Alan Greenspan: US economy not accelerating by any means

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Former Federal Reserve Chairman Alan Greenspan told FOX Business on Thursday that the U.S. economyis poised to slow down very soon.

“Just wait until the fourth quarter number comes out, it’s going to be down around 2.5 percent,” Greenspan said during an exclusive interview with Maria Bartiromo. “We have monthly data which suggests that we are slowing down, we are not going negative, but we are definitely slowing down – the rate of growth as we go into 2019 probably at a 2 to 2.5 percent pace maximum.”

Gross domestic product (GDP) increased 3.5 percent in the third quarter, according to a revised estimate from the Bureau of Economic Analysis, but Greenspan said gross domestic savings, which consists of savings of the household, private corporate and public sectors, is a critical factor in determining his outlook.

“Gross domestic savings is the key funding to capital investment in the Unites States, and as a result we are seeing capital investments slowing down,” he said.

Earlier this week, White House Council of Economic Advisers Chairman Kevin Hassett told FOX Business a capital spending boom is giving the U.S. economy momentum.

“A capital spending boom like the one that we’re in usually takes three to five years,” he told Bartiromo. “We’ve had about a 10 percent increase in capital [spending] since this time last year and that should continue if it’s a normal spending boom for the next three to five years.”

However in Greenspan’s opinion, although a recession is unlikely, the U.S. has entered a period of stagflation driven by runaway spending and entitlement programs.

“We are not funding our entitlements and as a result we have this huge deficit – [a] trillion dollar budget deficit,” he said. “You can’t exist with that sort of phenomenon without inflation re-emerging itself.”

The annual inflation rate in the U.S. fell to 2.2 percent in November from 2.5 percent in October, according to the Labor Department.

Julia Limitone is a Senior Web Producer for FOXBusiness.com.

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The recession hiding behind Wall Street’s record highs – The Washington Post

Wall Street may have set new record highs this week, but the rally is masking an uncomfortable truth: Corporate America is still in the midst of recession.

Companies have begun announcing earnings for the second quarter, and the results are not expected to be pretty over the next few weeks. Analytics firm FactSet estimates profits in the Standard & Poor’s 500-stock index will fall 5.6 percent compared with a year ago — the fifth straight quarter of decline. The contraction has been so prolonged that investors consider it an “earnings recession.”

[Dow follows S&P to record high]

Corporate earnings are supposed to be the bedrock of stock market value, but at the moment, they appear to be pointing in opposite directions. Energy companies have been devastated by falling oil prices. Multinationals have been hamstrung by the stronger dollar. Banks have been hammered by ultralow interest rates.

The gloomy reality comes amid growing warnings that the risk of a full-blown recession is rising — not only for the United States, but also the broader global economy. Britain’s decision to leave the European Union is also sowing uncertainty in financial markets and threatening to undermine the recovery in the United Kingdom. One of the most pessimistic forecasts came from Deustche Bank this month, predicting a 60 percent chance of a downturn in the United States over the next year.

That all sounds pretty dismal, and it makes the record highs set this week by both the S&P 500 and the blue-chip Dow Jones industrial average even more perplexing. At least part of the rally — and, some analysts argue, most of it — is the result of the signals from the world’s central banks that the era of easy money is far from over. But investors are also betting that corporate America and the broader economy are turning a corner, if they’re not already back on track.

Many analysts think the earnings contraction that started in the second quarter of 2015 bottomed out early this year. Profits fell 6.7 percent in the first quarter compared with a year ago, which makes the 5.6 percent estimate for this quarter look a little rosier. The outlook for the third quarter is even better, with analysts forecasting a milder decline as oil prices and the U.S. dollar stabilize.
Then there was a blockbuster report from the Labor Department showing rock-solid job growth of 287,000 jobs in June. That gave many investors confidence that the U.S. economy was weathering the global storm, especially after the exceptionally weak addition of just 11,000 jobs in May. On top of that, a new prime minister has been selected in Britain, a step toward resolving the political turmoil that has roiled markets.

[Opinion: Theresa May must contain the Brexit damage — and more]

Anthony Valeri, investment strategist for LPL Financial, analyzed the S&P’s 12 earnings recessions since 1954. Nine of them were accompanied by economic recessions a year before or after, although the depth and duration of the downturns varied widely.

Three earnings recessions have not been tied to broader distress. The first two occurred in 1967 and 1985, which he notes are periods in which the federal deficit was increasing, rather than decreasing as it is now.

The third is the one we’re in right now, and it is not done playing out.

 

New From Credit Suisse: Bonds for Self-Inflicted Catastrophes

Sagacious LLC will help customize a similar program to save op risk regulatory capital at your institution. 

By ANUPREETA DAS and LESLIE SCISM
May 16, 2016 1:21 p.m. ET WSJ

Credit Suisse Group AG is going to give it a try in the bond market. The bank plans as early as this week to launch unusual new securities that would pay investors relatively high interest rates. The catch is Credit Suisse could take their principal if incidents like rogue trading, information-technology breakdowns or even accounting errors lead to massive losses for the bank, people familiar with the offering said.

The deal is a first-of-its-kind twist on the “catastrophe bonds” that insurers have used for years to lay off the risk of natural disasters like hurricanes. Credit Suisse’s offering covers self-inflicted disasters as well as external events and has been marketed to hedge funds and other big investors.

The insurance feature of the bonds would be triggered if Credit Suisse’s annual operational risk-related losses cross $3.5 billion. Buyers have a level of comfort, however, because it’s a “second-event” bond. The most any single event could contribute to the trigger is $3 billion, meaning it would take more than one event to cross the threshold. The odds of that are remote: Credit Suisse has put them at roughly 1 in 500, the people said.

A Credit Suisse spokeswoman declined to comment.
The appetite for such offerings in the capital markets, as persistently low interest rates send investors searching for higher yields, is encouraging Wall Street companies to test new uses for the structure.

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Heard on the Street: Credit Suisse Takes Out Insurance on Itself
Insurance-industry executives said that they haven’t previously seen a bank attempting to tap capital markets to cover this type of risk. The move has its roots in regulation. Under European bank rules, banks must calculate operational risk and may use insurance products as part of meeting their capital requirements, according to industry participants.

In general, operational risk is the possibility of losses resulting from insufficient internal controls, errant systems or rogue employees. The Credit Suisse offering doesn’t cover market losses from trading that is authorized by the bank, some of the people familiar with the matter said.

Paul Schultz, chief executive of the Aon Securities unit of global insurance brokerage Aon PLC, said an offering like Credit Suisse’s reflects “growing investor sophistication on the underwriting side and a general view that to continue to grow the asset class, investors are going to have to expand from simply writing property risk.”

Zurich-based Credit Suisse, via a Bermuda company called Operational Re, plans to issue a five-year bond of up to 630 million Swiss francs ($646 million) to qualified institutional buyers such as hedge funds, asset managers and firms that pool together capital from pension funds. The bonds are part of a planned package that includes an insurance policy of up to 700 million francs issued by Zurich Insurance Group. Most of the cost of any claim would be paid for by the bonds. The size of the bond offering and the policy limits ultimately will be determined by investor interest, the people said. A spokeswoman for Zurich said the company’s policy is not to comment on current or potential commercial relationships.

The coupon is expected to be in the “mid-single digits,” one of the people said—higher than what Credit Suisse was initially planning, in order to entice investors to buy the novel security.

Credit Suisse last week reported a first-quarter net loss of 302 million francs, compared with a profit of 1.05 billion francs in the same period last year. The bank’s new chief executive, Tidjane Thiam, has been retooling the bank away from its investment-banking business toward its more stable wealth-management unit.

European banks have long used insurance products to meet capital requirements set by regulators or to unload risk from their balance sheets. Before the financial crisis, giant insurer American International Group Inc. sold financial derivatives known as credit-default swaps to major European banks as insurance against losses in their holdings of subprime mortgage assets. AIG’s near collapse in 2008 in the wake of the housing-bubble burst was tied to the massive volume of credit-default swaps it had sold.

As for Credit Suisse’s new bond, the bank can’t call on the money to cover regulatory liabilities or government fines, the people said. Losses from rogue trading, which have hobbled large banks such as Société Générale and UBS Group AG in recent years, could be covered by the insurance provided by the bond, but any fines stemming from it wouldn’t be, they said.

Write to Anupreeta Das at anupreeta.das@wsj.com and Leslie Scism at leslie.scism@wsj.com

Sagacious LLC can customize a disaster bond for your institution.

What is the amount of Operational Risk Capital at Your Bank?

Civil Antitrust Lawsuits Reinstated Against 16 Banks in Libor Case
May 23, 2016 By Nicole Hong, WSJ
Appeals court restores private suits against Bank of America, J.P. Morgan Chase, Citigroup and others
The lawsuits accuse 16 major banks—including Citigroup, J.P. Morgan and Bank of America—of collusion in manipulating the London interbank offered rate, or Libor, to the detriment of the banks’ consumers.

In a setback for some of the world’s largest financial institutions, a U.S. appeals court on Monday reinstated the private antitrust lawsuits filed against 16 banks for allegedly rigging Libor interest rates.

The ruling from the Court of Appeals for the Second Circuit reverses a lower court decision from 2013, in which U.S. District Judge Naomi Buchwald dismissed the claims because she said the banks’ alleged conduct did not violate federal antitrust laws.

The lawsuits accuse 16 major banks—including J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—of collusion in manipulating the London interbank offered rate, or Libor, to the detriment of the banks’ consumers.

The plaintiffs, who owned various financial instruments that were affected by Libor, claim the returns on their investments were depressed by the banks’ collusion. The lawsuits were filed by several groups of plaintiffs, including the local governments of cities like Baltimore, San Diego and Houston.

Judge Buchwald had dismissed the antitrust claims, saying the plaintiffs failed to show they were injured by the alleged rate manipulation. She said that because setting Libor was a “cooperative endeavor,” there could be no anticompetitive harm to consumers.

But the appeals court Monday disagreed and kicked the case back to the lower court for further proceedings. A three-judge panel found that the plaintiffs did show an antitrust injury “by alleging that they paid artificially fixed higher prices.”

Judge Buchwald in 2013 had allowed other claims by the plaintiffs to proceed, including allegations that the banks breached commodities laws, but the antitrust claims were a central part of the litigation, as violations can require a defendant to pay triple damages.

The appellate judges noted that the plaintiffs will still have to prove at a later stage whether the allegedly corrupt Libor rate did have an influence on the prices of their financial investments.

If this litigation is ultimately successful, the potential total bill to banks could be in the billions, analysts have estimated.

A lawyer representing the banks declined to comment, while a lawyer for the plaintiffs did not immediately respond to a request for comment.

Libor, a widely used benchmark that helps set interest rates for everything from mortgages to corporate loans, is calculated daily for different currencies based on estimated borrowing rates submitted by banks on panels. The lawsuits are targeting banks on the panel that sets U.S. dollar rates under Libor.

These private lawsuits are separate from the sprawling criminal and civil probes around Libor rigging, which began in 2008 and have implicated traders around the world. Regulators have accused big banks of letting their traders and executives raise Libor rates up or down to benefit their trading positions.

About a dozen financial firms have settled charges of manipulating Libor, and many have pleaded guilty to criminal charges. The largest penalty imposed was the $2.5 billion paid by Deutsche Bank AG last year.

In total, U.K. and U.S. authorities have imposed sanctions of more than $6 billion in the Libor cases. A series of global investigations are still ongoing, but The Wall Street Journal reported in February that regulators in the U.S. and U.K. are preparing to bring a final round of civil charges against several banks in the probe.

Write to Nicole Hong at nicole.hong@wsj.com

JPMorgan’s Dimon Says Violent Moves in Treasuries Are Possible – Bloomberg Business

Jamie Dimon, chairman and chief executive officer of JPMorgan Chase CEO says the Treasury market is one thing he worries about

Comments aren’t a prediction, just a possibility, Dimon says

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Jamie Dimon, JPMorgan Chase & Co.’s chief executive officer, said the bank will be prepared for the possibility that Treasury prices move violently when interest rates rise.
“The one thing I do worry a little bit about, by the way, is Treasuries,” Dimon said Friday at a conference in New York sponsored by Barclays Plc. “Interest rates have been so low, for so long,” he said, adding that some traders and their managers have never experienced a rising interest-rate environment.
The U.S. banking system is much safer now because of higher capital and business diversification, said Dimon, 59, responding to a question about whether the next U.S. credit downturn would come from banks or non-banks. In April, he called volatility in the Treasury market in late 2014 a “warning shot” to investors.
“So I wouldn’t be shocked to see 10-year Treasuries, when rates are going up, people change their mind, they change direction, that they will be violently volatile and go up much faster than people think,” Dimon said. “I’m not predicting that. I’m simply saying in the back of my mind, I think that’s a possibility.”
His comments followed the biggest single-day rally in six years for two-year Treasuries. After the Federal Reserve announced Thursday it would keep interest rates near zero, yields on the policy-sensitive note dropped by 13 basis points, the steepest decline since the central bank announced it would expand its bond-buying program in March 2009. The rate on 10-year notes fell 10 basis points to 2.19 percent.
JPMorgan has “about the same” third-quarter trading-revenue trends as other banks that have disclosed expectations at the conference, Dimon said. Executives from Bank of America Corp. and Citigroup Inc. have said they probably will report a 5 percent drop in third-quarter trading revenue.
“September is still to go, so who knows,” Dimon said. “I think people are massively over-focused on those numbers.”
Markets

James Dimon

JPMorgan Chase & Co

Interest Rates

New York

Barclays PLC

Flash Move Haunts Bond Traders Heeding Dimon’s Warning of Crisis

Flash Move Haunts Bond Traders Heeding Dimon’s Warning of Crisis

Jamie Dimon, Chief Executive Officer of JPMorgan Chase & Co. Photographer: Andrew Harrer/Bloomberg

Six months after an unexplained flash rally in Treasuries sent markets reeling, bond investors are bracing for it to happen again.

Prudential Investment Management is trading more futures because they’re both liquid and anonymous. State Street Corp. is making smaller bets. And Pioneer Investments is looking for returns in higher-quality securities that are easier to sell.

On Oct. 15, benchmark Treasury yields swung the most relative to overall yields since at least 2000, scarring debt investors who say they’re still trying to figure out why it happened. JPMorgan Chase & Co. chief Jamie Dimon called the move a “warning shot” last week, blaming it on central-bank hoarding of bonds along with regulations that have led dealers to retreat from making markets. Others say the rise of electronic trading is at fault.

Whatever the reason, those trends aren’t changing as the Federal Reserve prepares to raise interest rates for the first time since 2006. Bets on market swings suggest traders expect prices to fluctuate the most of any year since 2011, raising the risk of another flash move.

“There’s potential for extreme conditions in the marketplace when volatility really goes up,” said Steven Meier, head of cash, currency and fixed-income at Boston-based State Street’s money-management unit. “There’s still a lot of unanswered questions about what happened,” and no “clear explanation of what the drivers were.”

Yield Swings

Bond trading has been turbulent this year, driven by uneven economic data, currency moves and Fed changes to its interest-rate forecasts. Yields on 10-year Treasuries have swung from 1.64 percent to 2.26 percent.

Treasuries are the world’s haven asset during turmoil because the securities are supposed to be the most liquid. A market that’s more prone to gyrations has the potential to boost borrowing costs for taxpayers, consumers and companies — in addition to making it harder for the Fed to exit from its record stimulus.

Dimon isn’t the only one warning episodes such as the one on Oct. 15 may happen again. The Treasury Markets Practices Group — an advisory committee on bond-market integrity backed by the Fed Bank of New York — echoed the idea at its February meeting.

Electronic Trading

“There is an increased potential for further episodes of volatility and impaired liquidity in the Treasury markets,” the meeting minutes said. The committee concluded that the move was exacerbated by the dealers’ pullback from the market and growth in electronic trading.

Last year, 48 percent of U.S. Treasury trading happened electronically, according to a survey from Greenwich Associates, up from 33 percent a decade ago. The TMPG said in a paper last week that the trend has improved liquidity, while creating added risks, too.

“In some cases, malfunctioning algorithms have interfered with market functioning, inundating trading venues with message traffic or creating sharp, short-lived spikes in prices,” the group said in an April 9 paper.

Calvert Investments money manager Matthew Duch said the mystery of the flash rally leaves him in a tough spot. He wants to buy more high-yield bonds, but said he’s worried about the possibility that a Treasury-market swing could spark broader volatility, making it tough to trade the speculative-grade debt.

Yield Starved

“Are you getting compensated for the risk? Uh, maybe not,” Duch, whose firm manages $13 billion, said in a telephone interview from his Bethesda, Maryland, office. “But in this yield-starved environment, it’s difficult to find other places to put your money.”

Part of the reason trading has gotten bumpier is that banks are stepping back from market-making, according to Jeffrey Snider, chief investment strategist at West Palm Beach, Florida-based Alhambra Investment Partners LLC.

That’s shown up in the market for short-term financing, known as repurchase agreements or repos, which help grease the wheels for bond trading. The amount of securities financed through a part of the market known as tri-party repo is down 15 percent since December 2012, and more than 41 percent from its 2008 high.

“Funding has just fallen off a cliff,” Snider said. “The system is searching for a stable state, but it hasn’t been able to find one yet.”

BlackRock View

Not everyone is worried that it’s too hard to trade debt these days.

“We feel pretty comfortable with the liquidity,” Michael Fredericks, head of retail multi-asset client solutions for New York-based BlackRock Inc., said by telephone. Fredericks, who manages the $11.5 billion BlackRock Multi-Asset Income Fund, said he’s more worried that investors have gotten complacent about long-term rates staying low.

State Street’s Meier said he is concerned about being able to efficiently trade his holdings, and is making smaller bond trades as a result. Last year, his company recommended clients build up their cash positions and consider derivatives bets, such as swaps and futures.

Interest-rate futures — which are essentially an agreement to buy or sell rates at a later date — have been getting more popular in part because they trade through a clearinghouse, reducing counterparty risk. Trading was up 12 percent in the first three months of the year from the same period in 2014, according to CME Group Inc.

Liquidity Drop

Erik Schiller, a money manager for Prudential’s $533 billion fixed-income unit, said he’s been using futures more because they offer fast and anonymous trade execution during big market swings.

“There’s the potential for these types of moves to happen,” he said. “The liquidity providers in the bond market are less now than they’ve ever been.”

One measure of Treasury dealers’ trading activity has fallen closer to its financial-crisis levels. Deutsche Bank AG’s index that gauges liquidity by comparing the three-month average size of dealer trades against moves in the 10-year note’s yield fell to about 25 in February. It was above 500 in 2005, and reached as low as 19 in 2009 during the depths of the financial crisis.

“If liquidity is as bad as it is now, what’s going to happen when things really get adverse?” said Richard Schlanger, who co-manages about $30 billion in bonds as vice president at Pioneer Investments in Boston. “That’s why we’re trying to get in front of this and buy really good, liquid names.”

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Russia’s fast track to ruin DECEMBER 16, 2014 AT 1:26 AM BBC

Here are the numbers that explain why the Russian economy is imploding in the face of a tumbling oil price and Western sanctions.
Oil and gas energy represents two thirds of exports of around $530bn (£339bn). Without them, Russia would have a massive deficit on its trade and financial dealings with the rest of the world – which is why Russia’s central bank expects a capital outflow of well over $100bn this year and next.

And public expenditure is almost completely supported by energy-related revenues. In their absence, the government would be increasing its indebtedness by more than 10% a year, according to IMF data.

So the massive and unsustainable non-oil deficits in the public sector and trade explain why investors don’t want to touch the rouble with even the longest barge pole.
And Western sanctions, imposed to punish Putin for his Ukraine adventure, make it all the harder for Russia’s undersized non-oil economy to trade the country out of its mess.
Desperate government?

Little wonder then that the rouble has halved this year, more-or-less in line with the tumbling oil price.

That raises the spectre of rampant inflation – prices are already rising more than 9% a year on the backward-looking official measure.
And there is the twin nightmare of a fully fledged slump: Russia’s central bank expects the economy to contract not far off 5% next year.

But even so the decision of Russia’s central bank to raise its policy interest rate from 10.5% to 17% is eye-catching (ahem).
It might work to stem the rouble’s fall. Then again it could reinforce investors’ fears that the government is increasingly desperate and powerless in the face of a market tsunami.
Global ripples

Russia isn’t bust yet. In the middle of the year, it was projected by the IMF to hold reserves equivalent to about a year’s worth of imports. That will probably be down to nearer 10 months now, but provides some kind of cushion.

What does it mean for the rest of us? Well it doesn’t help that Russia is sucking demand from a global economy that is already looking a bit more ropey, as the eurozone stagnates and China slows.

As for the exposure of overseas banks – at $364bn, including guarantees – that is serious but not existentially threatening (and loans made by UK banks are just a few percentage points of that).

There are also about half a trillion dollars of Russian bonds trading, with about a third of those issued by the government. Most of those will be viewed by investors as junk, even if they are not officially classified as such by the rating agencies.

Or to pull it all together, Russia is massively leaking cash. And absent an entente with the West over Ukraine, which does not look imminent, it is challenging to see how the hole can be plugged.