The Threat to the Central-Bank Brand

The Threat to the Central-Bank Brand

04 June 2013

Mohamed A. El-Erian

NEW YORK – The “branding” of modern central banking started in the United States in the early 1980’s under then-Federal Reserve Board Chairman Paul Volcker. Facing worrisomely high and debilitating inflation, Volcker declared war against it – and won. In delivering secular disinflation, he did more than change expectations and economic behavior. He also greatly enhanced the Fed’s standing among the general public, in financial markets, and in policy circles.

Volcker’s victory was institutionalized in legislation and practices that granted central banks greater autonomy and, in some cases, formal independence from long-standing political constraints. To many, central banks now stood for reliability and responsible power. Simply put, they could be trusted to do the right thing; and they delivered. Read more of this post

Don’t Sell Your Soul for Yield, Pimco’s Simon Says; “The road to hell is paved with positive carry”

Jun 3, 2013

Don’t Sell Your Soul for Yield, Pimco’s Simon Says

By Al Yoon

Eking out a little bit of extra yield might be the death knell for an investment manager. That sums up some parting words from Scott Simon as he approached his May 31 retirement after three decades of mortgage-backed securities trading and investing, including the last 13-and-a-half years at bond fund giant Pacific Investment Management Co. Buying bonds for their yield, or “carry” over and above the cost of buying them is not the best approach if investors are sacrificing attention to the bonds’ prices, Simon said. Investors too often mistakenly focus on buying bonds for the interest they pay rather than their fundamental value, particularly after a period of prolonged low interest rates when buyers become starved for higher yields, he said.

“The road to hell is paved with positive carry,” he said, repeating a mantra that traders say he’s proffered before. Read more of this post

Investors are once again clamoring for a risky investment blamed for helping unleash the financial crisis: the synthetic CDO

June 4, 2013, 9:06 p.m. ET

One of Wall Street’s Riskiest Bets Returns

Before the financial crisis, CDOs and synthetic CDOs were a big cog in Wall Street’s so-called structured-finance machine, bringing in substantial fees for securities firms that put together the deals.



Investors are once again clamoring for a risky investment blamed for helping unleash the financial crisis: the synthetic CDO. In a sign of how hard Wall Street is trying to satisfy voracious demand for higher returns amid rock-bottom interest rates, J.P. Morgan Chase JPM -1.22% & Co. andMorgan Stanley MS -1.28% bankers in London are moving to assemble so-called synthetic collateralized debt obligations.

CDOs give investors a chance to bet on the creditworthiness of a basket of companies. Basic CDOs pool bonds and offer investors a slice of the pool. Synthetic CDOs pool, instead of the bonds themselves, insurance-like derivative contracts on the bonds. Read more of this post

The Federal Housing Administration’s projected losses over 30 years could reach as high as $115 billion under a previously undisclosed “stress test” conducted last year

Updated June 4, 2013, 6:39 p.m. ET

FHA Losses Could Hit $115 Billion in Extreme Scenario



The Federal Housing Administration’s projected losses over 30 years could reach as high as $115 billion under a previously undisclosed “stress test” conducted last year to determine how the agency would fare under an extremely severe economic scenario, according to documents reviewed by a congressional committee.

The forecast was significantly worse than the most severe estimate included in the government mortgage-insurance agency’s independent actuarial review released last November. The FHA’s outside actuaries modeled the analysis along the lines of the annual stress test employed by the Federal Reserve Board, which gauges how the nation’s largest financial institutions would fare in the event of a significant economic shock. The FHA isn’t required to use the Fed test. Read more of this post

Will Mortgage Bonds Enter the Vortex?

Will Mortgage Bonds Enter the Vortex?

In my previous post, I argued that bondholders will probably be able to tolerate any “tapering” of the Federal Reserve’s asset purchases so long as they aren’t using much leverage and are willing to hold to maturity. After all, the Fed has been bidding up financial asset prices to stimulate the economy, and I doubt financial policymakers would consciously choose to inflict substantial losses on savers.

That said, the prices of bonds could get a lot more volatile over the next few years. One possible scenario: the Fed starts tapering its asset purchase program only to observe large increases in interest rates, thereby leading to an increase in stimulus. This sort of start-stop (or slow-down, speed-up) behavior would fit with the pattern we have seen over the past few years with QE1 and QE2. Read more of this post

Cash Outflows Turn World’s Best Stocks to Worst: Southeast Asia

Cash Outflows Turn World’s Best Stocks to Worst: Southeast Asia

Stock markets in Indonesia, the Philippines and Thailand have gone from being the world’s best to among the worst as the threat of reduced bond purchases by the U.S. Federal Reserve sends foreign investors to the exit.

Equity indexes in the three markets have declined more than 3.5 percent since May 22, when Fed Chairman Ben S. Bernanke said policy makers could consider reducing stimulus if the U.S. labor market improves. International money managers pulled a combined $1.6 billion from the Southeast Asian countries in that period, the most since August 2011, data compiled by Bloomberg show. Read more of this post

Investors in Myanmar should heed lessons from Vietnam, which opened up to the world in a similar fashion two decades ago. The failure rate for early investors in that market may have been as high as 90%

Updated June 4, 2013, 3:56 a.m. ET

Myanmar Investors Need Vietnamese Lessons



The flavor of the month in emerging markets is a fish-based broth with rice noodles, ginger and lemongrass called mohinga. Myanmar’s national dish, it’s sure to be on the menu at this week’s World Economic Forum event in the former pariah state. While Myanmar is a mouthwatering a proposition, gorging on it too soon carries a lot of risk. The country ticks many boxes in terms of potential. Its population of 60 million has almost zero cellphone penetration. It’s in a logistical sweet spot between China and India and is rich in natural resources. New laws, including measures to allow 100% foreign ownership of companies in some sectors, show the politicians are open to foreign investment. To say that these are the early days in a frontier economy is an understatement: There is virtually no ATM network and very few commercial bank branches, for instance. Read more of this post

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