Financial Repression? []

By: Doug Noland

S&P500 recorded a total return for the quarter of 12.59%. The S&P 400 Mid-caps returned 13.50%. Apple gained 48%. The Morgan Stanley High Tech index jumped 21.7%. The Morgan Stanley Retail index (trading to a new all-time record high) rose 15.5%. The S&P500 Homebuilding index jumped 31.6%. The German DAX increased 17.8%, Japan’s Nikkei 19.3%, and Brazil’s Bovespa 13.7%.

For the quarter, total global corporate debt issuance of $1.16 TN just surpassed 2009’s first-quarter record. According to Bloomberg, developing nation debt issuance of $190bn was a new first quarter record – and was up about 50% from the year ago quarter. At $433bn, U.S. corporate debt issuance posted a new first-quarter record.

Today’s Bloomberg Headline: “Corporates Beat Governments in Best Start Ever.” According to Bank of America indices, global corporate bonds returned 3.85% for the quarter. Investment grade corporate debt earned 3.36%, while junk bonds returned 7.04%. European corporates returned 12.9%, led by an eye-catching 22% gain on Europe’s lowest rated corporate debt. U.S. municipal debt returned about 2.0% for the quarter. The benchmark Markit North American Investment Grade Credit defaults swap index posted its largest quarterly decline (28.6 bps, according to Bloomberg).

Watching it all, I struggle even more with the notion of “financial repression.” “Saver repression” and “bear suppression” make sense to me. Returns for the rationally risk averse investor are being depressed, no doubt about that. Yet for the financial speculator it’s an altogether different story: Instead of repression, it’s Financial Liberation. Never has the investment landscape been so stacked against the saver and investor in favor of the speculator community.

Over the years I’ve enjoyed Bill Gross’s monthly writings. At times I’ve taken exception with his (and his colleagues’) macro analysis – and I’ve as well tipped my hat. I look forward to his insights – plus there’s always the intrigue: Will he don the hat of the savvy analyst, the yearning statesman or the master poker player? No matter what, Mr. Gross sits enviably in the catbird’s seat overseeing history’s greatest Credit Bubble and financial mania. These days I read with keen interest.

Mr. Gross’s latest is cogent and insightful. Our analytical frameworks share important commonalities, although this month he takes one giant leap of faith that I imagine most readers would easily gloss over: From Mr. Gross: “On the whole, however, because of massive QEs and LTROs in the trillions of dollars, our credit based, leverage dependent financial system is actually leverage expanding, although only mildly and systemically less threatening than before, as least from the standpoint of a growth rate.” Systematically less threatening than before? The $64 Trillion question.

Along the lines of Mr. Gross’s view, I’ve held that notions of systemic deleveraging are largely urban myth. Here in the U.S., household debt has been contracting mildly (from a historically extreme level). The corporate balance sheet keeps expanding, although nothing compared to the ballooning of federal obligations. For three years now I’ve posited the “global government finance Bubble” thesis. There is overwhelming evidence supporting the “granddaddy of all Bubbles” view, not the least of which is that federal liabilities have doubled in only four years.


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