Tag Archives: inflation
Posted on 03. Feb, 2012 by Pension Pulse.
Guest Post By: Leo Kolivakis
Matthew Philips and Dakin Campbell of Bloomberg report, Banks Join Pensions in Squeeze as Federal Reserve’s Low Rates Erode Profit:
The Federal Reserve, which cut its target for the federal funds rate to a zero-to-0.25 percent range on Dec. 16, 2008, said last month that rates would remain “exceptionally low” at least through late 2014. While the unprecedented period of near-zero rates is meant to aid an ailing economy, it poses challenges for banks, insurers, pension funds, and savers.
The hope is that by making mortgages and other loans cheaper, ultra-low rates eventually may revive economic growth, Bloomberg Businessweek reports in its Feb. 6 issue. For now they’re squeezing profits at banks and disrupting investment strategies at insurance companies and pension funds. They’ve reduced payouts on savings accounts and bonds, and may lead to higher bank fees and insurance premiums.
“For most people, there’s been more downside to these low rates than upside,” says Barry Ritholtz, chief executive officer of FusionIQ, a New York-based investment research firm. “They’ve punished savers and people living on fixed income, and made insurance more expensive.”
For banks, low rates provided a boost at first because they could borrow money cheaply and reduce rates paid to depositors while still collecting interest on existing loans made at higher rates.
As old loans matured, banks had to make new loans at lower rates, cutting into profit. At JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Citigroup Inc. (C) and Wells Fargo & Co. (WFC), the four largest U.S. banks by assets, net interest margins — the difference between what they pay to borrow and what they earn on loans — dropped to 2.99 percent in the fourth quarter from 3.17 percent a year earlier.
“There’s no best way to counteract net interest margin compression,” says Betsy Graseck, a Morgan Stanley (MS)analyst. “You need to have several different strategies.”
Many banks have announced cost-cutting plans, including layoffs and lower compensation. Jason Goldberg, a Barclays Capital analyst, says larger banks are increasing fees on deposit accounts and slashing debit-card rewards programs.
“There are certainly a lot of levers they are pulling,” Goldberg says. “That said, it’s a big challenge. For a lot of these banks the majority of their profits comes from net interest income.”
Low rates also present a special challenge to insurers, which need safe, predictable investment returns to pay claims.About 64 percent of the property and casualty insurance industry’s portfolio is in high-grade corporate bonds. The average yield on investment-grade corporate bonds has fallen to 4.3 percent, from 6.2 percent in July 2007, according to data compiled by Bloomberg.
Insurers suffered $32.6 billion in losses from January through September 2011 in the wake of natural disasters including Hurricane Irene and tornadoes in the Midwest. To make sure they have cash available, insurers have begun moving some of their money into shorter-term bonds, says Steven N. Weisbart, chief economist at the Insurance Information Institute. Since shorter-term bonds have lower yields, that shift leads to a further squeeze on investment income.
Data through the third quarter indicates that industry profits were down 60 percent from the same period in 2010. Weisbart says that to make up for lost investment revenue some insurers may begin tightening underwriting standards and raising premiums.
Like insurers, pension funds have long counted on bonds to help them meet future obligations. After four years of low rates, and a decade of flat performance in the stock market, corporate pension funds face record shortfalls. A January report by Credit Suisse Group AG estimated that 97 percent of companies in the Standard & Poor’s 500 have underfunded pension plans.
The combined deficit at the 100 largest defined-benefit plans increased by $236.4 billion last year, according to an annual pension study by Milliman Inc., a Seattle-based actuarial and consulting firm.
“This was an unusually dispiriting year,” wrote John W. Ehrhardt, a co-author of the report. Depressed interest rates were responsible for 90 percent of the funding shortfall accrued since the middle of 2011, Ehrhardt says. “It’s all about having to cope with low rates right now.”
To address the shortfalls, companies have been making record levels of cash contributions to their pension funds over the past year. Boeing Co. (BA) recently announced that it would contribute $1.5 billion to its pension plan in 2012.
Traditionally, pension funds followed a simple allocation rule of thumb, investing 60 percent of their money in stocks and 40 percent in bonds, according to Ehrhardt.
“That was the answer for many years,’” he says. “Things have gotten much more sophisticated.”
The biggest change over the past decade has been the position pension funds have begun taking in alternative investments. Between 2006 and 2010 they doubled their exposure to riskier investments — including real estate, private equity, and hedge funds – to 20 percent, according to Milliman.
Lately, pension funds have been trying to boost yields by buying bonds with longer maturities. By lengthening the average maturity of their bond portfolios by about six to eight years, funds have been able to get about two percentage points of extra yield, says Ari Jacobs, a pension specialist at consulting firm Aon Hewitt. That strategy carries its own dangers: When interest rates rise, the value of existing bonds falls–and longer- maturity bonds drop more than shorter-maturity ones.
“The traditional tools to manage a portfolio, like time horizon and diversification, have been thrown out the window,” says Jack A. Ablin, chief investment officer at Harris Private Bank in Chicago. “All the lessons my generation has learned over our lifetime have been seriously called into question these last few years.”
Indeed, the ‘traditional tools’ to manage a portfolio, like time horizon and diversification, are not working as well as the past precisely because in an ultra-low interest rate environment, all asset classes are highly correlated.
The only real refuge from a shock in such an environment is government bonds. The article above blames the Fed for ultra-low rates but the reality is that the bond market still fears debt deflation, which is why rates remain at historic low levels. It’s not just ‘QE’, there remains a deep fear that the world is slipping into a debt-deflationary spiral.
How should pensions adapt in such an environment? Go back to read my comment on ATP, the world’s best pension/ hedge fund. I added insights from Jim Keohane, President and CEO of the Healthcare of Ontario Pension Plan (HOOPP), the best pension plan in North America. Read his comments carefully. The folks at HOOPP and ATP get it.
What else will help pensions? The macro environment. This morning’s strong jobs report out of the U.S. crushed expectations. Stocks rallied and bond yields jumped on the news. While this is good for pensions, it won’t make enough of a difference to shore up severely underfunded pension plans.
Importantly, you need a significant jump in real yields and a huge boost in stocks and other risk assets to help close the huge deficits pensions have experienced in the last few years. But even that won’t be enough. We still need serious pension reform and a better approach to managing assets and liabilities at pension plans.
And don’t cry for banks, they always find ways to profit off money for nothing and risk for free. In an ultra-low interest rate environment, the name of the game remains trading, and the big banks are going to continue pushing hard on trading revenue from their capital markets operations. Fees from underwriting, IPOs and merger arb will also add to banks’ bottom line.
But what about savers, workers and many others trying to survive these volatile markets? They’re getting crushed because most of them do not enjoy the benefits of a defined-benefit pension plan. That is the real tragedy of our time, one that needs to be addressed by courageous politicians willing to make the case for boosting DB plans.
Finally, Fed Chairman Ben Bernanke says he won’t tolerate inflation to boost jobs, but I can assure you he’s doing everything in his power to counteract restrictive fiscal policy, reflate risk assets and stoke inflationary expectations. When it comes to deflation or inflation, the Fed prefers to err on the side of the latter, and so do pensions and financial institutions.
Below, Bloomberg excerpts from Bernanke’s testimony before the House Budget Committee on the U.S. economy, budget deficit and Fed monetary policy. Bernanke says the economy has shown signs of improvement while remaining vulnerable to shocks. Barring a collapse in Europe, the U.S. economy will continue to surprise to the upside for the remainder of the year.
Posted on 26. Jan, 2012 by Wilensky.
Well, it’s looking like the Senate was unable to muster enough votes to reject the newest debt ceiling hike in a 52 to 44 vote. Due to take effect this Friday, we will be looking at a new ceiling of $16.4 trillion with our current levels reaching the $15.4 trillion mark.
“Since roughly $100 billion was plundered from Pension Funds in the past month, The US will have about $15.4 trillion in debt with the Monday DTS. The question then is how long will the $1 trillion in debt capacity last: at $125 billion/month it won’t be enough to carry the US past the election without another massive debt ceiling spectacle.While Congress recently voted down the increase in the US debt ceiling, that vote was largely irrelevant. And all that matters is how the Senate will vote. Watch it live in progress below. It is virtually unlikely that the process of debt ceiling increase will be overturned so within minutes the US should have a brand spaking new debt ceiling of $16.4 trillion.”
Not to mention Treasuries just hit an all time low yesterday, now offering a tantalizing real yield of -2.26 based on 3% inflation. Ouch.
Posted on 17. Aug, 2011 by Maxwell Leary.
U.S. core producer prices rose at their fastest pace in six months in July, pushed up by higher tobacco and light truck costs, according to a government report on Wednesday that could stoke inflation fears.
The Labor Department said its seasonally adjusted index for prices paid at the farm and factory gate, excluding food and energy, rose 0.4 percent—the largest increase since January—after rising 0.3 percent in June.
That compared with economists’ expectations for a 0.2 percent rise.
Overall prices received by producers rose 0.2 percent after falling 0.4 percent in June, above economists’ expectations for a 0.1 percent gain.
Full article available @:
Posted on 16. Aug, 2011 by Maxwell Leary.
SHANGHAI—Fresh data showing strong capital inflows into China and a spike in the interest rates on central-bank debt showed continuing pressure on the government to keep fighting inflation with tightening measures despite worries about weakness in the global economy.
Foreign direct investment in China last month jumped 20% from a year earlier to $8.3 billion, China’s Commerce Ministry said Tuesday. The data came as the People’s Bank of China unexpectedly jacked up the interest rate on its debt for the first time since late June. That higher yield, which came in a regular weekly auction of one-year bills, was seen …
Full article available @:
Posted on 13. May, 2011 by David Merkel.
When currencies do not serve as a long-term store of value, economic actors search for ways to preserve future purchasing power, which often mean purchasing commodities. But most commodities are not cheaply storable over long periods, so actors get forced into the few that do: gold, silver, etc. There is a problem here, stemming from dumb money. When dumb money shows up for purchase of generic “commodities” distortions follow: backwardation, large storage demand, and warped market incentives.
Eventually overproduction catches up, but the volatility when it breaks can be huge and self-reinforcing, with c0unterparties raising margin to protect themselves. Extreme volatility causes exchanges to raise margin requirements substantially, which reveals which side of the trade is inadequately financed, which typically is the side that was winning, which leads to a reversal in price action. The dumb money is revealed.
Now after a washout, the dumb money often assumes that powerful entrenched interests colluded against them to deny them their long-deserved free ride to prosperity through speculation. The exchanges are in cahoots with the other side. Well, no, the exchanges have two interests, which are solvency and transaction volume, which drives their profits. Solvency is a more primary goal for an exchange, because the second goal can’t exist without it, and exchanges are not thickly capitalized.
Many different types of financial systems are subject to these risks. Think of AIG: they were rendered insolvent by rising margin requirements as their creditworthiness was downgraded, largely because the rating agencies concluded they were going to lose a lot of money off of their many bets on subprime residential credit. Think of all of the mortgage REITs that got killed as repo haircuts rose on all manner of mortgage-backed securities at the time that values for the securities were depressed. Alternatively, think of Buffett, who entered into derivative trades where he received money and bore the risk, but his agreements limited the margin that he would have to post.
Posted on 27. Apr, 2011 by David Spinowitz.
Prices increase due to inflation; however, some things get more expensive quicker, while others even go down in price. Below shows these changes from March 2010 to March 2011. The cost of transportation and education went up the most while the cost of apparel and technology went down. Source: FlowingData
Posted on 06. Apr, 2011 by Jerry Corsi.
MAJOR STORIES NOW POSTED:
12 signs of U.S. hyperinflation
Will rampant inflation destroy the dollar?
Red Alert has warned for at least two years that the monetization of the federal debt undertaken by the Federal Reserve is the precursor to hyperinflation.
Now, the National Inflation Association has issued 12 warning signs of hyperinflation.
“In our estimation, the most likely time frame for a full-fledged outbreak of hyperinflation is between the years 2013 and 2015,” the National Inflation Association warns. “Americans who wait until 2013 to prepare will most likely see the majority of their purchasing power wiped out. It is essential that Americans begin preparing for hyperinflation immediately.”
The fear is that with hyperinflation, the purchasing power of the dollar will diminish so drastically that the wealth of millions of middle-class Americans will be severely impacted, possibly even wiped out.