Morning Report: Bill Gross talks Monopoly 7/6/16

Stocks are lower this morning as markets fret about the Italian banks and the Japanese 20 year bond went negative overnight. Bonds and MBS are up. The US 10-year hit 1.32% overnight and is trading at 1.36% at the moment. The German Bund now yields -18 basis points.

The FOMC minutes from the June meeting will be released around 2:00 pm EST today. Brexit has pretty much made these pretty much irrelevant for July meeting which is in 3 weeks. Still, there is always the possibility that something surprising could come out of it, so just be aware.

Mortgage applications rose 14.2% last week as purchases rose 4.3% and refis increased 20.8%.

The June ISM services index jumped to 56.5 from 52.9 in May.

Hillary Clinton will not face criminal charges over the email investigation. This should stick a fork in Bernie.

Bill Gross compares the current state of the economy to the game of Monopoly. In the beginning of the game, you get $1,500 and begin buying properties (investing). You also get $200 for passing go. However, the game always ends in a credit crunch where your opponents go bankrupt. He then imagines the game where the amount you get for passing go increases as the game progresses. He likens the income from passing go as credit growth. If you look at credit growth over the past several years, it has been much less than the previous decades. His advice to Janet Yellen is to stop worrying about the Taylor rule and inflation and worry more about slow economic growth. While QE and negative interest rates should have helped create credit, they aren’t really doing that, and the current economy is like the end of a monopoly game, where all the property has been bought, and conservation of cash becomes the name of the game. This is a recipe for stagnant growth.

Bank of America is forecasting a 1.25% 10 year yield by the end of September as pension funds embrace the “lower for longer” thesis and build their holdings of Treasuries. Roughly 6% of pension fund assets are in Treasuries, about half the allocation they were in 1980. Of course Treasuries represented true value in 1980, and now they are simply a momentum trade. The 100 largest pension funds in the U.S. have a shortfall of $400 billion, which has doubled over the past year. Pension funds have been the biggest victims of ZIRP, as the actuarial tables couldn’t care less that interest rates are zero. In fact, it makes their liabilities appear even worse because the rate used to discount them is lowered.

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