One Opinion About QE

Bill Gross: “The expansion of central bank balance sheets from perhaps $2 trillion in 2003 to a now gargantuan $12 trillion at the end of 2016 is remarkable. Not only did central banks buy $10 trillion of bonds, but they lowered policy rates to near 0% and in some cases, negative yields.

Withdrawal of stimulus, as has happened with the Fed in the past few years, seemingly must be replaced by an increased flow of asset purchases (bonds and stocks) from other central banks, as shown in Chart below. A client asked me recently when the Fed or other central banks would ever be able to sell their assets back into the market. My answer was “NEVER”. A $12 trillion global central bank balance sheet is PERMANENT – and growing at over $1 trillion a year, thanks to the ECB and the BOJ.

 

Chart: Central Bank Balance Sheet (US$)

 

An investor must know that it is this money that now keeps the system functioning. Without it, even 0% policy rates are like methadone – cancelling the craving but not overcoming the addiction. The relevant point of all this for today’s financial markets? A 2.45%, 10-year U.S.Treasury rests at 2.45% because the ECB and BOJ are buying $150 billion a month of their own bonds and much of that money then flows from 10 basis points JGB’s and 45 basis point Bunds into 2.45% U.S. Treasuries. Read more »

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Bloomberg Sunset Index: the countries that most at risk from aging populaiton

The world’s working-age population is shrinking faster than expected, leaving fewer people to support a growing number of seniors, according to the Bloomberg Sunset Index.

Bloomberg Sunset Index uses statutory retirement ages in 178 nations. Conventional measures of old-age dependency calculate the ratio of people ages 65 and older with those of working age: 15 to 64. But many people stop working well before 65: Men in 66 percent of the 178 countries Bloomberg evaluated and women in 78 percent can begin receiving retirement benefits earlier.

So the Bloomberg index calculates dependency based on each country’s statutory pensionable age, revealing substantial differences in some places with 2016 estimates from organizations including the World Bank and United Nations. For instance, Nigeria, with a statutory pensionable age of 50, has only 4.8 workers supporting each senior, compared with 19.4 as indicated by conventional measures. Russia has 2.4 instead of 5.1, and Colombia has 4.5 instead of 9.4.

 

 

As seniors increasingly outnumber people still in the workforce, pressures rise on investment pools, medical systems and funds to build economies for future generations. Read more »

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Oil. US Import Revolution in Numbers

OPEC often touts its 81% share of global “proven” reserves of oil. However, today it seems like OPEC’s peak influence is in the rear-view mirror due to several external factors. To start with the obvious, oil is slowly waning in importance in the global energy mix. According to the EIA, oil made up 34% of total global energy demand in 2010. By the year 2040, the EIA expects this share will be closer to 30%, though things could happen faster if the technology behind renewables and batteries makes a bigger impact than expected.

Next, U.S. domestic production has almost doubled because of the shale and fracking revolution. In 2008, the U.S. produced 5.0 million bpd, and in 2015 the country averaged 9.4 million bpd. Lastly, as you can see on the chart, accelerated development of Canada Oil Sands has enabled the U.S. to buy any imports needed from Canada instead of the Middle East. In 2005, Canada only supplied 16.1% of U.S. oil imports, but Canada is now the major supplier of oil to the U.S. with a massive 43.0% share.

 

The Changing Anatomy of U.S. Oil Imports Over the Last Decade

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How the world’s top universities are distributed

Oxford has won the accolade of world’s best university, according to the latest Times Higher Education Rankings. It is the first time an institution from outside the United States has topped the list. The ranking looks at 980 universities, which represent only the top 5% of the world’s higher education institutions. Seventy-nine countries feature in this elite list; however, the distribution of universities is far from even.

The domination in the rankings of Northern American universities is clear. During the previous 12 years no other nation has made it to first place, and the top 10 has consistently featured a majority of US institutions. In 2016, 148 US universities made the rankings, and 63 made it into the top 200.

 

Europe

The United Kingdom, with 91 institutions on the list, is home to the largest number of top universities in Europe. It is the only country other than the US to feature more than one institution in this year’s top 10. The one other country to make it into the top 10 is Switzerland, whose university ETH Zurich appeared in ninth place. (Nine other Swiss universities make the overall ranking.) Germany, Italy, France and Spain all have more than 26 universities in the rankings. But as the Times Higher Education notes, many European nations are “losing ground as Asia continues its ascent”. Read more »

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Economy and Politics: Review 2016 and Calendar 2017 (pls click to enlarge)

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The Problem With Forecasts

We can’t predict the future – if it was actually possible fortune tellers would all win the lottery.  They don’t, we can’t, and we aren’t going to try. However, this doesn’t stop the annual parade of Wall Street analysts from pegging 12-month price targets on the S&P 500 as if there was an actual science behind what is nothing more than a “WAG.” (Wild Ass Guess). In reality, all we can do is analyze what has happened in the past, weed through the noise of the present and try to discern the possible outcomes of the future.

The biggest single problem with Wall Street, both today and in the past, is the consistent disregard of the possibilities for unexpected, random events. In a 2010 study, by the McKinsey Group, they found that analysts have been persistently overly optimistic for 25 years. During the 25-year time frame, Wall Street analysts pegged earnings growth at 10-12% a year when in reality earnings grew at 6% which, as we have discussed in the past, is the growth rate of the economy.

Ed Yardeni published the two following charts which shows that analysts are always overly optimistic in their estimates.

 

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US economic indicators in one chart

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US 10-year Treasury yield and nominal GDP: what is the interrelation?

Yields on the 10-year Treasury are up 50 basis points (bps, or 0.50%) since the U.S. presidential election on Nov. 8, 2016 and nearly 100 bps from the July lows, as bonds sold off. This marks the fastest rise since the so-called “taper tantrum” in 2013, when expectations of an increase in interest rates by the Federal Reserve triggered a bond selloff.

Whether the new administration’s policies lead to faster economic real growth (after inflation) is an open question. But they are almost certain to lead to faster nominal growth, which includes inflation. This is important because over the long term it is nominal growth that drives rates. Going back to 1962, nominal growth has explained roughly 35% of the variation in U.S. 10-year Treasury yields (see the accompanying chart). Roughly speaking, 10-year yields increase 50 bps for every one percentage point increase in nominal growth.

 

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The Largest Bankruptcies in the World History

01. Lehman Brothers Bankruptcy

instantShift - Largest Bankruptcies in History

  • Bankruptcy Date: 09/15/2008
  • Assets: $691 billion

Lehman Brothers Holdings Inc. was a global financial-services firm which, until declaring bankruptcy in 2008, participated in business in investment banking, equity and fixed-income sales, research and trading, investment management, private equity, and private banking. It was a primary dealer in the U.S. Treasury securities market.

Lehman Brothers filed for Chapter 11 bankruptcy protection on September 15, 2008. The bankruptcy of Lehman Brothers is the largest bankruptcy filing in U.S. history with Lehman holding over $600 billion in assets. According to Bloomberg, reports filed with the U.S. Bankruptcy Court, Southern District of New York (Manhattan) on September 16 indicated that J.P. Morgan provided Lehman Brothers with a total of $138 billion dollars in “Federal Reserve-backed advances.” The cash-advances by JPMorgan Chase were repaid by the Federal Reserve Bank of New York for $87 billion on September 15 and $51 billion on September 16.

It was well known that Lehman, an Alabama cotton trader turned banking behemoth, was the biggest bankruptcy in US history. But nobody anticipated quite what would follow – a week that has become known on Wall Street as the great panic of 2008.

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World top 20 largest asset managers as of the end of 2015

Assets under management by the world’s 500 biggest managers totaled $76.7 trillion at the end of 2015, down by 1.7% from a year earlier. North American firms’ assets decreased by 1.1% to $44 trillion, those managed by European firms, including managers in the U.K., fell by 3.3% to $25 trillion, and assets of Asian managers and rest of the world were down by 4% to $3.6 trillion. Only Japanese managers enjoyed an increase in assets last year, up 3.1% to $4 trillion.

Willis Towers Watson conducted the research in conjunction with Pensions & Investments. According to the study, the 78.3% of total assets that were actively managed declined by 2.8% in 2015, while passively managed assets fell by 5.5%. In 2014, passive assets grew by 28.1%. Traditional asset classes, which held the lion’s share of total assets last year, decreased by 7.1%. Equity accounted for 45.4% of the total 78.2%, and fixed income 32.8%.

 

Top 20 Managers

The study showed the top 20 managers’ share of total assets increased to 41.9% in 2015 from 41.6% even as their assets fell from $32.5 trillion to $32.1 trillion. Assets of the bottom 250 managers fell to 5.8% from 6% in 2014, and stood at $4.4 trillion. Twelve U.S. managers and eight based in Europe made up the top 20 list. The highest-ranking Japanese manager was Sumitomo Mitsui Trust Holdings, in the 33rd spot. Independent asset managers held nine of the top 20 spots, followed by banks with eight and insurers with three. Developing country managers’ share of total assets fell from 3.4% in 2014 to 3.2% last year, with assets under management amounting to some $2.5 trillion.

Following are the world top 20 largest asset managers as of the end of 2015, according to the report.

 

20. Northern Trust Asset Management, U.S.: $875 billion Read more »

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