Dave Says It's Getting Worse!!!
Largest US Pension Fund Suffers Worst Annual Return Since Financial Crisis Due To Heavy Stock Losses
ZeroHedge.com Jul 18, 2016 2:06 PM
While we have often documented the dramatic underperformance by the hedge fund industry over the past decade courtesy of a centrally-planned market in which it no longer pays to "hedge", culminating with countless hedge fund closures and substantial redemptions (mostly by now redundant Fund of Funds managers), today we learn that "vanilla" asset managers were also hurt over the past year in which the S&P went nowhere, and not just in Japan where the gargantuan, $1.4 trillion GPIF recently suffered major losses, but in the US as well.
Case in point: Calpers, the largest U.S. public pension fund which as the WSJ reports posted its lowest annual gain since the last financial crisis due to heavy losses in stocks.
The California Public Employees’ Retirement System, or Calpers, said it earned 0.6% on its investments for the fiscal year ended June 30, according to a Monday news release, barely turning a profit fro the full year. The last time Calpers lost money was during fiscal 2009 when the fund’s holdings fell 24.8%.
It was the second straight year Calpers failed to hit its internal investment target of 7.5%. In 2015, Calpers earned only 2.4%, which suggests that as a result of the dramatic two-year underperformance relative to the funds' own internal target returns, public pensions in California are not only significantly underfunded as of this moment, and getting worse.
Calpers oversees retirement benefits for 1.7 million public-sector workers.
As the WSJ notes, "workers or local governments often must contribute more when pension funds fail to generate expected returns." The problem is when either workers nor local governments can, or want to, contribute more.
Unlike scores of under-performing hedge funds whose primary investors are already wealthy individuals who can weather a down year (or more, in the case of Pershing Square), Calpers’ annual results are watched closely in the investment world. It is considered a bellwether for U.S. public pensions because of its size and investment approach. Many pensions currently are struggling because of a sustained period of low interest rates.
“This is a challenging time to invest,” Ted Eliopoulos, Calpers’ chief investment officer, said in the release. Which is odd, because one look at the ticker shows the S&P trading at all time highs.
The giant California plan ended 2016 with roughly $295 billion in assets, and more than half of those funds are invested with publicly traded stocks. Those investments declined 3.4%, though the performance beat internal targets.
Fixed income produced the largest returns at 9.3%, though the results under performed Calpers’ benchmark. The California retirement giant’s private-equity portfolio posted returns of 1.7%.
Real estate holdings returned 7.1%, but that was below Calpers’ internal target by more than 5.6 percentage points.
Which brings us to a post from two weeks ago, namely BofA's take why bond yields are set to hit record lows after the current hiccup: it has to do with pension fund capital reallocation and disenchantment with the equity asset class, which absent PE multiples soaring to 30x or more, will hardly generate substantial returns from this moment on. As BofA wrote, "treasuries make up nearly 50% of the positive-yielding DM sovereign bonds; curves are 100bp flatter; and there is a greater likelihood that 10y yields probably won’t go back to even 2.5%. We would expect a bigger capitulation by pension managers in the coming months/years."
Ironically, if more of Calpers' assets were invested in Treasuries, it would had an absolutely stellar return courtesy of a record YTD profit generated by longer maturity bonds, especially the 10 and 30Y as everyone rushes to capture whatever yields they can.
Red Flags Everywhere!
Fed's Undercover Bailout???
Risk On/Risk Off: What Schizophrenic Markets Are Telling Us
Submitted by Charles Hugh-Smith via OfTwoMinds blog,
These trends cannot be reversed with yet another rate cut or another "whatever it takes" announcement.
In the conventional investment perspective, risk-on assets (i.e. investments with higher risks and higher potential returns) such as stocks are on a see-saw with risk-off assets (investments with lower returns and lower risk, such as Treasury bonds). When risk appetites are high, institutional managers and speculators move money into stocks and high-yield junk bonds, and move money out of safe-haven assets such as gold and U.S. Treasuries.
But recently, markets are no longer following this convention. Safe haven assets such as precious metals and Treasuries are soaring at the same time that stock markets bounced strongly off the post-Brexit lows.
Risk-on assets (stocks) rising at the same time as safe-haven assets is akin to dogs marrying cats and living happily ever after.
What the heck is going on?
Why are markets acting so schizophrenic? What’s changed?
Before we cover the dynamics that are in play, let’s review the market gyrations so far in 2016.
The Market Gyrations Of 2016
Risk-off / safe havens
Gold: from $1,060/oz in January to $1,360/oz (as of July 5)
Silver: from $13.90/oz to $20/oz
U.S. dollar: from 99 in January to 92 in May to a current level around 96. (The DXY dollar index was 80 in mid-2014 and topped 100 in March 2015.)
U.S. 30-year Treasury bond yield: from 3.00% in January to 2.14% in early July.
TLT (20 year bond ETF): from 120 in early January to 142 in early July.
S&P 500: from around 2,035 in early January to 1,820 in February, topping 2,100 in April, then a decline below 2,000 in June and back to 2,100 by July 1 - and a new all-time high just today. (SPX was above 2,100 in mid-2015, then it plummeted to 1,825 before bouncing back to 2,100 in late 2015.)
JNK (high-yield bond ETF): from 36.5 in May 2015 to 32.5 in early January to 30.5 in February to 35.5 on July 1.
In broad brush, the tide that raised all risk-on boats for the past seven years is now ebbing.
The momentum that drove the stock market higher since early 2009 has weakened. Stocks have repeatedly plummeted sharply over the past year, only to be saved by central bank jawboning of the now-shopworn “whatever it takes” variety, or by coordinated central bank purchases of stocks, futures, ETFs, etc.
The momentum has clearly shifted to the risk-off safe-haven assets such as precious metals and sovereign bonds. This flood-tide of cash into bonds has helped push yields into negative territory, an unprecedented development: owners of capital are so concerned about getting their money back that they are accepting negative returns, i.e. guaranteed losses, to park their cash.
In effect, capital is focusing less on earning a return on cash and more on making sure the cash is returned. Paying 1% for the privilege of parking capital is making cash and gold look attractive, as the cost of holding cash and precious metals is relatively modest, and the upside is potentially significant.
Indeed, the flood-tide of money into precious metals is attracting speculative hot money: Chinese Day Traders Are Behind Silver Frenzy Moving Prices (Bloomberg)
What has caused this sea-change in risk appetite and sentiment? A number of fundamental dynamics are now in play globally.
Diminishing Returns on Monetary Policy
What worked so effectively in the aftermath of the 2008-09 Global Financial Meltdown is no longer working: lowering interest rates and pumping more money into the financial system is no longer sparking risk-on animal spirits. Rather, pushing these monetary policies to new extremes is now perversely generating negative consequences: rather than pushing growth higher, the policies are causing stagnation in the real economy and unhealthy speculative frenzies that last a few days or weeks.
John Rubino recently covered the diminishing returns on Abenomics in Japan: Something Huge Is Coming From Japan. Policies that were intended to expand exports by driving the Japanese yen down have failed, as the yen is drifting higher despite ever-greater policy extremes.
In China, the solution that worked in the past—expanding credit to new extremes—has not generated real growth in the real economy. All it has accomplished is yet another housing bubble in Tier 1 cities and a speculative hot-money frenzy as cash sloshes from one asset class to the next in rapid succession. Not only are the positive returns on these monetary policies diminishing; these new extremes are unleashing new systemic risks in global markets. Kyle Bass expects a devaluation in China’s currency that is beyond the control of its central bank, and Analyst Andy Xie believes "China Is Headed For A 1929-Style Depression" as a result of its unprecedented expansion of debt.
In Europe, the same “whatever it takes” monetary easing policies that sparked a global risk-on rally in 2012 have failed to spark real growth in Europe or save its banking sector: EU Banks Crash To Crisis Lows
The Social Contract Is Unraveling
Around the world, the message being sent to the average citizen is “the lifestyle you ordered is out of stock”. The promises of rising consumption, steady employment, secure pensions and guaranteed healthcare are running aground on the unwelcome reality that promises made decades ago can no longer be kept in a world of limited resources, stagnant growth, negative demographics and rising income/wealth inequality.
The status quo promised that growth could be restored and its promises fulfilled with extraordinary monetary and fiscal policies, but now that the returns on these policies are diminishing, people are waking up to the reality that the “good old days” of cheap, abundant energy and steady expansion of consumption, jobs, profits and taxes are over.
People are also waking up to the reality that these unprecedented monetary policies have exacerbated income/wealth inequality, as the few with access to near-zero-cost credit have scooped up productive assets that have boosted their income and wealth at the expense of the many without access to what I call free money for financiers.
The failure of these policies to accomplish anything but widen the income/wealth gulf has de-legitimized not just the policies but the institutions that issued them: central banks and states.
Rather than lay out a practical solution to the demographic/resource constraints that required proportionate sacrifices from everyone, central banks and states have continued to promise what amounts to a free lunch—borrowing our way to prosperity by borrowing from future earnings and future taxpayers.
The moral and financial bankruptcy of this policy is now evident to all, and the result is profound uncertainty. This uncertainty is no longer short-term, as people have lost faith in the promise that yet another expansion of monetary policy will fix what’s broken.
Uncertainty Is Now Long-Term
It’s an investment maxim that "markets don’t like uncertainty," and now that the limits of extreme monetary policies are self-evident, uncertainty stretches far beyond any political time horizon. Any confidence that another interest rate cut or another quantitative easing asset purchasing program will magically restore flailing risk-on animal spirits is fleeting, for a very good reason: there is no reason to place any long-term confidence in policies that are so obviously yielding diminishing returns.
Long-Term Political Instability
The realization that conventional monetary/fiscal policies have failed those who have been turned away from the 'free money for financiers’ banquet is fueling political rebellion against the status quo. This global grassroots movement has found expression in the recent Brexit vote in the United Kingdom and in the rise of anti-establishment politicians and parties around the globe.
Profits Are Declining for Structural Reasons
The ultimate foundation supporting risk-on assets is rising profits: as profits increase, stocks rise and the multiples of valuation expand. Higher stock prices fuel a self-reinforcing virtuous cycle feedback in which hot-money speculators pile in, pushing prices higher, and companies are able to issue more debt to buy back their own shares. This reduction in outstanding shares pushes the per-share value higher, which then fuels more speculative buying, and so on.
Now profits are harder to come by for a number of reasons. The best way to visualize this stagnation is the S-Curve: rapid expansion leads to a boost phase in which everything goes right. But inevitably, the fuel for this expansion is consumed, and growth stagnates and then rolls over.
In the classic investment cycle, some new engine of growth emerges to re-energize a stagnant economy. Over the past 35 years, the new engines of growth have been favorable demographics, financialization, the rise of the Internet, and the emergence of China/India/emerging markets (globalization).
Now that financialization and globalization have run their courses, the central banks and states have attempted to restart growth with debt. Injections of new credit work wonders when economies are lightly indebted, but once they’ve become heavily indebted, adding more credit/debt accomplishes less and less in the way of sustainable real growth.
Globalization has expanded productive capacity to the point that most sectors of the global economy suffer from excess capacity. This makes it harder to extract a premium, i.e. profit, for producing goods and services.
The rapid advances in software and automation are gathering speed as these technologies are commoditized, meaning they are becoming cheaper and more abundant. Markets that are commoditized offer few profits, as somebody somewhere else is producing the same goods and services for less.
This Sea-Change Results In Dangerous Waters Ahead
These trends cannot be reversed with yet another rate cut or another “whatever it takes” announcement of central bank bond purchases. Greater volatility and uncertainty are baked in the cake at this point as what worked before fails to produce the rescues it once did.
For the individual investor looking to preserve capital, these will be treacherous waters to navigate. Not only is another crisis approaching, but it will not unfold like the last global crisis in 2008. With the greater pressures in play now -- economically, demographically, resource-wise, and politically -- the fracture lines will be different and likely more disruptive.
Celente - 2016 Panic Near???
This is what a Currency Crash Looks like
Post by Newsroom Superstation95.com
- Jul 07, 2016
Since the British people voted to Exit the European Union, not one single thing has changed - but bankers and investment houses are crashing all over Europe, slamming the British currency nonetheless. Why? Power!
This article was written by Michael Snyder and originally published at his Economic Collapse blog.
Editor’s Comment: Those of us who’ve been around for the long run knew that a big currency crash was coming. The assumption was that the big event would center around the dollar losing its world reserve status; but what if that only comes in tandem with EU disintegration, trouble in the Chinese economy and continued disruptions in price for oil and other commodities.
There are many scenarios that can play out, but one this is clear: currencies are not stable, and they are not invincible. Whether there is a larger plan at work, or there is just turbulence for Britain and European banks, major financial decisions are determining the future as we speak.
“Currency Crash” Drives British Pound To 31 Year Low, Deutsche Bank Sinks To Lowest Level Ever
by Michael Snyder
The fallout from the Brexit vote continues to rock the European financial system. On Wednesday, the British pound dropped to a fresh 31-year low as confidence in the currency continues to plummet. At one point it had fallen as low as $1.2796 before rebounding a bit. As I write this, it is still sitting at just $1.293. Meanwhile, the problems for the biggest banks in Europe just continue to mount. At one point on Wednesday Credit Suisse hit an all-time record low, and German banking giant Deutsche Bank closed the day at an all-time record closing low of 12.93. Overall, Europe’s Stoxx 600 Bank Index closed at the lowest level in almost five years. What we are watching is a full-blown financial meltdown in Europe, but because it is not personally affecting them yet, most Americans are not paying any attention to it.
The collapse of the British pound that we have seen since the Brexit vote has been nothing short of breathtaking. In fact, CNN says that this “is what a currency crash looks like”…
This is what a currency crash looks like. The pound has slumped to $1.28, its lowest level in more than three decades.
Investors are dumping the pound following Britain’s vote to leave the European Union on June 23. The pound has dropped roughly 15% since the referendum day, when it reached $1.50.
After appearing to stabilize, the pound resumed its decline this week after three big asset management firms halted withdrawals from real estate investment funds.
Of course this is likely only just the beginning. There are some analysts that are suggesting that the British pound could eventually hit parity with the U.S. dollar at some point. We are seeing seismic shifts on the foreign exchange market right now, and this is going to affect trillions of dollars worth of currency-related derivatives. It will be exceedingly interesting to see how all of this plays out.
Meanwhile, Deutsche Bank continues to get absolutely hammered.
If the biggest and most important bank in Germany is not completely imploding, then why does the stock price continue to crash time after time?
Since the start of 2016, the value of Deutsche Bank has fallen by half, and many have pointed out that the trajectory that it is on is very, very similar to Lehman Brothers in 2008.
My regular readers are probably sick and tired of hearing me warn about Deutsche Bank, so today I will let someone else do it. According to an article that was just published by the BBC, Deutsche Bank is now “the most dangerous bank in the world”…
Deutsche Bank shares hit a new record low today. It’s value has halved since the beginning of the year.
So is it now the most dangerous bank in the world?
According to the International Monetary Fund – yes.
Last week, the IMF said that, of the banks big enough to bring the financial system crashing down, Deutsche Bank was the riskiest. Not only that, Deutsche Bank’s US unit was one of only two of 33 big banks to fail tests of financial strength set by the US central bank earlier this year.
At this point Deutsche Bank is scrambling to raise cash to stave off an imminent implosion. Just today, I came across a report about how they plan to sell at least a billion dollars worth of shipping loans in order to bring in some much needed funds. Many of the steps that they are taking are reminiscent of what Lehman Brothers tried to do just prior to their collapse, and that alone should tell you something.
3rd British Fund LOCKS DOWN; Investors CANNOT get their money
Post by Newsroom Superstation95.com
- Jul 05, 2016
Things are getting bad fast in Britain... a third major Investment company has now locked investors OUT of their own money; preventing withdrawals from accounts! Financial Crisis is developing fast.
Domino #1: *STANDARD LIFE INV PROPERTY DROPS 15%; TRADING IN FUND SUSPENDED
In a stark flashback to the catalytic event that ultimately brought down Bear Stearns in 2008, and subsequently unleashed the greatest financial crisis in history, last night we reported that Standard Life, has been forced to stop retail investors selling out of one of the UK’s largest property funds for at least 28 days after rapid cash outflows were sparked by fears over falling real estate values.
As we further noted, citing an analyst, “given the outflows the sector seems to be experiencing, this could well put downward pressure on commercial property prices,”said Laith Khalaf, senior analyst at Hargreaves Lansdown. “The risk is this creates a vicious circle, and prompts more investors to dump property, until such time as sentiment stabilises.”
As we concluded, whie Brexit is not a Humpty Dumpty event, where all the Fed’s horses and all the Fed’s men can’t glue the eggshell back together, it is an event that forces investors to wake up and prepare their portfolios for the very real systemic risks ahead. And, indeed, if Standard Life was the first domino, moments ago the second domino also tumbled when as Bloomberg reported that Aviva Investors Property Trust is as of this moment "frozen" citing "extraordinary" market conditions.
Domino #2: *AVIVA SUSPENDS TRADING ON AVIVA INVESTORS PROPERTY TRUST
As the FT adds, Aviva Investments said it had prevented retail investors from selling out of its £1.8bn UK Property Trust since Monday afternoon.
Cited by Bloomberg, Aviva said in an email that "market circumstances, which are impacting the wider industry, have resulted in a lack of immediate liquidity" adding that "we have acted to safeguard the interests of all our investors by suspending dealing in the fund with immediate effect.... Suspension of dealing will give Aviva Investors greater control in managing cash flows and conducting orderly asset sales in order to meet our obligations to investors.”
And now Domino #3: *M&G SUSPENDS TRADING IN M&G PROPERTY PORTFOLIO FUND
As Bloomberg reports, M&G suspends trading in property portfolio, feeder funds, according to statement on website.
"Investor redemptions in the fund have risen markedly because of the high levels of uncertainty in the U.K. commercial property market since the outcome of the European Union referendum.
Redemptions have now reached a point where M&G believes it can best protect the interests of the funds’ shareholders by seeking a temporary suspension in trading."