Pension Funds in Historic Surplus Eye $1 Trillion of Bond-Buying (Consumers In Bad Shape With Personal Savings Down 53.5% YoY And Real Weekly Earnings Negative For 21 Straight Weeks, GOLD Soaring!)

Despite polticians like President Biden cheerleading his great economic accomplishments and Treasury Secretary Janet Yellen dipping into Social Security to fund the Federal government (much like Biden’s dipping into the Strategic Petroleum Reserve), there are serious problems facing America’s middle class and low-wage workers. Inflation is still brutal (but slowing) and REAL weekly earnings growth has been negative for 21 straight months (meaning that Biden’s bragging about wage growth has been destroyed by the inflation created by his energy policies and massive spending sprees). Personal spending rate YoY has plunged -53.5% to cope with inflation. To quote Joe Biden (Chauncy Gardner), “All is well in the garden.” But all is not well in the garden. As a result, we are now seeing pension funds jumping from stocks to bonds.

(Bloomberg) For some of America’s biggest bond buyers, the soft-versus-hard-landing debate on Wall Street might be a sideshow. They’re getting ready to swoop in with as much as $1 trillion, no matter what happens.

One of the pillars of the trillion-dollar pension fund complex is now awash in cash after struggling under deficits for two decades. This rare surplus at corporate defined-benefit plans, thanks to surging interest rates, means they can reallocate to bonds that are less volatile than stocks — “derisking” in industry parlance. 

Strategists at Wall Street banks including JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. say the impact will be far-reaching in what’s already being coined “the year of the bond.” Judging from the cash flooding into fixed income, they’re just getting started.

“The pensions are in good shape. They can now essentially immunize — take out the equities, move into bonds and try to have assets match liabilities,” Mike Schumacher, head of macro strategy at Wells Fargo, said in an interview. “That explains some of the rallying of the bond market over the last three or four weeks.”

An irony of pension accounting is that a year like last year, with its twin routs in stocks and bonds, can be a blessing of sorts to some benefit plans, whose future costs are a function of interest rates. When rates climb, their liabilities shrink and their “funded status” actually improves.

The largest 100 US corporate pension plans now enjoy an average funding ratio of about 110%, the highest level in more than two decades, according to the Milliman 100 Pension Funding index. That’s welcome news for fund managers who suffered years of rock-bottom interest rates and were forced to chase returns in the equity market.

Now, they have an opportunity to unwind that imbalance and Wall Street banks pretty much agree on how they’ll use the extra cash to do it: buying bonds, and then selling stocks to buy more bonds. 

Already this year fixed-income flows are outpacing those of equity funds, marking the most lopsided relationship since July. 

How much of that is due to derisking by pension funds is anyone’s guess. Some of the recent rally in bonds can be ascribed to traders hedging a growth downturn that would hit stocks hardest.

But what’s obvious is their clear preference for long-maturity fixed-income assets that most closely match their long-dated liabilities.

Pension funds need to keep some exposure to stocks to boost returns, but that equation is changing. 

Once a corporate plan reaches full funding, their aim is often to derisk by jettisoning stocks and adding fixed income assets that line up with their liabilities. With the largest 100 US corporate defined benefit funds riding a cash pile of $133 billion after average yields on corporate debt more than doubled last year, their path is wide open.

With yields unlikely to go above their peak level once the Federal Reserve hits its terminal rate of about 5% around the middle of the year, there’s rarely been a better time for them to make the switch to bonds. 

Even if growth surprises on the upside and yields rise, causing bonds to underperform, the incentive is still there, said Bruno Braizinha, a strategist at Bank of America.

“At this point and considering where we are in the cycle, the conditions are favorable for de-risking,” Braizinha said in an interview. 

JPMorgan’s strategist Marko Kolanovic estimates derisking will lead pension managers to buy as much as $1 trillion of bonds; Bank of America’s Braizinha says a $500 billion buying spree is closer to the mark.

How about gold? As the probability of a US debt default looms (as Bride of Chucky Schumer stomps his feet and says ” No budget cuts!”) and the US Treasury 10Y-3M yield curve remains inverted, gold is soaring.

Perhaps pension funds should by gold rather than cryptos.

MBA Purchase Applications Drop -.58% Since Last Week, Refi Apps Rise 3.15% WoW As Mortgage Rates Declined 3rd Straight Week (Purchase Apps Down -39% Since Same Week Last Year, Refi Apps Down 77%)

Falling mortgage rates are having a predictible effect on mortgage refinancing applications, but not so much for mortgage purchase applications.

Mortgage applications increased 7.0 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 20, 2023. This week’s results include an adjustment for the observance of Martin Luther King, Jr. Day.

The Refinance Index increased 3.15 percent from the previous week and was 77 percent lower than the same week one year ago. The unadjusted Purchase Index decreased 1 percent compared with the previous week and was 39 percent lower than the same week one year ago.

Generally speaking, declining mortgage rates are due to declining 10-year Treasury yields. And 10-year Treasury yields decline as the economy weakens. Of course, M2 Money growth YoY is now 0% as The Fed tightens.

On a humerous note, US Treasury Secretary Janet “The Evil Gnome” Yellen is visiting Africa and lecturing them on prudcnt sovereigh debt management. Seriously. China responded with “Fix the US debt problems before you lecture anyone else.”

The Secret Panel? US Yield Curve Inversion, CDS Default Price, SOFR Signals More Rate Increases Then Rate Cuts

Ah, the start of a new week with Treasury Secretary Janet Yellen arguing (with a straight face) that there is no room in the Federal budget for cuts. Apparenly, Yellen never read any of the massive, pork-laden spending bills signed by Biden (no one else did in Congress either, nor did Biden).

Let’s start with the US credit default swap (1 year). It remains high at 68.72 (the price of insuring against a US default). And the US Treasury yield curve (10Y-3M)? It remains deeply inverted at -114 basis points this morning signaling an impending US recession.

Then we have SOFR (Secured Overnight Financing Rate). SOFR futures are pricing for the Federal Reserve to hike rates a few more times and to start cutting before the end of this year. The pricing for the 2023 rate path is little changed from a month ago, but this year the market has priced in deeper cuts in 2024, with SOFR now seen below 3% by early 2025 before stabilizing. The implication is that hedging recession and significant rate cuts in 2024 now seems to be fully priced in, yet there’s a risk that the Fed cuts even deeper than the market is factoring in.

We think the market is partially preparing for the risk of even deeper rate cuts than linear instruments are pricing. To see how dramatic those are, we can look at options on SOFR futures and model what’s being priced by the volatility surface.

We are seeing the same story if we look at Fed Funds Futures data. Fed rate hikes until June, then rate cuts to follow.

How did Biden’s lawyers and now the DOJ figure out that Biden has classified documents all over the place? Probably from reading “The Hardy Boys.” Except that Biden didn’t cleverly hide classifed documents. Rather, he carelessly left them lying around at The Penn Biden Center and his home in Wilmington Delaware that he shared with his son, Hunter. And probably on the Amtrak train he would take from Wilmington to Union Station in DC. And probably at Chinatown Garden, a short walk from The White House.

United States Yield Curve 3M10Y Most Inverted In 30+ Years! (But Other Assets Signaling Cooling Odds Of Recession)

The first headline I saw when I turned on Bloomberg.com was “DOJ Officials Find More Classified Documents at President Biden’s Home.” This is an improvement! So far, the task has been handled by Biden’s private attorneys who don’t have proper security clearance; at least the Justice Department is finally getting involved!

But back to the US yield curve. It is now the most inverted in 30+ years as M2 Money growth stalls. Inverted yield curves have preceded recessions in the past.

But as China reopens and Europe is experiencing a warmer winter than expected (meaning that Europe has sufficient natural gas reserves) and US inflation cooling,

we are seeing market-implied odds of a recession falling in January.

I am still betting on a recession in the second half of 2023.

Sign Of The Times? Citi Economic Surprise Index Falls To -17.70 As US CDS (Default Insurance) And Fed Reverse Repos Remain Elevated

Its a sign of the times!

First, US default risk as measured by credit default swaps remains elevated (primarily because Biden and Democrats refused to cut wasteful spending or reign in non-retirees on Social Security). And NY Fed’s Reverse Repos remain elevated.

And then we have Citi’s economic surprise index for the US at -17 as The Fed slows money growth to 0%.

I wish I knew a place where inflation and insane Federal government spending and policies doesn’t exist.

Janet Yellen And Treasury Tap Retirement Funds (Social Security) to Avoid Breaching US Debt Limit (US CDS Elevated To 2013 Debt Crisis Level)

US Treasury Secretary Janet Yellen has signalled that she will “tap” into Social Security to avoid breaching the US debt limit. Of course, if she does, it is unlikely that she will return the dollars.

The Credit Default Swaps 1-year for the US (insurance against default) sits at 68.55, near the highest since 2013 debt ceiling crisis.

Notice that the debt ceiling keeps on climbing once the Kabuki Theater of Democrats and Republicans is over.

The Volatility Cube for the US CDS 1 year signals that it will all be over soon.

So, Yellen and Treasury are threatening us with taking away Social Security and Medicare if we don’t agree with their lavish Pelosi-like spending sprees and debt.

And why exactly is Janet Yellen flying to China? I admit Washington DC has lousy Chinese food, but at least I hope Yellen takes Hunter Biden with her to negotiate the impending US default and debt workout.

US Default? Since 2008, Net Interest Costs UP 192%, Social Security And Health Entitlements UP 140%, Nondefense Discretionary Spending UP 76% Based On 2032 Federal Budget

Newly-minted US House Speaker Kevin McCarthy faces a daunting task: trying to avoid a US debt default. As I have discussed many times before, nothing has been the same since the US housing bubble and near-collapse of the banking system that produced an expensive bailout of seemingly all financial institutions. After 2008, Federal spending has gone out of control. The budgetary hawks (or pigeons) in the US House of Representatives (with Pelosi, Boehner, Ryan then Pelosi again) went on Federal spending sprees of epic proportions.

The Manhattan Institute has a nice chart showing the explosion in the Federal budget since 2008. Of particular note, interest payments on the Federal debt has increased by a staggering 192%. On the non-interest spending front, Social Security and Health Entitlements have increased by 140% while Nondefense Discretionary Spending has increased 76%.

The massive increase in Federal debt interest is due to both increased Federal spending and rising interest rates thanks to The Federal Reserve raising rates to fight inflation.

But what will McCarthy and House Republicans recommend cuts in? Tighter restrictions on who qualifies for Social Security and particularly Social Security Disability payments?

The odd factoid is that Defense and Wars budget is up less than 1% from 2008 to 2032. So, Ukraine military aid is coming from somewhere, but not from the Defense budget. Is Ukraine another entitlement program?

Rest assured that after debate, the House will pass a budget and, provided that virtually nothing was cut, the Senate will gleefully agree to more spending and “Top Secret Documents” Biden will sign it.

After he parks his gorgeous Corvette Sting Ray, that is.

The Great Dislocation! M2 Money Growth Crashes To 0% As M2 Velocity Near Lowest In History (21 Straight Months Of Negative Weekly Earnings Growth)

The 2020 Covid outbreak and the resulting government shutdowns and school closures begat a Washington DC spending spree and Federal Reserve monetary stimulus barrage unlike anything other time in history. Congress and Administrations love to spend other people’s money, but as Rahm Emanuel once said “You never let a serious crisis go to waste. And what I mean by that it’s an opportunity to do things you think you could not do before” And wow, did they ever binge spend and expand the M2 Money supply. I call it “The Great Dislocation” of the economy and we never recovered from it.

Or as Ray Wylie Hubbard sang, “Drinking with my low life companions, dancin’ with a woman who is not my wife.” This should be the theme song for Washington DC and their manic spending.

But after the massive spending splurges and Fed monetary stimultypto, The Fed finally started withdrawing “the punch bowl” to combat inflation. M2 Money growth year-over-year (YoY) is now 0%. And with inflation, US average weekly earnings growth YoY turned negativc and has been negative for 21 straight months.

After the spending explosion under Pelosi/Schumer and Powell’s monetary, M2 Money velocity (GDP/M2 Money) crashed to it lowest level in history. So now we have depressed money velocity and no M2 money growth. And the US still has 21 straight months of negative weekly earnings growth.

But former Fed Chair and current Secretary of Treasury Janet Yellen is pleased that inflation is FINALLY slowing which Yellen attributes to relaxing supply chains. Or is it declining M2 Money growth, Janet?

Now that the Federal government’s spending spree and The Fed’s monetary stimulypto dislocated the US economy, we are headed for a recession with no ammunition left in The Fed’s arsenal.

After all. The Federal Reserve has been destroying consumer purchasing power since 1913. And we may be at the end of The Fed’s monetary rope.

Even worse, we have Joe Biden as President, who curiously has been found to have classified documents in his possession from when he was Vice President, at least, at two locations (his Wilmington DL home that his son Hunter had access to and the now infamous Penn Biden Center in Washington DC). Even worse, Biden seems to be talking to dead world leaders like Germany’s Schmidt and France’s Mitterand.

Knowing Biden’s penchant for blatant lying and carelessness, I wouldn’t be surprised if this is a stack of classified documents on the table during his meeting with Treasury Secretary Janet Yellen.

Let’s hope Biden isn’t saying that he is talking to late Robert Kennedy, the former US Attorney General.

A Year Of Pain! Investors Struggle In A New Era Of Higher Rates And Goin’ Green, Worst Combined Stock And Bond Returns Since 1871 (Buffet’s Berkshire Hathaway Was UP 4% In 2022, Cathie Wood’s ARK Innovation Was DOWN -67%)

2022 is one of the record books and not in a Tiger Woods way. Call it a year of pain.

First, the US enacted policies that drove up energy prices (goin’ green) that reverberated through the entire economy in the form of higher prices. Second, The Federal Reserve, in attempt to combat runaway inflation, started removing the excessive monetary stimulus that had been around since Fed Chair Bernanke initiated QE, the seemingly unlimited purchase of Treasury and Agency MBS securities. Janet Yellen continued the massive asset purchases and zero interest rate policies or ZIRP. Now that inflation has struck the American middle class hard, we are seeing Fed Chair Powell doing what Bernanke and Yellen wouldn’t do — remove the monetary punchbowl.

Using Robert Shiller’s on line data, US stocks and bonds have had an awful year, the worst combined year since 1871.

US equity returns have been demolished under the NEW dual mandate (goin’ green = rising prices = Fed tightening).

Let’s see how two of the most famous investment gurus did in 2022, Warren Buffet and Cathie Wood. Buffet’s Bershire Hathaway Class A equity was UP 4% in 2022, while Cathie Wood’s ARK Innovation ETF collapsed by -67% in 2022.

Here is the clinker. The US economy (as well as the global economy) seem dependent on “cheap money” from Central Banks like The Federal Reserve. So the question is … will The Fed pivot? Fed talking heads are saying no, but Fed Funds investors are saying yes to a pivot after June 2023.

Ulysses S Grant was the President the last time the combined stock and bond market was this bad.

Surviving Inflation And The Fed: ARK’s Cathie Wood or TSLA’s Elon Musk? Or Bitcoin? (Answer: All Are Down Around -68% YoY)

Trying to survive high inflation is difficult, but surviving The Federal Reserve’s counterattack to inflation is even more difficult.

Two people who constantly appear in the business are ARK’s Cathie Wood and TSLA’s Elon Musk. A third we can add is Sam Bankman-Fried of FTX and Alameda Research infamy.

So which one was the best at surviving inflation and The Fed’s counterattack? Answer? None of them.

Since the same day last year, we have seen M2 Money growth plunge and The Fed Funds Target rate rise rapidly from 25 basis points to 4.50%, a rapid increase. But over the last year, Cathie Wood and ARK fell -68.4%, Elon Musk’s Telsa fell -68.9% and Bitcoin fell -65.1%

So, ARK, Tesla and Bitcoin were demolished in 2022 thanks to inflation and The Fed’s counterattack. But the NASDAQ index was down too, but only -35.2% YoY.