Tuesday, July 31, 2012

Bill Gross: The Cult of Equity Is Dying

Okay, this commentary by Bill Gross is scary.  If he's right, public pension plans with assumed rates of return of 7%, 7.5%, 8% are in for a world of hurt.  But then so is the entire investor class.




Excerpts from the Bill Gross of PIMCO Investment Commentary:


Cult Figures

•​The long-term history of inflation adjusted returns from stocks shows a persistent but recently fading 6.6% real return since 1912 - The Siegel constant of 6.6% real appreciation. 

•The legitimate question that market analysts, government forecasters and pension consultants should answer is how that return can be duplicated in the future.

•Unfair though it may be, an investor should continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades.


"The cult of equity is dying."


"With long Treasuries currently yielding 2.55%, it is even more of a stretch to assume that long-term bonds – and the bond market – will replicate the performance of decades past."


"The Siegel constant of 6.6% real appreciation, therefore, is an historical freak, a mutation likely never to be seen again as far as we mortals are concerned."



John Broussard

Assistant State Treasurer

Chief Investment Officer

State of Louisiana

Department of the Treasury


FW: 1(BN) U.S. Bonds Seen Mimicking Japan’s Lost Years: Chart of the

(BN) U.S. Bonds Seen Mimicking Japan's Lost Years: Chart of the Day

U.S. Bonds Seen Mimicking Japan's Lost Years: Chart of the Day
2012-07-31 10:00:00.1 GMT
By Michelle Jamrisko and Ilan Kolet
July 31 (Bloomberg) -- Declining U.S. bond yields are mimicking the path of Japan's securities during its "lost years" of sluggish growth, showing investors hold a dim view of the American economic outlook, according to Douglas Porter.
The CHART OF THE DAY shows the yield on the benchmark Treasury 10-year note since 2005 has closely tracked the first seven years of Japan's slow-growth period that started in 1990. That is a correlation central bankers should keep in mind when formulating policy, said Porter, deputy chief economist at BMO Capital Markets in Toronto.
"It's a tad unnerving," Porter said in an interview. U.S. rates have followed Japan's even as the Federal Reserve has been more successful than the Bank of Japan in fighting deflation, or a protracted drop in prices. "This could be a long-grinding episode where yields bounce around at low levels for an extended period of time," he said.
While there are plenty of differences between the two countries -- such as their rates of inflation, the aging of the population in Japan and the relative strength of U.S. financial institutions -- there are also similarities, said Porter. These include severe financial crises and protracted periods of weak growth that are difficult to shake off, he said.
If U.S. Treasuries were to continue following the trajectory of securities for the world's third-largest economy, the yield on the 10-year note over the next 15 years would decline to about 0.75 percent -- in line with the current level of Japan's 10-year bond.
The U.S. 10-year yield dropped to a record 1.3790 percent on July 25 amid concern that the European debt crisis is hampering economic growth, before posting gains on policy makers' pledges to support the euro. The yield will rise to 1.83 percent by year-end, based on forecasts in a Bloomberg News survey of financial companies, with the most recent projections given the heaviest weightings.

For Related News and Information:
News on the U.S. economy: NI USECO <GO>
World bond markets: WB <GO>
Bond yield forecasts: BYFC <GO>
Japan markets monitor: OTC JPY <GO>
Top credit market stories: TOP CM <GO>
Japan credit market stories: NI JNCREDIT <GO> Charts, graphs home page: CHART <GO>

--Editors: Carlos Torres, Christopher Wellisz

To contact the reporters on this story:
Michelle Jamrisko in Washington at +1-202-654-7304 or mjamrisko@bloomberg.net; Ilan Kolet in Ottawa at +1-613-667-4806 or ikolet@bloomberg.net

To contact the editors responsible for this story:
Christopher Wellisz at +1-202-624-1862 or cwellisz@bloomberg.net; Alex Tanzi at +1-202-624-1959 or atanzi@bloomberg.net

It's The Economy Stupid: Big Day, Lot's of Economic Stuff

It’s a big day today, there’s lots of economic stuff that reported today. 


Economic Event


Economic Survey

Actual Reported

Original Prior

Revised Prior

Employment Cost Index

2Q A





Personal Income






Personal Spending






PCE Deflator MoM






PCE Deflator YoY






PCE  Core MoM






PCE Core YoY






S&P Case Schiller 20 City MoM






S&P Case Schiller Composite YoY






S&P Case Schiller Home Price Index






Chicago Purchasing Manager







Employment Cost Index was up slightly, that ain’t bad.

Personal Income was up 0.5%, that’s a good thing (I always like a little more money in my pocket).

Personal Spending was ZERO PERCENT, reflecting the slowdown in consumer spending that businesses are feeling.


So, consumer incomes are increasing slightly, consumer spending has stopped increasing, and savings are increasing.  Doesn’t sound like confidence in the economy to me.



By Shobhana Chandra

     July 31 (Bloomberg) -- Consumer spending in the U.S.

stagnated in June as Americans used the biggest gain in incomes

in three months to boost savings, indicating a weak handoff to

the second half of the year.


     Household purchases, which account for about 70 percent of

the economy, were unchanged after a 0.1 percent decrease the

prior month that was previously reported as little changed, a

Commerce Department report showed today in Washington. The median

estimate in a Bloomberg News survey of economists called for a

0.1 percent rise. Incomes rose 0.5 percent, lifting the savings

rate to 4.4 percent, the highest in a year.


     The results may raise concern limited job prospects are

causing Americans to pull back at the same time business

investment is cooling and the European debt crisis has triggered

a slowdown in overseas markets. Federal Reserve policy makers

meet today and tomorrow to determine whether more monetary

stimulus is needed to shore up an economy that’s slowed for two

straight quarters.


     The Bloomberg survey median called for incomes to rise 0.4

percent in June. Wages and salaries climbed 0.5 percent after a

0.1 percent gain. The 0.3 percent gain in May was revised up from

0.2 percent.


    The saving rate increased from 4 percent.


    Disposable income, or the money left over after taxes,

increased 0.3 after adjusting for inflation. It rose 0.5 percent

in the prior month.


     The June results indicate the consumer was losing steam as

the quarter drew to a close. Household spending rose 1.5 percent

from April through June, the slowest pace in a year, Commerce

Department data showed last week. Gross domestic product climbed

at a 1.5 percent annual rate, cooling from a 2 percent pace in

the prior three months.




John Broussard

Assistant State Treasurer

Chief Investment Officer

State of Louisiana

Department of the Treasury


Friday, July 27, 2012

It's The Economy Stupid: Good News / Bad News

GOOD NEWS:  The “Great Recession” was a bit less weak than thought originally according to Government measures.


BAD NEWS:  The recovery from the “Great Recession” was a bit less than thought originally according to Government measures.


CONCLUSION:  The economy is STILL sucky




Associated Press



Here's a small consolation: The Great Recession wasn't quite as horrendous as previously thought.


But it was still pretty horrendous: Updated government estimates from January 2009 through December 2011 show that the downturn remains by far the worst recession since the Great Depression.


And growth since the recession officially ended in June 2009 has been slightly less than previous estimates. That's a reminder of how weak the recovery has been.


The revisions were released Friday by the Commerce Department's Bureau of Economic Analysis with its report on April-June growth. Each year in July, the bureau revises the previous three years of data on the nation's gross domestic product, the broadest measure of the economy.


The changes show the economy shrank 4.7 percent from the start of the recession in December 2007 until it ended three years ago. That's 0.4 percentage point less than the previous estimate of 5.1 percent.


The main reason for the revision: State and local governments spent more in 2009 than initially thought.


Still, only two previous recessions suffered contractions greater than 3 percent. One was in 1957, the other in 1973.


Since the Great Recession ended, growth has been modest at best. From July 2009 through the end of 2011, the economy grew a total of 5.8 percent. That's down from an earlier measure of 6.2 percent.


The economy grew at an average annual rate of 0.3 percent from 2008 through 2011, the government said. That's down from an earlier measure of 0.4 percent.



John Broussard

Assistant State Treasurer

Chief Investment Officer

State of Louisiana

Department of the Treasury

Ph:  225-342-0013

Fx:  225-342-9721

Email:  jbroussard@treasusry.state.la.us

Street Address:

445 North Blvd, 7th Floor

Baton Rouge, LA 70802

Mailing Address:

P.O. Box 44154 Capitol Station

Baton Rouge, LA 70804-4154

Physical Location:

One City Plaza, 7th Floor

Corner of North Blvd & 4th Street

Exit 1B I-110 Convention Street,

Turn Left to get to North Blvd,

Turn Right on North Blvd


It's The Economy Stupid:

GDP is 1.5%, 10 Year Treasury is 1.4%, and CPI is 1.7%.  So even though inflation is low (CPI), economically speaking we’re losing ground.  Real rates of return are negative (Treasury vs CPI), and economic growth adjusted for inflation is negative (GDP vs CPI).


Technically speaking, the economy is sucky.   



Economic Event


Economic Survey

Actual Reported

Original Prior

Revised Prior

GDP QoQ (Annualized)

2Q A





Personal Consumption

2Q A





GDP Price Index

2Q A





Core PCE QoQ

2Q A









John Broussard

Assistant State Treasurer

Chief Investment Officer

State of Louisiana

Department of the Treasury


Wednesday, July 25, 2012

FW: Moody's Places Penn State on Review for Possible Downgrade

Et tu Moody’s???  Isn’t there a penalty for piling on? 



John Broussard

Assistant State Treasurer

Chief Investment Officer

State of Louisiana

Department of the Treasury

Ph:  225-342-0013


From: Linda Callaway [mailto:Linda.Callaway-Gusnowski@firstsw.com]
Sent: Wednesday, July 25, 2012 8:56 AM
To: John Broussard
Subject: FW: Moody's Places Penn State on Review for Possible Downgrade


Will the punishment never stop??


Linda Callaway
Senior Vice President

direct (512) 481-2041   fax 512.481.2050   cell 512.431.2500     
300 W. Sixth Street, Suite 1940, Austin, TX  78701

Neither First Southwest Company nor any of its affiliates (collectively, "First Southwest") is responsible for any recommendation, solicitation, offer or agreement or any information about any transactions, customer account or account activity in this communication. Confidential or time-sensitive security-related communications should not be transmitted to First Southwest via the Internet as there can be no assurance of actual or timely delivery, receipt and/or confidentiality. Neither can there be any assurance that messages transmitted by electronic mail will not be corrupted, lost, deleted or modified. First Southwest reserves the right to refrain from processing or executing electronic mail until verification of the information is obtained in another format acceptable to First Southwest.

Thursday, July 19, 2012

It's The Economy Stupid: The good, the bad & the ugly

IInitial Jobless Claims UP, that’s BAD

Continuing Jobless Claims UP, that’s BAD

Bloomberg Consumer Comfort DOWN, that’s BAD

Bloomberg Economic Expectations UNCHANGED, sadly, in this report that qualifies as GOOD

Philadelphia Fed DOWN, that’s BAD

Existing Home Sales DOWN, that’s BAD

Existing Home Sales MoM DOWN, that’s BAD

Leading Indicators DOWN, that’s BAD


So, let’s summarize:  bad, bad, bad, good, bad, bad, bad, bad.


In total:  UGLY!


Economic Event


Economic Survey

Actual Reported

Original Prior

Revised Prior

Initial Jobless Claims

JUL 14





Continuing Jobless Claims






Bloomberg Consumer Comfort

JUL 15





Bloomberg Economic Expectations






Philadelphia Fed






Existing Home Sales






Existing Home Sales MoM






Leading Indicators









John Broussard

Assistant State Treasurer

Chief Investment Officer

State of Louisiana

Department of the Treasury


Wednesday, July 18, 2012

It's The Economy Stupid: Housing and Big Ben

Housing & Building Numbers:


Economic Event


Economic Survey

Actual Reported

Original Prior

Revised Prior

MBA Mortgage Applications

JUL 13





Housing Starts






Housing Starts MOM%






Building Permits






Building Permits MOM%







Housing Starts were better than expected, Building Permits were worse than expected.  Single family housing and single family building appears to be doing better, but not great.  A mixed bag at best.



Big Ben: 


What we learned about what goes on in the minds of the propeller heads at the Fed is that something called the IOER Target is now in play.  The Fed minutes released revealed the Fed's scary take on draining excess bank reserves.


The Federal Reserve has come up with a new acronym, IOER. It stands for INTEREST RATE ON EXCESS RESERVES.  Sounds innocent enough, pretty straight forward.  It’s the interest rate that the Fed pays banks on their reserve deposits at the Federal Reserve Bank.  Currently the Fed is paying 25 basis points (0.25%) on $1.5 TRILLION in excess reserves that serve NO economic purpose. In the FOMC minutes released today, it is clear that the Fed is considering a major role for the IOER when it comes to managing the money supply.


The minutes show that the Fed has had extensive discussions on the IOER and methods they are considering to control the money supply.


How confident is the Fed about the proper method to drain the huge amount of reserves that now sit on the Fed's balance sheet?  Not very.


This is truly remarkable, the Fed has pumped all these reserves into the system and they really are not sure how they should drain them:

“Participants recognized, however, that the supply of reserve balances would need to be reduced considerably to lift the funds rate above the IOER rate. Several saw advantages to using the IOER rate, rather than a target for a market rate, to indicate the stance of policy. Participants noted that their judgments were tentative, that they would continue to discuss the ultimate operating regime, and that they might well gain useful information about longer-run approaches during the eventual withdrawal of policy accommodation.”


The only thing you can read into this is that the Fed is going to "try stuff" and see what happens. There is no other way to interpret it:

“Participants noted that their judgments were tentative, that they would continue to discuss the ultimate operating regime, and that they might well gain useful information about longer-run approaches during the eventual withdrawal of policy accommodation.”

We are talking about the control of the money supply of the country and they are going to play it by ear as they go along, to see what works and what doesn’t.





John Broussard

Assistant State Treasurer

Chief Investment Officer

State of Louisiana

Department of the Treasury


Tuesday, July 17, 2012

It's The Economy Stupid: CPI

Headline CPI did not increase, and it didn’t decrease.  Of course everything else about CPI changed.  Fuel costs down, food costs up, yada, yada, yada.  Inflation ain’t our problem.  Growth (or lack thereof), that’s the problem.


Wire: BLOOMBERG News (BN) Date: Jul 17 2012  9:14:23

Consumer Price Index in U.S. Was Unchanged, Core Up 0.2% (2)



     (Updates with Bernanke comments in eighth paragraph.)


By Shobhana Chandra

     July 17 (Bloomberg) -- The cost of living in the U.S. was

little changed in June, a sign inflation may stay subdued as

Federal Reserve officials have predicted.

     No change in the consumer-price index followed a 0.3

percent drop in May, a Labor Department report showed today in

Washington. The measure matched the median forecast of

economists in a Bloomberg News survey. The so-called core

measure that excludes volatile food and fuel costs rose 0.2

percent for a fourth month.

     Companies from Supervalu Inc. to Chrysler Group LLC are

offering incentives to boost sales as weak job gains squeeze

households, underscoring limited pricing power among businesses.

With inflation less of a concern, Fed policy makers have room to

take additional steps to ensure the world’s largest economy

keeps expanding.

     “Inflation is not a concern at this time,” said Ryan

Sweet, a senior economist at Moody’s Analytics Inc. in West

Chester, Pennsylvania, who was among economists projecting no

change in June consumer prices. “The central bank is more

worried about growth. Policy makers have signaled they may lean

toward more easing.”

     The CPI was restrained by a third month of declines in

energy prices. Airfares fell, used car prices were unchanged and

the cost of shelter posted its smallest gain since September.

     The forecast for consumer prices was based on the median of

81 economists in a Bloomberg survey. Economists’ estimates

ranged from a gain of 0.2 percent to a decline of 0.6 percent.


                        Stock Fall


     Stocks fell after Fed Chairman Ben S. Bernanke’s testimony

to Congress disappointed investors anticipating a more

definitive signal the central bank was prepared to provide more

stimulus. The Standard & Poor’s 500 Index dropped 0.2 percent to

1,350.97 at 10:08 a.m. in New York.

     “The U.S. economy has continued to recover, but economic

activity appears to have decelerated somewhat during the first

half of this year,” Bernanke said today in testimony for

delivery to the Senate Banking Committee in Washington. The Fed

is “prepared to take further action as appropriate to promote a

stronger economic recovery,” he said, while refraining to

discuss specific steps.

     Overall consumer prices increased 1.7 percent in the 12

months ended in June, matching the year-over-year gain in May.

     The core CPI climbed 2.2 percent from June 2011, in line

with the median forecast and following a 2.3 percent gain in the

12 months to May.


                       Cheaper Fuel


     Energy costs decreased 1.4 percent from a month earlier,

reflecting drops in gasoline, fuel oil and electricity.

     Households are getting some relief as lower fuel expenses

contain the cost of living. The price of a gallon of regular

gasoline at the pump averaged $3.49 in June, down 22 cents from

May, according to AAA, the nation’s largest motoring

organization. It has fallen further, reaching $3.40 on July 15.

     Food costs climbed 0.2 percent, driven by gains in meats,

fruits and vegetables. A worst-in-a-generation drought from

Indiana to Arkansas to California is damaging crops and rural

economies and threatening to drive food prices to record levels.

     Today’s report showed prices of new vehicles rose 0.2

percent for a second month, while the cost of used cars was



                      Auto Incentives


     Automakers are offering incentives to attract customers.

Chrysler Group LLC, the company controlled by Fiat SpA, said it

will let buyers put off monthly payments for the first 90 days

in a national promotion for all of its vehicles through the end

of July. General Motors Co. will offer no-haggle pricing on 2012

Chevrolet vehicles plus a money-back guarantee on all new

Chevys, running through Sept. 4.

     The cost of medical care services climbed 0.7 percent, the

biggest gain since 2010, today’s data showed.

     Owners-equivalent rent, one of the categories designed to

track rental prices, climbed 0.1 percent for a second month. The

cost of all shelter also rose 0.1 percent.

     Average hourly earnings adjusted for changes in prices rose

0.2 percent in June after a 0.5 percent increase the prior

month. They were up 0.3 percent over the past 12 months.

     Businesses may hold the line on prices as slower payroll

gains and unemployment at 8.2 percent sap household spending,

which makes up 70 percent of the economy. Retail sales fell for

a third month in June, the longest stretch of declines since

2008, figures showed yesterday.


                       Grocery Stores


     Supervalu, the third-largest U.S. grocery chain, plans to

accelerate price reductions. The Eden Prairie, Minnesota-based

company said dollar-store chains have grabbed more consumers.

     “Consumers’ price sensitivity has intensified given the

continuing weak economic environment,” Craig Herkert, chief

executive officer, told analysts on a July 11 call. “This has

led many retailers to become even more aggressive on promotions

and price investment, and to step up their marketing activity.”

     Several Fed officials said more action could be warranted

if growth slows, risks intensify or inflation seems likely to

fall “persistently” below their goal, according to minutes of

the June 19-20 meeting released last week. Central bank staff

“continued to project that inflation would be subdued through

2014,” the text showed.

     The CPI is the broadest of three price gauges from the

Labor Department because it includes goods and services. About

60 percent of the index covers prices consumers pay for services

from medical visits to airline fares, movie tickets and rents.

     Producer prices rose 0.1 percent in June, the first gain in

four months and a reflection of higher food expenses, while the

import-price index declined 2.7 percent in June, the biggest

plunge since December 2008, reports showed last week.