Not Enough TIPS to Go Around

By Michael Ashton

I have had insurance company risk managers say to me, “we cannot own enough TIPS to matter if inflation rises to a level that would concern us, because the return if inflation does not rise is so horrible

Some days – well, on days like today, and for the last few days – it seems like there are far too many TIPS. Although energy has slipped only mildly, and (let’s not forget!) core and median inflation are both over 2% and rising, today ten-year breakeven inflation fell to only 1.48%, the lowest level since early March (see chart, source Bloomberg).

panickybei, tips and inflation

The panicky-feeling downtrade is exacerbated by the thin risk budgets on the Street in inflation trading. From an investment standpoint, with inflation over the next few years highly likely to exceed the current breakeven rate (unless energy prices go to zero, or median inflation and wages abruptly reverse their multi-year accelerations), investors who buy TIPS in preference to nominal Treasuries (which is the bet you’re putting on in a breakeven trade, but works from a long-only perspective as well) are likely to outperform unless US inflation comes in below, say, 1.25% for the seven years starting in three years. And even if inflation does come in below that, the underperformance will be slight in comparison to the potential outperformance if inflation rises from its current level. TIPS don’t continue to underperform worse and worse in deflationary outcomes; their principal amounts are guaranteed in nominal terms.

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The Vanity of Central Bankers and the Common Sense Rule

By Danielle DiMartino Booth

The Vanity of Central Bankers and the Common Sense Rule

Some wedding gifts just keep on giving, even after the celebrated union upon which they were bestowed has failed. That would certainly be true in the case of Carly Simon and James Taylor, whose notoriously rocky marriage ended in 1983. The timing of her November 1972 wedding marked more than a vow to Taylor, it coincided with Simon’s gift to pop music and the release of “You’re So Vain,” which ripped to the No. 1 spot on the charts and still retains the ranking of 82nd highest on Billboard’s Greatest Songs of All-Time. What a generous gift!

But, was it for the duo? Might it just be possible this lasting gift bred some not so blissful turbulence in the marriage? At the time, speculation swirled around the obviously vainglorious but mystery male subject. Was it Warren Beatty, David Geffen, Mick Jagger, Kris Kristofferson, Cat Stephens or James Taylor himself? The list went on and on. As of November 2015, Simon has only divulged that Beatty was one of three the lyrics reference. Taylor is not among the remaining two mystery men.

It’s a safe bet that a Taylor of a completely different stripe is far from being a mystery man in Janet Yellen’s appreciably less torrid past. In fact, the roles might even be reversed in Yellen’s world, with a slew of economists lamenting her vanity in rejecting them. The eminent John Taylor would be first in line, given that no less than his namesake rule used for devising monetary policy has been so explicitly and publically snubbed by the Chair.

Continue reading at TalkMarkets →

The Daily Shot 6.15.16

By SoberLook


1. We begin with the Eurozone where the 10-yr Bund yield closed in negative territory for the first time.

2. European bank shares dropped another 2.5% in a relentless selloff. Brexit risks, undercapitalization, bad loans, negative rates, regulatory pressures, weak global growth – all weigh on the sector.

Deutsche Bank is under pressure again as the CDS spreads widen.

Source: Google

Source: @Convertbond

Italian banks seem especially vulnerable as share prices fall to the lowest level since 2012.

3. Periphery bond yields are higher. Spanish, Italian bond yields rose despite all the ECB buying activity amid European financial sector jitters.

Greek bond yields are back up to 8%.

Continue reading at TalkMarkets →

How to Invest for Brexit: A New Subscriber-Level Summary Report

By Elliott Wave International

If you follow Europe’s major financial news networks, you’re no doubt inundated by all the rumor and conjecture surrounding the Brexit referendum — it dominates the headlines.

Back across the pond, the Washington Post calls it the “most important vote in Europe in a half-century.”

So will Great Britain exit the EU? If it does, what happens next? How do you separate fact from fiction, the signals from the noise? Is a Brexit bullish or bearish for Europe’s already weak markets and economies? What about Great Britain’s market and economy? How will it impact U.S. investors? Who stands to benefit the most? Who stands to lose the most?

And most important of all … where does your money fit into the picture? How can you protect it? And are there any opportunities developing out of the turmoil?

We have answers for you in a new report, How to Invest for Brexit. And you can read this new report, by EWI Chief European Market Analyst Brian Whitmer, FREE.

Brian has been tracking EU break-up signs since forecasting the Union’s coming unraveling as early as 2009, and he asks and answers investors’ most pressing questions inside this new free report.

Get your free report now.

Brexit: Will They Stay or Will They Go?

By Chris Ciovacco

Polls currently indicate a bias for the Brexit leave scenario


Polls Lean Go, Markets Lean Stay

A referendum is being held on Thursday, June 23, to decide whether Britain should leave or remain in the European Union (EU). Polls currently indicate a bias for the leave scenario. However, Great Britain’s wagering markets continue to show a bias toward the stay scenario. From CNBC:

“On Friday, a poll for the Independent newspaper gave a massive 10-point lead to the British voting public that want to leave the European Union. Over the weekend, another poll for The Times newspaper gave leave vote a small lead. A Financial Times Poll of Polls gives leave a lead as well — 46 percent, versus stay at 44 percent. Furthermore, while Great Britain’s vibrant wagering markets have shown the momentum build on the leave side, they still show a significant preference for remain. The latest odds on Monday — 4-7 for stay vs. 7-4 for leave — imply a Brexit probability of 36 percent.”

Continue reading Brexit: Will They Stay or Will They Go?

The Daily Shot 6.14.16

By SoberLook


We begin with several developments in China.

1. The country’s fixed asset investment growth slowed to the lowest level since 2000. Current investment activity is dominated by the government as it tries to target a specific growth rate.


2. One can see the fiscal stimulus in Beijing’s official expenditures.

Source: Reuters

3. Regional government tax revenue growth has picked up recently amid improved property investment. It’s back to everyone making money on land development deals.

Source:  ‏@fastFT

Source: Deutsche Bank,  ‏@joshdigga

4. Bloomberg’s China GDP tracker shows the overall growth stabilizing. The question, of course, is whether this is sustainable without the fiscal stimulus.

Source: @business

5. China’s domestic crude oil production saw the largest year-on-year decline in 15 years.

Source: ‏@JavierBlas2, @business 

6. Monday’s yuan drop reignited jitters around the RMB depreciation vs. the dollar. Beijing is trying all it can to stem capital outflows but significant loopholes around capital controls remain.

Continue reading at TalkMarkets →

Back to Back… to Back?

By Tim Knight

It took just two days (today and last Friday) to wipe clean 11 days of bullish “progress.” Indeed, today on a big television monitor there was some wildlife footage of some bear cubs playing, and I naturally was completely charmed by what I saw. I mused about the difference between real life bears and bulls. The bears are playful, intelligent, good-looking, and delightful to watch. Bulls, on the other hand, are huge, ogre-like creatures that push out – – what else? – – bullshit. I’m glad to be a bear.

In any case, I’m calling it a day, but I notice (with some nervousness) that the ES is banging right against the level I considered to be support. If we’re going to make any more progress, especially with the awful 2-day FOMC meeting commencing, we’ve got to break through this level with gusto.

0613-es, stock market

I am, as always, even more obsessed with crude oil, which I think is in a better position to keep the weakness going. I confess, having two fantastic back to back days feels like something out of a science fiction movie at this point. Dare I ask for a third?

0613-cl, crude oil

The Good, Bad & Ugly?

By Axel Merk

The good, bad and ugly of QE policies

Are we better off with “QE”, the ultra-accommodative monetary policy pursued by major central banks around the world? Is it “mission accomplished” or are we facing a “ticking time bomb”? Are extreme characterizations even warranted to describe the unconventional monetary policy of recent years, and what are implications for investors?

The Good
When interest rates are at or near zero and central bankers want to provide more “monetary accommodation,” it is not clear that negative interest rates are the answer.  The term “quantitative easing” or “QE” was coined to describe the purchases by of government bonds by central banks. It was combined with “forward guidance” which signaled rates would stay low for an extended period; in our assessment the key goal of both policies was to lower long-term rates (historically, central banks control short-term rates, but leave longer term rates up to the market to determine). Doing so, so the logic goes, would provide the desired “accommodation.” There is an index that tries to create a Fed Funds rate incorporating QE:

Note that this index suggests that we have had substantial tightening take place since the ‘end’ of QE.

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14 Year Record for the TSX-V

By Mickey Fulp

The 14-Year Record For The Toronto Venture Exchange

I have documented seasonal moves in the prices of gold and oil over the past 20 years and copper over 13 years (Mercenary Musings: January 4; March 28; April 11). Now I present our research on the seasonality of the Toronto Venture Exchange.

In a series of normalized charts, I will show that for overall, bull, and bear market conditions, there are predictable intra-year trends in the capitalization of the Toronto Venture Exchange (TSXV).

This microcap stock exchange was created with the merger of the Vancouver Stock Exchange, the Alberta Stock Exchange, and the Montreal Stock Exchange and upon its purchase by the TMX Money Group in late 2001. The Toronto Venture Exchange Index, a weighted average of about 400 of the largest companies, serves as a proxy for performance of the overall market.

The market is dominated by junior resource exploration companies with a few small miners in the mix. Of 1773 current listings, 1031 (58%) are classified as “mining” companies. In actuality, few mine anything other than the stock market. Energy companies comprise another 10% of the listings. Minor sectors include diversified industries, technology, life sciences, real estate, and clean technology.

Here is the record of the TSXV Index from the beginning of 2002 thru June 9, 2016:

Over the past 14+ years, the Index has exhibited significant volatility. Its rises and falls broadly correspond to bull and bear markets for gold.

Although the market valuation of equities in this resource-heavy stock market is strongly influenced by the price of gold, there are other inputs that directly influence the composite value of the TSXV. They can include:

  • Supply-demand fundamentals and prices of other hard commodities.
  • General health of the world’s economy.
  • Performance of major US markets; bull markets generate investor profits that often trickle down to riskier speculations.
  • Geopolitical events in resource-rich countries including elections, civil wars, coups, and terrorism.
  • Resource nationalism, environmental opposition, and restrictive regulatory policies on mine development.
  • Advent of new technologies for exploration, development, and recovery of the hard commodities.
  • Discovery of new mineral deposits, particularly in underexplored frontier regions.

Continue reading at TalkMarkets →

Global Asset Allocation Updated

By Joseph Calhoun of Alhambra

The risk budgets are unchanged again this month. For the moderate risk investor, the allocation between risk assets and bonds remains at 40/60. I struggled more with this decision than any in recent memory but in the end there just isn’t sufficient evidence to make a change. Raising or lowering the allocation to risk assets right now would require making too many assumptions about the future and I’m not in the business of foretelling the future. Credit spreads did narrow again over the last month but not enough, as last month, to change the overall trend toward wider spreads. All other indicators continue to support the bearish case. Sentiment does seem to support the case for risk assets but isn’t a primary consideration in our allocation process and not as clear cut as it seems in any case.

risk budget

As I related in the Bi-Weekly Economic Review, the economic news recently has not been encouraging. The negative turn in the economic data has been reflected most directly in the bond and currency markets. The yield curve continues to flatten while the 10 year Treasury yield pushes toward record lows. The US dollar index is again testing its recent lows, threatening to break the uptrend of the last few years. Stock and junk bond traders have taken lower rates and a cheaper dollar as a positive, a dubious assumption in my opinion and contrary to the survey based sentiment readings. Investors may tell pollsters they are not bullish but their portfolio say something entirely different.

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