Staying Out of the Doghouse During the Age of Releveraging

•    “There’s a bubble in the confidence that the Federal Reserve can get us all out of this without adverse consequences.”  Doug Kass – December 2014 

•    “Own high quality bonds and low P/E, high, quality stocks if you want to stay out of the doghouse.”  Bill Gross – March 15, 2015 

•    “The high-yield market has never faced a rising-rate environment, and investors have little historical data on which to base forecasts.”  Jeffrey Gundlach - April 14, 2015 

•    “The reason for the remarkably slow expansion over the past decade and a half has to do with the accumulation of too much debt.”  Dr. Lacy Hunt – April 17, 2015 

•    “U.S. banks have collectively run down their holdings of cash and Treasuries at over a 13% annual rate over the past 13 weeks to fund a near 11% run up in net new loans to households and businesses.  We are now seeing a very tentative uptick in core inflation and in median measures of inflation.”  David Rosenberg – April 21, 2015

The Age of Releveraging

- - - - - - -

Commercial real estate releveraging its way to 2007 levels

- - - - - - -

"Consumers have now racked up close to $180 Billion in credit card debt [alone] following the nearly debt-neutral [deleveraging] years of 2009 and 2010."

Quote source:  Card Hub statistics 2014 credit card debt study

- - - - - - -

OK...so maybe with HELOCS...but that's about it...

- - - - - - -

"From Sep 1985 to Mar 1986, the oil price went from $28 per barrel to $12 and the savings rate jumped from 6.7% to 9.3%; the six-month trend in real consumption throttled back from over 8% at an annual rate to barely more than 2%.  But look at what happened next - the oil price consolidated for a long while and when households saw that we were indeed in a more durable lower energy cost environment the savings rate receded and then guess what?  The pace of consumer spending in real terms rebounded sharply - as in, over a 9% annual rate."  David Rosenberg - April 10, 2015

- - - - - - -

- - - - - - -

Chart of 30 year U.S., Treasury bond yield (12/31/09 -3/31/15)

- - - - - - -

German 10 year bonds headed for negative yields?

• Currently yields 0.07% (as of April 21, 2015);
• Swiss equivalent yields -0.18% (as of April 21, 2015);
• ECB's Draghi pledges to continue massive QE program designed to mash down rates.

With the quiet, but real measures of inflation increasingly nearly everywhere (in the U.S.), this dip in yield (if it occurs), should be very temporary.

• Overnight Reverse Repurchase Agreement Operational Exercise - Federal Reserve Bank of New York (effective January 14, 2015)
• The Desk has been testing ON RRPs since September 2013, and the Committee has indicated in the normalization principles released in September 2014 that it intends to use an ON RRP facility as a tool in the normalization of policy as needed.  In that regard, it has directed the Desk to continue testing to further examine how the ON RRP facility might be best structured to help control the federal funds rate while also limiting the potential for unintended effects in financial markets.
• These operational exercises will be conducted daily thru the Desk's FedTrade system from 12:45pm - 1:15pm ET, until January 29, 2016.

• Yes, the rate submitted as part of each bid is subject to a maximum, referred to as the "offering rate", but rates below this level, including negative rates, are permitted.