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Outgoing PIMCO CEO Mohamed El-Erian told a conference in New York yesterday that the global economy is approaching a “T-stop” in the road.
After years of relying on central banks to stabilize financial markets, “The current road is going to end,” El-Erian said. “You can go left, you can go right, but you can’t stay on the current road.”
Quantitative easing, the Fed’s chief tool to jumpstart the economy, has bought time but with a “big qualifier.” And with its decision to taper asset purchases, the Fed is starting to realize that, El-Erian said.
“It can buy the system time to heal, but it alone cannot carry the burden… We should realize the Fed cannot deliver great outcomes for the economy without help. Either they’re going to get help from other agencies in DC that are currently paralyzed or our future is going to be less bright.”
The financial crisis was largely created by a love affair with debt. This has left a toxic legacy which needs to be solved. If not the U.S. risks becoming a stagnated economy, like Japan.
El-Erian went on to identify four ways for the nation to escape debt: First, and by far best, is to grow out. Second, default, which he said would come at huge cost. Third, austerity, which he said was not working out too well in Europe. And fourth, the current course: artificial stimulus from the central bank.
“The Fed has the willingness to help, but it doesn’t have the tools,” he said. “But with a polarized Congress it’s impossible to solve the problems.” How to stimulate growth, “that is how the debate over debt should begin and end.” Though he avoided specifics, he did suggest Congress would need to spend more, not less, presumably in the short term.
Investment News: – Puerto Rico cuts push OppenheimerFunds’ junk holdings above limit. – Fund company says while there’s “room for improvement,” commonwealth “moving in the right direction”.
MuniNetGuide: – Puerto Rico: The next emerging market credit? – Puerto Rico debt is now trading at yields much higher than that of Italy, Spain and Portugal – and is roughly on a par with Greece. In contrast to Greece, Puerto Rico is not a serial defaulter. In fact, it is part of an asset class – US state and territorial bonds – that has not seen a default in over 80 years. Further, the last default – of Arkansas in 1933 – ended in a full recovery for investors. So, from an international perspective, Puerto Rico bonds appear to offer good relative value.”
Bloomberg: – Fed rule may curb bank buying after holdings double. – U.S. banks poured more than $200 billion into state and local-government debt since the onset of the financial crisis six years ago, boosting their share of the $3.7 trillion market to a two-decade high.
Cate Long: – Detroit’s hasty plan of adjustment. – Having watched six municipal bankruptcies happen before Detroit filed for Chapter 9 protection, it was never clear why Michigan Governor Rick Snyder and Detroit Emergency Manager Keyvn Orr thought that they could conclude court proceedings in only fourteen months. Previous bankruptcies were much smaller and less complex, and each took several years to conclude.
Income Investing: – Muni funds see a mere trickle of an inflow again. – Muni funds posted a relatively puny $82 million net inflow in the latest week, per Lipper data, which follows a $227 million net outflow a week ago. Such funds are averaging just $69 million in weekly net inflows over the past four weeks, which at least is positive but is still nowhere close to offsetting the 33-week streak of outflows that ended in January and typically saw investors pull over $1 billion from such funds in any given week.
LearnBonds: – Understanding the taper and its effect on your fixed income portfolio. – It’s time to clarify how quantitative easing affects the market. QE critics say it artificially props up the market, that it will cause inflation, and that it has killed fixed income investing. There is some truth to these criticisms, so here’s what to watch for with stocks, why bond yields have cratered, and how to find other fixed income investments.
MarketRealist: – Comparing investment-grade loans and Treasuries. – Treasuries are debt securities issued by the U.S. government through a system of periodic auctions. Issued by the U.S. Treasury, these securities are considered one of the safest fixed-income investments, as they’re backed by the full faith and credit of the U.S. government.
Global Demographics: – Sell stocks, buy Treasury bonds and high hopes. – With the outlook for stocks being quite negative, treasuries could this year surprise on the upside. Advisors are unanimously negative on treasuries, and this is a bullish sign.
Bloomberg: – Morgan Stanley sees bond evolution in trade jump. – Corporate-bond trading volumes are surging to the highest ever to start the year as investors adapt to a new reality of reduced dealer balance sheets by turning to electronically exchanged debt and smaller transactions.
Reuters: – U.S. high-yield muni bond funds lead inflows. – High-yield U.S. municipal bond funds attracted new cash for a fifth straight week even as major U.S. credit rating agencies downgraded Puerto Rico to junk status, data released on Thursday showed.
Artemis: – 2014 catastrophe bond maturities by peril and expected loss. – With over $4.2 billion of outstanding catastrophe bonds scheduled to mature in 2014, the insurance-linked securities (ILS) and cat bond primary issuance market will have opportunities to entice sponsors to re-issue their risks in new transactions in 2014.
Reuters: – EM back in vogue – for now. – Risk appetite is in full flow, led by Turkey’s remarkable return to the international bond markets on Wednesday, just weeks after a currency crisis had thrown the country, and through it the emerging markets asset class, into a tailspin.
MoneyBeat: – How to trade emerging markets now. – In recent weeks, EM could have stood for Emerging Markets or En Masse given the stampede out of developing world assets. The dust is beginning to settle, though, and investors are taking a more discerning approach.
Morningstar: – The virtue of contrarianism. – Sometimes the best investment advice is to do the opposite of what everyone else is doing. When the stock market was in free fall during the financial crisis, many investors who had hung on for as long as they could take it finally gave up. They sold their stocks, locking in huge losses and missing out on a historic rally.
USA Today: – Be wary of bank loan funds. – As their name suggests, bank loan funds invest in bank loans, typically, commercial and industrial loans. The loans are usually secured, which means the bank can take certain assets if the borrower defaults, and sell those assets to recoup its losses. And the loans are senior loans, which means that lenders are high up the creditor line in case of bankruptcy. So what could possibly go wrong?
abc News: – Abandoned last year, bond funds are back on top. – Bond funds have made money so far this year as many stock markets around the world have faltered.
MarketWatch: – BMO asset management Inc. Launches seven new ETFs. – New equity and fixed income ETFs give investors opportunities for income and growth – Non-currency hedged and currency hedged products provide investors with more choice – Since its introduction in 2009, BMO AM’s ETF business has expanded to 58 funds and more than $12 billion in AUM.
CNBC: – Why big investors are excited about a 0.62% coupon bond. – In November, BlackRock, Deutsche Bank, State Street, Ford Motor, Microsoft and other big investors jumped at the opportunity to buy a three-year bond yielding just 0.625 percent. Resulting in the $1 billion International Finance Corporation issuance being heavily oversubscribed. Why would investors be so jazzed about such a low rate of return, less than even a U.S. Treasury bill?
Worah, Deputy CIO: 1.1% PCE inflation too low for comfort. Deleveraging economy needs faster wage growth.
— PIMCO (@PIMCO) February 13, 2014
Big question on weather related issues is if the sales will be made up in future periods or just “lost”. Meaningful difference IMO. — David Schawel (@DavidSchawel) February 14, 2014
Puerto Rico government is dissing the statehood legislation filed in Congress. Effect on bondholders? None. #muniland
— Cate Long (@cate_long) February 14, 2014
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