves across various market. The VIX surged ~15% higher to an intra-day peak of 12.63, before range trading and then finally sharply falling to close only 1.5% higher for the day (+0.15pts to 11.11). Over at UST 10Y, yields initially fell ~2bp before increasing back to be broadly flat for the day. The calming influence on the markets was likely due to US Secretary of State Tillerson signalling military confrontation was not imminent, saying that “Americans should sleep well tonight, have no concerns about this particular rhetoric of the last few days” while on a plane post a tour of Southeast Asia. Trump was also a bit more tempered later on and said via twitter, that the “…US nuclear arsenal is now far stronger than ever…but hopefully we will never have to use this power”. Nonetheless, the preference for safe haven assets was still apparent yesterday, with gold (+1.3%) and Swiss franc both modestly up (+1.1%). Over in European government bonds, core yields fell ~5bps at the longer end of the curve with bunds (2Y: -3bps; 10Y: -5bps), Gilts (2Y: -1bp; 10Y: -5bps) and French OATs (2Y: -1bp; 10Y: -4bps) rallying hard. Peripheral bond yields were a bit more mixed, with Portugal’s yield modestly down (2Y: -3bps; 10Y: -2bps), but the Italian BTPs actually up slightly (2Y: unch; 10Y: +1bp). Back to the non nuclear war part of the day, overnight two more Fed speakers echoed prior comments made by their colleagues earlier in the week. St. Louis Fed President Bullard cautioned that failure to get inflation to the Fed’s 2% target could undermine its credibility, “the misses add up over time”. Elsewhere, the Chicago Fed Chief Evans noted it would be “reasonable” to announce the start of balance sheet unwind next month. As far as conventional monetary policy is concerned, he noted the possibility that "We might be pretty close to neutral", and that despite the economy doing very well "...inflation might have some trouble getting up to 2%". Turning to market performance overnight, US bourses closed slightly lower despite the intraday actions, with the S&P (-0.1%), the Dow (-0.2%) and the Nasdaq (-0.3%) all lower but recovering into the close as discussed above. Within the S&P, modest gains in the Health care and materials sector were broadly offset by losses in utilities (-0.5%), consumer and telco names. After the bell, Twenty- First century Fox was up ~+1.5% post a result beat. In Europe, markets also weakened, with the Stoxx 600 down -0.7%. Within the index, only the utilities sector was up (+0.1%), while financials saw heavier losses (-1.5%). Across the region, indices all fell, with the DAX (-1.1%), FTSE 100 (-0.6%), CAC (-1.4%) and Italian FTSE MIB (-0.9%). Currency markets ended the day broadly unchanged, the US dollar index dipped 0.1% yesterday, but is slightly up this morning. Elsewhere, the Euro and Sterling both edged 0.1% higher against the USD, while Euro/Sterling softened for the second consecutive day. In commodities, WTI oil was up 0.8% following EIA’s report of a drop in crude inventories, although intraday gains were slightly pared back due to reports of a build-up in US gasoline stockpiles. Precious metals were higher yesterday (Gold: +1.3%; Silver +3%) but have softened a little this morning. Industrial metals were higher with Copper up 0.7% and Aluminium up 3.9%, marking a cumulative gain of ~9% over three days, likely reflecting reports of China increasing efforts to curtail illegal or polluting capacity. Away from the markets, the Washington Post has reported the FBI has searched a home belonging to Paul Manafort, who was Trump’s former campaign chairman. The search took place on 26th of July, but could be another sign that the federal probe into Russian involvement in the 2016 election is expanding. To recap, Manafort was Trump’s election campaign chairman from March to August 2016, but was forced to resign post increased scrutiny of his past work consulting for the Kremlin backed former Ukrainian president. Elsewhere, a $23bn 10-year US note sale drew a yield of 2.25%, with a bid-to-cover ratio of 2.23, the second-weakest in the last eight years, which contrasts the strong demand for the three-year note yesterday where it’s bid-to-cover ratio was the highest since Dec. 15. Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the preliminary 2Q nonfarm productivity stat was a little firmer than expectations at 0.9% (vs. 0.7% expected), leaving throughyear growth at the unrevised 1.2% yoy rate seen in 1Q. However, the growth in unit labour costs were weaker than expected at 0.6% (vs. 1.1%), although this quarter follows a large upward revision in the prior reading. Elsewhere, the final wholesale inventories for June was marginally higher at 0.7% mom (vs. flash estimate of 0.6%) and the MBA’s new purchase mortgage applications index rose 0.8% last week, with the four-week average rising 7.5% yoy. In Italy, industrial production for June was higher than expectations at 1.1% mom (vs. 0.2%), taking annual growth to 5.3% yoy (vs. 3.5% expected) – a bit closer to what the Markit manufacturing PMI has been suggesting. Looking at the day ahead, UK and France’s industrial production and manufacturing production data will be out in the morning, with expectations for UK’s IP at 0.1% mom (-0.1% yoy) and manufacturing production at flat mom (0.6% yoy). Further, June trade balance stats for UK (-£2500 expected) and Italy are also due. Over in the US, there is the July PPI data (for core, 0.2% mom and 2.1% yoy expected), the monthly budget statement (-$54bn) as well as the initial jobless claims and continuing claims figures. Onto other events, the Fed’s Dudley will speak today. Notable companies reporting include Macy’s and Newscorp in the US and ABN Amro closer to home.
While Jeff Gundlach has been engaging in an odd subtweeting campaign on Twitter over the past week with an unnamed media outlet that is allegedly being used by a similarly unnamed Doubleline competitor to accuse Gundlach's fund of doing poorly and is suffering outflows, something the "bond king" has said is a "false narrative"... ... he has done everything in his power to publicize that DoubleLine is in no way in peril, or in need of funding. Just yesterday, in an interview with Bloomberg's Erik Shatzker, Gundlach said that he is content with the size of his fund, which he does not want growing too large, and may soon turn new money away: “Gundlach is taking a similarly conservative approach to building his eight-year-old firm. While some competitors embrace the mantra “size matters,” he believes there’s a limit to how much DoubleLine can manage well and says the firm may stop marketing altogether once assets reach $150 billion, up from about $110 billion today. ‘I’ve actually been turning money away in our institutional business,’ Gundlach said. ‘I don’t want to manage $500 billion. I don’t really want to manage $200 billion.’... “I don’t want one $150 billion fund, I want 10 $15 billion funds. A diversified business,” Gundlach said in the interview. “We lose business because our fees are too high and I say, ‘Fine, that’s a way of regulating growth.’” “Bill Gross once managed a single fund with $293 billion in assets, the Pimco Total Return Fund. By comparison, Gundlach, who co-founded DoubleLine in 2009, said he’s debated whether to close the $54 billion DoubleLine Total Return Bond Fund, the firm’s largest, to new money.” The statement echoed what Gundlach said in a tweet from August 2: "DoubleLine Facts: All time high AUM, revenue, headcount. Returns good-to great across funds. CEO never berates employees. Boycott fake news!" It now appears that the reason for the recent din over DoubleLine - or rather Total Return Bond Fund - AUM is that Gundlach was anticipating the latest Morningstar fund flow data, reported by Reuters, according to which investors pulled another $200 million from Jeffrey Gundlach's flagship Total Return Bond Fund in July, extending the outflow streak that began in November to nine consecutive months. So far this year, the fund has posted outflows of $3.6 billion, leaving it with $53.6 billion in AUM as of the end of July. As Reuters writes, "the withdrawals are notable given that other bond funds are swimming in new cash from investors and at a time when the DoubleLine fund's performance has been strong. Some $203 billion flowed into bond funds in the first half of 2017, and bond funds overall have not recorded a single week of outflows all year, according to the Investment Company Institute, a trade group. The outflows are odd in the context of TRF's YTD outperformance: "DoubleLine Total Return Bond Fund's lower-cost institutional shares were up 3.2 percent this year through Tuesday, beating its benchmark, according to data from Thomson Reuters' Lipper research unit." Preempting the news, Gundlach in a tweet early Wednesday said that DoubleLine is a top-ranked fund company by net cash inflows this year through July. YTD thru July, DoubleLine ranks 19th out of 747 Fund Families in terms of Net Cash Inflows. Looks to me DBL Funds are growing significantly. — Jeffrey Gundlach (@TruthGundlach) August 9, 2017 Sure enough, while TRF is seeing outflows, the broader DoubleLine continues to take in cash: overall, the firm pulled $253 million into its mutual funds and ETFs during July and $2.5 billion this year, ranking 24th of 405 fund families, according to Morningstar data. A recent interview with Reuters may explain this discrepancy: Gundlach said DoubleLine was "trying to focus on our strategy: growing our other funds." He was referring to the SPDR DoubleLine Total Return Tactical ETF, DoubleLine Core Fixed Income Fund, DoubleLine Shiller Enhanced CAPE, DoubleLine Low Duration Bond Fund, DoubleLine Infrastructure Income Fund and DoubleLine Flexible Income Fund. Those six funds have attracted $5.8 billion this year, according to Morningstar. "We are marketing our other funds and not DBLTX," Gundlach said. "We are accomplishing exactly what we planned." Perhaps Gundlach is one of the few managers who actually means it when he says he does not want his fund to end up being too big: he has said repeatedly that he did not want to grow DoubleLine into a monstrous firm. He told Reuters in 2014, when DoubleLine crossed $60 billion in assets under management, that "most people think the definition of success is more. It's gotta be more all the time. There's a quality-of-life aspect and a way of maximizing the probability of success." He repeated the same again this week to Bloomberg. It remains to be seen if there is anything more structural within DoubleLine to explain the outflows, or the explanation for Gundlach's recent odd tweeting behavior. In other news, Gundlach sounded a bearish tone and told Reuters, Bloomberg and CNBC that he expects volatility to spike, his "highest conviction trade", and gold prices to rise. He also said on Tuesday said he initiated an options trade designed to profit if market volatility ramped up. His timing may have been good: both the VIX and gold have been rising in recent days, although it is unclear if the trend will continue, considering the S&P closed unchanged despite the growing sound of war drums.
One day after DoubleLine chief Jeff Gundlach told Bloomberg TV that it is time for investors to head for the exits as his highest conviction trade is "volatility is about to go up", and that he is reducing his positions in junk bonds, EM debt and other lower-quality investments on fears investor sentiment may roll over (explaining later to CNBC that he expects to make no less than 400% on his S&P puts) today two other money-managing titans - T.Rowe Price and Pimco - both issued similar warnings to investors, urging investors to start taking profits. In its latest Midyear asset allocation report "Preparing for Pivot Points", bond giant Pimco said Investors should pare stocks and high-yield debt while shifting to lower-risk assets, such as Treasuries and mortgage-backed securities. Some selected excerpts: "After reviewing the landscape, we conclude that the lack of near-term positive catalysts combined with current valuations does not offer sufficient margin of safety to support a risk-on posture." "While we wait for clarity on key risks or more attractive valuations, we are focused on quality sources of yield to increase portfolio carry while still keeping some dry powder." "With the macroeconomic backdrop evolving in the face of potentially negative pivot points and considering asset prices generally are fully valued, we are modestly risk-off in our overall positioning" Pimco MDs Mihir Worah and Geraldine Sundstrom wrote in today's report released Wednesday adding that while “we recognize events could still surprise to the upside, but starting valuations leave little room for error.” Pimco’s allocation recommendations also mark a shift from the start of 2017 for the firm, which managed $1.61 trillion as of June 30. One change since February is the reduced prospects of a U.S. fiscal stimulus, such as tax reform or infrastructure spending, under President Donald Trump. “We expect that any U.S. fiscal package that passes be tilted to tax cuts, but light on reform,” Worah wrote while also warning that “we see limited fiscal space in Europe.” Overall, Pimco, which is "risk-off" overall risk, recommends underweighting equities, especially U.S. stocks, following recent rallies. The firm also advises to reduce high-yield debt as defaults could climb and yield spreads could widen, while keeping exposure to better-quality credit, such as non-agency MBS likely to benefit from a healthy U.S. housing market. Pimco suggests maintaining investments in “real assets,” such as inflation-linked bonds, commodities, gold and real estate investment trusts (see full report here). In a similar warning, T. Rowe Price also urged to allocated away from stocks, noting that it cut the stock portion of its asset allocation portfolios to the lowest level since 2000. The Baltimore-based money manager said it also reduced its holdings of high-yield bonds and emerging market bonds for the same reason, Bloomberg noted. “Everything is expensive and we are late in the business cycle,” Sebastien Page, head of asset allocation at T. Rowe Price said in an interview with Bloomberg. “That introduces fragility for risk assets and there isn’t much buffer.” The move will affects $265 billion of the $904 billion under management at T. Rowe Price, and only applies to asset allocation portfolios, said Page. A typical portfolio with 60% stocks and 40% bonds now holds 58 percent in equities. Between 2000 and 2010, the equity portion peaked at 67 percent, he said. * * * The two investing giants join several other prominent billionaires who have issued similar warnings against participating in the market, among which: Carl Icahn warning that stocks are overvalued, telling CNBC in June that “I really think now, I look at this market and you just say ‘look at some of these values’ and you have to wonder." George Soros turning bearish, famously derisking his portfolio and buying gold in anticipation of a big downturn after Trump’s election, warning that global markets were in trouble (a call that has been incorrect so far). Howard Marks warning clients of “too-bullish territory”: in his late July note to clients, the billionaire Oaktree Capital founder warned about the chance of a correction. Amongh many other things, he warned aggressive investors are “engaging in willing risk-taking, funding risky deals and creating risky market conditions” and that this has been a hallmark of past downturns. David Tepper saying he is “on guard”, and while the Appaloosa Management head isn’t short yet, he is far less bullish than just several months ago. He has even suggested wary investors put some money in cash if they don’t like the frothy valuations on Wall Street right now. Tepper was particularly concerned about central-bank intervention over the last several years distorting bond markets and how that is influencing stocks. Paul Singer warning about an ETF crisis: the Elliott Management founder warned in his latest letter to investors and on CNBC that passive funds could lead to a marketwide sell-off: “at one point you will not have the active end in the market to stabilize it. You would have just the passive guys getting into herd mentality." In other words, once sentiment turns, it will be dramatic. Meanwhile, with the threat of nuclear war breathing down the market's neck, the S&P is down 0.1%.
US futures are set for a sharply lower open (at least in recent market terms) following a steep decline in European stocks and a selloff in Asian shares, following yesterday's sharp escalation in the war of words between the U.S. and North Korea. In a broad risk-off move U.S. Treasuries rose, the VIX surged above 12 overnight, while German bund futures climbed to the highest level in six weeks. The Swiss franc gained 1.2 percent to 1.1320 per euro its biggest daily advance since February 2015, while the yen surged as much as 0.8% against per euro, its strongest level in three weeks while gold rose. "Trump's comments about North Korea have created nervousness and the fear is if the President really means what he said: "fire and fury"," said Naeem Aslam, chief market analyst at Think Markets in London. "The typical text book trade is that investors rush for safe havens." Gold was headed for it’s largest gain this month while the yen and Swiss franc were the biggest advancers among G-10 currencies after President Donald Trump ratcheted up his rhetoric against North Korea. Treasuries and most European government bonds climbed amid the shift to safer assets, while almost every sector of the Stoxx Europe 600 Index fell and emerging markets equities were poised for the biggest drop since June 15. The rand extended losses after South Africa’s president survived a no-confidence vote. Earlier on Tuesday, volatility from the U.S. to Japan rose after Trump said in response to a Washington Post report on North Korea’s nuclear capabilities that further threats from the country would be met with “fire and fury.” North Korea said it’s examining an operational plan for firing a ballistic missile toward Guam. The VIX jumped above the 200-DMA as equity markets continuously push lower. The financial sector lagged, while defensive healthcare sector outperforms; gold and crude were supported in tandem. The heightened geopolitical tensions between the US and North Korea dampened global risk sentiment, which snapped the DJIA's streak of record closes and saw nearly all Asia-Pac bourses in negative territory. This was after US President Trump warned North Korea the US would respond to any threats with an unprecedented level of "fire and fury", which spurred a response from North Korea that it was considering striking Guam with mid-to long-range missiles. “Trump in his reactions is something new for all of us,” Geraldine Sundstrom, portfolio manager at Pimco Europe, said in an interview on Bloomberg TV. “Given the nature of the threats, given the players are new, it makes the situation a little bit unusual,” said Sundstrom, who recommended safe haven trades and minimizing risks through duration. As a result, global assets have slumped in a "classic, risk-off reaction" as Bloomberg puts it. The MSCI EM Asia Index of shares slid the most in a month. “We’re seeing a bit of risk aversion due to concerns over North Korea,” said Dushyant Padmanabhan, a currency strategist at Nomura in Singapore. “Besides the geopolitics, the market will also be focused on the Friday’s U.S. CPI print and what clues that might give us on the path for inflation.” The Nikkei 225 (-1.3%) underperformed as exporters suffered from the flows into JPY. The Nikkei Stock Average Volatility Index soared as much as 38%, most since August 2015, with the VNKY Index closing +24% at 16.00. The Korean KOSPI (-1.1%) was also, so to say, "weighed down" by the increased threat of nuclear war. In retrospect, that the South Korean market dipped just over 1% on the prospect of a mushroom cloud, is rather impressive. Hang Seng (-0.4%) and Shanghai Comp (-0.2%) were subdued following a miss on Chinese CPI and PPI data, while ASX 200 (+0.4%) bucked the trend amid gains in the metals-related stocks and with the largest-weighted financials sector buoyed after big-4 bank CBA reported an 8th consecutive year of record profits. Demand for 10yr JGBs was spurred by a flight to quality and with the BoJ in the market for JPY 770b1n of JGBs. The curve also slightly flattened amid outperformance in the long-end. Elsewhere, the Stoxx Europe 600 Index declined 0.6 percent as of 9:54 a.m. in London, the largest drop in more than a week on a closing basis. The U.K.’s FTSE 100 Index declined 0.6 percent, the first retreat in a week. Germany’s DAX Index sank 1.2 percent in the biggest tumble in almost three weeks. Futures on the S&P 500 Index sank 0.4 percent, the largest decrease in almost five weeks. The MSCI Emerging Market Index sank 0.9 percent, the biggest dip in almost eight weeks. "Heightened geopolitical risks overnight have seen the markets flip from risk-on to risk-off and we have to wait and see how long this move runs before adding some positions," said Viraj Patel, an FX strategist at ING in London. In overnight FX trading, risk aversion dominated trading as the Swiss franc and the yen led gains among Group-of-10 currencies, while the dollar index steadied as EM currencies halted a three-day rally. The yen appreciated as much as 0.8 percent to 128.61 per euro, its strongest level in three weeks. During previous occasions of political turmoil between the U.S. and North Korea, the Japanese currency over performed, yet the Swiss franc’s sharp decline in the past two weeks made for stretched positioning versus the euro, resulting in a bigger gain. The Australian dollar and New Zealand dollar both weakened. South Korea’s won fell to a three-week low amid heightened geopolitical tensions over North Korea. CNH and CNY both rally through 6.70/USD, highest since October 2016 after another stronger PBOC fixing. Core fixed income gains sharply, curves bull flatten with heavy volume noted in USTs. VIX jumps above 200-DMA as equity markets continuously push lower. Financial sector lags, while defensive healthcare sector outperforms; gold and crude supported in tandem. Some remain skeptically optimistic: at the moment the tensions increasing around North Korea’s nuclear weapons program does remain an “exchange of rhetoric,” and under normal expectations it’s difficult to think that any “real action” will be taken from here, says Takuya Yamada, a senior money manager in Tokyo. •If something actually happens, it won’t be surprising to see the market fall 5%, 10% in no time at all. However investors are aware of the fact that if North Korea takes action it will mean self- destruction, so their premise is that this is merely “trash talking.” "We've had some competing forces play out over the past 12 hours - the U.S. dollar was stronger off economic data, but that was quickly reversed with President Trump's comments about North Korea earlier today (Wednesday)," said ANZ analyst Daniel Hynes. In rates, the yield on 10-year Treasuries decreased two basis points to 2.24 percent. Germany’s 10-year yield declined four basis points to 0.44 percent, the lowest in six weeks. Britain’s 10-year yield fell four basis points to 1.117 percent, the lowest in six weeks. France’s 10-year yield dipped three basis points to 0.73 percent. In commodities, gold gained 0.6 percent to $1,267.99 an ounce, heading for the biggest one-day increase since July 28. West Texas Intermediate crude climbed 0.4 percent to $49.36 a barrel. Looking at the day ahead, there is the preliminary 2Q nonfarm productivity (0.7% expected) and unit labour costs (1% expected) data, final June wholesale inventories (0.6% expected) as well as the MBA mortgage applications. In Asia, Japan’s PPI for July will also be out on early Thursday morning. Notable US companies reporting today include Twenty First century Fox. Market Snapshot S&P 500 futures down 0.4% to 2,463 MSCI Asia down 0.4% to 160.58 MSCI Asia ex-Japan down 0.6% to 528.93 STOXX Europe 600 down 0.8% to 379.60 Nikkei down 1.3% to 19,738.71 Topix down 1.1% to 1,617.90 Hang Seng Index down 0.4% to 27,757.09 Shanghai Composite down 0.2% to 3,275.57 Sensex down 0.5% to 31,859.44 Australia S&P/ASX 200 up 0.4% to 5,765.66 Kospi down 1.1% to 2,368.39 German 10Y yield fell 3.7 bps to 0.437% Euro down 0.2% to 1.1730 per US$ Brent Futures up 0.02% to $52.15/bbl US 10Y yield fell 2 bps to 2.24% Italian 10Y yield rose 1.1 bps to 1.714% Spanish 10Y yield fell 4.3 bps to 1.411% Brent Futures up 0.02% to $52.15/bbl Gold spot up 0.6% to $1,268.77 U.S. Dollar Index down 0.03% to 93.62 Top Overnight News President Donald Trump’s threat to hit North Korea with “fire and fury” jolted markets from New York to Seoul even as U.S. lawmakers questioned the president’s willingness to back up the heated rhetoric N. Korea can strike before any U.S. pre-emptive attack; considering firing ballistic missiles “at areas around Guam” where U.S. strategic bombers are stationed: KCNA Trump’s presidential campaign, his son Donald Trump Jr. and former campaign manager Paul Manafort have started turning over documents to the Senate Judiciary Committee as part of the panel’s expanded investigation of Russian election- meddling South African President Jacob Zuma narrowly overcame a bid by opposition parties to topple him through a no-confidence motion in parliament. The real loser may be his own party, the African National Congress Morgan Stanley beat Goldman Sachs Group Inc. to become the most profitable foreign securities firm in Japan last fiscal year after it boosted structured-product sales and managed the two biggest initial public offerings BOE Agents’ Summary of Business Conditions: some manufacturers reported that initial pass-through of weaker sterling near completion Italian June Industrial Production m/m: +1.1% vs +0.2% est. China July CPI y/y: 1.4% vs 1.5% est; PPI 5.5% vs 5.6% est. API inventories according to people familiar w/ data: Crude -7.8m; Cushing +0.3m; Gasoline +1.5m; Distillates -0.2m Disney’s Iger Sees a Future Without Netflix, Comcast or DirecTV Goldman Sells U.K. Insurer Stake to GIC, Blackstone, MassMutual Canada Mulls Nicotine Cut as New Front Opens Against Smoking British American Tobacco Is Said to Extend Debt Binge in Europe New iPhone Models Are Said to Enter Mass Production: DigiTimes U.S. FDA Is Said to Issue Form 483 to Baxter Ahmedabad Site: CNBC Fox Is Said to Have Declined to Settle Suits for $60M: NYT Novo Sees Price of Insulin in U.S Dropping Again Next Year Ford Repairs Over 50 Police Units on Carbon Monoxide Concerns In Asia, increased geopolitical tensions after a war of words between US and North Korea dampened global risk sentiment, which ensured the DJIA snapped a 9-day streak of record closes and saw nearly all Asia-Pac bourses in negative territory. This was after US President Trump warned North Korea the US would respond to any threats with an unprecedented level of fire and fury, which spurred a response from North Korea that it was considering striking Guam with mid-to long-range missiles. Nikkei 225 (-1.3%) underperformed as exporters suffered from the flows into JPY, while KOSPI (-1.1%) was also weighed on by the increased threat of nuclear war. Hang Seng (-0.4%) and Shanghai Comp (-0.2%) were subdued following a miss on Chinese CPI and PPI data, while ASX 200 (+0.4%) bucked the trend amid gains in the metals-related stocks and with the largest-weighted financials sector buoyed after big-4 bank CBA reported an 8th consecutive year of record profits. Demand for 10yr JGBs was spurred by a flight to quality and with the BoJ in the market for JPY 770b1n of JGBs. The curve also slightly flattened amid outperformance in the long-end. RBA Assistant Governor Kent states that fixed-income funding is available at favourable rates and that banks' use of wholesale debt is much lower than a few years ago. Further stating that AUD appreciation is more of a story regarding USD depreciation, adds further strength in AUD would result to slightly weaker domestic growth. South Korea Finance Minister sees limited risk impact on markets from North Korea. Chinese CPI (Jul) M/M 0.1% vs. Exp. 0.2% (Prey. - 0.2%) Chinese PPI (Jul) Y/Y 5.5% vs. Exp. 5.6% (Prey. 5.5%) Chinese CPI (Jul) Y/Y 1.4% vs. Exp. 1.5% (Prey. 1.5%) Top Asian News Morgan Stanley Tops Goldman Sachs With Biggest Profit in Japan S. Korea Official Says Tension High, But Not A Crisis: Yonhap Markets on Edge in Seoul as Trump Escalates North Korea Warnings China Remains Inflation Backstop as Mills and Smelters Close India Is Said to Tweak HPCL Share Sale Terms to Skip Open Offer Gold Imports by India Are Said to Have More Than Doubled in July Wharf Soars to Highest Since ’86 on $29 Billion Spinoff Plan Abu Dhabi’s FAB Is Said to Appoint Pant International FIG Head In European bourses, the selling persisted across virtually all markets with Trump's comments in North American trade has been the catalyst for the selling pressure seen in Global equities. US President Trump warned North Korea that a US response to any threats would be 'fire and fury the likes of which the world has never seen'. Comments followed from North Korea, with the state media stating that the US war hysteria will bring a miserable end, and also warns of operation on signs of US provocation, further saying that they are seriously mulling striking Guam. Adding to the downbeat was rather subdued inflation figures out of China. EGB yields falling to the lows amid the aforementioned escalating tensions between the US and North Korea. Peripheral bonds wider by around lbps against the German benchmark. Elsewhere, BATs have begun marketing form their multi-currency (GBP, EUR) 5 tranche after yesterday's chunky USD-denominated 8 part. Technically uncovered German Bobl auction. Top European News Brexit Will Strain BOE’s Supervisory Resources, PRA’s Woods Says Italy Industrial Production Jumps, Pointing to Faster Recovery ABN Amro Bolsters Capital as Dutch Growth Drives Profit Rise Carl Zeiss Meditec Slides as Valeant Shuts Door on Target Assets Ahold Delhaize Boosts Synergy Goal as Competition Concerns Grow Russia Readies $4 Billion Eurobond Swap in Face of Sanctions EON Plots Growth Strategy as Profit Rebounds, Debt Falls Santander Sells Control of Popular Real Estate to Blackstone In currencies, the initial mover following the exchange from the USA and North Korea was USD/JPY, breaking through August's low, however finding some bids just below this 109.80 level. USD/CHF saw similar price action, attempting to test August's low around 0.9650. Traffic was clear at these levels, becoming key support in the pair, with bids clearly stacked around 0.9650. Sterling saw some early bullish pressure this morning, as cable broke 1.30 to the upside, with GBP/USD struggling to find any real direction as Brexit concerns continue. EUR/GBP saw some selling, however, failed to attempt to test 0.90 as bids are evident ahead of this key psychological level. The geopolitical uncertainties between Australia and China did cause some suffering of AUD, as AUD/NZD fell from 1.08, further weight was put on the currency with Central bank commentary from the RBA, as Kent said AUD appreciation is more of a story regarding USD depreciation, adds further strength in AUD would result to slightly weaker domestic growth. In commodities, safe haven flow supporting precious metals with Gold prices up a modest 0.6%, while crude prices have recoup from yesterday's lows following last night's large drawdown in the API report. Saudi and Iraqi oil ministers are to hold a joint press conference on Thursday in an attempt to stabilise oil markets. US Event Calendar 7am: MBA Mortgage Applications, prior -2.8% 8:30am: Nonfarm Productivity, est. 0.7%, prior 0.0%; Unit Labor Costs, est. 1.1%, prior 2.2% 10am: Wholesale Trade Sales MoM, est. 0.0%, prior -0.5%; Wholesale Inventories MoM, est. 0.6%, prior 0.6% DB's Jim Reid concludes the overnight wrap A bit more going on in the last 12 hours with Trump inflaming already elevated tensions between the US and North Korea late in yesterday's session and this morning we have seen Chinese inflation numbers. If that’s not enough today is a special financial crisis anniversary. More on that later but first to China. China’s July PPI was up 5.5% yoy, but a tad softer than expectations of 5.6% (5.5% previous), the National Bureau of statistics noted mom producer price growth turned positive on the back of steel and non-ferrous metal price rebounds, with ~50% of the industrial sectors seeing price gains in July. CPI was up 1.4% yoy in July (vs. 1.5% expected; 1.5% previous) with food costs decline partly offsetting gains in other consumer goods. Focus remains on the extent of economic growth in 2H, as China’s policy makers had previously indicated a preference for slower growth This morning in Asia, markets are sharply lower on the back of the North Korea story rather than the above inflation numbers. The Nikkei is -1.2%, the Kospi down -0.8%, the Hang Seng -0.8% with Chinese bourses ranging from -0.2% to +0.1%. The Korean won has also dipped 0.5% against the USD. This follows another soporific session yesterday, albeit one that awoke from its slumber in the last hour of trading following defiant comments from Mr Trump concerning North Korea. As per Bloomberg, he said the country would be "met with fire and fury and, frankly, power the likes of which the world has never seen before" if it continues to threaten the US. The VIX spiked from 9.54 just after Europe went home and around 10 when the comments were reported to a peak of 11.29 with 30mins left in the session before closing at 10.96. However even with the late shake-up the S&P 500 only lost around 0.4% after the news and (closed -0.24%) extending the record closing run of sub 0.3% moves in either direction to 14 days. Remember this record covers 90 years of daily data with the previous record being 10 days without a bigger move. Trading volumes in the S&P were again very thin, with the daily value traded at 0.15% of the index market cap, which is ~45% of the historical average. Elsewhere, the Dow dipped 0.2%, with Trump’s comments helping to break a run of 8 consecutive days of fresh all-time highs. Staying with Trump, an earlier article by the Washington post suggested North Korea’s nuclear capabilities may be more advanced than prior expectations. According to US intelligence reports the state: i) can now produce small nuclear warheads that fit inside its missiles, ii) is outpacing expectations in building missiles that are capable of striking the US mainland, and that iii) the state may have up to 60 nuke warheads, this compares to ~7,000 each in US / Russia, 260 in China and 215 in the UK. These reports coupled with increased rhetoric from Pyongyang and a flat refusal to negotiate on their nuclear program may have added to Trump’s fury. Senator McCain said Trump needs to be more cautious in his statements because he may not be able to make good on the implied threats. For now, we watch and wait. Before we review the rest of the last 24 hours, from the prospective of a research analyst that has to write something about financial markets every day, 2017 and 2018 are a great source of ongoing material given the regular 10 year financial crisis anniversaries that we'll see. Today is one of those such days as we mark a decade to the day that money markets started to seize up thus requiring heavily coordinated central bank action that marked an extraordinary period of central bank activity that is still in full flow today. The announcement by BNP Paribas that they were closing three funds linked to US mortgages was the catalyst for a complete lack of trust in money markets over the coming days and weeks. Just over a month later we had the bank run on Northern Rock. As an example of the impact BNP's announcement had, 3 month dollar Libor hadn't moved all year but over the course of two days spiked 20bps. Not a great deal but on this day 10 years ago all the major central banks were forced to inject liquidity with the ECB doing so for the first time since 9/11. One of the great ironies of the period since is that returns in major global assets have been very healthy albeit with some major exceptions. Of the 38 major global assets we usually track for this purpose 27 are higher and 11 lower in dollar adjusted terms. Top of the pack is the S&P 500 (+106%) followed by US HY (+95%) and Gold (87%). Other DM fixed income markets are generally in the 35%-80% range. The Dax (+38%) leads the way in an underperforming European equity story. The Stoxx 600 is up 22% and the FTSE 100 only 12% higher in Dollar terms largely due to a 36% fall in Sterling over the period. Of the 11 assets that has seen negative dollar returns over the last 10 years the highlights are Greek equities (-82%), Stoxx Euro Banks (-54%), Portuguese equities (-42%), the CRB commodity index (-42%), Italian equities (-33%), and Oil (-32%). EM equities were up 29% but Chinese (-2%), Brazilian (-26%) and Russian (-32%) bourses were selective under-performers. So the huge intervention and general asset price inflation over the last decade hasn't been universally seen across the board. There have been clear winners and losers. Were you the one who during late afternoon on August 8th 2007 decided to switch out of their portfolio of Greek equities to buy the S&P 500 and then go on a 10 year sabbatical? If you were then I have nothing but respect, admiration and jealousy towards you. If you did the reverse trade then I suspect you might not be reading this now but you have my sympathies!! Back to the market’s performance, US bourses all softened ~0.2% overnight. Within the S&P, only the utilities sector was up (+0.3%), while the materials (-0.9%) and Telco sector dipped the most. After the bell, Disney traded ~4% down post its result on softer revenue trends and has said it will stop selling movies to Netflix. Back in Europe, markets broadly strengthened. The Stoxx 600 gained 0.2%, aided by the softer Euro and advances in the utilities sector (+0.6%). Regional indices were also slightly up, with the DAX (+0.3%), FTSE 100 (+0.1%), CAC (+0.2%) and FTSE MIB (+0.1%). Over in government bonds, yields were modestly higher across maturities, with the bunds (2Y: +2bp; 10Y: +2bps), Gilts (2Y: +2bp; 10Y: +2bps) and OATs (2Y: +2bps; 10Y: +2bps) all up ~2bp at the long end of the curve, while Italian BTPs (2Y: unch; 10Y: +1bp) ticked up a bit less. The UST 10Y has dipped overnight (2Y: -1bp; 10Y: -1bp) after yields rose 2-3bps yesterday. PPI/CPI data tomorrow and Friday will be key though for global yields. Currencies were little changed, the US dollar index gained 0.2%, while the Euro/ USD fell 0.4% and the sterling dipped 0.3%. Elsewhere, the Euro/Sterling was broadly flat. In commodities, WTI oil retreated 0.4%, with the EIA increasing its US output forecasts and OPEC noting they had fruitful talks and agreement on compliance (but likely shy of tangible takeaways the market may be hoping for). Elsewhere, precious metals were slightly up (Gold +0.5%; Silver 0.7%) and aluminium increased 5% following reports of China increasing efforts to curtail illegal or polluting capacity. Agricultural commodities were fairly mixed but little changed, with cotton (+0.8%), coffee (+0.5%), soybeans (flat), corn (-0.1%), wheat (-0.2%), and sugar (-0.6%). Away from the markets, Republicans are discussing some kind of compromise to get the tax reforms through, potentially involving a hybrid approach that include permanent tax revisions with temporary cuts for individuals and business. House Speaker Ryan is said to be more resistant to the idea, preferring for corporate tax rate cuts to be permanent. Back in April, the plan was for corporate tax rate to be cut from 35% to 15% and individual tax rates to be reduced from 7 bands to 3, with the top rate down from 39.6% to 35%. Elsewhere, the US treasury's $24bn three-year note sale drew a yield of 1.52%, with a bid-to-cover ratio of 3.13, the highest since December 2015. Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the JOLTS survey reported a record 6.163m job openings in June (vs. 5.75m expected), which should partly support the state of US labour demand. Elsewhere, the July NFIB small business optimism index was higher than expectations at 105.2 (vs. 103.5 expected), the best reading since February. In Europe, June trade reports in both German and France were a bit weaker than market expectations. Germany’s June export posted a -2.8% mom (vs. 0.2% expected) and imports at -4.5% (vs. 0.2% expected). However, despite these declines, exports were still solid on an annual basis, up 5.7% yoy and imports up 6.9% yoy. French’s trade deficit also widened in June, as a 2.8% mom decline in exports dominated a 2.0% mom decline in imports. Elsewhere, Spain’s home sales rose 19.0% yoy in June. Looking at the day ahead, Bank of France’s July business sentiment indicator (103 expected) will be out early in the morning, followed by Italy’s June industrial production data (0.2% mom and 3.4% yoy expected). Over in the US, there is the preliminary 2Q nonfarm productivity (0.7% expected) and unit labour costs (1% expected) data, final June wholesale inventories (0.6% expected) as well as the MBA mortgage applications. In Asia, Japan’s PPI for July will also be out on early Thursday morning. Notable US companies reporting today include Twenty First century Fox.
DoubleLine Capital’s Jeff Gundlach has become one of the most visible critics of market complacency, revealing his purchase buy five- and eight-month S&P 500 put options. Now, the legendary bond investor is touting his bet on a spike in equity market volatility as one of his “highest conviction” trades, according to an interview with Bloomberg. "Volatility is about to go up," he said. "That’s my highest-conviction trade right now." As a result, Gundlach - who does not anticipated a crash (yet) - says his fund is quietly moving toward the exits on riskier assets, which is also his recommendation to traders. “I don’t see the big drop, unless there’s something out of left field, like some sort of really escalating conflict,” he said. “I think you’re supposed to be gradualistically moving toward the exits.” Speaking to Erik Shatzker, Gundlach says he’s reducing DoubleLine’s positions in junk bonds and EM debt and moving to safer high-yield credits. With US equities looking increasingly overvalued with each successive all-time high, Gundlach says being defensively positioned is worth sacrificing a few quarters of higher returns. In the interview, Gundlach echod recent bearish views expressed by investing legend Howard Marks, who said that markets have crossed into “too bullish” territory according to his latest investor letter, discussed here previously. “If you’re waiting for the catalyst to show itself, you’re going to be selling at a lower price," he said in a phone interview Monday from DoubleLine’s office in Los Angeles. “This is not the time period where you say, ‘I can buy anything and not worry about the risk of it.’ The time to do that was 18 months ago.” When asked about his business plans, Gundlach revealed that DoubleLine’s AUM increased to an all-time high of $110 billion in 2017. However, he unlike so many other managers, he has no intention of growing his AUM exponentially, and insisted that he may soon close the fund to new money, adding that he doesn’t want DL to become an industry behemoth like BlackRock or Vanguard. “Gundlach is taking a similarly conservative approach to building his eight-year-old firm. While some competitors embrace the mantra “size matters,” he believes there’s a limit to how much DoubleLine can manage well and says the firm may stop marketing altogether once assets reach $150 billion, up from about $110 billion today. ‘I’ve actually been turning money away in our institutional business,’ Gundlach said. ‘I don’t want to manage $500 billion. I don’t really want to manage $200 billion.’ That attitude is out of step with an industry that prioritizes asset growth, both as a means to generate more revenue and as a way to defray fixed expenses such as technology and compliance. Janus Capital Group and Aberdeen Asset Management Plc each combined with other firms in part to gain scale. Vanguard Group has more than quadrupled its assets to $4.4 trillion in less than a decade, and in an interview in March, Larry Fink, whose BlackRock Inc. oversees $5.7 trillion, said ‘scale has become a greater necessity - and for us a greater advantage.’” As a result, Gundlach may soon shut his flagship $50 billion Total Return Fund to new money, saying that continued growth would make it more difficult to invest in some less-liquid high-yield markets. “Bill Gross once managed a single fund with $293 billion in assets, the Pimco Total Return Fund. By comparison, Gundlach, who co-founded DoubleLine in 2009, said he’s debated whether to close the $54 billion DoubleLine Total Return Bond Fund, the firm’s largest, to new money.” While many hedge funds are slashing fees in a desperate attempt to attract new capital, Gundlach sees high fees as a way to regulate growth. “I don’t want one $150 billion fund, I want 10 $15 billion funds. A diversified business,” Gundlach said in the interview. “We lose business because our fees are too high and I say, ‘Fine, that’s a way of regulating growth.’” Of course, there’s probably no better strategy to ensure that every major institutional investor will show up at your door, check in hand, begging for you to take their money than telling Bloomberg that the door to new money is closing quickly.
На фото: Грэг Шернау, портфельный управляющий Pimco Грег Шэрнау, портфельный управляющий Pimco, рассказывает о том, что может спровоцировать падение цен на нефть ниже 40 долларов за баррель, и какова участь соглашения ОПЕК+ читать далее…
Джон Мейнард Кейнс написал однажды: “Практичные люди, считающие себя совершенно не подверженными никакому интеллектуальному влиянию, обычно оказываются рабами какого-нибудь умершего экономиста.”Более верных слов и придумать сложно, однако, если вы захотите освежить цитату Кейнса применительно к сегодняшним условиям, вам следует начать ее с “практичных женщин,” чтобы учесть в этом высказывании Председателя Федрезерва Джанет Йеллен. “Умершим экономистом” в таком случае будет значиться изобретатель Кривой Филлипса Уильям Филлипс, отошедший в мир иной в 1975 году.Если описать в простых терминах, то Кривая Филлипса – это модель, основанная на одном уравнении, которая описывает обратное отношение между инфляцией и уровнем безработицы. Если безработица уменьшается, то инфляция растет, и наоборот. Это уравнение было впервые явлено миру в академическом журнале в 1958 году, и оно рассматривалось как полезный инструмент в монетарной политике в 1960-х и начале 1970-х годов.Но к середине 1970-х Кривая Филлипса перестала работать. В США наблюдалась большая безработица и высокая инфляция в одно и то же время. Иногда такую ситуацию называют “стагфляцией.” Милтон Фридман высказал идею, что Кривая Филлипса может работать только на непродолжительных промежутках времени, потому что в долгосрочной перспективе инфляция всегда определяется монетарным предложением.Экономисты начали видоизменять оригинальное уравнение, добавляя в него различные факторы, которые имели не эмпирическую природу, а были сами результатами других моделей. В результате вместо уравнения получилась путаница моделей, основанных на моделях, которые не имели ни малейшего отношения к действительности. К началу 1980-х Кривая Филлипса никем не воспринималась всерьез, даже академиками, и она оказалась похороненной раз и навсегда. RIP.Но подобно зомби из сериала “Ходячие мертвецы” Кривая Филлипса вновь вернулась!И человек, который сделал главную работу по оживлению этого мертвеца, оказался никем иным, как Джанет Йеллен, которая является либеральным экономистом, специализирующимся на экономике труда, и которая по совпадению занимает теперь пост Председателя Федрезерва.Уровень безработицы в США сейчас равен 4,3%, и это самое низкое значение с начала 2000 годов. Йеллен полагает, что в таких условиях должна возникнуть инфляция, так как недостаточное предложение на рынке труда приведет к росту зарплат, в результате чего экономика приблизится к пределам реального роста. Йеллен также согласна с Фридманом в том, что монетарная политика работает с временным лагом.Если вы верите в то, что вскоре случится инфляция, и в то, что монетарная политика работает с лагом, то вам следует повышать процентные ставки прямо сейчас, чтобы сохранить контроль над ростом цен. Именно это Йеллен и ее коллеги делают в настоящее время.Однако давайте вернемся в реальный мир, в котором все указывает не на приближение инфляции, а на приближение дефляции. Нефтяные цены падают, среднесрочные процентные ставки снижаются, участие в рабочей силе сокращается, демография располагает к сбережениям, а не к тратам, а логистика и цепочки поставок таких гигантов, как Wal-Mart и Amazon, душат рост цен, где бы он не возникал.Даже традиционные сектора, в которых ранее наблюдалась высокая инфляция, такие как высшее образование и здравоохранение, и те охлаждаются в последнее время.Йеллен и небольшая группа руководителей Феда, включая Билла Дадли и Стэна Фишера, продолжают всем видом показывать, что намерены и дальше повышать ставки в этом году. Оппозиция, выступающая за то, чтобы в этом году ставки остались на текущем уровне, растет, и в рядах этой оппозиции числятся Нил Кашкари, Лейл Брейнард и Чарльз Эванс.Их интеллектуальная схватка вскоре достигнет своего апогея.Во-первых, облигации растут в цене, потому что рынки ожидают рецессию или замедление экономики в результате неоправданного ужесточения политики Федрезервом. И тут я вспоминаю Билла Гросса…Практически каждый инвестор слышал о Билле Гроссе. В течение нескольких десятилетий он возглавлял фонд PIMCO, являющийся самым большим облигационным фондом. Он специализировался на долге американского казначейства…Фонд PIMCO всегда был “тяжеловесом” на облигационном рынке. В 1980-х и в 1990-х годах я работал в качестве главного кредитного специалиста в одном из крупнейших первичных дилеров, которые напрямую заключают сделки с торговым деском Федерального Резерва, осуществляющим операции на открытом рынке.Фонд PIMCO имел выделенные линии и выделенную команду специалистов в нашей фирме. Когда этот фонд продавал или покупал облигации, рынок приходил в движение. Каждый первичный дилер хотел получить заявку от этого фонда.Гросс стал известен благодаря своему умению показывать доходность, значительно превышающую рост облигационных индексов. Его успех заключался в правильно выбранном тайминге. Если вы продаете бонды накануне роста процентных ставок, и покупаете их, когда Федрезерв готовится понизить ставки, то вы можете получить не только купон и полный возврат затраченных вами средств в момент погашения этих облигаций, но и большие прибыли от изменения цен этих долговых инструментов.Теперь Гросс выступает с одним из самых своих серьезных предупреждений. Он говорит, что уровень рыночного риска теперь выше, чем когда-либо с момента, предваряющего панику 2008 года. Гросс говорит, что все может повториться вновь, и скоро.Никто не умеет читать рынок лучше, чем Билл Гросс. А значит, когда он выступает с предупреждением, инвесторам стоит обратить на это внимание.Рынок акций дает противоположный сигнал. Акции растут, потому что рынки интерпретируют повышение ставок Федрезервом как сигнал о том, что экономика набирает силу.Оба эти рынка не могут быть правы одновременно. Либо акциям, либо облигациям предстоит упасть в недалеком будущем.Золото наблюдает и ждет, то снижаясь, испугавшись дефляции, то устремляясь вверх, решив, что Федрезерв будет вынужден развернуть свой курс, как только экономика заметно замедлится.Мои модели показывают, что облигации, Билл Гросс и золото правильно оценивают ситуацию, а акции ждет обвал.Коррекция на рынке акций не случится прямо сейчас, потому что Федрезерв все еще находится в режиме заговаривания ставок вверх и полагает, что дизинфляция – это временное явление.Но даже Джанет Йеллен не может игнорировать реальность слишком долго. Прогнозы ФРБ Атланты по росту ВВП во втором квартале снизились с майских 4,3% до 3,4% по состоянию на 2 июня и до 2,9% по состоянию на 15 июня.Сегодня этот банк выпустил свой последний прогноз по росту ВВП, который остался неизменным с 15 июня, то есть, по мнению ФРБ Атланты, экономика Америки вырастет во втором квартале на 2,9% из расчета за год.Но есть нечто, что замедляет рост экономики, и это нечто – повышение ставок Федрезервом.К августу даже сам Федрезерв получит послание. Но может так статься, что к тому моменту время исправлять ситуацию будет упущено. Если рост экономики США во втором квартале составит 2,5%, то в совокупности со значением этого показателя за первый квартал на уровне 1,2% прирост ВВП Америки во первом полугодии будет равен 1,85% из расчета за год.И это даже меньше роста ВВП в 2%, который считается слабым в текущем цикле восстановления, стартовавшего в июне 2009 года. В таких условиях инфляция не рождается.Необдуманная политика Феда не должна никого удивлять.Федеральный Резерв делал почти все неправильно по крайней мере в последние 20 лет, а то и дольше. Федрезерв организовал бэйл-аут Long-Term Capital Management в 1998 году, хотя по делу этому фонду следовало бы дать обанкротиться, чтобы Уолл Стрит услышал предупреждение.Вместо этого мы увидели, что пузыри стали еще больше, в результате чего случился катастрофический коллапс 2008 года. Гринспен удерживал низкие ставки слишком долго с 2002 по 2006 год, и все это привело к надуванию пузыря в секторе недвижимости и последующему его коллапсу.Бернанке проводил “эксперимент” (как он сам выражался) с количественным смягчением с 2008 по 2013 год, и этот эксперимент не привел к ожидаемому росту экономики, но он надул новые пузыри в акциях и в облигациях развивающихся рынков.И теперь Йеллен повышает ставки в условиях слабеющей экономики, и ее действия, вероятно, приведут к рецессии, как это произошло в 1937 году, когда Федрезерв также решил поднять ставки на фоне низких темпов экономического роста.Почему Федрезерв совершил это череду ошибок?Ответ заключается в том, что он использует устаревшие и дефективные модели, такие как Кривая Филлипса, и так называемую политику “эффекта богатства.” Ничего из этого не ново; я говорю об этом годами в моих книгах, интервью и выступлениях.Новизна заключается в том, что теперь даже мейнстрим-медиа начинают замечать, что что-то идет не так. Руководители Федрезерва были представлены как шарлатаны, как профессора из Страны Оз.Последняя ошибка Федрезерва приведет к тому, что еще до сентября его политика смягчится в форме сигналов рынкам о том, что повышений ставок до конца года не предвидится.Пришла пора покупать казначейские ноты и золото, а также выходить из акций в кэш. Возможно, Федрезерв последним узнает о наступлении дефляции, но, когда он узнает об этом, его реакция может оказаться немедленной, и в этом случае рынки могут пережить потрясение.Именно это и происходит, когда зомби вырываются на свободу.Опубликовано 26.06.2017 г.Источник: Why the Fed Will Fail Once Again
After years of purportedly cultivating relationships with journalists to burnish his image in the press, Pershing Square Capital Founder Bill Ackman has created a twitter account, presumably to cut out the middleman and speak directly to the people, after eating a series of embarrassing losses from bad bets on Valeant pharmaceuticals and Herbalife Inc. Ackman confirmed to Bloomberg that the account, which bears the handle @BillAckman1, is, in fact, genuine. Unfortunately, his reluctance to join the service – which was launched 10 years ago – at an earlier date left him unable to secure a handle using just his own name: That handle, apparently, belongs to an imposter. Ackman forced to use @billackman1 — zerohedge (@zerohedge) June 29, 2017 Ackman’s fund ate a $3 billion loss in March when it announced it had liquidated its entire stake in Valeant Pharmaceuticals and has effectively resigned from the board, saying he won't stand for re-election. In a statement, Ackman said "it was time to get out of the position, investment required disproportionately large amount of time and resources." Ackman hasn’t yet tweeted, nor has he added profile picture. Here’s a breakdown of the accounts Ackman is following, via BBG: Ackman was following 46 accounts on Thursday morning, including President Donald Trump’s @Potus and @realDonaldTrump accounts, and Lin-Manuel Miranda, the creator of the hit Broadway musical “Hamilton” Following Anthony Scaramucci, PIMCO, GS CEO Lloyd Blankfein Also following Larry Summers, Mohamed El-Erian, Ben Bernanke Follows French President Emmanuel Macron, ex-U.K. Prime Minister David Cameron Follows Jeff Bezos, Elon Musk, Tim Cook Also follows tennis stars Roger Federer and Frances Tiafoe Which begs the question: Where’s our follow-back, Bill?
Authored by James Rickards via The Daily Reckoning, John Maynard Keynes once wrote, “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” Truer words were never spoken, although if you updated Keynes today, the quote would begin with “practical women” to take account of Fed Chair Janet Yellen. The “defunct economist” in question would be William Phillips, inventor of the Phillips curve, who died in 1975. In its simplest form, the Phillips curve is a single-equation model that describes an inverse relationship between inflation and unemployment. As unemployment declines, inflation goes up, and vice versa. The equation was put forward in an academic paper in 1958 and was considered a useful guide to policy in the 1960s and early 1970s. By the mid-1970s the Phillips curve broke down. The U.S. had high unemployment and high inflation at the same time, something called “stagflation.” Milton Friedman advanced the idea that the Phillips curve could only be valid in the short run because inflation in the long run is always determined by money supply. Economists began to tweak the original equation to add factors — some of which were not empirical at all but model-based. It became a mess of models based on models, none of which bore any particular relationship to reality. By the early 1980s, the Phillips curve was no longer taken seriously even by academics and seemed buried once and for all. RIP. But like a zombie from The Walking Dead, the Phillips curve is baaaack! And the person who has done the most to revive it is none other than Janet Yellen, the 70-year-old liberal labor economist who also happens to be chair of the Federal Reserve. Unemployment in the U.S. today is 4.3%, the lowest rate since the early 2000s. Yellen assumes this must result in inflation as scarce labor demands a pay raise and the economy pushes up against the limits of real growth. Yellen also agrees with Friedman that monetary policy works with a lag. If you believe that inflation is coming soon and that policy works with a lag, you better raise interest rates now to keep the inflation from getting out of control. That’s exactly what Yellen and her colleagues have been doing. Meanwhile, back in the real world, all signs point not to inflation but to deflation. Oil prices are declining, intermediate-term interest rates are falling, labor force participation is falling, demographics favor saving over spending and logistics and supply-chain giants like Wal-Mart and Amazon are relentlessly squashing price increases wherever they appear. Even traditional high-price sectors like college tuition and health care have been cooling off lately. Yellen and a small group of Fed insiders, including Bill Dudley and Stan Fischer, are keeping up the drumbeat for more rate hikes later this year. Opposition to more rate hikes among Fed officials is growing, including from Neel Kashkari, Lael Brainard and Charles Evans. This intellectual tug of war is coming to a head. First, bonds are rallying because the bond market expects a recession or slowdown due to unnecessary tightening by the Fed. Which brings me to Bill Gross… Practically every investor has heard of Bill Gross. For decades he was the head of PIMCO and ran the world’s largest bond fund. His specialty was U.S. Treasury debt.. PIMCO was always a “bigfoot” in the bond marketplace. In the 1980s and 1990s, I was chief credit officer at a major U.S. Treasury bond dealer, one of the so-called “primary dealers” who get to trade directly with the Federal Reserve open market operations trading desk. PIMCO had dedicated lines and a dedicated sales team at our firm. When they called to buy or sell, it would move markets. Every primary dealer wanted to be the first firm to get the call. Gross is famous for outperforming major bond indices by a wide margin. The way to do that is market timing. If you sell bonds just ahead of a rising rate environment, and buy them back when the Fed is ready to reverse course you not only capture most of the coupon and par value at maturity, you can book huge capital gains besides. Now Gross has issued one of his most stark warnings yet. He says that market risk levels today are higher than any time since just before the 2008 panic. We all know what happened then. Gross says it could happen again, and soon. No one reads the market better than Bill Gross. So, when he issues a warning, investors are wise to pay attention. The stock market is giving a different signal. Stocks are rallying because markets interpret Fed rate hikes as a signal that the economy is getting stronger. Both markets cannot be right. Either stocks or bonds will crash in the weeks ahead. Gold is watching and waiting, moving down on deflation fears and then up again on the view that the Fed will have to reverse course once the economy cools down. My models show that bonds, Bill Gross and gold have it right and that stocks are heading for a fall. The stock market correction won’t come right away, because the Fed is still in a mode to talk up rate hikes and strong growth and to dismiss disinflation as “transitory.” Yet even Janet Yellen can’t ignore reality forever. The Atlanta Fed GDP growth forecast for the second quarter has gone from 4.3% on May 1, to 3.4% on June 2, to 2.9% on June 15. Today it released its latest growth forecast, which remains unchanged from its June 15 reading — 2.9%. Something is slowing down the economy, and that something is Fed rate hikes. By August, even the Fed will get the message. But by then it may be too late. If Q2 growth comes in at 2.5% combined with Q1 growth of 1.2%, that would put 2017 first-half growth at about 1.85%. That’s even weaker than the historically weak 2.0% growth of the current expansion since June 2009. This is not the stuff of which inflation is made. The Fed’s bungling should come as no surprise. The Federal Reserve has done almost nothing right for at least the past twenty years, if not longer. The Fed organized a bailout of Long-Term Capital Management in 1998, which arguably should have been allowed to fail (with a Lehman failure right behind) as a cautionary tale for Wall Street. Instead the bubbles got bigger, leading to a more catastrophic collapse in 2008. Greenspan kept rates too low for too long from 2002-2006, which led to the housing bubble and collapse. Bernanke conducted an “experiment” (his word) in quantitative easing from 2008-2013, which did not produce expected growth, but did produce new asset bubbles in stocks and emerging markets debt. Yellen is now raising rates in a weak economy, which should produce the same recessionary reaction as 1937, the last time the Fed raised into weakness. Why this trail of blunders? The answer is that the Fed is using obsolete and defective models such as the Phillips Curve and the so-called “wealth effect” to guide policy. None of this is new; I’ve been saying it for years in books, interviews and speeches. What is new is that even the mainstream media is beginning to see things the same way. Fed leaders have been exposed as charlatans, like the Professor in the Wizard of Oz. The Fed’s latest failure will cause policy to shift to ease before September in the form of forward guidance on no further rate hikes this year. Just one more failure in a long list. It’s time to load up on Treasury notes, gold and cash and lighten up on stocks. The Fed may be the last to learn about deflation, but when they do, the policy response could be instantaneous and markets could suffer whiplash. That’s what happens when zombies are on the loose.
David Hammer, Head of Municipal Portfolio Management for PIMCO, says the best opportunity today for municipal bond investors is in the high yield space. That’s not just because of interest rates. It’s got more to do with bond spreads than yield itself.
Below we share with you three top-ranked PIMCO mutual funds. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy)
06.03.2016 г. на ресурсе China Matters появилась публикация, очень точно нацеленная на нанесение репутационного ущерба Х.Клинтон в контексте предвыборной кампании в США Название статьи: «Ливия: хуже, чем Ирак. Прости, Хиллари». Ливийское фиаско может оказаться камнем преткновения в президентских притязаниях Хиллари Клинтон.
Новым президентом Федерального резервного банка Миннеаполиса стал бывший топ-менеджер инвестбанка Goldman Sachs и фонда облигаций PIMCO Нил Кашкари.