Notes from the PIMCO Investment Summit with Mohamed El-Erian
by ilene - May 24th, 2013 12:56 am
Notes from the PIMCO Investment Summit with Mohamed El-Erian
Courtesy of Joshua M Brown, The Reformed Broker
I've heard just about all of the great investors of our time speak by now and suffice it to say that the bar for me to be impressed is pretty high. But PIMCO'S CEO and Co-CIO Mohamed El-Erian was spectacular this morning at the 2013 Investment Summit in New York City.
In my mind, no one else has as good a grasp on the macro crosscurrents affecting the investment landscape paired with the innate ability to communicate them so simply. He must be the smartest guy in most rooms he walks into but he is also probably the most engaging as well.
Speaking at the Grand Hyatt to an audience of wealth managers and advisers, El-Erian took us behind the scenes of the vaunted PIMCO Secular Forum research event and on a macroeconomic tour around the world.
My notes and reactions are below, where you see direct quotes it is El-Erian speaking, elsewhere I am paraphrasing:
Contrasts and Complexity
The world is full of contrasts, but there is nothing "irrational" about them. Inside of these contrasts there is important information to be learned, these contrasts describe the world we're in. PIMCO uses a term to describe this concept, "Stable Disequilibrium". It sounds like an oxymoron but it is not, it is a way to describe imbalances that are longer-lasting than they otherwise should be.
The biggest contrast of the moment is the Unloved Rally – "17% S&P returns this year! How is it that you can have such wonderful achievements and yet have such anxiety about them at the same time?"
PIMCO strives to take this contrasts and put them into a simple framework, one which explains 85% or so of what is happening. El-Erian believes that the greatest thing we can do as investors and observers is to "simplify complexities". (Interestingly, he's a fan of Thomas Friedman's NYT columns because of Friedman's ability to do exactly this.)
The New Normal – Still
"In 2009 we came up with 'The New Normal'" – characterized by persistently slow economic growth, elevated unemployment, high levels of geopolitical tension with social inequality and strife. It's pretty amazing how spot-on PIMCO has been with this concept. They also produced the idea of multi-speed recovery in 2011…
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Bullshit Walks – Claims On Trend As QE Gooses Overbought Market, Not Jobs
by ilene - May 23rd, 2013 8:13 pm
Courtesy of Lee Adler of the Wall Street Examiner
First time claims stayed right on trend again this week but economists went back to underestimating the strength of the trend. They were too optimistic the week before. With the market now worried about Ben doing the QE Stomp, any good news on claims is now bad news for the market, especially with stock prices having gotten way over extended versus the improving trend in jobless claims. But should that matter?
The Labor Department reported that the seasonally adjusted (SA) representation of first time claims for unemployment fell by 23,000 to 340,000 from a revised 363,000 (was 360,000) in the advance report for the week ended May 18, 2013. The consensus estimate of economists of 348,000 for the SA headline number was too a little too high after missing on the low side last week.
Economists have been getting whipsawed lately as they try to adjust their forecasts based on the previous week’s number. It’s a ridiculous game, but everybody plays anyway. The irony is that the reporters frame it as the economy missing or beating the estimates. Ladies and gentlemen, the economy does not beat or miss. The economic forecasters are the ones who are guessing and missing, not the economy.
Why is the onus put on the economy to line up with the wild guesses of the economics priesthood? Why not focus on the fact that the consensus forecast is virtually never on the mark? Aside from the fact that economic forecasting is hocus pocus idol worship, the seasonally adjusted number, being made-up, is virtually impossible to consistently guess (see endnote). Even the actual numbers can’t be guessed to the degree of accuracy that the headline writers would have you believe is possible.
The headline seasonally adjusted data is the only data the media reports but the Department of Labor (DOL) also reports the actual data, not seasonally adjusted (NSA). The DOL said in today’s press release, “The advance number of actual initial claims under state programs, unadjusted, totaled 301,056 in the week ending May 18, a decrease of 19,767 from the previous week. There were 330,427 initial claims in the comparable week in 2012.” [Added emphasis mine]
The advance report is usually revised up by from 1,000 to 4,000 in the following week, when all interstate claims have been counted. Last week’s number was approximately…
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Medallions & State-Mandated Scarcity
by ilene - May 23rd, 2013 4:56 pm
Medallions & State-Mandated Scarcity
By Ilene
Why is your NYC taxi fare is so expensive?
The price is high due to NYC's limited supply of Medallions.
The taxicabs of New York City, with their distinctive yellow paint, are a widely recognized icon of the city. Taxicabs are operated by private companies and licensed by the New York City Taxi and Limousine Commission (TLC). It also oversees over 40,000 other for-hire vehicles, including "black cars", commuter vans and ambulettes. "Medallion taxis," the familiar yellow cabs, are the only vehicles in the city permitted to pick up passengers in response to a street hail. Wikipedia.
Paul Price made a video discussing the Medallion situation sometime last year:
The price Medallions has skyrocketed over the last 30 years.
Taxi medallions have become tradable assets that have been selling for around $1 million due to their financialization and the state-mandated scarcity. In an effort to relieve the monopoly-like grip on the taxi industry, good for neither the taxi driver or the consumer, Mayor Michael Bloomberg made a bid to service the outer boroughs with a new "borough taxi."
This would alleviate the tight supply of Medallions, while setting the stage for a repeat, someday, with the borough taxi system. In the meantime, a three-year borough taxi license would be available to drivers for a relatively small fee.
Currently, however, the borough taxi remains "a figment of the Bloombergian imagination." It's entangled in lawsuits brought by the powerful medallion owners.
Dana Rubinstein writes, in The Curse of the NYC Taxi Medallion:
DURING A RECENT RADIO INTERVIEW, A QUESTION about a different taxi initiative sent the mayor into a fit of pique about the peculiar way in which government-issued aluminum plates could bring such wealth to those lucky enough to own them, with the city cut out of the profit entirely.
"The cab industry's a funny industry," he said. "I don't know of any other place in the world where the city gives a license and the people that have that license can then trade it and resell it and the city doesn't have any interest and any ability to share in the value going up."
That wasn't his only issue with the way this city runs its taxi and livery system.
"A normal market, you'd say, 'well, just issue more taxi licenses,'" he continued. "Wrong. Because they have bought the
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Another Warning Call for Depositors! Bank of Spain Says Spanish Banks Need €10bn More Loan Loss Provisions; Mish Asks €10bn or €100bn?
by ilene - May 23rd, 2013 3:34 pm
Courtesy of Mish.
Here’s an optimistic headline on the Financial Times that could easily be off by a factor of 10 or more: Spain’s banks need €10bn more provisions.
Spanish banks will need to put aside extra provisions of up to €10bn to cover loans that borrowers will struggle to repay, according to an internal estimate by the Bank of Spain.
According to recent data, Spanish banks rolled over more than €200bn of loans before they expired – often because corporate borrowers would be unable to repay their debt on time and in full. The €10bn estimate is the first official assessment of the likely impact of the central bank’s new approach towards these refinanced loans.
The Bank of Spain believes that the risks emanating from this practice, known as “extend and pretend”, have not been fully covered and is pressing all banks to reclassify their refinanced loans according to tighter standards by the end of September. The new regime will make it harder for banks to treat refinanced loans as if they were performing normally, in turn forcing lenders to take additional provisions.
“Our banks will need more provisions,” a senior official at the Bank of Spain told the Financial Times. “The provisions will affect their results, but the question is by how much. We cannot know for sure but we think the impact will be between €5bn and €10bn [in provisions] across the system.”
€10bn or €100bn?
Banks rolled over €200bn of loans because they could not pay debt on time, pretending the loans were current, and the Bank of Spain estimates the risk at a mere €10bn.
Who do they think they are they fooling?
Will 70% of those loans be paid back? 50%? 20%? I don’t know but I strongly suggest it sure will not be 95%.
Given the perpetual over-optimism on Spanish bank losses, I estimate there is a 0% chance the losses on this disclosure will be as little as €10bn.
That said, I do not know what the existing loan loss provisions are, but if they are high enough (extremely doubtful), then there is some chance the losses will be on the order of €30bn or so (on the general principle things are typically 300% worse than the optimistic scenario).
This does
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Christine Lagarde, Head of IMF, In Court Facing Questions on Embezzlement and Fraud
by ilene - May 23rd, 2013 1:47 pm
Courtesy of Mish.
Christine Lagarde, head of the IMF, is in court today addressing her role in a $366 million payout to Bernard Tapie, a close friend of former president Nicolas Sarkozy who was also Lagarde’s boss at the time. Lagarde was Sarkozy’s finance minister.
Reuters reports IMF’s Lagarde in court for French arbitration case.
IMF chief Christine Lagarde was questioned in court by French magistrates on Thursday over her role in a 285-million-euro ($366 million) arbitration payment made to a supporter of former president Nicolas Sarkozy.
Lagarde risks being placed under formal investigation at the hearing for her 2007 decision as Sarkozy’s finance minister to use arbitration to settle a long-running court battle between the state and high-profile businessman Bernard Tapie.
Under French law, that step would mean there exists “serious or consistent evidence” pointing to probable implication of a suspect in a crime. It is one step closer to trial but a number of such investigations have been dropped without any trial.
In Paris, Lagarde flashed a smile at waiting media as she arrived at court with her lawyer and said: “It’s a pleasure to see you.”
They were not expected to emerge until the end of the day’s proceedings, which could run into late evening. The decision on whether to place her under investigation or give her “supervised witness” status will be announced at the end of the hearing, which could last into Friday.
Lagarde is not accused of financially profiting herself from the payout and has denied doing anything wrong by opting for an arbitration process that enriched Tapie. With interest, the award amounted to 403 million euros.
However a court specializing in cases involving ministers is targeting her for complicity in the misuse of funds because she overruled advisers to seek the settlement.
If Lagarde is formally charged with embezzlement or fraud, she may be asked to resign as head of IMF whether she is convicted or not.
It’s difficult to say how much of this is political maneuvering by current French president Francois Hollande, but it’s equally difficult to dismiss the charges outright.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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It’s a confidence game
by ilene - May 23rd, 2013 11:47 am
Paul Price discusses the "Confidence Game" being played in the stock market and how to read the indicators. Some commonly used indicators are contrary indicators (e.g. individual investors' sentiment).
Paul made this video for Real Money Pro about a year and a half ago, so his closing thoughts on the market are out-dated.
It's a confidence game
Courtesy of Paul Price
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Japanese Bond Rout Continues; BoJ Vows to Curb Bond Turbulence; Curbing Turbulence is Theoretically Easy
by ilene - May 23rd, 2013 11:42 am
Courtesy of Mish.
Curve Watchers Anonymous has been watching a major selloff in Japanese bonds. Here are a couple charts to consider.
10-Year Japanese Government Bond Yield
5-Year Japanese Government Bond Yield
Since March 4, the 5-year yield has gone from 0.1% to 0.43%. Although a mere .33 percentage points, the move represents a 330% percent rise in in yield.
One Month Changes
Charts courtesy of Bloomberg
Note: Those charts were snapshots taken last evening. This morning, yields have settled down, for now.
Bank of Japan Vows to Curb Bond Turbulence
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Koch Media’s Megaphone and the IRS “Scandal”
by ilene - May 23rd, 2013 9:34 am
Courtesy of Pam Martens.
US Tea Party Was Formed by Koch's Citizens for a Sound Economy in 2002.
There are IRS scandals and then there are IRS Scandals – with a capital S. Last year, we reported on the capital S kind. For decades, billionaires Charles and David Koch had secretly owned shares giving them 50 percent ownership of the Cato Institute – a 501(c)(3) nonprofit organization subsidized by the taxpayer – while pushing a deregulatory agenda for big business. Today, Cato is functioning as a megaphone to spin the current flap over the IRS to advance its agenda.
Before the news broke in 2012 of the Kochs’ ownership in Cato, most of America believed that nonprofits could not be owned by individuals and were required under the law to have a freely elected Board of Directors. (Charles Koch had found a loophole in the law in Kansas where Cato was originally formed.) The Internal Revenue Service warns that charitable organizations like the Cato Institute, organized as a 501(c)(3) “must not be organized or operated for the benefit of private interests…” But last year, following the death of another shareholder, Charles and David Koch filed a lawsuit to assert their shareholder rights at Cato, making it clear private interests were behind a dark curtain at the Institute.
The Koch brothers, majority owners of the super secretive private conglomerate, Koch Industries, have direct links to the current furor over the IRS singling out the Tea Party for extra scrutiny when new applicants apply to the IRS for tax-exempt status using the name Tea Party in their registrant title. In 1984 the Koch brothers spearheaded the creation of Citizens for a Sound Economy (CSE), which started its first Tea Party in 2002. CSE was a nonprofit front for the interests of Koch Industries and Big Tobacco, receiving $5.3 million between 1991 and 2002 from Philip Morris and other tobacco companies. CSE evolved into another Koch brothers’ created nonprofit, Americans for Prosperity, which ramped up the formation of Tea Parties, while reporting to David Koch on the success of the project.
Last year, as the Kochs battled to take control of Cato, a Senior Fellow at the Institute, Jerry Taylor, shared an insider’s take with a blogging friend, Jonathan Adler,…
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Simon Johnson: Financial Power Corrupts System
by ilene - May 23rd, 2013 9:05 am
Courtesy of Larry Doyle.
Incestuous activity in every fashion is a destructive and corruptible force. Would anybody hoping to be regarded as a serious, credible individual dare say, “Hey, I think incestuous activity is actually pretty good.”
Certainly not, although those engaged in the behaviors may appreciate the benefits that accrue to them without wanting them brought to light.
On that note, the incestuous dynamic that defines the Wall Street-Washington-Regulatory menage-a-trois continues to thrive. You don’t have to take my word for it. Let’s listen to what Simon Johnson, former chief economist of the IMF, professor at MIT Sloan, and a senior fellow at the Peterson Institute for International Economics has to say on this topic.
Johnson writes a compelling commentary today at Project Syndicate:
The recent governance controversy at JPMorgan Chase has masked a much larger issue. Regardless of Jamie Dimon’s victory in retaining his dual role as CEO and chairman of the board, the more important failure on display was that of the board of directors itself – a problem that affects almost all of the world’s megabanks.
This is completely obvious at JPMorgan Chase. The report of the recent bipartisan investigation, led by US Senators Carl Levin and John McCain, into the infamous “London Whale” trades provides just one example. There is also the litany of complaints and legal cases now surrounding the firm. It is difficult to see JPMorgan Chase escaping its past anytime soon.
But the problem is much broader: Not a single global megabank has a well-functioning board. Their members kowtow to CEOs, do not examine management decisions closely, and, with very few exceptions, rubber-stamp compensation requests.
Big banks’ boards are supine for three main reasons. First, and most important, there is no market for control over the biggest banks. One cannot build up a significant shareholding and use it to put pressure on boards – let alone pursue a hostile takeover. The London Whale is a case in point. The pressure brought to bear on JPMorgan Chase was completely inconsequential – nothing significant will change.
This is primarily because regulators – despite what they may claim – effectively protect megabanks from market discipline. “Systemic importance” has become an excuse for maintaining impenetrable entry barriers (yet another reason why executives want their firms to be regarded as too big to fail).
Second, most
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Nikkei Plunges 1,143 Points (7.32%); Global Equities Hammered; Start of Reflation Bubble Bust?
by ilene - May 23rd, 2013 2:49 am
Courtesy of Mish.
The Nikkei plunged a whopping 1,143 points as the following chart shows.
Global Equities Hammered
It’s not just the Nikkei that’s being hammered. Asia-Pacific is in a rout as well.
click on chart for sharper image
Start of Reflation Bubble Bust?
Is this the start of the great reflation unwind? I don’t know, but we should all hope so.
The bigger the bubble the bigger the crash, and this Fed (central bank in general) sponsored equity and corporate bond bubble is enormous.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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