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RETAIL CRE - More Loans Come With Few Strings Attached

More Loans Come With Few Strings Attached 06-12-14 WSJ

Models at a Kate Spade presentation in February.

The junk-rated company got a $400 million term loan requiring no regular financial targets.

Companies with junk ratings, ranging from designer fashion house Kate Spade KATE & Co. to nut specialist Diamond Foods Inc., DMND have been borrowing cash with few strings attached.

Lending to weaker companies on easy terms is becoming more and more common as investors' appetite for higher-yielding debt grows stronger and the Federal Reserve keeps money flowing at ultralow rates. Since the financial crisis, companies have been able to borrow more without offering investors what were once considered standard protections against possible losses.

• More than half of the loans in the $747 billion U.S. market for loans made to junk-rated companies don't have financial "covenants," triggers that could cause a borrower to shore up its health, including periodic tests of overall debt levels and cash flow to cover scheduled interest payments.
• Thus far this year through Thursday, 62% of leveraged loans lacked these regular requirements, up from 57% for all of 2013, according to S&P Capital IQ LCD.

The shift recalls a boom era for loan deals that led up to the 2008 financial crisis. Easy lending terms are once again appearing as part of an expansion of credit to riskier borrowers, including companies often being bought out or financed by private-equity firms.

Even with weaker loan contracts, corporate defaults have been held down and troubled companies have been able to refinance their debts at much lower rates due in part to Fed-provided liquidity.

Some investors are worried.

"Things started to get silly in 2013, and now they're getting even sillier,"

David Sherman, President of Cohanzick Management LLC, which oversees $1.7 billion in assets

He has reduced his ownership of leveraged loans and generally doesn't buy so-called "covenant lite" deals. "We have seen this film before."

Leveraged loans, including loans with and without financial covenants, now yield 5.03% as of Wednesday, compared with 3.81% for investment-grade corporate bonds, according to J.P. Morgan Chase & Co. data, and about 2.59% on the 10-year Treasury note.

Leland Hart, head of the bank-loan team at BlackRock Inc., BLK overseeing more than $10 billion in leveraged loans, said covenant-lite loans had fewer defaults than standard loans in many of the years after the financial crisis. Most companies that can do those deals are healthy enough to repay their debts, he said.

A Kate Spade bag. Lending on easy terms is becoming more common. Getty Images

Still, by having fewer strings attached to their loans, borrowers are once again able to build flexibility to take on more debt or to pay dividends to owners such as private-equity firms.

• Outdoor clothier Eddie Bauer arranged $225 million of loans in April to make a dividend payment to its private-equity owner, Golden Gate Capital. A spokeswoman declined to comment.
• Kate Spade borrowed to refinance debt in April, and its $400 million term loan required the New York-based company to maintain no regular financial targets, according to Xtract Research LLC. A representative for Kate Spade declined to comment.
• Ray Silcock, chief financial officer at Diamond Foods in San Francisco, said the company's February $415 million covenant-lite loan "allowed us to have a larger proportion of debt than we might otherwise have had." Those extra borrowings helped the company repay rescue financing that Oaktree Capital Management provided in 2012, when Diamond had no access to the debt markets, he said. "We were able to take advantage of a window of opportunity that's not there all the time."

David Hillmeyer, senior portfolio manager at Delaware Investments, DDF said he was planning to buy into a covenant-lite loan being marketed currently for drug company Akorn Inc., AKRX which will help finance its purchase of VPI Holdings Corp., the parent of VersaPharm Inc.

But Mr. Hillmeyer said he plans to avoid a separate covenant-lite loan for snack maker Shearer's Foods LLC because he is concerned the company may be expanding too much and too fast.

Federal Reserve Governor Daniel Tarullo said in February that there was "greater investor appetite for risky corporate credits, while underwriting standards have deteriorated."

Covenant-lite loans comprise 54% of loans in a leveraged-loan index run by J.P. Morgan Chase. That is the highest in the bank's index data going back to 2007, and it is up from 46% at the end of last year.

The share of Securities and Exchange Commission-registered covenant-bearing loans that feature just one is at its highest point ever, around 35%, according to Thomson Reuters' unit Loan Pricing Corp. That is up from 31.5% in 2012 and 21% in 2007.

Issuance of leveraged loans in the U.S. has reached $531 billion so far this year, compared with $549 billion to this point last year, which was the busiest pace since 1987, said Thomson Reuters' LPC unit.

Demand for loans is brisk among many institutions, in part because their payments float, or are regularly reset using a fixed spread to a benchmark, protecting investors if rates go higher. Fixed-rate bonds' prices tend to fall when interest rates rise.

Issuance of loan pools known as collateralized-loan obligations, which buy up leveraged loans, is soaring. About $5.4 billion of CLOs were created last week, the biggest week since January 2013.

Buying by CLOs has helped offset eight recent weeks where retail investors took their cash out of loan funds, according to Lipper. Their pullback followed 95 weeks of inflows.

So far, rate fears haven't been realized. The yield on the benchmark U.S. Treasury note has fallen to about 2.59% from 3% at the end of 2013, signifying a rise in bond prices.

RETAIL CRE - May Retail Sales Miss, Core Retail Sales Unchanged, Control Group Declines

May Retail Sales Miss, Core Retail Sales Unchanged, Control Group Declines 06-12-14 Zero Hedge

Another swing and a miss for the so-called Q2 GDP surge.

After April data was revised higher, with headline retail sales pushed from 0.1% to 0.5%, and core retail sales ex-autos and gas boosted from -0.1% to 0.3%, May showed a big drop in whatever momentum may have resulted from the March spending spree. As a result May headline retail sales missed expectations of a 0.6% increase, printing at 0.3%, with the entire positive print due to auto and gas sales. Indeed, when looking at core retail sales excluding autos and gas, these were unchanged from April, printing at 0.0%, far below the 0.4% expected.

As the table below shows, segments that saw a decline in May were Electronics stores (again), as well as food and beverage stores, health and personal care, clothing stores, sporting goods stores, restaurants, as well as general merchandise stores. In other words a decline across the board.

As usual, the biggest wildcard is just how accurate and relevant the seasonal adjustment is: the headline change from April to May was a substantial $26 billion, which however was neutered to just $1.5 billion when applying seasonal adjustment factors, which however as the ISM data recently showed, are nothing but a farce.

Finally, and what's worst for GDP calculations, the retail sales control group which goes into GDP calculations showed the first sequential decline since January when the full brunt of the "harsh weather" which is now said to have subtracted 2.0% from Q1 GDP hit. Clearly, US consumers are still delaying all those purchases they would have otherwise made in January.

Just blame it on the blamy balmy May weather.

RETAIL CRE - McDonalds Has Longest Stretch Without Rising US Sales In History

McDonalds Has Longest Stretch Without Rising US Sales In History 06-09-14 Zero Hedge

Back in April when McDonalds reported its fifth consecutive decline in US comp store sales, the longest in decades, maybe ever, the excuses came fast and furious: 'The U.S. has been difficult for them,” Jack Russo, an analyst at Edward Jones & Co. in St. Louis, said in an interview. "The weather has played a role, and I think the competition is a little bit sharper. We’ve seen better results out of Burger King and Wendy’s." "Harsh winter weather and “challenging industry dynamics” weighed on U.S. results, McDonald’s added. So only MCD was impacted by weather, not the comps? Mmmk. But more importantly, there was hope so one could just ignore the present and past:“The month of April is going to be slightly improved so there are some positives out there" according to Russo.

Then April came and went, and the much awaited rebounds failed to materialize as McDonalds US sales posted an unchanged month. Perhaps it was the weather's fault too?

However, what McDonalds will have a tough time explaining is why after almost hitting 'escape velocity' and nearly posting positive annual comps in the US, McDonalds just reported that May US comps once again dipped, declining by 1.0%, on expectations of a tiny 0.1% increase, thus cementing the longest period in our records database, a total of 7 months, in which McDonalds has gone without posting a single month of increasing US sales! We can't wait for the company to blame the blamy balmy, spring weather as the reason why nobody could afford a 99 cent meal.

RadioShack Is Collapsing 06-10-14 BI

RadioShack shares were down as much as 21% in premarket trading after the electronics retailer reported a wider than expected quarterly loss.

The company posted a net loss of $98.3 million, or $0.97 a share. Analysts were looking for a loss of $0.52 per share.

Revenue fell 13% from a year ago to $736.7 million and on a same-store basis, sales fell 14%, which the company said was driven by traffic declines and poor sales in its mobile business. Analysts were expecting revenue of $767.5 million.

The electronics retailer said it ended the quarter with total liquidity of $423.7 million, including $61.8 million in cash and cash equivalents and $361.9 million available under a credit agreement. 

 "Overall, our first quarter performance was challenged by an industry-wide decline in consumer electronics and a soft mobility market which impacted traffic trends throughout the quarter," chief executive Joseph Magnacca said in a statement. 

Magnacca added that the company has taken steps to cut costs, including lowering its corporate head count and reducing discretionary expenses.

These charts show RadioShack's performance over the last year and the last decade. 

It's not pretty.

RETAIL CRE - Retail Furniture Sales Collapse

Another Housing Red Light: Furniture Spending Negative For The First Time Since 2012 06-10-14 Zero Hedge

When nearly two years ago everyone jumped with joy after the US housing market posted its latest uptick, the fourth since Lehman, with all previous three promptly fading as dead cat bounces always do, the permabulls were quick to bet that "this was the recovery we've all been waiting for", ignoring such simple concepts as QE3, the record scramble by foreign oligarchs to use US real estate as a dirty money laundry, the Fed's housing subsidy with REO-to-Rent (which promptly made Blackstone into America's largest landlord), and the fact that banks then (and now) still refuse to dump millions of foreclosed homes back on the market over fears what the supply surge would do to prices. We noted all of this at the time, and said it was only a matter of time before this 4th consecutive dead housing bounce fizzles.

Now, that we have seen nearly a year of declining existing home property prices, a collapse in transaction volumes, and a new home market that is catering solely to the rental segment, this has been confirmed.

But that's not all. 

As we showed a week ago, it is not just the coincident housing signals confirming that the latest artificial bounce has faded, but both upstream and downstream indicators. Specifically, we showed that lumber prices - that one component so critical in the building of new homes and a traditional leading indicator - have cratered.

That's the upstream indicator.

As for the downstream, we go to Bank of America which finds that not only has home improvement store spending declined substantially since the dead housing bounce peak last summer, but that furniture spending according to BofA estimates, is now once again negative:the first such drop since early 2012.

From BofA Michelle Mayer, who very soon will also have to change her tune from 2012 proclaiming the housing collapse over and a recovery is just beyond the horizon.

Spending in home improvement stores ticked up in May, but the pace of spending on a yoy basis has slowed substantially from the cyclical peak in November 2013.

Spending at furniture stores had picked up over 2012 through early 2013 but has been on a downward trajectory since last fall. Sales actually slipped into negative territory on a yoy basis in May, showing weakness into the spring season. This weakness is consistent with a wide array of indicators on the housing market, including Census Bureau's new home sales as well as weak household formation data.

But what by far worst for reality deniers is that with QE fading, there will be no additional stimulus to push all important housing away from the upcoming drop and into its fifth "dead housing bounce." Unless, of course, the Fed has no choice but to untaper and unleash even more trillions in liQEdity once the latest version of QE (we forget if it is 3 or 4) ends and is found to not have generated any "self-sustaining", escape velocity growth in the US economy yet again.

CHINA - China's Rehypothecation

China's Rehypothecation Scandal In One Chart 06-10-14 Zero Hedge

Remember how small Greece was and how it wasn't relevant to US stocks... until suddenly it got close to breaking up the EU and the world's markets slumped. Remember how small subprime was? Remember how Lehman was not a 'big' bank? We hear the same "why would that impact us?" chatter now about the China rehypothecation scandal and we suspect the outcome will be just as dramatic a "whocouldanode" moment for many. The problem, as this chart so simply explains, is "more warrants than the volume of the underlying physical commodities have been issued in the repo business" and that is a problem for every foreign bank that was tempted into China's carry trade (which is "every" bank).

Simply put - the collateral that I promised you on my loan... I also promised to between 10 and 30 other people... but we're good right?

The “repo” business in commodities in China is similar to any other “repo” business in the financial markets. Generally speaking, the repo is a short-term FX funding vehicle, whereby a commodity owner first sells the commodity warrants issued by bonded warehouses (paired with an equal amount of short positions) to banks, then buys the package back from the banks in 3 to 6 months. It is a way for commodity traders/refiners to gain access to foreign banks’ balance sheets and improve liquidity efficiently.

The Qingdao situation alleges the issuance and pledging of more warrants than the underlying physical commodity. Were this to have occurred, foreign banks may be exposed to asset write-offs due to potential collateral shortages and/or losses. As a result, some foreign banks may have reduced or suspended their commodities repo business in China, and could be undertaking further investigation as to whether to make any suspension permanent.

...

The initial reaction is likely to be to significantly reduce the exposure to different repo businesses and investigate whether there are any other multi-pledge issues in other deals. This is already happening in the market.

A further potential reaction, in our view, is for the banks to investigate the broader spectrum of their Chinese commodity financing deals (i.e. not just the repos or CCFDs, but the whole book) in order to clarify:

• whether these deals are exposed to substantial underpriced risks;
• whether the banks as a whole still want to continue the business;
• if they choose to continue, what rules could be established and enforced.

Our base case is that, even if banks do not find any further cases during the investigation periods, they are likely to raise the bar for Chinese commodity financing deals in general, in order to broadly lower the exposure to this sector. This would occur via higher funding costs for the arbitrageurs, thereby slowly disincentivising repurchase deals and CCFDs, and resulting FX inflows.

*  *  *

In a world where central banks have encouraged levered carry trades everywhere, a crack in the virtuous circle - such as we are seeing in China's fractional-reserve commodity financing deal business - will rapidly lead to a sell first (unwind first), think later mentality.

SENTIMENT - Fear & Greed Index

What Is Driving The Market Right Now According To Mainstream Media 06-09-14 CNN Money via ZH

Via CNN Money

CNN Money's model consists of 7 indicators...

We can only imagine the Fed is in full panic mode by now...

The Fed realizes investors do not act rationally... blowing up their models entirely...

“In a world of rational expectations, asset prices adjust and that’s it,” Mr. Williams said. ” He added, “but if one allows for limited information, the resulting bull market may cause investors to get ‘carried away’ over time and confuse what is a one-time, perhaps transitory, shift in fundamentals for a new paradigm of rising asset prices.”

Mr. Williams explained that it appears to be the case that investors, on balance, look at where a given market has been heading and assume that pattern will persist. Rapidly rising markets fuel the belief the good times are here to stay, while market blowouts generate such pessimism that investors cease to act as if prices will rise again.

“The recognition that people behave in this way can move us a long way closer to understanding how asset price booms and busts can emerge and how policy actions could influence that process,” he said.

So in summary... It's entirely circular...

The Fed must blow bubbles because otherwise irrational investors get "carried away" and inevitably crash the markets...

Ultimately it seems clearer and clearer that, as Williams himself opines "financial stability is just as important as pursuing price stability and growth."

h/t @Stalingrad_Poor

CREDIT - Worsening risk/reward fundamentals in US corporate credit

Worsening risk/reward fundamentals in US corporate credit 06-06-14 Soberlook.com

US corporate credit markets, particularly high yield bonds, are becoming quite frothy, as risk/reward dynamics continue to worsen. Here are some key indicators:

1. In the last couple of years high yield supply has been massive relative to equities. HY has had no shortage of buyers thus far, but the market is becoming increasingly comfortable with the primary market buyers always being there. Investors are ignoring the fact that such demand may not always be the there.

2. High yield bond spreads have declined to new post-recession lows, with the latest spread tightening driven by ECB's easing. Bond holders are simply not being compensated for the risk they take.

3. Similarly, corporate credit default swap spreads are falling as well. Here is what CDX (index of CDS) spreads have done recently for both investment grade and HY indices.

Investment grade CDX spread; current on-the-run series (source: Barclays Research)

High yield CDX spread; current on-the-run series (source: Barclays Research)

4. Valuations in the most leveraged and lower quality portion of the credit spectrum have risen dramatically. Over 60% of corporate bonds rated CCC by Fitch now trade above par.

To be sure, improving economic fundamentals in the US have reduced default risks considerably. But we are now back to the days when the ability to refinance is taken for granted and current cash flow to service debt is starting to become less relevant. With banks' ability to hold inventory impaired, these markets are becoming quite vulnerable to a sharp correction.

PATTERNS - Two Most Powerful Forces Pushing the Stock Market Higher

The Two Most Powerful Forces Pushing the Stock Market Higher 06-09-14 Gary Dorsch via FSN

Following last week’s announcement by the European Central Bank (ECB), the stock market has now broken out above its mostly sideways movement since the beginning of the year to new all-time highs. Over the course of this bull market, each time the market has begun to show weakness, many have expected a selloff to occur only to then find the opposite take place: stocks roar back to life and continue to soar higher.

In a recent interview with Financial Sense Newshour, Gary Dorsch of Global Money Trends says that over the last several years, investors have underestimated the power of two major forces driving stocks higher—quantitative easing by central banks and companies buying back their stock—and that these two forces may propel the market even higher.

Here are some excerpts from his recent interview (click here for audio) that aired to the public on Saturday:

FSN: Gary, the market has now broken out again to all-time highs and continues to push upwards despite all the bearish projections we’ve heard over the last several years. What’s driving the market higher in your opinion?

Dorsch: I think the two major factors that are supporting this market in a nut shell are

1. The Federal Reserve's quantitative easing money injection scheme
2. The shrinking stock market, which is the enormous amount of stock buybacks being conducted by the S&P 500 companies. Last year the S&P 500 companies bought $475 billion of their own stock and in the first quarter purchased another $160 billion. Close to 80% of all the profits of the S&P 500 companies are being recycled into the hands of shareholders through buybacks and dividends, and this is the most powerful force pushing the market higher. You wonder why the market doesn't have any pullbacks—it’s because the major corporations are buying on all dips and they've got plenty of firepower left.

So, between the buybacks that are still projected between now and the end of the year, which could be about $350 billion plus injections by the Fed of $180 billion, you've got about half a trillion dollars yet to come into this market between now and the end of the year.

FSN: So, with the Fed’s QE and stock buybacks driving the market higher, what targets are you looking for on the major averages?

Dorsch: I would project that it’s very possible we could see the

1. Dow hit 18,000, which would be about another 1100 points from here, and for
2. The S&P 500 to hit 2200, in what could be the final euphoria stage of the market where people really just don't even have any fear of risk any more.  

FSN: Are there any worrying signs you see technically with this current move higher?

Dorsch:  A very interesting technical aspect of this rally is that

• It is occurring on shrinking volume…and so some technicians would argue that this is not a good sign. It doesn't lend to a lot of participation.
• The rally is on very narrow breadth. That of the top 500 stocks, only about 25 are having new 52-week highs. This is a very narrowly based rally.

I understand all that, but all these bearish arguments that we've been hearing for the last few years have just fallen flat and I think it's because we have underestimated the power of buybacks and QE, even as the Fed winds down its QE, low and behold it has one of its colleagues, the ECB, coming to the rescue just at the right time to do some money injections in to the European banking system. Although, it’s an intelligent type of QE that the ECB is going to do by funneling it directly into the hands of small business and medium sized businesses as opposed to just randomly giving it out to hedge fund managers as the Federal Reserve does, or investment bankers to inflate stock prices. But this could actually help the European economy, but still, the net result is Europe is going to be keeping its interest rates down.

FSN: Is this what you think has also helped to drive interest rates lower here in the U.S.?

Dorsch: One of the reasons US bond yields have dropped so far this year to the amazement of most economists is that we've seen a drop in interest rates in Europe, in Switzerland, in Germany, and Italy and Spain. And so because of the drop in international bond yields, US bond yields looked relatively good. So some money managers bought US bonds in reaction to the drop in foreign bond yields, and that's also been a supporting factor in a way for the stock market as US corporations can borrow very cheaply. And, in fact, many of the buybacks are leveraged buybacks where the companies are borrowing very cheaply and using it to buy back their own stock. There's not much care about the long-term organic growth of the company. It's all very short-term focus on today and tomorrow and CEOs have a lot riding with their stock options based on the price of their stock. So they're acting in their own personal interest. So, I believe we're sort of that euphoric stage now where psychology kind of gets out of hand. The Fed realizes that they're blowing the bubble, but they have no inclination what so ever to stop it through monetary policy and so it could very well be that we see this parabolic final euphoric liquidity surge.

FSN: Gary, with central banks and plentiful liquidity helping to push the stock market higher, many would have thought that gold would’ve sprung to life by now. What's your take on the yellow metal?

Dorsch: Well, if you take a look at the gold market, I always think first of all the biggest buyers of gold are China and India. They buy a little over more than half of all the gold that is produced in the world and there was a recent report by the World Gold Council indicating that there was a sharp drop-off in demand for gold out of India and China in the first quarter. About an 18% drop in China and a 26% decline in India. Of course, India has had restrictions on imports as a government policy to help India…get its current account deficit under control and it has succeeded in stabilizing its currency. […] This new government in India is lending optimism that those restrictions on purchases of gold overseas will be relaxed in the months’ ahead. That could be a supporting factor, but overall in the gold market I think after last year’s sharp decline in 2013, watching the amount of gold that is being held in the global ETF such as GLD here in the US, the amount of gold now being held in ETFs is down about a third from its peak level in 2011 and it has not recovered. Those numbers are still showing that we are slightly below last year’s low and it indicates that investment demand in the western world via ETFs has not yet revived. So, to me, it looks like it’s sort of consolidating and has lost its luster and, if anything, I would say

"traders have made a psychological shift saying the way to profit from massive central bank intervention is you're better off with equities where the company is buying back their own stock."

You have that added benefit. You don't have that with the gold. So they know that money is being devalued and it’s how do you stay ahead of the devaluation, and equities have now become the favored asset class. I think that's been a big shift where the typical retail investor now has abandoned the gold market and you're basically mostly depending on traditional cash buyers…So, I don't look for gold to do all that much. $1200 is a very important number because that is the average breakeven cost for miners around the world. Half the miners have an all-inclusive cost above $1200, the other half slightly below $1200. Should it go below $1200 I think you'd really start to see some reductions in production and supply and then some mining companies may ultimately be forced out of business. That would be a tough situation, but that's kind of how it’s going to have to heal itself. The mining companies are going to have to think about ways of reducing supply in order to get a recovery in the market so, to me, I don't see the gold market going much above the $1350 level on any possible rally and I see a bottom should be around $1200 because of the breakeven point there. And a lot of traders are aware of that. So I'm not really projecting much for the gold market in the next few months.

CORPORATE PROFITS - Stagnant Wages a Major Contributor

What's The Source Of Soaring Corporate Profits? Stagnant Wages 06-09-14 Charles Hugh-Smith of OfTwoMinds blog via ZH

What if all the low-hanging fruit of outsourcing jobs and financialization have already been plucked by Corporate America?

The connection between soaring corporate profits and stagnant wages is both common sense and inflammatory: common sense because less for you, more for me and inflammatory because this harkens back to the core problem with the bad old capitalism Marx critiqued: that capital dominates labor and thus can extract profits even as the purchasing power of wages declines.

John Hussman said something interesting a while back - he was talking about whether or not the current level of corporate profits was sustainable, and he pointed out that in order to have those profits rise as a % of GDP, they had to be snatched from somewhere else. I was intrigued and asked myself, where might they be snatched from? 

Here’s a chart that appears to show at least a chunk of where they came from. Wages & Salaries/GDP dropped from about 47% of GDP in 2001 down to 42.7% of GDP today. At the same time, (non-financial) corporate profits rose from about 2% to 6% of GDP. So wage earners lost 4.3%, while non-financial companies gained 4%. 

There was a very steep climb in corporate profitability from 2001-2008, during the height of the housing bubble, and a brisk drop off in the chunk of the economy provided to wage earners. Perhaps - globalization? Jobs lost to China? That’s the period where China started to really become a powerhouse. Yet after a brief drop during the recession, it's now back up to its peak levels.

And here’s one more chart, aligning corporate profits (total) as a % of GDP - includes financial companies too. Notice how the S&P 500 (SPX) tends to follow (more or less) the profits skim off the economy. The linkage isn’t there during the 1995-2000 period, but it sure is for the rest of the period. So - unless and until the corporate skim drops as a % of GDP, I think our S&P 500 (SPX) is going to remain elevated. 

Can this Corporate Profits/GDP series grow to the sky? I don’t know. But it is certainly doing pretty well right now. A combination of outsourcing and low rates = a great corporate environment for profits, taken from savers and wage-earners. 

Who do we blame? Debt constructed from the housing bubble (which went to increase financial corp profits) as well as outsourcing, which allowed companies to snatch that % of GDP from workers (increasing non financial corp profits).
So to Hussman’s point - is this sustainable? As long as work continues being outsourced, unemployment is relatively high (i.e. wage pressures are low) and as long as the debt remains intact, I think it is.

RISK - More Signs Of Bullish Excess

More Signs Of Bullish Excess 06-09-14 Lance Roberts via ZH

"It is also important to realize that these late cycle stages of bull markets can last longer, and become even more irrational, than logic would dictate."

The chart below shows that while the current bull market trend remains in place, the recent "consolidation" failed to reduce the overbought, overly bullish, conditions in the market.

Exuberance is most clearly seen by the near record low levels of "fear" in the market as shown below.

RISK - The Biology of Risk

The Biology of Risk 06-07-14 John Coates, New York Times

76% of the largest one-day percentage moves over the past 40 years occurred after 1994

SIX years after the financial meltdown there is once again talk about market bubbles. Are stocks succumbing to exuberance? Is real estate? We thought we had exorcised these demons. It is therefore with something close to despair that we ask: What is it about risk taking that so eludes our understanding, and our control?

Part of the problem is that we tend to view financial risk taking as a purely intellectual activity. But this view is incomplete. Risk is more than an intellectual puzzle — it is a profoundly physical experience, and it involves your body. Risk by its very nature threatens to hurt you, so when confronted by it your body and brain, under the influence of the stress response, unite as a single functioning unit. This occurs in athletes and soldiers, and it occurs as well in traders and people investing from home. The state of your body predicts your appetite for financial risk just as it predicts an athlete’s performance.

If we understand how a person’s body influences risk taking, we can learn how to better manage risk takers. We can also recognize that mistakes governments have made have contributed to excessive risk taking.

Consider the most important risk manager of them all — the Federal Reserve. Over the past 20 years, the Fed has pioneered a new technique of influencing Wall Street. Where before the Fed shrouded its activities in secrecy, it now informs the street in as clear terms as possible of what it intends to do with short-term interest rates, and when. Janet L. Yellen, the chairwoman of the Fed, declared this new transparency, called forward guidance, a revolution; Ben S. Bernanke, her predecessor, claimed it reduced uncertainty and calmed the markets. But does it really calm the markets? Or has eliminating uncertainty in policy spread complacency among the financial community and actually helped inflate market bubbles?

We get a fascinating answer to these questions if we turn from economics and look into the biology of risk taking.

ONE biological mechanism, the stress response, exerts an especially powerful influence on risk taking. We live with stress daily, especially at work, yet few people truly understand what it is. Most of us tend to believe that stress is largely a psychological phenomenon, a state of being upset because something nasty has happened. But if you want to understand stress you must disabuse yourself of that view. The stress response is largely physical: It is your body priming itself for impending movement.

As such, most stress is not, well, stressful. For example, when you walk to the coffee room at work, your muscles need fuel, so the stress hormones adrenaline and cortisol recruit glucose from your liver and muscles; you need oxygen to burn this fuel, so your breathing increases ever so slightly; and you need to deliver this fuel and oxygen to cells throughout your body, so your heart gently speeds up and blood pressure increases. This suite of physical reactions forms the core of the stress response, and, as you can see, there is nothing nasty about it at all.

Far from it. Many forms of stress, like playing sports, trading the markets, even watching an action movie, are highly enjoyable. In moderate amounts, we get a rush from stress, we thrive on risk taking. In fact, the stress response is such a healthy part of our lives that we should stop calling it stress at all and call it, say, the challenge response.

This mechanism hums along, anticipating challenges, keeping us alive, and it usually does so without breaking the surface of consciousness. We take in information nonstop and our brain silently, behind the scenes, figures out what movement might be needed and then prepares our body. Many neuroscientists now believe our brain is designed primarily to plan and execute movement, that every piece of information we take in, every thought we think, comes coupled with some pattern of physical arousal. We do not process information as a computer does, dispassionately; we react to it physically. For humans, there is no pure thought of the kind glorified by Plato, Descartes and classical economics.

Our challenge response, and especially its main hormone cortisol (produced by the adrenal glands) is particularly active when we are exposed to novelty and uncertainty. If a person is subjected to something mildly unpleasant, like bursts of white noise, but these are delivered at regular intervals, they may leave cortisol levels unaffected. But if the timing of the noise changes and it is delivered randomly, meaning it cannot be predicted, then cortisol levels rise significantly.

Uncertainty over the timing of something unpleasant often causes a greater challenge response than the unpleasant thing itself. Sometimes it is more stressful not knowing when or if you are going to be fired than actually being fired. Why? Because the challenge response, like any good defense mechanism, anticipates; it is a metabolic preparation for the unknown.

You may now have an inkling of just how central this biology is to the financial world. Traders are immersed in novelty and uncertainty the moment they step onto a trading floor. Here they encounter an information-rich environment like none other. Every event in the world, every piece of news, flows nonstop onto the floor, showing up on news feeds and market prices, blinking and disappearing. News by its very nature is novel, adds volatility to the market and puts us into a state of vigilance and arousal.

I observed this remarkable call and echo between news and body when, after running a trading desk on Wall Street for 13 years, I returned to the University of Cambridge and began researching the neuroscience of trading.

In one of my studies, conducted with 17 traders on a trading floor in London, we found that their cortisol levels rose 68 percent over an eight-day period as volatility increased. Subsequent, as yet unpublished, studies suggest to us that this cortisol response to volatility is common in the financial community. A question then arose: Does this cortisol response affect a person’s risk taking? In a follow-up study, my colleagues from the department of medicine pharmacologically raised the cortisol levels of a group of 36 volunteers by a similar 69 percent over eight days. We gauged their risk appetite by means of a computerized gambling task. The results, published recently in the Proceedings of the National Academy of Sciences, showed that the volunteers’ appetite for risk fell 44 percent.

Most models in economics and finance assume that risk preferences are a stable trait, much like your height. But this assumption, as our studies suggest, is misleading. Humans are designed with shifting risk preferences. They are an integral part of our response to stress, or challenge.

When opportunities abound, a potent cocktail of dopamine — a neurotransmitter operating along the pleasure pathways of the brain — and testosterone encourages us to expand our risk taking, a physical transformation I refer to as “the hour between dog and wolf.” One such opportunity is a brief spike in market volatility, for this presents a chance to make money. But if volatility rises for a long period, the prolonged uncertainty leads us to subconsciously conclude that we no longer understand what is happening and then cortisol scales back our risk taking. In this way our risk taking calibrates to the amount of uncertainty and threat in the environment.

Under conditions of extreme volatility, such as a crisis, traders, investors and indeed whole companies can freeze up in risk aversion, and this helps push a bear market into a crash. Unfortunately, this risk aversion occurs at just the wrong time, for these crises are precisely when markets offer the most attractive opportunities, and when the economy most needs people to take risks. The real challenge for Wall Street, I now believe, is not so much fear and greed as it is these silent and large shifts in risk appetite.

I consult regularly with risk managers who must grapple with unstable risk taking throughout their organizations. Most of them are not aware that the source of the problem lurks deep in our bodies. Their attempts to manage risk are therefore comparable to firefighters’ spraying water at the tips of flames.

THE Fed, however, through its control of policy uncertainty, has in its hands a powerful tool for influencing risk takers. But by trying to be more transparent, it has relinquished this control.

Forward guidance was introduced in the early 2000s. But the process of making monetary policy more transparent was in fact begun by Alan Greenspan back in the early 1990s. Before that time the Fed, especially under Paul A. Volcker, operated in secrecy. Fed chairmen did not announce rate changes, and they felt no need to explain themselves, leaving Wall Street highly uncertain about what was coming next. Furthermore, changes in interest rates were highly volatile: When Mr. Volcker raised rates, he might first raise them, cut them a few weeks later, and then raise again, so the tightening proceeded in a zigzag. Traders were put on edge, vigilant, never complacent about their positions so long as Mr. Volcker lurked in the shadows. Street wisdom has it that you don’t fight the Fed, and no one tangled with that bruiser.

Under Mr. Greenspan, the Fed became less intimidating and more transparent. Beginning in 1994 the Fed committed to changing fed funds only at its scheduled meetings (except in emergencies); it announced these changes at fixed times; and it communicated its easing or tightening bias. Mr. Greenspan notoriously spoke in riddles, but his actions had no such ambiguity. Mr. Bernanke reduced uncertainty even further: Forward guidance detailed the Fed’s plans.

Under both chairmen fed funds became far less erratic. Whereas Mr. Volcker changed rates in a volatile fashion, up one week down the next, Mr. Greenspan and Mr. Bernanke raised them in regular steps. Between 2004 and 2006, rates rose .25 percent at every Fed meeting, without fail... tick, tick, tick. As a result of this more gradualist Fed, volatility in fed funds fell after 1994 by as much as 60 percent.

In a speech to the Cato Institute in 2007, Mr. Bernanke claimed that minimizing uncertainty in policy ensured that asset prices would respond “in ways that further the central bank’s policy objectives.” But evidence suggests that quite the opposite has occurred.

Cycles of bubble and crash have always existed, but in the 20 years after 1994, they became more severe and longer lasting than in the previous 20 years. For example, the bear markets following the Nifty Fifty crash in the mid-70s and Black Monday of 1987 had an average loss of about 40 percent and lasted 240 days; while the dot-com and credit crises lost on average about 52 percent and lasted over 430 days. Moreover, if you rank the largest one-day percentage moves in the market over this 40-year period, 76 percent of the largest gains and losses occurred after 1994.

I suspect the trends in fed funds and stocks were related. As uncertainty in fed funds declined, one of the most powerful brakes on excessive risk taking in stocks was released.

During their tenures, in response to surging stock and housing markets, both Mr. Greenspan and Mr. Bernanke embarked on campaigns of tightening, but the metronome-like ticking of their rate increases was so soothing it failed to dampen exuberance.

There are times when the Fed does need to calm the markets. After the credit crisis, it did just that. But when the economy and market are strong, as they were during the dot-com and housing bubbles, what, pray tell, is the point of calming the markets? Of raising rates in a predictable fashion? If you think the markets are complacent, then unnerve them. Over the past 20 years the Fed may have perfected the art of reassuring the markets, but it has lost the power to scare. And that means stock markets more easily overshoot, and then collapse.

The Fed could dampen this cycle. It has, in interest rate policy, not one tool but two: the level of rates and the uncertainty of rates. Given the sensitivity of risk preferences to uncertainty, the Fed could use policy uncertainty and a higher volatility of funds to selectively target risk taking in the financial community. People running factories or coffee shops or drilling wells might not even notice. And that means the Fed could keep the level of rates lower than otherwise to stimulate the economy.

IT may seem counterintuitive to use uncertainty to quell volatility. But a small amount of uncertainty surrounding short-term interest rates may act much like a vaccine immunizing the stock market against bubbles. More generally, if we view humans as embodied brains instead of disembodied minds, we can see that the risk-taking pathologies found in traders also lead chief executives, trial lawyers, oil executives and others to swing from excessive and ill-conceived risks to petrified risk aversion. It will also teach us to manage these risk takers, much as sport physiologists manage athletes, to stabilize their risk taking and to lower stress.

And that possibility opens up exciting vistas of human performance.

John Coates is a research fellow at Cambridge who traded derivatives for Goldman Sachs and ran a desk for Deutsche Bank. He is the author of “The Hour Between Dog and Wolf: How Risk Taking Transforms Us, Body and Mind.”

VOLUMES - Virtually Everyone "Sold In May"

The Mystery Grows: Goldman Finds That Virtually Everyone "Sold In May" 06-08-14 Goldman's David Kostin via ZH

The great mystery of the endlessly levitating market continues to confound everyone, even Goldman Sachs. Because while the market soared in May (and has continue to surge in June) contrary to the sell in May mantra, when peeking beneath the market's covers, Goldman has found that most investor groups did just as they are supposed to do for this time of the year:they sold!

From Goldman's David Kostin:

While many investors puzzle over the decline in 10-year US Treasury yields to 2.6% alongside the S&P 500 at an all-time high, recent data suggest they moved flows in the same direction. Mutual fund, futures, and ETF data show a shift away from stocks and towards bonds during the past month. Pension funds have also sold stocks and bought bonds in 1Q. Equity market performance supports a pro-risk stance offset by a muted return outlook given high current valuations.

US equity flows have weakened during the past month with outflows from US equity mutual funds totaling $10 billion since April 30. The outflows have been broad-based with all categories affected other than Equity Income funds. The preference for yield is also evident in continued strong flows into taxable bond funds as well as outperformance by stocks with high dividend yield. Small-cap funds have experienced the largest outflows consistent with Russell 2000 lagging the S&P 500 by 625 bp YTD (5.9% vs. -0.3%).

Flows are also weaker in relative terms as both bond and international equity funds continue to receive inflows. During the past five weeks $12 billion was withdrawn from ICI domestic equity mutual funds. Meanwhile, $7 billion moved into international equity and $11 billion flowed into taxable bond funds. Both hybrid and municipal bond funds also had inflows. Lipper fund flow data shows a similar but less pronounced trend with $8 billion of outflow from domestic funds in May of which $7 billion was small cap funds.

The combination of fund flows has pushed our Rotation Index to its lowest level since June of last year. Recent flows suggest a modest preference for equity allocation but less risk appetite than during the past year or compared with previous bull markets. The index estimates the risk appetite of retail investors based on the mix of their fund flows as compared with their base-line mutual fund allocation across money market, bond and equity funds. Margin balances in retail brokerage accounts have also eased from very high levels implying less retail risk tolerance.

Institutional investors have also reduced exposure to US equities. Net equity futures positions of Institutional and Levered Funds have declined to $68 bn at the end of May from $92 billion at the start of April (Exhibit 4). The shift has been caused by large growth in the net short exposure of levered funds. Net futures sentiment is below average but has rebounded from very low readings last month. Broad-based short ETF exposure also continues to rise across major indices.

Pension funds have also been selling stocks and buying bonds this year but the pace has outstripped our estimates. Yesterday’s release of the Federal Reserve Flow of Funds report showed pension funds sold $42 billion of equities during 1Q ($168 billion annualized). The outflow is already 7x our initial 2014 annual estimate of $25 billion. Public rather than private pension funds dominated the equity selling. Assets shifted to short-term bonds.

And yet:

Changes in positioning do not appear to be driven by event or growth risks and may instead reflect fatigue post strong valuation expansion. The options market does not suggest higher event risk as the VIX fell below 12 last week (5th percentile since 1990) and 1-month skew is at its average level over the past 10 years while realized volatility was just 8.2% in May. Low volatility may persist as the average VIX regime lasts more than 3 years.

What is the conclusion by the firm which has a 2014 year end target of 1900, and whose June 2015 S&P 500 price target of 1950 was just hit on Friday?

Performance at the stock level is consistent with high risk tolerance but high current valuation suggests limited upside. Firms with lower return on capital, high realized volatility, and weaker balance sheets have all outperformed peers by about 200 bp this year. However, stocks with high dividend yield are also outperforming as modest upside and low interest rates make dividend-paying stocks attractive from a total return perspective.

So what's going on? Simple: one massive, ongoing, relentless short squeeze:

Finally, as Zero Hedge revealed, everyone else may be selling (or shorting) stocks, but here is who is buying with zero considerations for cost or value:

Of course, since neither facts, nor news, nor events, nor anything matters in a centrally-planned market, just BTFATH.

SENTIMENT - Markets Have Left The "Complacency" Phase, Have Entered Full Blown "Mania"

Deutsche Warns Markets Have Left The "Complacency" Phase, Have Entered Full Blown "Mania" Deutsche Bank via ZH

With a closing P/E ratio over 17 and a VIX under 11, Deutsche Bank's David Bianco is sticking with his cautious call for the summer. Their preferred measure of equity market emotions is the price-to-earnings ratio divided by the VIX. As of Friday's close, this sentiment measure has never been higher and is in extreme "Mania" phase. Deutsche's advice to all the summertime-'chasers' - "wait for a better entry."

Via Deutsche Bank,

We find the current PEs demanding.

S&P median PE at 18.9, non-financial PE at 18.1 and trailing PE at 17.5 are all elevated vs. history.

And the P/E to VIX ratio suggests we have shifted from compacency into mania...

Don't Chase...

Since 1960, there have been 10 years when S&P materially advanced to new highs during the summer, but only 2 years (1964 and 1995) when it was not a post recession/bear market rebound and the market retained the summer gains until year end.

1968 and 1980 summer highs were post bear markets; 1985, 1989, 1997, 1999 summer high followed by a late summer/fall correction; 1987 and 1998 suffered a bear market (“1987 crash” and “1998 Russian default).

But what about all the money on the sidelines?... and the great rotation...

Source: Deutsche Bank

VOLUMES - The Carnage Beneath The Bullish Stampede

The Carnage Beneath The Bullish Stampede 06-08-14 Wolf Richter via The Testosterone Pit blog, via ZH

It’s part of the daily routine by now: the S&P 500 index rose to another all-time high. We’ve been confronted with this miracle for a long time. The last correction when the index dropped over 10% was, well, if anyone can even remember, in 2011. And it shows.

Every single bearish call on the S&P 500 has been punished with a rally, followed by ridicule. Realism got to be very expensive for those hapless daredevils. Financial advisors lost clients over mentioning the possibility that the market could someday head south. To save their own skin, they did what it took: an all-time record 62.2% are bullish, up from 58.3% a week earlier, above the exuberance line of 55% for the fifth week in a row, above the prior record of 62.0% set in October 2007. Which wasn’t, it turned out, the ideal time to be bullish.

“Danger territory” is what Investors Intelligence, which compiled these numbers, called the phenomenon where everyone is comfortably relaxing on the same side of the boat.

“Almost all clients have the same outlook: 3% economic growth, rising earnings, rising bond yields, and a rising equity market,” Goldman Sachs chief equity strategist David Kostin wrote in a research note a few days ago after he’d met with numerous institutional clients. They considered Goldman’s own forecasts for the S&P 500 – 1900 by the end of this year and 2100 by the end of next year – too conservative.

Risk is no longer priced into anything. Volatility has gone to sleep. Uniformity of thought has taken over the stock market. Complacency has reached a point where even central banks have begun to worry about it: the idea that markets can only go up – once entrenched, which it is – leads to financial instability because no one is prepared when that theory suddenly snaps.

Even the Fed is frazzled by the absence of frazzles.

By practically guaranteeing with their verbiage and their trillions for the past five years that asset prices would rise forevermore, the Fed made sure that markets have become a one-way bet, that risks are eliminated from the calculus, that everybody is comfortable with that, and that therefore volatility has settled on record lows.

So it’s ironic that New York Fed President William Dudley would suddenly, as he said last week, be “a little bit nervous that people are taking too much comfort in this low-volatility period.” He was worried that these folks would “take more risk than really what’s appropriate.” Others have chimed in. “Low volatility I don’t think is healthy,” explained Dallas Fed President Richard Fisher, concerned about “a little bit too much complacency.”

But all this bullishness, this complacency is only skin deep. Beneath the layer of the largest stocks, volatility has taken over ruthlessly, the market is in turmoil, people are dumping stocks wholesale, and dreams and hopes are drowning in red ink.

The 50 stocks with the largest market capitalization in the Russell 3000 index are up a not too shabby 4.1% so far this year, while the rest of the stocks in the index (51-3000) are on average down 1.1%. But this average papers over a much uglier reality. Charlie Bilello at Pension Partners did the math in an excellent report. The Russell 2000, which covers the smallest 2000 stocks in the Russell 3000, peaked on March 4. Since then, the 50 largest stocks have climbed 3.8%. And the rest? Here is how they fared by market capitalization rank:

Since March 4, the smallest 500 stocks in the Russell 3000 have plunged 14.7%! The smallest 1000 stocks have dropped 8.4%. But even these averages paper over the bloodletting among individual stocks. 

The greatest hype sectors have been hit the most.

“Cloud” computing – which boils down to renting server space and software off premise – was where our revenue-challenged tech heroes, including Cisco and IBM, saw their salvation because it would be the growth area of the future. The smaller companies in that sector are now careening south.

Other stellar performers: social media outfits – including Twitter, down 54% from its high in December – biotech stocks, ad tech stocks.... Oh my.

Ad tech stocks used to be a white-hot sector. Rubicon Project, whose IPO was in April, is already down 44% from its high. Criteo, which went public in November, is down 50% from its peak in March. Tremor Video, which went public about a year ago, is down 65% from its peak in November. Rocket Fuel, which went public in September, is down 68% from its peak in January. Millennial Media is down a cool 85% from its peak, which was its IPO in 2012.

The Wall-Street hype machine is currently busy explaining that this brutal turmoil and “volatility” beneath the surface, beneath the largest five hundred companies, is just a routine rotation from small caps into the mastodons of the stock market, with the largest 50 stocks benefitting the most. What it is currently not very busy explaining is why the many stocks it had hyped by hook or crook to push them to ridiculous valuations are now getting annihilated. Better not bring it up.

But why worry, with the S&P 500 hitting new highs day after day! Extreme bullishness rules! At least on the surface, and among hard-pressed financial advisors. Meanwhile, the “larger, institutional players are systematically rotating out of illiquid small-cap names and hiding in names with the highest liquidity,” Bilello writes. “They are at the very least anticipating a more difficult market environment to come and likely something more severe.”

So that record-breaking bullishness among financial advisors – people whose job it is to advise regular folks what to do with their life savings – is not shared by the big money, and presumably the smart money. They’re busy battening down the hatches.

And throughout, the most important “data” Wall Street hands out via its army of analysts to rationalize these lofty mega-cap valuations is consistently the biggest hoax out there. Read....The Big Hoax Of The Wall Street Hype Machine

The Simple Reason Treasury Yields Are Going Lower: Half A Trillion More Demand Than Supply 06-10-14 Zero Hedge

Back in April 2013, when looking at the dynamics of global treasury supply and demand (and just before the TBAC started complaining loudly about a wholesale shortage of quality collateral), we made the simple observation that between the (pre-tapering) Fed and the BOJ, there would be a massive $660 billion shortfall in supply as just under $1 trillion in TSY issuance between the US and Japan would have to be soaked up $1.7 trillion in demand just by the two central banks.

A year later, bonds yields continue to defy conventional explanation, with ongoing demand for "high quality paper" pushing yields well below where 100% of the consensus said they would be this time of the year, and in this cycle of the so-called recovery, because for the improving economy thesis to hold, the 10Y should have been well over 3% by now. It isn't.

As a result, a cottage industry sprang up in which every semi-informed pundit and English major, voiced their opinion on what it was that was pushing yields lower, and why bids for Treasury paper refused to go away even as the S&P hit record high after record high.

And just like in April of last year, the simplest explanation is also the most accurate one. According to a revised calculation by JPM's Nikolaos Panigirtzoglou, the reason why investors simply can't get enough of Treasurys is about as simple as its gets: even with the Fed tapering its QE, which is expected to end in October, there is still much more demand than supply, $460 billion more! (And this doesn't even include the ravenous appetite of "Belgium" and the wildcard that is the Japanese Pension Fund arriving later this year, bids blazing.) This compares to JPM's October 2013 forecast that there would be $200 billion more supply than demand: a swing of more than $600 billion! One can see why everyone was flatfooted.

As Bloomberg summarizes, “Everybody was expecting supply to come down, but maybe it’s coming down sooner” than anticipated, said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “There’s a shift in sentiment from the beginning of the year when everyone expected rates to move higher."

Here is JPM's math:

QE-driven demand looks set to decline as the Fed tapers. Assuming Fed tapering is completed by October, and no change in BoJ policy, bond purchases by G4 central banks should decline by $500bn vs. 2013 to around $1,080bn this year. All these components of bond demand are shown in Figure 1. The 2014 bar encompasses the projections explained above. In total, bond demand is expected to stay flat vs. last year as an improvement in private sector demand offsets Fed tapering.

How does this compare with bond supply? After peaking in 2010, government bond supply is on a declining trend due to declining government budget deficits.  Spread product supply is also declining driven by European credit supply, which is contracting in both the Corporate and Agency bond space, and securitized products in the US (ABS and non-Agency MBS), which are also contracting. In these supply estimates we only included external rather than EM local debt, as the latter tends to be dominated by local EM investors. We still expect bond supply to decline by $600bn in 2014 to $1.8tr. The balance between supply and demand, i.e. excess supply, looks set to  narrow from +$200bn in 2013 to -$460bn in 2014, a swing of more than $600bn (Figure 4).

Our estimates for bond supply and demand are in notional amounts rather than market values, so a gap between the two is a meaningful concept and should close via market movements. Indeed, the correlation between the estimated gap in Figure 4 and bond yield changes is 0.56, which is significant. Mechanically, the decline in the excess bond supply in 2014 vs. 2013 would imply that the yield of the Global Agg bond index should fall this year by around 40bp by simply looking at what happened before in years with similar excess bond demand to the one projected for this year, i.e. in 2008, 2011 and 2012.

The simple conclusion:

The Global Agg bond index yield has fallen by 30bp so far this year, so most of the projected decline has happened already.

Well, yeah... assuming JPM's massively downward revised estimate of global bond supply is accurate. What happens if instead of $460 billion in excess demand there is $1 trillion, or more? What is the equilibrium rate then?

And there you have it: no crazy de-unrotations, no short squeezes, no unicorn magic voodoo: simple supply and demand.

Furthermore, while we await the demographic hit to arrive sometime in 2017 which will once again send US Treasury issuance soaring as a result of a need to fund budget deficits from a welfare state caring for an aging population, the biggest wildcard until then is just what the US current account will do in the coming years.  Curiously, that also happens to be Bank of America's chart of the day:

The savings gap: The US current account balance, at -1.9% of GDP, is often seen as the trade shortfall. But by definition, it is the gap between savings and investment. Simply put, if we are not saving enough to finance investment, we will need to borrow capital from abroad to fund that gap. The result: a capital account surplus or an offsetting current account deficit. With savings undershooting investment for roughly the past thirty years, the current account has been in negative territory and foreign capital inflows (netted against US outbound capital flows) have bridged that shortfall.

What is ironic here, is that if JPM is accurate in its supply/demand calculation, one of the main reasons why bond yields are tumbling has everything to do with the decline in the US trade, and thus, current account deficit. Because if the US needed more external funding, then it would be able to issue more debt, which would then result in greater supply, and higher prevailing yields. In the meantime, however, since the US government's funding needs, at least for the next 3 years that is, are lower than at any point since Lehman, one can argue that, at least based on declining supply of Treasurys (and US funding needs), the prevailing yield will drift ever lower, making life for the spinmasters (those whose livelihood depends on convincing mom and pop that sliding bond yields is not indicative of a slowing economy) a living hell for the foreseeable future.