One Year To Nowhere

[OriZ 3,157]

Posts like this should be deleted, Off topic. this is no place for S&P 500?

This thread is more on topic than 99% of the threads in CEHST. This is about financial markets, politics, the economy, interest rates, everything that has everything to do with our every day life. Wouldn't you like to know where your life is headed? Where the economy of the country you live in is headed? And how that all affects and ties into politics and your mortgage rate?

[Voice of Reason 10,298]

This has to be THE FUNNIEST post in CEHST history. Good one!

You obviously don't spend much time in this forum...

Posts like this should be deleted, Off topic. this is no place for S&P 500?

Edited November 8, 2016 by LFEHFN

[OriZ 3,157]

This has to be THE FUNNIEST post in CEHST history. Good one!

You obviously don't spend much time in this forum...

Probably fully invested and buys the baloney that Obama saved the economy and doesn't want to hear the truth.

But I'm trying to stick to strictly professional stuff here so that we don't end up again with 32 pages that could be summarized into 4 but have many other comments throughout. I worked hard to recap everything into the last 5 pages so I want it to remain clean and clear, so hopefully that's the end of that.

Edited November 9, 2016 by OriZ

[Voice of Reason 10,298]

Well, I for one appreciate your efforts. I need to print this out when I get back homega and try reading it again, when I can dedicate the time your research deserves.

[OriZ 3,157]

Well, I for one appreciate your efforts. I need to print this out when I get back homega and try reading it again, when I can dedicate the time your research deserves.

Well truth be told I quote quite often, with credit given. But hey, I could easily quote someone with a different opinion if that's what I believed in. So belief and my own research first, then based on that(as well as personal acquaintance) in order to make my life easier so I don't have to type everything myself, sometimes I'll borrow his words, that reflect my own views nonetheless. I know many of the things he writes about, but my background is more the technical stuff, charts etc.

[OriZ 3,157]

I think the best prediction I can make here is what's not going to happen. There is not going to be a landslide victory, at least not with the popular vote. I think it will be either a very narrow margin for Trump or a very narrow margin for Clinton, however when it comes to the electoral vote we might end up with another Gore/Bush situation, as it is definitely not impossible that while Trump gets the majority of the popular vote, Clinton will still win. I do think Clinton will probably get more than 300 electoral votes, and Trump probably around 200.

I'm sayin chances are Trump takes the popular vote, but Clinton still prez. Expect riots lol

An update on the elections: I've been repeating for months that due to elevated stock prices, and based on research of centuries of data, Clinton will win the elections. I still believe that. However, if I saw it as an 80-20 chance before, after the developments of the last few days I have to allow for the off chance that due to this NOT being a "normal" election with normal candidates and normal circumstances, this could prove to be one of the exceptions in the study, as exceptions and anomalies always happen, there is no 100%. I would have to lower Clinton's chances to 65% at this point, and if the market moves beneath the support seen in the charts above, it could be lowered even further. So, right now still Clinton, but have to allow for developments that could lead to different outcomes.

Again, the question is will it happen quick enough to change the elections? To recap, based on this:

Quote

“The best single predictor of presidential re-election results that we found was the percentage change in the stock market during the three years that preceded Election Day,” said Goel. “Changes in stock prices had a positive, substantial and statistically significant association with incumbents’ performances in re-elections. We found that they accounted for more than a quarter of the variation in incumbents’ popular vote margins.”

The researchers studied every presidential re-election campaign in U.S. history back to George Washington’s successful bid of 1792. They found that incumbents who served during periods of rising stock prices typically do better in the elections than those who served during periods of falling stock prices.

Meanwhile, the relationship between how an incumbent performs and the changes in gross domestic product, inflation and unemployment is weaker and, with the latter two, “often insignificant,” according to the authors.

The study, posted on the Social Science Research Network (SSRN), acknowledges that a few incumbents were re-elected when the markets had declined and a few others were defeated when the markets had risen. But those margins of victory and defeat were smaller on average than when the direction of the markets and the incumbents’ fates matched.

Matthew Lampert, a Research Fellow of the Socionomics Institute and doctoral candidate at the University of Cambridge, says one of the study’s purposes is to address popular opinion surrounding elections. “We often hear people debate which presidential candidate will be better for the stock market,” Lampert said. “Our study comes to a different conclusion: that there is significant predictability in the opposite direction.”

The researchers also checked the measures that most analysts believe matter to voters, namely gross domestic product (GDP), inflation and unemployment. As it turns out, “Inflation and unemployment had no predictive value in any of our tests,” said statistician Goel. “GDP was a significant predictor in some of the simple models, but it was rendered insignificant when we combined it with the stock market in multiple regression analyses. In contrast, the stock market was a consistent indicator of re-election outcomes.”

The authors addressed the question of whether investors voted for or against incumbents simply because they made or lost money in stocks. “If rational self-interest were the basis for our results, then GDP and unemployment should have mattered at least equally,” said Prechter. “But they don’t.” Moreover, he said, “We contrasted eras when stocks were widely owned vs. hardly owned, and there was no difference in results.” Lampert concluded, “We think that the best explanation is that the trend of social mood is important in driving the valuations of both stocks and presidents.”

I have estimated Clinton will win. Now, besides the above there are several approaches. Some look at the 3 years prior to elections, such as the quote above .In that case, the SPX went from 1750 to 2111 today at the close. While that is a 20% gain, we have to remember that is only the SPX, and the broader market did not fare quite as well. Yes, it is a gain but is it significant enough to overcome the issues Clinton is dealing with? I say she has to hold at the 20% gain or more to be sure. The second approach talks about the year prior. Well, in the past 52 weeks the SPX is pretty much flat. The third approach which I have also posted in the past a couple pages back in this thread is this one: http://www.mcoscillator.com/learning_center/kb/special_market_reports/the_intersection_of_stock_market_political_races/

According to that Trump has a good shot at winning unless the market manages to reverse the course of recent months and especially days. Speaking of the past several months, here is another metric that says the same looking from Jul 31:

http://www.cnbc.com/2016/10/31/this-stock-market-metric-says-the-likely-winner-istrump.html

So in summary: One method is tied(flat market), two are Trump and one Clinton. I am not ready to back down from the prediction that Clinton will win. However, if in the next few days the market declines beneath 2100(as in less than a 20% gain in those 3 years), I will declare it a toss-up. Theoretically speaking because it won't happen, if in the next 5-6 days the SPX goes down as low as 1900 - I will predict trump will win. Conversely, if it can remain comfortably above 2100, I will continue to predict Clinton will win. Inbetween is no man's land.

Mcclellan now says based on the method from above, he thinks Trump will win the popular vote. I actually tend to agree. Similarly to what I said in the election prediction thread, my view is it is very likely to have another Bush/Gore scenario, with Trump winning but Clinton taking the electoral college. This will be tighter than many believe. I am not even sure anymore that Clinton will go over 300. Trump winning is not excluded anymore either. We'll see. Here is his prediction:

http://www.mcoscillator.com/learning_center/weekly_chart/my_final_2016_poll_analysis/

SPX broke the support I had talked about and ended the week near the lows, which is right by its initial target of 2080. There is now lots of support between the 2000-2030 area and 2080. This whole range is literally going to determine the future of this market in coming years. A break of 2000, and we're talking major bear again. So another 4% can make the difference between life and death, the market needs to hold on to these levels if it wants to keep moving higher, and while I said 1900-2100 would be a toss up area for the elections, above 2000 still favors Clinton, at least as far as the electoral vote goes. There are definitely mixed signals out there, which leads me to conclude there will likely be mixed results., Under 2000 Trump is the favorite, but that's not going to happen in 2 trading days.

All of the above quotes are from the past 7-10 days or so, from this thread as well as the "election prediction thread".

It is too early to tell, but one prediction already came true: This is tighter than many expected. At this point, it seems very likely Trump could take both the electoral college as well as the popular vote. The market did dip beneath 2100 late last week - as low as 2083 which is the support I've identified ahead of time. From there, it bounced yesterday and then some today back above 2100, but the question is with early voting going on, how significant was that move back up and was it in time?

Even though the prediction for a Clinton win will ultimately fail if Trump wins tonight, I have to say I am actually very pleased with the results of these elections so far. I think it shows again the power and predictive value of markets. How so?

Looking at the quotes above, while I did expect a Clinton victory, I did emphasize that these elections are different; That the result could very well be different; That there's never 100% with any system; That there have been mixed signals from the market(two out of 4 methods favoring Trump); That I believe we will get mixed results, and wouldn't rule out a Trump win, although viewed it as unlikely.

So while the prediction for a Clinton victory per se could end up being wrong(or it could end up exact, who knows?) alot of the other signals were right, and actually in all likelihood got me closer to the real results in my prediction than what we have seen pollsters and experts say, and even here what the majority in vj expected(a major win for Clinton both with the popular vote and electoral college).

Bottom line, according to market action in recent days and weeks, which largely offset the performance of the last 3 years, we knew there was quite likely going to be a SURPRISE - be it just the popular vote, or more, something "out of the blue" was going to happen. And while it may end up being far from perfect this time around(or as I said, it could end up being just perfect) - Can already say another HUGE SCORE for the market as a leading indicator, not something that's AFFECTED by events.

Overall, not a bad forecast for my first US elections, especially when you consider all the other forecasts by people with so much more "experience". Now, in regards to the reaction in the markets today, this actually reminds me of the Brexit thread - where I sat and watched the results come in live with a few other people here, and at the same time I was watching market futures plunge as it became more likely that they will vote to exit. Same thing is happening tonight - the more results that come in - we're seeing them collapse live(down 4.5% as we speak!). Like I said in another thread today, knee jerk reactions to news do happen. The magnitude of the rise yesterday was certainly one(in response to the FBI's announcement). However, it does not affect the general direction of the market.

So just as I said that night as we were watching brexit, this could be a one day affair(assuming, now, that Trump wins), or it could be a much longer decline, but the reason will not be Trump getting elected. just as the reason would not have, and did not end up being, brexit since the market quickly recovered per my prediction from that night. The reasons will be the ones I've been talking about for months. This can serve as a catalyst, or an excuse, sure. But it's already baked in the cake. Conversely if Clinton wins, futures could jump again and we'll rally tomorrow, but again, it would be a one or two day event, no more. If the trend is meant to be down it will then resume declining as it has in recent months, or if it's meant to keep going up it will regardless.

If me being wrong in my prediction is the price to pay, in order to see all the "experts" be even more wrong than me, I'll happily pay it. Overall this thread has got a real good track record of being in the right direction and on the right side of most events and it will continue to do so.

How fitting that this all happens right after a poster questions the relevance of this thread, as if more proof was needed. This is also the time to repeat again that a recession is due to happen within the next 4 years anyway. So it doesn't matter which of those two wins - it will NOT be their fault.

Edited November 9, 2016 by OriZ

[OriZ 3,157]

More proof news doesn't move markets. Check out the next chart which I just copy/pasted out of the live futures tonight. You can see the red trend line, the first arrow points at support, which eventually broke days ago. The second arrow is showing the test of that line from beneath, which happened in the last couple days rally. Sure, this was fueled in part by clearing Clinton but would have more than likely happened anyway, as it is common occurrence for price to retest the breaking area. Technical analysis 101. Once a test fails, which it did tonight in part due to the results, price continues in the direction of the break, in this case down. The third arrow shows where we are currently at. Down hard.

[Rob L 3,811]

Dow futures plunge amid Trump jitters; safety breakers stop Nasdaq, S&P 500 spirals

http://www.cnbc.com/2016/11/08/stock-futures-waffle-after-first-election-results-emerge-showing-tight-race.html

More proof news doesn't move markets. Check out the next chart which I just copy/pasted out of the live futures tonight. You can see the red trend line, the first arrow points at support, which eventually broke days ago. The second arrow is showing the test of that line from beneath, which happened in the last couple days rally. Sure, this was fueled in part by clearing Clinton but would have more than likely happened anyway, as it is common occurrence for price to retest the breaking area. Technical analysis 101. Once a test fails, which it did tonight in part due to the results, price continues in the direction of the break, in this case down. The third arrow shows where we are currently at. Down hard.

[OriZ 3,157]

Dow futures plunge amid Trump jitters; safety breakers stop Nasdaq, S&P 500 spirals

http://www.cnbc.com/2016/11/08/stock-futures-waffle-after-first-election-results-emerge-showing-tight-race.html

And yet by now the losses have already been trimmed by nearly 70% to just 1.5%. I'm not saying it can't get worse again, or better, just that markets are sovereign, with the exception of knee jerk reactions, and not the other way around. All of a sudden he's not that scary? No, markets just do what markets wanna do. So I know you must still be in shock about what happened or confused, but not sure what the point of the post is, especially when you're quoting my post which you obviously did not read, or the one before it, because I showed why the drop happened. Regardless, like I said I want to keep this thread clean, so I'm just going to carry on in the same post.

So before everyone starts talking about how it's Trump fault we're in a recession(I can already see the talk once we enter one - which we will), here is a quote from several months ago. The only thing that changed is instead of Clinton we have Trump, because at the time it seemed like she would get in. While I only ended up being half right on these elections, when you take into account the type of elections we just saw and the fact that I was still more right than most pundits due to and thanks to my methods, I'll take it.

At the risk of sounding like a broken record, it bears repeating yet again that the Federal Reserve's actions, backed by president Obama, only create more wealth transfer and more wealth disparity in this country. This is why I cannot understand how people cannot see that supporting the people who support these actions is the complete opposite of what they want to accomplish by narrowing the gap beteen rich and poor. As I've explained in detail before - when you lower interest rates to zero, savers can't save anything. When you engage in QE, speculation runs amoc. This means, that at best the savers will get nothing for their money, and at worst they will end up joining in on the speculation and lose once the market crashes.

All the while, the professional speculators will make money during the bubble as well as during the crash(via shorting), all the while, big institutions like banks will make even more money during the bubble, and get bailed out during the crash. All the while, large company shareholders will make more money during the bubble, and sell with perfect timing to the "used-to-be savers" turned fools. I don't understand how you can't see this happening right infront of your eyes. Again, FED policy, backed by Obama, or for that matter Clinton or Trump, is creating an even bigger gap between rich and poor. How can one stand by and let that happen while talking about equality? And of course it was in Obama's interest to keep it that way because it gave the appearance that he saved the economy. Nobody wants a recession on their watch, but all he did was kick the can down the road.I am seriously beginning to think Obama really doesn't like Clinton Trump and that he endorsed and sabotaged her him on purpose because I have no doubt we will see a recession while she he is president. Yes folks, I will say it right now and I will repeat it again once it happens - it will not be her his fault, it will be Obama's fault. Obama did nothing to save the economy, and worse, he planted the seeds for the next crisis.

The Fed is one of the biggest sources right now of wealth transfer and disparity creation, and any politician backing these same policies is equally responsible. So this ridiculous notion by some that Obama ended the recession and saved the economy could not be further from the truth. Or that any of his policies actually benefitted the middle or lower classes. The crisis would have ended when it did no matter who the president was at the time. Markets bottomed 2 months after Obama came into office, due to reasons I have already mentioned before. Part of it was completely technical/cyclical, and the rest I will repeat later in this post. You can't tell me in 2 months he did miracles. If anything, if the right policies would have been in place we would have seen a much stronger recovery.

The true wealth of any nation is embodied in its accumulated stock of productive capital, infrastructure, unused resources and knowledge. The use of this productive capital to generate “value added” - goods and services that have a greater value than the inputs used to produce them - is how new income, productive capital and wealth emerge. The Federal Reserve’s deranged and wholly experimental attempt to create illusory paper “wealth” through speculative overvaluation - a policy backed and supported by all presidents in recent memory - is no substitute for thoughtful and historically informed economic policy.

Last word: Holding interest rates down too low, for too long, is exactly how FED induced yield seeking speculation created a bubble in mortgage debt and housing, and triggered the deepest financial collapse since the Great Depression. Now that the Fed has repeated this error, it has painted itself into a corner where even a timid quarter point interest rate hike is the subject of quivering indecision. Unfortunately, having pushed the system to a speculative extreme, a collapse is baked in the cake. The problem with speculative bubbles is that until the consequences arrive, idiocy can masquerade as genius, and vice versa. Those two have a remarkable way of reversing over the completion of a market cycle.

Borrowed:

The insistence of central banks on promoting yield-seeking speculation, a game that always ends in destruction, reminds me of the 1983 Cold War movie “War Games” where a teenage Matthew Broderick hacks into a Defense Department computer called WOPR, and launches a “global thermonuclear war” simulation that’s mistaken for the real thing. How much yield-seeking speculation do central banks have to provoke, and how much do future economic prospects have to be injured, before they stumble onto the same conclusion as WOPR: “A strange game. The only winning move is not to play.”

I will just add one more thing; This is the first time since 1928 that Republicans have the white house, senate and house of representatives. Unfortunately, that was also right before the crash of 29. History has a funny way of repeating itself.

Edited November 9, 2016 by OriZ

[OriZ 3,157]

Just a link to a relevant post in another thread:

And something to add to the above posts;

September 26, 2016: "Believe me, we're in a bubble right now. We are in a big, fat, ugly bubble." - Donald J. Trump. One thing we agree on. Now lets see what he does with/about it. If he actually believes in it and didn't just say it cause he was told to what he needs to do is make everyone sit on their hands and let it fall as soon as he gets in. If he tries to hold it up like other goons did in the last 8 years it just might collapse near the end of his presidency and he'll end up getting the blame like Bush. This way at least he will have enough time to pretend he fixed it. That's the best advice I could give him. Start clean, start fresh, clean up a mess that wasn't yours after that mess runs its natural course.

Unfortunately, it will probably take historians decades to realize they should consider this part of the Obama legacy, not the Trump one, but that's what I'm here for.

It is extremely rare to actually have a president that understand this, that knows how it really works. Obama certainly wasn't this kind of president(hell, he was under the illusion he controls gas prices). Whether these were Trump's own words or not, it makes me hopeful that for the first time in a very very long time, the president actually lives in the real world where that's concerned, but like I said lets see what he actually does with it.

Now in regards to the election results; Now that (almost)final results are in, I feel even better in relation to the approaches that will be quoted below and how well they worked in such complicated elections. I just guessed backwards! lol. Take a look at what happened here yes I said he might win the popular vote and her the electoral college, but it ended up being the other way around. Still mixed results. The approach, based on the last 3 years, which led me to believe she will win...she did get the popular vote, we can count that in. The approach that was flat/tied...well, we're talking less than 400,000 votes and about 0.3%, pretty flat to me. The two approaches that predicted a Trump victory - well he won the electoral vote. So like I said, I admit to not getting things completely right, but I'll take getting them more right than most of the guesses out there and what the "experts" predicted.

[OriZ 3,157]

I have estimated Clinton will win. Now, besides the above there are several approaches. Some look at the 3 years prior to elections, such as the quote above .In that case, the SPX went from 1750 to 2111 today at the close. While that is a 20% gain, we have to remember that is only the SPX, and the broader market did not fare quite as well. Yes, it is a gain but is it significant enough to overcome the issues Clinton is dealing with? I say she has to hold at the 20% gain or more to be sure. The second approach talks about the year prior. Well, in the past 52 weeks the SPX is pretty much flat. The third approach which I have also posted in the past a couple pages back in this thread is this one: http://www.mcoscillator.com/learning_center/kb/special_market_reports/the_intersection_of_stock_market_political_races/

According to that Trump has a good shot at winning unless the market manages to reverse the course of recent months and especially days. Speaking of the past several months, here is another metric that says the same looking from Jul 31:

http://www.cnbc.com/2016/10/31/this-stock-market-metric-says-the-likely-winner-istrump.html

So in summary: One method is tied(flat market), two are Trump and one Clinton. I am not ready to back down from the prediction that Clinton will win. However, if in the next few days the market declines beneath 2100(as in less than a 20% gain in those 3 years), I will declare it a toss-up. Theoretically speaking because it won't happen, if in the next 5-6 days the SPX goes down as low as 1900 - I will predict trump will win. Conversely, if it can remain comfortably above 2100, I will continue to predict Clinton will win. Inbetween is no man's land.

An update on the elections: I've been repeating for months that due to elevated stock prices, and based on research of centuries of data, Clinton will win the elections. I still believe that. However, if I saw it as an 80-20 chance before, after the developments of the last few days I have to allow for the off chance that due to this NOT being a "normal" election with normal candidates and normal circumstances, this could prove to be one of the exceptions in the study, as exceptions and anomalies always happen, there is no 100%. I would have to lower Clinton's chances to 65% at this point, and if the market moves beneath the support seen in the charts above, it could be lowered even further. So, right now still Clinton, but have to allow for developments that could lead to different outcomes.

[OriZ 3,157]

Anyway, Mcclellan now says based on the method from above, he thinks Trump will win the popular vote. I actually tend to agree. Similarly to what I said in the election prediction thread, my view is it is very likely to have another Bush/Gore scenario, with Trump winning but Clinton taking the electoral college. This will be tighter than many believe. I am not even sure anymore that Clinton will go over 300. Trump winning is not excluded anymore either. We'll see. Here is his prediction:

http://www.mcoscillator.com/learning_center/weekly_chart/my_final_2016_poll_analysis/

SPX broke the support I had talked about and ended the week near the lows, which is right by its initial target of 2080. There is now lots of support between the 2000-2030 area and 2080. This whole range is literally going to determine the future of this market in coming years. A break of 2000, and we're talking major bear again. So another 4% can make the difference between life and death, the market needs to hold on to these levels if it wants to keep moving higher, and while I said 1900-2100 would be a toss up area for the elections, above 2000 still favors Clinton, at least as far as the electoral vote goes. There are definitely mixed signals out there, which leads me to conclude there will likely be mixed results., Under 2000 Trump is the favorite, but that's not going to happen in 2 trading days.

[OriZ 3,157]

Hey I forgot the link! http://www.visajourney.com/forums/topic/616220-global-markets-in-tailspin-as-trump-victory-looms/?p=8376439

[OriZ 3,157]

What happened since? Spring boarded after meeting the initial support(which held) right around election time, two days before and two days after(right side of the chart). Rally on both Clinton and Trump, after meeting support, proof that it was the support that was the cause and not news as they don't drive markets.

IMPORTANT RATE HIKE UPDATE:

I was adamant the FED was NOT going to raise rates this year, even at the time their goons thought they would raise 4 times, and have shared in detail what was behind my view several times throughout this thread and how I knew they were not going to hike despite all the "experts" being certain they will. I said that once there is a change, and once T-Bills move up closer to 0.5% I will update. Well, T-Bills have now moved to 0.41% which is the highest point they have been in many years. This is not quite enough yet for me to be confident we will get a hike in December; Market action could still change that, for example, a decline in the stock market will probably be uniform with a decline in T-Bill rates that may take us back down too far away from 0.5%. At this point though, I felt this was an important enough update - as there has not been one like it since Dec of last year which was the only time I said they will actually hike(and they did). So, the closer we get to Dec, I'll keep following the T-Bill rate. If it's 0.45% or up, I'd say there is a good chance for a hike(above 0.5% would be virtually guaranteed).

UPDATE! The 3 month T-Bill is now at 0.55%! This virtually guarantees(that is, assuming it stays at these levels) a rate hike in Dec. So, for the second time ever, I am hereby predicting a Dec rate hike. I of course reserve the right to take this prediction away, as long as it is before their meeting of course, based on new developments. But as it stands now, we will see another hike next month.

Speaking of which, 10 year Treasury Yields are at 2.2%, which is higher than the expected return for the S&P500 over the coming decade. You know things are dire when bonds are expected to perform better than riskier assets. One has to wonder what will happen once more people start to realize that...

The global equity markets remain well below their mid-2015 peak, and the U.S. markets remain in what I would continue to describe as the extended top formation at the third most extreme valuations in history (and the single most extreme valuations from the standpoint of the median stock). In terms of leadership, while the Dow made a new all time high, it was done on muted breadth in the overall market, which is not a healthy sign at all. We're also witnessing some sector rotation, with speculation in banks and pharmaceuticals that are expected to benefit from deregulation, and transportation stocks seen as potential beneficiaries of transport related infrastructure spending. Conversely, Treasury securities plunged on expectations of larger deficits resulting from both higher spending and lower taxes, and many technology stocks, especially the FANGs(Facebook, Amazon, Netflix, Google) as well as Microsoft, Apple and some others have also declined sharply in recent days, in line with my expectation that I have written in depth about that these own stocks' bubbles will begin to pop in 2016.

I continue to expect 10-12 year nominal total returns for the S&P 500 averaging about 1.5% annually, with a likely market retreat of 50-60% over the completion of this cycle. Nothing in the recent election results materially changes those expectations. It’s not clear that the fiscally conservative side of the Republican party will embrace a large expansion of deficit spending, nor that the more moderate elements in the party will embrace aggressive deregulation, so my sense is that much of last week’s activity was driven more by a combination of hope and fear than by evidence.

[OriZ 3,157]

France’s second-largest pension fund is at risk of “bleeding to death” if government bond yields remain low and it’s unable to increase investments in riskier assets, according to the company that manages the fund.

“Our allocation to bonds is absolutely sub-optimal,” Philippe Desfosses, chief executive officer of ERAFP, said in an interview at a conference on Monday. His firm oversees the 26 billion-euro ($28 billion) RAFP fund for public servants. Desfosses wants France’s government to cut the minimum allocation to bonds in the trust’s investment mandate.

The pension trust’s annual return, which was 4 percent last year, could fall to as little as 0.4 percent within the next few years if the low-interest rate environment continues and the allocation restrictions remain unchanged, Desfosses said.

While yields on government bonds spiked after Donald Trump’s election as U.S. President, interest payments on 10-year French and German government bonds remain below 0.9 percent, the return ERAFP aims to achieve for retirees. The pension pot faces a dilemma prevalent across Europe: a dearth of safe, long-dated investment options that match liabilities, as purchasing by the European Central Bank has pushed yields on sovereign debt to historic lows.

“One of the major issues for our European economies is this pension time-bomb,” said John Hourican, CEO of Bank of Cyprus Pcl, said in London on Wednesday. “There isn’t enough risk being taken by the asset-management industry” and a change of rules is needed, he said.

Desfosses’s fund has to invest at least 50 percent of its assets in bonds, a threshold he would like to see halved. The manager wants the fund’s maximum investment in stocks to be increased to 50 percent from 40 percent, and in real estate to 15 percent from 10 percent.

The fund manager has met regularly with officials from France’s economy ministry to argue for a change in the pension pot’s asset allocation restrictions, but with little success.

“The inertia you have to overcome is so dramatically high,” he said. “Politicians here have no culture of market-driven finance. They don’t understand how markets are important for allocating capital to where it’s needed.”

Reform of the trust’s mandate is unlikely before France’s presidential election next year because the government will be preoccupied by the vote, Desfosses said. The French government didn’t respond to calls and e-mails seeking comment on the fund’s mandate.

Its default position is likely to be against changing the restrictions because European pension funds tend to have a safety-first approach and favor investing in bonds, said Francois Barker, head of pensions at law firm Eversheds.

The RAFP fund, which started in 2005 and is expected to grow to about 50 billion euros by 2026, currently invests 25 percent of its assets in stocks, 7 percent in real estate and 63 percent in bonds, according to the latest figures on its website.

Since Trump won the U.S. presidential election, 10-year U.S. Treasury yields have risen by more than 40 basis points and on Monday climbed to the highest this year.

“It’s a knee-jerk reaction,” Desfosses said. “I don’t think we’ll be back to normal rates for a long time.”

http://www.bloomberg.com/news/articles/2016-11-17/bond-squeeze-bleeding-to-death-28-billion-french-pension-fund

Or in other words: "Choose your consequence: Bleed to death, or invest in hypervalued risky assets." "I choose risky assets." "Granted. Death! By risky assets".

This is quite the divergence. Goldman Sachs Financial Conditions Index vs. the S&P

FTSE All-World Index, representing about 95% of global investable market capitalization, still rolling over from May'15 peak. Worth watching

Edited November 19, 2016 by OriZ