Zombie Bonds: Yields Dive to Record Lows Off Renewed Monetization Schemes

Europe intends to liberalize their QE program to switch from buying bonds in the largest economy to the most indebted. This would switch much of the $90 bill or so in monthly appropriations to Italy and Spain and away from Germany.

The second quarter ended. But we’re getting more of the same, large swaths of money chasing yield. I equate these people to zombies, because there’s no rationale behind buying a 1% Spanish or Italian bond, let along a negative yielding Japanese or German. Out of all the western nations, America has the highest yielding government bonds, which is why I am long TLT in size.

These are all record low yields, all due to the creation of money, out of thin air, which is then tossed into the bond market like zombies running after people for their brains.

In case some of you are new to this investing game, let me describe QE in simple terms. Europe has a lot of expenses, so they issue bonds to people, offering a yield to lure them into the fold, sort of like when you took out a mortgage for your home. But instead of waiting for someone to buy their bonds, they create money, out of thin air, and buy the bonds themselves. Yes, they’re literally financing their own debt. This intervention in the bond market is the reason why yields keep plunging, as ordinary investors front run scheduled monthly purchases of debt by central banks.

This is the definition of perversion of economics, a Frankenstonian experiment destined to blow up in our faces.

Hao Zhou was talking extra greasy tonight about the great walled nation of China. He better be careful, otherwise a mobile execution van might accidentally visit him while visiting family, or holiday in Beijing. Zhou is woefully disappointed in private investment in China, which is virtually non-existent. I gather from the words streaming out of his mouth, he’d like China to take a more western approach to fixing ailing economies, such as creating money out of thin air and then taking said dollars and tossing them at the bond and stock markets.

This is the way of the future, the way of the future (extra Howard Hughes).

Mr. Rosenstein, the guru at Jana Partners, got smoked the fuck out in June, down 1.2%–extending his miserable year to -5.8%.

He’s been doing all sorts of stupid shit the past two years, buying and selling, trying to be an activist, and it has done nothing for him–losing 5.4% for all of 2015.

If Barry keeps this nonsense up, he might need to sell some his modern art to maintain the upkeep at his $150 million villa in the Hamptons. His behavior, hitherto and quite frankly, has been unbecoming of a man of his size and stature.

Redemptions loom, Barry! Don’t pick up the phone.

Such kind hearts.

Goldman is gonna teach them English. Google will teach them tech. Airbnb will give them places to stay. Chobani will give them sustenance.

In return, one of these men might blow up one of their buildings.

The companies have pledged to fund programs that assist refugees and aid workers directly. Airbnb Inc., for example, will donate credits for relief workers to book housing through its site. Yogurt maker Chobani, based in upstate New York, has pledged to hire additional resettled refugees.

Goldman Sachs, which has already contributed $4.5 million in response to the crisis, says it will underwrite programs to help refugees learn English and gain employment skills. Alphabet’s Google will provide consulting and technology to nonprofits the company says will help more than 1 million refugees worldwide access information and education this year.

“We are thrilled to be part of this partnership, and to see the White House’s continued leadership in this area,” Roya Soleimani, a spokeswoman for Google, said in an e-mail.

The corporate commitments may give the president some leverage as he pushes other countries to increase their refugee commitments by this fall. Samantha Power, the U.S. ambassador to the UN, said on a conference call Thursday that the UN received just $11 billion of $20 billion it requested for refugee assistance in 2015, forcing the organization to cut rations of food and medicine. Out of 1.2 million refugees that need to be resettled, the UN High Commissioner for Refugees has only found homes for 110,000, Power said.

“That’s just not enough,” she said.

Obama is expected to begin lobbying for increased refugee aid in person next week at a NATO summit in Warsaw. According to the White House, Obama wants to increase global financing for refugees by 30 percent, double the amount spent to resettle refugees, and increase the number of refugees in school and in work by 1 million.

Insanity.

Be sure to review it. I hope that you find this helpful.

On April the 1st, 2016, the SPX closed at 2,072. Heading into today, we were down 2 points. No worries, the stocks Gods responded, in kind, catapulting stocks higher–closing the S&P 500 at 2,098 for a gain of roughly 1%.

Bonds went up like gangbusters, up more than 8%. And commodities did exceptionally well, spearheaded by gains in sugar (+28%), natural gas (+28%) and silver (+21%). Fun fact, old man coal is up 47% for 2016.

The worst performing sector, by far, were the airlines, down 26% for Q2–followed by a sundry of retail-mall based stocks. It was a very poor quarter for the U.S. consumer, as the malls are dead and no one shops any longer.

Moving on.

Silver and gold stocks were up 75 and 44%, respectively. All of the cool money managers, like yours truly, is long gold. Oil stocks were up roughly 15-20% and utilities were outsized winners–up nearly 10%.

Whereas Q1 was about recovery and stemming the flow of blood, Q2 was mainly about a return to an inflationary landscape, one rife with debilitating food prices. However, towards the ass end of the quarter, the data got stodgy and BREXIT really messed up our psyche. Banks got demolished, crushed to pieces, off by 5% for Q2. Most of those losses were applied post BREXIT, after many of them outperformed into BREXIT. It was a real death blow.

REITs were big winners, higher by double digits. The main, underlying theme, aside from ramps into the close, was the search for yield. Negative rates, both in Japan and Europe, have caused investors to flood US markets–allocating into stocks and bonds that pay out good, safe, reliable dividends. I don’t see this changing much, unless the dollar comes under considerable weakness and/or european rates soar.

The NASDAQ finished out June, down by 5%. The last time we had a down June of more than 5% was in 2010. In July of 2010, the NASDAQ surged by 7%. Last year the NASDAQ pressed higher by 4.5%, albeit, in a very choppy month.

Things have properly reflated since the March lows. Markets are, once again, at a cross roads. Will we build upon these gains and position stocks into the fall, technically strong? Or will the European uncertainty, coupled with the psychotic negative rate environment, give us more of the same sideways choppy, hair raising, volatility?

Stay tuned. It should be fun.

NOTE: Exodus members, I will give my q2 review in the blog section shortly.

This is a fascinating interview. By the sound of Jes Staley, CEO of Barclays, this is a company in panic mode. He’s selling all non-core assets, assets that were supposed to be the driving force of growth. Instead, it’s a fire sale and desperation is in the air.

Staley insists the company will not need to raise new capital. How many times have we heard this? Moreover, he says the company is moving very rapidly to execute assets sales, for the explicit purposes of increasing its share price, in order to ensure access to capital markets.

Sounds grim.

BCS is off by 40% in 2016.

Good news for Italian and Spanish bond players. Yields in highly indebted, bad balance sheet, European nations are plunging on chatter that the ECB is thinking about changing the QE rules, shifting purchases away from the size of the economy to the size of the debt.

This, of course, is laughable fuckery of the first magnitude.

In other words, since Germany is the largest economy in Europe with the best balance sheet, the ECB will begin buying less of the high quality paper in exchange for horrid paper, shoveled out by nations like Italy and Spain.

“It’s the type of thing the market wants to hear,” said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP in Dublin. “Out with the bunds, in with the bonos,” he said, referring to German and Italian securities.

The Italian 10 yr is down 23 bps to 1.11%, a 17% drop.

The Spanish 10 yr is down 22 bps to 1.00%, a 18% drop.

German bunds are up 2 bps to -0.10, a 16% jump.

Italian debt is 132% to GDP.

Markets love this shit and is eating it up like a bowl of freshly served feces. Yummy!

File this one under ‘what could go wrong?’

Having dealt with high net worth clients my entire adult life, I can tell you right now that anyone that is a client of this moron cringed while watching this. His clients aren’t to be worried about ‘illiquid’ investments, because ‘they have a lot of cash.’ Really?

In other words, his clients, this CIO of ‘ultra high net worth’ people, not to be confused with ordinary high net worth people (think Sir Larry v Gordon Gekko), has no problem, whatsoever, tossing his clients money into flaming barrels of trash because they’ve got plenty of it.

Way to manage risk, Simon Smiles.

It was a nice gesture, really. The BREXIT ploy gave bargain seekers the discounts in equities they craved, all the while the British people were played as fools–arguing with one another over a referendum that might never see the light of day.

Markets are certainly behaving as if the fix is in. Nigel Farage, the man at the vanguard of the Brexit campaign, says that he’s nervous the wishes of the people will not be honored and is detecting backsliding amongst many of the ‘leave’ campaigners in parliament.

Somewhere, some sneaky German is smirking.