Juggling Dynamite

Well it has been 5 years since the banks were last begging at the taxpayer till…which historically means they are due back any day now for their next tranche of bailout. And since nothing at all has changed their risk-seeking-on-leverage behaviour since 2008, and the big banks are now bigger than ever, the recent abrupt plunge in emerging market fixed income markets and currencies (entirely predictable) is likely to trigger forced selling across all global risk markets. Here is a direct video link.

Host Sara: “Don’t banks hedge?” Answer: No they don’t; not in any meaningful way..why would they when the officials have repeatedly let them keep all their levered profits while being rescued from their rightful losses by taxpayers.

Gary Shilling, president of A. Gary Shilling & Co. and a Bloomberg View columnist, talks about Federal Reserve policy, the U.S. economy and bond market. Here is a direct link.

“Investors should look at the yield on at 10-year…and see whether that legitimately in this environment provides some type of return,” Gross says. “Six weeks ago at 1.6% [the 10-year yield] was more than skinny. Where we are now, [over] 50 basis points higher, is a much better situation than where we were then.”

In other words, price matters, and the recent drop on Treasury prices – which move in opposition to yields – has made Gross a buyer again…”Here is a direct video link.

Gross: “The whole world… the credit space, high-yield space, equity space, currency space – is enamored and hooked on carry, in fact levered carry,” he says. “Some of this and the funding of it is vulnerable based on the yen carry trade. It looked good for a while but when the yen goes up in price vs. down and JGB yields go up as opposed to down then funding of this fabulous carry trade presents a risk for levered trades…there’s more risk now in all assets than there was before…Never have investors reached so high for so little return [and] stooped so low for so much risk.”