Corporate Bond Bubble Threat?

[Gracious1]

I love the insurance and annuity business. I want to be a hero for my clients and save hard working Americans Excessive taxes and Fees and Loads. I only think I know where my clients money is going , ie a small percentage to the call market(derivatives) to cover the risk and the majority to the corporate bond market. After this last week where JP Morgan Chase was reported to lose 2 billion ( I also read actually $ 800 million) hedging the CORPORATE BOND MARKET. If this is true, can any experienced insurance geek explain if the Corporate bond market is the next playground for wall street to pummel like the mortgage market was about 7 years ago. I would hate to wake up someday and find that the annuity product business was a sham and my clients money was lost to a bunch of wall street hedge funds. Also would the reinstitution of the uptick rule help prevent another tragedy for middle Americans. I expect alot of of discussion on this topic as our industry health depends on it.
NAIVE and Gracious

 

[iceco1d]

General consensus is that there is not a "bond bubble" in the true sense of the word.

Bubbles are formed when prices are out of whack to what fundamentals show they should be.

For example, P/E ratios were 40+ back in the "tech bubble." Fair value is typically in the 15 - 17 range. But people were saying how it's "different this time."

Now back to bonds...they are expensive right now (i.e. prices are high), but bond prices are inline with where interest rates are (and have been). So even though things are expensive right now, prices are where they should be given the interest rate environment.

As for rising rates crushing bond prices, that should not affect the annuity guarantees for insurers, since they (presumably) should be matching durations in their general account with the liabilites of the annuity (and life insurance) contracts.

These risks should already be reflected in contracts by way of lower caps, bigger spreads, lower participation rates, etc.

For what it's worth, I think being in the financial services industry and mudslinging against "the big bad hedge funds" makes a person look unprofessional and uninformed.

Remember the financial crisis in 2008? It wasn't caused by the uptick rule (although, I think you're right that it should be permanently reinstated). Who were the biggest beneficiaries of government bailouts?

AIG (an INSURANCE COMPANY) was #1. GM was #2. In fact, AIG and GM got more bailout money than Wells Fargo, JP Morgan, Morgan Stanley, Citigroup, PNC, and Goldman Sachs COMBINED.

 

[scagnt83]

JPMC did not loose money on corporate bonds.

They lost money on Credit Default Swaps (think AIG 2008), whos purpose was to hedge against US Corporate & Junk bonds.

They layered both long & short positions to try and offset each other, it got too complex and they screwed the pooch on liquidating their positions.
(If you have too many offsetting positions nothing offsets anything anymore.. )


Nothing is wrong with the corporate bond market imo. Most large US corporations are very well capitalized.


And speaking of AIG, AIGs problems mainly stemmed from a single arm of the company (they used to have lots of subsidiaries) which was "AIG Financial Products" (essentially a hedge fund). AIGFP created CDSs so large it put the entire company at risk when they went south.

But yes, a company that is mainly an insurance company received most of the bailout money.

And Ice is correct, it helps no one to bash other sectors of the financial industry.

 

[iceco1d]

And Ice is correct, it helps no one to bash other sectors of the financial industry.

This has been a hot topic on another board I visit. You have brokers hating on annuity agents. Insurance agents hating on RIAs. RIAs hating on all commissioned salespeople. It's a mess. And while we're all giving each other black eyes, the rest of the world is only hearing the negative and it's making all of us look bad.

Joe America doesn't know the difference between a stock broker, an IAR, a life insurance agent, and a trader at Goldman Sachs. When they hear "Wall Street" they think of all of us (the grunts on the ground) without prejudice.

By the way I agree with everything in your post above.

 

[Justin Bilyj]

There are many bubbles happening. Bubbles happen when there is malinvestment. Malinvestment happens through distortion. Fixing interest rates is a distortion. Distortions come from the Keynesian idea that you can have central economic planning. Only free markets will tell you honest prices exclaim Austrian economists.
There is the student loan bubble, 1+trillion.
You have the bond bubble, the derivatives bubble 300+trillion, and you have the dollar bubble which is the faith of the dollar backed by a ghost of a promise from the private cartel the Federal Reserve hedged by oil trading (petrodollar). Except now countries are trading gold for oil (brazil,india,iran,china,russia) and our dollar has lost 93% purchasing power since the Feds beginnings in 1913, which coincedently the same year the IRS was created.
The dollar bubble is unraveling and will trump all bubbles...

 

[iceco1d]

And there's the tinfoil hat point of view.

The dollar has lost purchasing power intentionally, primarily through relaxation (over time) of the reserve requirement. The idea is to expand the money supply, and keep a modest level of inflation. We need inflation in order to motivate consumers to spend their dollars, rather than hoard them (i.e. if you know your dollars are going to be worth less tomorrow than they are today, you'll dispense them on goods ASAP to get the best bang for your buck). Policies that encourage "money in motion" are good for economic activity.

The fear of deflation is that you have the opposite effect on consumer behavior. In a deflationary environment (which means your purchasing power is going UP), you're likely to hold your dollars for as long as possible, because you know you can buy more "stuff" with the same dollar tomorrow/next week/next year.

Once you have people hoarding their dollars because each passing day leads to more and more purchasing power, you're in a "deflationary spiral," which is dangerous because people aren't spending money, and the economy suffers.

I think the expansion of the money supply (and hence decreasing value of the dollar) is a very calculated and profitable move for our country. The problem is, with Reserve Requirements now in the 10% range, the Fed is running out of tools to expand the money supply to pull us out of recessions (the RR is the most power tool the Fed has, followed by changing the discount window rate, and buying/selling treasury bonds).

The countries trading gold for oil are only doing so to circumvent trade sanctions imposed by the U.S.A. It has nothing to do with the dollar itself.

The IRS really has no place in this discussion. They don't create laws, they just enforce them.

 

[Justin Bilyj]

Read your history and you will understand why the IRS was created with the FED, what is so tinfoil about this? Do you think its kosher to give 16 trillion to foreign banks, bringing on inflation, help out their buddies, make a vig for loaning out the money, and god knows what ever the hell they have done.
These are evil people, Keynes had it all wrong.

 

[iceco1d]

Read your history and you will understand why the IRS was created with the FED, what is so tinfoil about this?

What ISN'T tinfoil hat about it? Most civilized countries have agencies to collect their taxes...

Do you think its kosher to give 16 trillion to foreign banks

You'll have to elaborate on exactly what you mean by "giving $16 trillion to foreign banks."

, bringing on inflation,

Yes. Modest inflation keeps money in motion, which is good for economic activity in general.

help out their buddies,

No doubt this happens. But it happens all over the world in all industries. When it happens at the top of the monetary system, the numbers are just bigger. All the time though, schools hire teachers that used to be students there. Coaches start players whose parents give money to the boosters. Cops get friends & family out of tickets. Restaurant & club managers/owners give friends & families priority seating. On. And on. And on. The whole world does it.

make a vig for loaning out the money,

Shouldn't something be charged for use of funds? Our clients are getting a "vig" from insurance companies when they buy a fixed annuity...

and god knows what ever the hell they have done.
These are evil people, Keynes had it all wrong.

No doubt some of these people are evil. But I don't think all of them are. I don't think Keynes had it all right, or all wrong.

Sorry if I came across as offensive. Your post seemed very conspiracy theory-ish. And don't get me wrong, it's obviously fishy when the last however-many Treasury Secretaries are ex-Goldman executives. There are problems. There is unfairness. I think we have the best economic system the world has ever seen. I do not believe the dollar, or the USA, is on the verge of (or anywhere close to) collapse.