Macro and Credit - The Seventh-inning stretch

"It's easier to resist at the beginning than at the end." -  Leonardo da Vinci

Watching with interest the better than expected US 1st quarter GDP print up 2.3%, vs 2.0% expected despite a slowdown in consumer spending, with wages and salaries up 2.7 percent in the 12 months through March compared to 2.5 percent in the year to December, and (PCE) price index excluding food and energy increasing at a 2.5% being the fastest pace since the fourth quarter of 2007, leading many pundits to usher more and more the dreaded "stagflation" growth (real negative growth), when it came to selecting our title analogy we decided to tilt our choice towards a baseball one given the growing signs of the lateness of the credit cycle. The Seventh-inning stretch is a tradition in baseball in the United States that takes place between the halves of the seventh inning of a game. Fans generally stand up and stretch out their arms and legs and sometimes walk around. As to the name, there appears to be no written record of the name "seventh-inning stretch" before 1920, which since at least the late 1870s was called the "Lucky Seventh", indicating that the 7th inning was settled on for superstitious reasons. While all thirty Major League franchises currently sing the traditional "Take Me Out to the Ball Game" in the seventh inning, several other teams will sing their local favorite between the top and bottom of the eighth inning. In the current state of affairs of the credit cycle, as we pointed out in our last musing, the debate on where we stand in regards to the credit cycle is still a hotly debated issue particularly with the US 10 year Treasury Notes passing the 3% level before slightly receding as of late.

In this week's conversation, we would like to look at potential headwinds for credit markets in the second half of 2018 given the markets have become much more choppier in 2018 thanks to higher volatility and rising yields. 

Synopsis:

• Macro and Credit - Switching beta for quality? 
• Final chart -  More and more holes in the safe haven status of the CHF cheese

• Macro and Credit - Switching beta for quality? 

As we pointed out in our early April conversation "Fandango" when we quoted our friend Edward J Casey, Flows and outflows matter more and more as many are dancing closer and closer towards the exit it seems in this gradually tightening environment thanks to the Fed's hiking path. Rising rates volatility have whipsawed credit markets in 2018, upsetting therefore the prevailing "goldilocks" environment which had been leading for so long in credit markets thanks to repressed volatility on the back of central bankers meddling with asset prices. With rising dispersion as we have pointed out in our recent musings, credit markets have become more choppy and less stable to that effect, more a traders market one would opine. It has become therefore more and more important as pointed out by our friend to monitor fund outflows but as well foreign flows coming from Japanese investors to gauge the appetite of investors for specific segments of the credit markets. It appears to us more and more that there is somewhat a growing rotation from high beta towards more quality, moving up the ratings spectrum that is.

When it comes to assessing flows, we read with interest Bank of America Merrill Lynch's Follow The Flow note from the 27th of April entitled "Pressure On, Pressure Off":

"Another week of the same? Not exactly.

While HY and equity flows remained on the negative side it seems that the "risk off" flows trend is turning. Last week’s outflow from government bond funds was the first in 15 weeks.

Note that the asset class has seen a significant inflow trend so far this year on the back of the rise in yields and but more importantly on the back of a bid for "safety". With rates vol still close to the lows and spread trends improving on the back of a more moderate primary and with geopolitical risks and trade war risks moderating, we think that high grade fund flows trends are set to continue to improve.

Over the past week…

High grade fund flows were positive over last week after a brief week of outflows.
High yield funds continued to record outflows (24th consecutive week). Looking into the domicile breakdown, US and Globally-focussed funds have recorded the vast majority of the outflows, while the European-focussed funds flow was only marginally negative.

Government bond funds recorded their first outflow in 15 weeks and the second of the year. All in all, Fixed Income funds flows were negative for a second week.

European equity funds continued to record outflows for a seventh consecutive week. Over those seven weeks, the total withdrawal from the asset class funds was close to $19bn.

Global EM debt funds saw outflows for the first time in four weeks. Commodity funds on the other hand continued to see strong inflows for a fourth week.

On the duration front, long-term IG funds were the ones that suffered the most last week, as outflows were recorded on that part of the curve. Mid-term and short-end funds both recorded inflows." - source Bank of America Merrill Lynch

Are we seeing the start of a risk-reduction trend in high beta namely high yield in favor of quality, namely investment grade thanks to the support of foreign flows following the end of the Japanese fiscal year with investors returning to US shores on an unhedged currency risk basis? We wonder.

It would be hard not to take into account the change in the narrative given the Fed is clearly becoming less supportive, though we would expect Mario Draghi to remain on the accommodative side until the end of his tenure at the head of the ECB. While clearly credit markets investors have recently practiced a "Seventh-inning stretch" as we pointed out last week, we do not think the credit cycle will be decisively turning in 2018 given financial conditions remain overall still very loose.

But, no doubt that the credit game is running towards the last inning with leverage above average and credit spreads at "expensive" levels particularly in Europe where as of late Economic Surprises have experienced a significant downturn. On the subject of leverage and inflows into credit markets we also read with interest Société Générale's Equity Strategy note entitled "Rising yields and debt complacency spell trouble for equity markets" from the 23rd of April:

"Leverage is high as spreads have narrowed substantially

Both in Europe and in the US we observe that leverage levels are above their respective historical averages. While on a net debt to EBITDA ratio, US companies (1.6x) appear less leveraged than European companies (2.0x), both regions are at levels only seen during the worst of the TMT bubble (2001-03), or the financial crisis (2008-09). Indeed, it seems as though companies have tried to take advantage of the low yield environment by leveraging their balance sheets (Apple is good example of this). However, while the balance sheet of an IT company is not significantly at risk from higher bond yields (cash rich), some other segments of the market may be more at risk.

Since 2009, the corporate bond market has benefited from massive inflows. Despite the change of volatility regime and releveraging of corporate balance sheets, credit spreads are still ultra low. SG credit strategists expect more challenging conditions for the credit market in the second half of the year, with the end of the EU’s Corporate Sector Purchase Programme (CSPP) and rising government yields.

Mutual Fund Watch - exceptional outflows from credit

The latest outflows from European credit funds are exceptional in the sense that they mark a clear break from previous trends. This is easily observed in the charts below: the four-week trailing series are well below zero (overall net outflows over the last four weeks) and have crossed the lower band of two standard deviations below the long-term average. That is exceptional, especially given that we find the same picture in the US.

The outflows from European credit funds follow a similar pattern to that seen in the US. The four-week trailing series for the US have also fallen below zero (overall net outflows over the last four weeks) and have crossed the lower band of two standard deviations below the long-term average. In the case of investment grade (IG) credit funds in the US and Europe, the turnaround comes after a prolonged period of strong cumulative net inflows. The series therefore appears to be peaking at very high levels.

- source Société Générale

As we discussed on many occasions on this very blog, when it comes to US credit markets foreign flows matter, particularly flows coming from Japan. During the hiking period of the Fed in 2004-2006, Japanese Lifers and other investors gave up FX risk and took one more credit risks. Given the start of the new fiscal year in Japan, it is paramount to find out their intentions in relation to their foreign bond appetite. On this particular point we read another Bank of America Merrill Lynch note from their Credit Market Strategies series from the 27th of April entitled "Drinking from the firehose":

"Unhedged foreign bonds for life

Every six months Japanese life insurance companies update on their investment plans for the half of their fiscal years that just started. Hence we have now heard plans for the fiscal first half that began April 1st (Figure 10).

The color is very much consistent with last year and our discussion above – to reduce yen holdings in favor of foreign holdings and alternative investments (see our most recent updates: Foreign bonds for life 26 April 2017, Lifers on the hedge 24 October 2017).
Increasingly Japanese lifers plan to directly reduce currency-hedged foreign holdings, explicitly due to the rising cost, which should lead to more selling of shorter-maturity US corporate bonds (than have rolled down). That translates into increasing currency-unhedged holdings of foreign assets, which means an up-in-quality shift in Japanese

Reaching for investors

The recent spike in interest rates to 3% on the 10-year is the bond market reaching for investors (Figure 11).

While we have no real-time information on domestic insurance and pension buying – which we expect is increasing - we have detected a significant acceleration in foreign buying the past seven business days (Figure 12).

On April 17th our measure of foreign buying was down 59% year-to-date compared with the same period last year - but by now the decline is just 46%. In fact foreign buying over the past seven days is the strongest we have seen since February last year (Figure 13).

Of course, since a lot of this foreign money is likely currency unhedged (see: Unhedged foreign bonds for life 23 April 2018), which comes from a smaller budget, there is a limit to how long this pace can persist. However, increased yield-sensitive buying gives hope that the market is going to be better able to absorb the big seasonal increase in supply volumes we expect in May. This especially if inflows to bond funds/ETfs do not continue to deteriorate (Figure 14).

Defensive flows

US high grade fund and ETF flows weakened for risk assets such as stocks, high yield and EM bonds this past week ending on April 25. On the other hand inflows increased for safer asset classes such as high grade and government bonds. The overall impact on overall fixed income was a decline in inflows to $3.12bn from $4.36bn. For stocks flows turned negative with a $2.43bn outflow following two weeks of inflows, including a $6.23bn inflow in the prior week (Figure 15).

Inflows to high grade increased to $3.33bn from $0.86bn the week before. Inflows increased across the maturity curve, rising to $1.16bn from $0.26bn for short-term high grade and to $2.17bn from $0.60bn outside of short-term. Most of the increase was from ETFs that tend to be dominated by institutional investors. ETF inflows rose to $2.48bn from $0.38bn. Inflows to funds increased more modestly, rising to $0.85bn from $0.47bn (Figure 16).

Inflows to government bond funds were higher as well, coming in at $1.66bn this past week, up from a $0.85bn inflow in the prior week. High yield, on the other hand, had the largest outflow since February of $1.60bn, compared to a $2.67bn inflow the week before. Similarly inflows to leveraged loans weakened, decelerating to $0.16bn from $0.49bn, while global EM bond flows turned negative with a $0.72bn outflow following a $0.61bn inflow a week earlier. The net flow for munis was flat, up from a $0.68bn outflow in the prior week. Finally, money market funds had a $3.16bn inflow this past week after a $31.57bn outflow a week earlier." - source Bank of America Merrill Lynch

If the trend is "your friend" then it seems that it is becoming more defensive in credit markets, with rising dispersion on the back of investors becoming more discerning when it comes to their credit risk exposure. We might have seen a "Seventh-inning" stretch, but when it comes to earnings for Investment Grade credit, the results so far have pointed towards a notable acceleration in earnings growth, supported as well by a weaker US dollar benefiting the global players. 

The big question on our mind in continuation to what we posited last week is relating to the might overstretched short positioning in US 10year notes. We indicated in our previous musing "The Golden Rule" the following when it comes to our MDGA (Make Duration Great Again) stance:

"We don't think yet with have reached the "trigger point" making us bold enough to dip our investing toes into the long end of the US yield curve particularly as we are getting closer to the 3% level on the 10y Treasury yield" - source Macronomics, 22nd of April 2018

We continue to watch this space very closely, given the short-end of the US yield curve is becoming more and more enticing with the return of "Cash" being again an asset in a more volatile environment, we continue that the Fed's control of the long end is more difficult to ascertain. The most important question that will be coming in the next quarters as the Fed continues its hiking path will be about substituting credit risk for interest risk. Bank of America Merrill Lynch in their High Yield Strategy note from the 27th of April entitled "When Rates Arrive, Credit Risk Leaves":

"This week marks the second time in this credit cycle that the 10yr Treasury yield has touched on 3%. The previous instance was in Dec 2013, when the benchmark peaked at 3.02%, before turning the other way and rallying all the way to 1.36% by mid-2016. We continue to believe that the 10yr yield struggles to go higher from these levels and remain willing holders of some incremental duration risk.

One of the arguments around rates here with the 10/2yr yield curve at 50bps is that historically the Federal Reserve has refrained from intentionally inverting yield curve into deeply negative territory. We can observe such a behavior in Figure 1 on the left, where we plot the fed funds rate against the 10yr Trsy yield, or Figure 2 on the right where the former is plotted against the 10/2yr yield curve itself.

Regardless of the angle we take, the picture appears to be convincing in that over the past three policy tightening cycles, the Fed tried hiking once, or at most twice into a flat yield curve, and then it would cease further action. We think it is both natural and reasonable to expect this behavior to be repeated in the current policy tightening episode.

And if that is the line the Fed is unlikely to cross then our distance to that line could be only 3-4 hikes away from here, with the benefit of doubt that the curve does not flatten basis point for basis point of each hike. In this case, the Fed’s own longer-term median dot projection, at 2.75% or 4 hikes from here, may be closer to reality than it gets credit from consensus, which prices in 5-6 hikes.

A different aspect of the question on positioning between credit vs interest rate risk could be gleaned from Figure 3 and Figure 4 below.

These two graphs help us contrast the opposite extremes on the risk spectrum: the one on the left plots proportion of total BB yield contributed by its rates component, while the one on the right shows proportion of CCCs OAS coming from distressed credits. The two datasets are naturally inversely correlated (r = -30%), although they measure non-overlapping parts of the credit space.

Extreme observations on these graphs help us calibrate our risk allocation scale between heavily weighting rate duration risk or credit risk. Naturally, there is rarely a choice that includes both simultaneously, except for valuation deviations in smaller market segments. In the grand scheme of things, investors are mostly facing a choice of one over another.

So for example, between 2009 and 2016, rates represented only a modest part of overall BB yield, suggesting that their proportion could increase through either rising rates into stable spreads or tightening spreads into stable rates. In either case investors would be better off by overweighting credit over interest rate risk exposures.

Figure 4 further provides an additional layer of precision by highlighting extreme peaks of distressed contributions to CCCs spreads, which occurred in early 2009, late 2011, and early 2016. In all three cases, of course, an overweight in credit risk was the optimal strategy.

The opposite was true in early 2007 or late 2000, when both lines were at the other end of their historical range (i.e. an outsized contribution from rates to BB yields and modest contribution from distressed to CCC spreads). With the benefit of hindsight, both extremes provided clear signals to overweight the rate over credit risk.

Even when the lines were not at their extremes, in early 2011 or late 2014, they were leaning on the side of being long rates over credit. In other words, when rate risk dominates the picture, credit risk tends to fall into obscurity. Our preference is to lean against such consensus views, all else being equal, i.e. we would be inclined to take on relatively more risk that is on everyone’s mind, and take less risk that is out of scope and thus probably underpriced.

Today, both lines are tilted on the same side of distribution, i.e. rates contribute relatively more than their historical average and distressed contributes relatively little. While levels are far from supporting any extreme positioning tilts, they do point towards modest overweight in rates over credit risk. Our preference for excess returns in BBs with some element of total return exposure fits this description well. We continue to maintain a market weight in CCCs, although we are watching the deterioration in our default rate estimates closely. Any further increases in expected defaults could lead us to take a more defensive view on lower quality." - source Bank of America Merrill Lynch

Sure by all means, massive increase of US government supply represents a serious headache for a bold contrarian investor, yet we do think that we are getting very closer to the points where the US long end of the curve will start to be enticing from a carry and roll-down perspective, particularly when inflation expectations are surging and negative real US GDP growth might provide support the dreaded "stagflation" word. In our book, flat or inverted yield curves never last for a very long time, and often appear near the peaks of economic cycles. Sure we are marking a pause similar to a "Seventh-inning stretch" but, this is the direction the Fed is clearly taking. In this Fed hiking context, rising interest rates has favored a Barbell strategy because reinvestments are implemented at regular times, which allowed you to benefit from higher rates. Once the yield curve is almost flat, the Barbell strategy will become meaningless and the time will come to reconsider your asset allocation policy and to lean toward the median part of the yield curve (belly). As discussed in our conversation "Rician fading" from December the question is whether we are in a in a bull flattening case or in a bear flattening case: 

• In a Bull Flattener case, the shape of the yield curve flattens as a result of long term interest rates falling faster than short term interest rates.  This can happen when there is a flight to safety trade and/or a lowering of inflation expectations.  It is called a bull flattener because this change in the yield curve often precedes the Fed lowering short term interest rates, which is bullish for both the economy and the stock market.
• In a Bear Flattener case short term interest rates are rising faster than long term interest rates.  It is called a bear flattener because this change in the yield curve often precedes the Fed raising short term interest rates, which is  generally seen as bearish for both the economy and the stock market

In the case of bear flattening, Japanese lifers tend to gravitate towards foreign bond investment. Bull flattening encourages Japanese lifers to move away from foreign bonds and they are left with no choice but to park their money in yen bonds. To that extent, we think that the ongoing "Bear Flattener" is still supportive of US credit, but most likely towards quality, being Investment Grade that is. During the bear flattening in 2013-14 (as the taper tantrum subsided), Japanese lifers accelerated their UST investment. This could certainly push us in short order to put back our MDGA hat on and dip our toes into the US long end part of the curve but we ramble again...

Given ongoing volatility brewing in the US yield curve and the dreaded 3% level touched by the US 10 year Treasury Notes, the world is turning towards alternative “safe havens”…instruments that act as a store of value in volatile times, instruments that can be used as collateral to raise funding and post margin in derivatives transactions and instruments that lubricate the financial system. For years, the US Treasury bond has been seen as the safe haven - a high-quality asset that rally in times of market stress and offer diversification for investors’ risky portfolios. Obviously 2018 has shown growing pressure on the "safe haven status" coming from the Fed's balance sheet reduction, higher US Libor rates and the jump in the US budget deficit. The supply of Treasuries that the private sector will need to digest will be much greater than during the Fed’s QE mania. Could Japanese investors come to again to the rescue given they sold a record amount of U.S. dollar bonds in February as the soaring cost of currency-hedging undercut yields? We wonder as it seems their appetite seems to be more credit related eg non-government bonds related. For now cash in the US seems to have been emerging as a safe haven according to Bank of America Merrill Lynch European Credit Strategist note from the 26th of April entitled "What is the safest asset of them all?":

"Cash as an emerging asset class in the USRalf Preusser, our global rates strategist, makes an excellent point, namely that the typical haven characteristic of Treasury debt is being hindered by the appealing rates of return on cash in the US. As Ralf points out, historically during periods of market turbulence, money would flow from risky assets (such as stocks) into US Treasury bonds. But with $ Libor at 2.36%, support for Treasury debt is diminishing (consider that 5yr Treasury yields are 2.84%). In other words, the rise of “cash” as an asset class is altering the traditional allocation decisions of multi-asset investors in times of market stress.

Chart 5 highlights this point. We show the rolling 1yr correlation between total returns on 10yr Treasury bonds and the total returns on the Dow Jones stock index (daily returns). We overlay this with the evolution of 3m $LIBOR.

As can be seen, a decade ago the correlation between Treasury bond returns and stock returns was significantly negative (-60%). Treasuries performed their function as a place of safe harbor, and a store of value, around the time of the Global Financial Crisis. But since then the negative correlation has dwindled and is now just -28%.

Moreover, the chart shows that the changes in Treasury/stock correlation have closely followed the evolution of 3m $LIBOR, as Ralf has pointed out. Higher LIBOR rates have coincided with weaker Treasury/stock correlations. In other words, “cash” has started to become an attractive place to park money in times of market stress, and especially so since mid ’17 – when $LIBOR began to rise more vigorously.

In addition, Chart 8 above shows that the rolling 1y beta between Treasury bond returns and stock returns has also declined since the start of 2017, highlighting the reduced sensitivity of US rates to fluctuations in the stock market.

The competition from “cash”, therefore, seems to be challenging the traditional safe harbor characteristics of US Treasuries." - source Bank of America Merrill Lynch

Or put it simply when the king of the last decades, balanced funds are becoming "unbalanced" thanks to rising positive correlations we have been discussing many times. As we move towards the second part of 2018, it seems to us that clearly any tactical rally/relief should entice an investor in reducing his beta exposure and adopt overall a gradual more defensive stance credit wise. Safe havens it seems, and even the US dollar have so far been more elusive in 2018 apart from the "barbaric relic" aka gold's performance during the first quarter of this year.  Talking of "safe havens" as per our final chart below, even the defensive nature of the Swiss currency CHF has become questionable.

• Final chart -  More and more holes in the safe haven status of the CHF cheese

Given the aggressive nature of central banking interventions in recent years, the SNB has also shown in its nature by becoming somewhat a very large hedge fund, particularly in the light of its large equities portfolio. It is therefore not really a surprise given the aggressive stance of the SNB to expect further intervention on its currency, preventing in effect its safe haven magnet status of the past. Our final chart comes from another Bank of America Merrill Lynch report World at a Glance entitled "After 3%" and displays how the CHF have lost its safe haven allure:

"CHF is certainly finding no friends at the SNB and during this latest bout of weakness, board members have shown little appetite to prevent further losses. Indeed, at the time of writing, SNB President Jordan has stated that a move above 1.20 in EUR/CHF “goes in the right direction”. The SNB’s motivations are clear – they still see CHF as highly valued and in our view want to see EUR/CHF trade meaningfully and sustainably above 1.20 before changing their characterization of the currency. Against the backdrop of the protectionism and trade wars, “vigilant” and “fragile” have been key buzzwords used by the SNB and they remain concerned that CHF may succumb to safe haven inflows on geopolitical tremors.

We would challenge the SNB assertion that the CHF is a safe haven currency. As the chart below highlights, CHF has meaningfully under-performed the two other major safe haven assets (gold and JPY) over the past 15 months.

We believe the existence of the SNB put will likely prevent sustained CHF appreciation during risk-off periods as the SNB continues to make it clear that it is prepared to use intervention as a tool in order to prevent sustained CHF appreciation." - source Bank of America Merrill Lynch

Whereas we have seem in credit recently a short term bounce, in this "Seventh-inning stretch", we think that gradually one should adopt a more cautious stance in regards to credit markets and be more discerning at the issuer level given rising dispersion. The change of narrative also means that "cash" in the US is back in the asset allocation toolbox after years of financial repression thanks to QE, ZIRP and NIRP. It remains to be seen if 2020 will mark the 9th inning or if it will be early 2019, as far as we are concerned, the jury is still out there.

"Switzerland is a country where very few things begin, but many things end." - F. Scott Fitzgerald

Stay tuned!

Macro and Credit - The Butterfly effect

"The foolish are like ripples on water, For whatsoever they do is quickly effaced; But the righteous are like carvings upon stone, For their smallest act is durable." -  Horace

Watching with interest the retreat in government bond yields, thanks to overall dovishness from our "Generous gamblers" aka central bankers including recently ECB's Le Chiffre (Mario Draghi), leading to renewed inflows into High Yield and equities in the US making new records in the prospect, with a continuation of the bull market in complacency, we reminded ourselves for our title analogy of the much used "Butterfly effect" narrative. While the "Butterfly effect" is the concept that small causes can have large effects and was initially used in weather prediction, in chaos theory, the sensitive dependence on initial conditions in a nonlinear system such as financial markets can lead to large differences in a later state of a credit cycle. The name was coined by American mathematician, meteorologist and chaos theory pioneer Edward Lorenz.

Our chosen analogy is also a veiled reference to US Treasuries Butterfly, given we think it is showing us that the US economy to some extent is tracking Japan. The butterfly spreads formed by the gaps between short, medium and long term US Treasury yields has been narrowing with Japan as of late:

- source Bloomberg 

In this week's conversation, we would like to look at what continues to provide inflows and support for credit markets, namely "Bondzilla" the NIRP monster which we indicated on numerous occasions has been "made in Japan". 

Synopsis:

• Macro and Credit - Bondzilla is back and he provides strong support for US Credit Markets
• Final charts - Financial conditions? The punch bowl is still plentiful.

• Macro and Credit - Bondzilla is back and he provides strong support for US Credit Markets

Back in July 2016 in our conversation "Eternal Sunshine of the Spotless Mind" we indicated that "Bondzilla" the NIRP monster was more and more made in Japan due to the important allocations to foreign bonds from the Government Pension Investment Fund (GPIF) as well as other Lifers in conjunction with Mrs Watanabe through Uridashi and Toshin funds (Double Deckers) being an important carry player. In the global reach for "yield" and in terms of "dollar" allocation, Japanese investors have been very significant hence the importance of monitoring the flows from an allocation perspective. 

While 2016 was a record year in terms of foreign bond purchases by Japanese Lifers, 2017 was more tepid thanks to European elections risk, but according to Nomura in their JPY Flow Monitor note from the 21st of July, Insurance companies bought JPY201bn ($1.8bn) of foreign bonds for the fourth month in a row:

"Insurance companies: Insurance companies kept purchasing foreign bonds in June, but momentum remained relatively weak (Figure 1). They bought JPY201bn ($1.8bn) of foreign bonds for the fourth month in a row. They tend to be net buyers of foreign bonds in June, and the amount of net purchases was not significant (see “JPY: Season of seasonality”, 2 March 2017). Their investment in JGBs slowed to JPY171bn ($1.5bn). We expect lifers to keep purchasing foreign bonds, as major lifers’ investment plans suggest JGB yields will remain unattractive (see “BOJ review: Waiting longer for tailwinds”, 21July 2017).

Banks: Banks were net buyers of domestic and foreign bonds in June for the second month in a row (Figure 2).

They were large net sellers of bonds in April, but as seasonality shows, they resumed purchasing bonds in May and June. Foreign bond investment has slowed from May, but the FX impact was limited, in our view.

Pension funds: Trust banks, which manage pension funds’ money, kept purchasing foreign securities in June for the third month in a row (Figure 3).

The pace of net purchases slowed to JPY132bn ($1.2bn) though. Pension funds were also net buyers of domestic equities for the first time in five months. They bought JPY236bn ($2.1bn) of domestic equities, the biggest amount since August 2016. They were net buyers of JGBs too (JPY411bn or $3.7bn). The GPIF’s latest portfolio data up to end-March showed the fund’s portfolio is closer to its target portfolio. However, it accumulated short-term assets at a high level, and the president of the fund said the accumulation of short-term assets is to enhance available capacity for the next investment. Diversification from short-term assets into portfolio assets should continue for the time being as European political uncertainty has diminished. We expect pension funds to be dip buyers of foreign bonds and equities." - source Nomura

Not only for Japanese Lifers, but also for retail investors such as Mrs Watanabe, in the popular Toshin funds, which are foreign currency denominated and as well as Uridashi bonds (Double Deckers), the US dollar has been a growing allocation currency wise in recent years as per Barclays JPY Monthly Flows noted from the 20th of July:

• "Japanese institutional investors continued to buy foreign bonds, but net outflow slowed down from last month. By investor type, banks and trust banks remained net buyers of foreign bonds. Meanwhile, life insurers continued to purchase foreign bonds. Foreign equity investments also decreased slightly in June, led by banks and bank trust account. Weekly data indicates that a net purchase of foreign bonds by Japanese investors turned positive again in the first week of July amid yield curve steepening globally since the end of June. Regional breakdown of foreign bond flow shows that Japanese investors turned net buyers of US, German and French bonds in May (Figure 1).

• Among retail investors, toshin funds remained popular while net issuance of foreign-currency-denominated uridashi bonds decreased somewhat in June. In bonds, INR- and RUB-denominated uridashi bonds continued to attract solid demand from investors. As for toshin funds, BRL-denominated funds increased for the first time since January this year and TRY- and INR-denominated funds continued to tick higher. Margin FX investors reduced their net long positions in USDJPY and AUDJPY notably and increased their short EURJPY and GBPJPY positions.

- source Barclays

Clearly, for Japanese retail investors, it has all been in recent years about low bond volatility and "king dollar". We continue to believe that when it comes to global flows, Japan matters and matters a lot. Japanese yen is indeed the source of the carry trade on a global basis and this has very significant implications from a tactical perspective when it comes to foreign bonds overall. Since the implementation of NIRP in 2016, Japanese Lifers went into "overdrive" in their purchases of foreign bonds. No surprise therefore that, when it comes to the "Butterfly effect", Bondzilla's appetite has been increasing at a rapid pace. 

You might be wondering where we going with the reference to the Butterfly effect and the importance of Japan but for US credit markets, Japan matters as well and matters a lot. Back in March 2017 in our conversation "Outflow boundary", we indicated the following:

"The big question, as we await the allocation decision from our Japanese friends, if there will be enticed again by foreign bonds like they have in recent years. The weakness seen since the beginning of the year has reduced the cost of dollar funding, and with US policy in turmoil in conjunction with prospects for slower US growth than anticipated, there is a chance to "make duration great again" we think in the current "Outflow boundary" environment." - source Macronomics, March 2017

For Japanese investors increasing purchases in foreign credit markets has been an option. Like in 2004-2006 Fed rate hiking cycle, Japanese investors had the option of either increasing exposure to lower rated credit instruments outside Japan or taking on currency risk. During that last cycle they lowered the ratio of currency hedged investments.  

One thing that appears clear to us is that USD corporate credit in recent years has been supported by a large contingent of foreign investors in particular Japan. Reading through UBS Credit Strategy note from the 21st of July entitled "Where are we in the credit cycle?" we were pleasantly surprised that indeed, Bondzilla the NIRP monster is "made in Japan" and it is as well a critical support of US credit markets:

"Our deep dive analysis isolates Japan as the critical support for US credit"

- source UBS

Where we disagree with UBS is that according to their presentation, because of a divergence in short-term rates is increasing hedging costs, they believe that the yield advantage of FX-hedged US IG credit is eroding and therefore the foreign bid is set to unwind due to these dollars hedging costs. As we posited above, during the 2004-2006 Fed rate hiking cycle, Japanese foreign investors lowered their ratio of currency hedged investments and sacrificed currency risk for credit risk. 

The latest dovish retreat from our "Generous gamblers" (Fed and ECB) has created a "Rebound effect" as posited last week in the sense that is has not only prolonged the goldilocks state in credit markets with spreads tightening further for a longer period in this credit cycle, but, equities wise, it has provided additional strong support as well. Summer 2017 has led to record stock indices and all time spread tights in many instances. For now it seems it is "carry on" and we are indeed in the final melt-up of this last inning of the credit cycle risky assets wise. For many it continues to be the most hated bull-market in history. So far it seems our gamblers are reluctant in removing too early and too fast the credit punch bowl. For the moment the credit love boat is still sailing strong during this summer lull and unless we see some exogenous factors coming into play, it is difficult to see what could be a catalyst for a reversal before September where the Fed and the ECB could decide to tighten the financial conditions spigot as per our final charts.

• Final charts - Financial conditions? The punch bowl is still plentiful.

As we have seen recently, the Butterfly effect from the hawkish comments from Le Chiffre aka Mario Draghi led to a mini-tantrum in the Euro government bond space. Obviously the recent tone down in the rhetoric from both the Fed and the ECB has led to a continuation of "goldilocks" for risky assets thanks to record low volatility. Given the current financial conditions on both side of the Atlantic, it remains to be seen if our "Generous gamblers" will maintain further their dovish rhetoric in September. Our charts below come from Nomura and displays the US and Euro area financial conditions and comes from their recent Japan Navigator notes:

"Euro area and US policymakers are likely concerned about riskier asset rally;

Japanese policymakers may welcome it

This week 40yr and 2yr JGB auctions will be held. Japanese CPI data will be released.

The FOMC meets.

This week’s ECB announcement and market reaction have strengthened our conviction that the global yield upcycle that started from the euro area in late June has faded. We believe bond markets will move substantially only in September, when the Fed and ECB are likely to tighten policy, but only if riskier asset markets remain bullish despite Fed and/or ECB action. During this period, yields are likely to trade in a fairly narrow range, with risks on the downside, in our view. Riskier asset markets may strengthen and prevent yields from rising, but they tend to destabilize in the summer, particularly because US growth expectations are unlikely to rise.

UST yields have begun to fall. Although the market had become bearish owing to momentum from the euro area government bond (EGB) market, it lacked bond-negative factors (Figure 1).

There have been fairly strong concerns over US growth and inflation, and August data will likely be interpreted with scepticism – at the very least, a single month’s worth of data are unlikely to dispel these concerns, in our view.

We believe the ECB and Fed will look to tighten policy further if the output gap continues to improve and the riskier asset rally continues, even as they express concern about slow inflation growth, in our view. However, the Fed and ECB are unlikely to have an opportunity to jawbone until the Jackson Hole symposium in late August. Although the BOJ has emphasized its dovish stance, we believe it has basically the same stance as the Fed and ECB, and is unlikely to adopt an easing stance again as long as the output gap continues to improve. However, if JPY strengthens on risk aversion this summer, the market’s easing expectations may rise again, if only temporarily.

Compared with the Fed and ECB, the BOJ appears more tolerant about an increase in JPY carry trades and a riskier asset rally, and appears to be concerned about how much it can increase its JGB purchases further, rather than ETF buying, in our view. That said, if the BOJ revises its policy framework in such a way as to (erroneously) cause risk aversion, the negative impact on the appointment of the next governor should be substantial. Therefore, we do not expect policymakers to change the upper end of the target 10yr JGB yield range (0.11%) in the near term." - source Nomura

There you go, for now the ECB and the Fed have been mindful of the "Butterfly effects" in risky asset markets, hence the tone down of the rhetoric and insisting on a gradual process in removing the proverbial punch bowl, while the Bank of Japan (BOJ) has so far been in a holding pattern, ensuring in effect that investors in Japan as well continue to play out the low volatility leveraged "carry" play into overtime. No wonder the "Butterfly effect" is made in Japan, maybe it's related to the famous Opera play Madame Butterfly by Giacomo Puccini where the hero was so excited to marry an American that she had earlier secretly converted to Christianity or like Bank of Japan to central bankers' current religion we wonder. It didn't end well for Madame Butterfly in the end but we ramble again...

"See, the night doth enfold us! See, all the world lies sleeping!" - Giacomo Puccini

Stay tuned !

Macro and Credit - The Three Questions

Quote of the day: "When the bottom 50% of your population doesn't matter you can't complain when they throw political hand grenades."- H/T P.O.K. on twitter - (and by the way it works with Trump, BREXIT, French elections, etc.).

Watching with the interest the convolutions in French politics leading to a much disputed than thought second round of the presidential race, we reminded ourselves when it came to selecting this week's title analogy of "The Three Questions", a short story by Russian author Leo Tolstoy first published in 1885. The story takes the form of a parable, and it concerns a king who wants to find the answers to what he considers the three most important questions in life:

"It once occurred to a certain king, that if he always knew the right time to begin everything; if he knew who were the right people to listen to, and whom to avoid; and, above all, if he always knew what was the most important thing to do, he would never fail in anything he might undertake." - The Three Questions, Leo Tolstoy

In similar fashion, most investors are always trying to find the right time to invest, the right people to listen to, and whom to avoid, and above all, the most important thing to do, investment wise, so that they never fail in the fiduciary duty they might be undertaking.

As such we find of interest, that as we posited in recent conversations, there is a continuation in the "risk-on" mantra, even in credit markets with a strong continuation in the grind tighter for spreads for both Investment Grade and High Yield given it validates our short-term "Keynesian" stance. As we stated last week:

"For now the market wants to rally and will rally, as we often see significant rally in late stages in the credit cycle", source Macronomics, April 2017

In this week's conversation we would like to look at what to expect in the second quarter, on the back of some worsening credit trends in the US that warrants monitoring and also why we continue to be much more cautious on the second part of 2017.

Synopsis:

• Macro and Credit - The right time for every action?
• Final charts - Dude, where is my vol?

• Macro and Credit - The right time for every action?

In Leo Tolstoy very enjoyable short story, the main character the king had it proclaimed throughout his kingdom that he would give a great reward to anyone who would teach him what was the right time for every action, and who were the most necessary people, and how he might know what was the most important thing to do. Obviously many financial pundits in the investment world would be ready to pay a reward to anyone able to teach them what was the right time for every action and for similar answers searched by the king in Tolstoy parable:

"Remember then: there is only one time that is important-- Now! It is the most important time because it is the only time when we have any power" - The Three Questions Leo Tolstoy

Yet, at this juncture with earnings season in full swing, it seems to us there are many mixed signals coming from both macro data, earnings and flows. Macro wise we were not surprised by the lower US GDP print at 0.7% published last Friday. What has been somewhat a surprise has been the muted reaction in US long bonds on the news and the recent weakness in the duration play. It seems after all that for now, being the most important time, the MDGA trade (Make Duration Great Again), is a fade. This as well the signal we are getting from the allocation tool DecisionScreen, for Japan Economic Surprise:

- source DecisionScreen

It seems that whenever Japan's economic surprise index is positive, we get a negative signal for US 10 year Treasury notes.  This little binary trading rule gives you a sharpe ratio of 0.87 over 14 years worth of data and the difference of performance for US 10 year Treasury notes is 10% whenever Japan's Economic surprise index is either negative or positive. With a T stat at 3.29, there is only one chance out of 2000 it is a random result.

When it comes to Macro, the latest raft of data coming from Japan have been steering towards the strong side with the jobless rate standing at 2.8% in March at a two decade low and March output while declining by 2.1% on the month, rising 3.3% over the year as indicated by Bloomberg in their article from the 28th of April entitled "Japan Data Deluge Points to Economic Growth, Weak Inflation":

"The central bank has been unable to reach its target of stable 2 percent inflation despite four years of stimulus from Governor Haruhiko Kuroda. With only subdued inflation, workers have not seen significant pay hikes, meaning household spending has been weak. On the other hand, industrial production been increasing, thanks to a pick-up in external demand, with the central bank saying the economy was in an expansion for the first time in about nine years. This has led to high corporate profits." - source Bloomberg

Given wage and income growth remains weak, there is no way inflation can pick up without a significant break out, which would finally mark the end of the long deflationary spell of the country. While the jury is still clearly out there when it comes to assessing the potential return of Bondzilla to US shores in terms of foreign bonds allocations in general and US Treasuries in particular, while our Macro tool DecisionScreen points out to additional weakness on the back of better data coming out of Japan, flow wise, the Japanese investment crowd continues to be elusive as indicated by Deutsche Bank in their Fixed Income Weekly note from the 28th of April:

"The Japanese-Libor Connection

The lack of love shown by Japanese investors for Treasuries might be responsible for low 3m Libor fixings and the collapse in Libor/FF spreads. Japan was a net seller of foreign bonds again this week, divesting $12bn of securities. It was the third straight week of selling out of Japan, according to MOF data, and the year-to-date divestment of $66bn is so far the biggest since 2002, the first full year of
such data is available.

Profit-taking most likely explains Japan’s selling. Ten-year Treasury yields declined in April to a lower level than any previous month since the Trump election. In the process, yen cross-currency basis has tightened to levels not seen since January 2016. Japanese investors use the yen basis (or more precisely, their derivative FX forwards) to hedge the currency risk of their coupon flows from non-yen bonds. The basis tightens when there is a drop in demand to swap yen for dollar. The chart below shows a distinctive inverse relationship between cumulative Japanese purchases of foreign bonds and the 3m yen basis.

In US money markets where Japanese banks also raise dollars, the rates they’ve been paying on commercial paper and certificates of deposit have narrowed vis-à- vis the rates on they pay on repos. CP and CD rates are of course used by banks as the main input for daily Libor submissions. Three of the 17 contributing banks to USD Libor are also Japanese. The narrowing of rates Japanese banks pay to borrow dollar using CP/CDs versus repos is further evidence that unsecured funding costs have dropped, which is reflected in the tightening in Libor-FF spreads.

Our Japanese rates strategist noted this week that April typically tends to be a month when Japanese investors sell foreign assets as they take profits at the start of the fiscal year. Seasonality would suggest that Japan becomes a buyer again in May, with especially strong appetite for foreign bonds in the July to September period. Consequently, we would look for Libor-FF spreads to find some support in the coming month, especially if Treasury yields become attractive again." - source Deutsche Bank

It seems that the Fed's hiking process has somewhat dampened the appetite of Bondzilla the NIRP monster, which seems to be more reluctant than in previous years to rush into a buying spree for the time being. This is as well confirmed by the Nikkei Asian Review in an article from the 27th of April entitled "Japanese life insurers buying foreign bonds at slower pace":

"Alarmed by the prospect of U.S. interest rate hikes, Japanese life insurance companies are purchasing foreign bonds at a much slower pace and shifting more of their investment focus to real estate and infrastructure.

Japan's 10 major life insurers are expected to increase their holdings of foreign bonds by 2.9 trillion yen to 3 trillion yen ($25.9 billion to $26.8 billion) on a net basis, according to their fiscal 2017 asset management plans shared with The Nikkei. That would be down roughly 70% from growth of 8.8 trillion yen in fiscal 2016.

Domestic insurers continue to shy away from Japanese government bonds due to their rock-bottom yields. JGB holdings are forecast to fall by over 3 trillion yen on a net basis. Nippon Life Insurance and some other insurers plan to add more stocks to their portfolios.

The main reason life insurers are taking a cautious approach to foreign bonds is the expectation that the U.S. Federal Reserve Board will raise interest rates two more times this year. "Last fiscal year, we increased [currency-hedged] foreign bonds by 1.9 trillion yen, but this fiscal year will remain flat," a Nippon Life official told reporters on Wednesday. "As the FRB is seen raising rates, we will closely observe trends." - source Nikkei Asian Review

If indeed Bondzilla isn't playing the duration game, then again, we shall keep close a close look at our MDGA for the time being, though we did play it in the first quarter, from a contrarian perspective. We have also reduced our Gold/Gold Mining exposure in April following the decent run we had in the 1st quarter. It was a good first quarter for Gold as in 2016 but we are keeping some dry powder for the time being given the level of complacency as seen recently in lower lows touched by the VIX. This level of early summer lull as witnessed in the VIX is aptly described by DataGrapple in their latest post from the 2nd of May entitled "Wearing My Happy Glasses":

"Volatility has never been so low, and it is difficult to see what might change the situation. That is certainly the feeling most investors have and that is what VIX – an indicator based on the implied volatility of US equity options with a wide range of strikes maturing within 2 months – is telling us. It traded today at levels not seen since before the Great Financial Crisis. There is no stress and it is also obvious from the price action of the credit market, which rallied in a straight line from start to finish. More hedges came off across the board, as the general feeling is that Mrs Le Pen has no chance to come on top next Sunday. Investors have decided to brush aside the uncertainty surrounding the general elections that will take place in France in June and which will effective decide the composition of the government and its political orientation. They have also decided to ignore the tough negotiating stance which was endorsed by the 27 EU members in the talks regarding Brexit with the UK, to which the latter responded by saying it is bracing for a confrontation. Back from a 3-day week-end, they are wearing their happy glasses." - source DataGrapple

This is indeed a reflection of the strong "risk-on" mood experienced during the course of last month. There is indeed a certain angst created by the upcoming second round of the French elections with some financial pundits pointing out to some tail risk with Marine Le Pen, yet, it is difficult to have any proper clarity on the French elections until the parliamentary elections in June. When it comes to the significant performance of various asset classes including credit we read with interest Bank of America Merrill Lynch's take from their Euro Excess Returns for April 2017 note entitled "Rally à la française":

"Political risk has declined post the first round of French elections. Credit market valuations are reflecting the strength in equity markets and improving economic data.
Credit investors are still benefiting from a low supply backdrop, making the numbers (supply vs demand) add up. Nevertheless the ECB’s decision to reduce the pace of the
QE purchases has weakened the technical in the credit market, and higher supply amid lower political risk, will ultimately move spreads wider we think.

• Duration outperforms. In April the back-end of the curve has outperformed significantly the front-end. 1-3yr credit posted 20bp of excess returns last month, while the +10yr bucket posted a gain of 106bp.
• Beta outperforms. Euro-denominated high-yield credit posted almost double the excess return vs its high-grade counterpart (112bp vs 52bp, respectively). Same story within the IG space with BBBs outperforming single-As and double-Bs.
• Sectors: Virtually all sectors posted positive excess returns last month. Insurers, real estate and utilities/energy names feature at the top of the performance table.
• On the other side technology and industrials were at the bottom of the performance table.
• Issuers: French credits like Credit Agricole, EDF and BNP for another month were among the best performers in April. Healthcare names feature in the bottom of the list.

Cross market performance overview

Table 1 shows April’s total return performance across various fixed income and equity markets.

• Equity indices were at the top of the list for another month. European bank stocks topped the best performers list, followed by the French stocks, the EM and the broader European equity indices. The top 5 spots were dominated by equity indices.
• On the flip side, UK stocks have been down last month as sterling strengthened post the announcement of the June general election.

- source Bank of America Merrill Lynch

April in many instances has seen a clear outperformance of beta, particularly in the lower rated part of the capital structure as indicated by the performance in EUR HG Financials Junior Subordinated and Tier 1 bonds, as well as in the US with the CCC segment in US High Yield. The results of the first round of the French elections saw as well a significant rally in French financial stocks as we pointed out in our previous missive, in conjunction with somewhat better macro data such as PMIs. 

On a side note we have a very strong distaste for banking stocks. We explained our reasoning in our February conversation "The Pigou effect" back in February 2015:

"As we have stated on numerous occasions, when it comes to European banks, you are better off sticking to credit (for now) than with equities given the amount of "deleveraging" that still needs to happen in Europe.  You probably better understand now much better our long standing deflationary stance and lack of "appetite" for European banks stocks (we are more credit guys anyway...). It's the demography stupid! " - source Macronomics, February 2015

Back in 2015, while touching again on the "japanification" process of Europe, we pointed out to German Berenberg's research note on European banks turning Japanese and we agree with them at the time that from a long term perspective banks were uninvestable. To repeat ourselves, should you want to play the "japanification" process of Europe, stick to financial credit, you'll sleep better at night. Touching briefly again on this subject we would like to point out towards Berenberg very interesting note from the 30th of March entitled "But I'm holding on" relating to banks a poor investment proposal over the long term:

"History says you do not invest in banks

While past performance is no guarantee of future performance, looking back over the long term, banks have not been a great investment. The European banks have underperformed over the past 45 years, apart from the huge leverage binge during the late 1990s/2000s. While looking even further in the past, US banks have underperformed since 1800, so the recent 45 years (bar 2008-09) present some stability in terms of bank performance.

At heart there is a fundamental question to be asked as to whether banks should outperform the wider markets. While an argument could be made for those emerging markets with underdeveloped banking systems, for developed markets we struggle to believe that should be the case" - source Berenberg

For those loyal readers who have been following us for a while, we told you in our September 2015 in our conversation "Availability heuristic - Part 2" the importance of stocks versus flows:

"Our core thought process relating to credit and economic growth is solely based around a very important concept namely the accounting principles of "stocks" versus "flows". We have used this core principle in the past when assessing the issues plaguing Europe versus the United States as per our September 2012 conversation "Zemblanity":"We mentioned the problem of stocks and flows and the difference between the ECB and the Fed in our conversation "The European issue of circularity", given that while the Fed has been financing "stocks" (mortgages), while the ECB is financing "flows" (deficits). We do not know when European deficits will end, until a clear reduction of the deficits is seen, therefore the ECB liabilities will have to depreciate." - Macronomics, September 2015

There is still €1 trillion of Nonperforming loans (NPLs) sitting on European banks balance sheet including €360 billion just for the Italian banking sector. The Fed has clearly played a much efficient game in restoring the credit impulse by dealing swiftly with the impaired assets of US banks whereas, with its numerous liquidity supports, the ECB has continued to provide funding for these impaired assets but in no way resolving the rising solvency issues such as the ones seen in the Italian banking system hence our "japanification" analogy. When dealing with NPLs, you need to act swiftly. But, to end our side note, should you want to play tactically banking stocks, you would be better off playing US banks over European banks as per the chart below from Berenberg's recent note displaying the growth in tangible book values per share as a key performance driver:

- source Berenberg.

All about "stocks" versus "flows", hence the different outcomes between the US banking sector and the European banking sector.

But moving back to "complacency" and "volatility", as we pointed out last week, from a Bayesian perspective, generally the end of low volatility periods often leads to strong and sudden crash in prices. It is hard not to feel that the market is not too complacent at the moment and it would be probably wise to start reducing gradually your beta exposure particularly in US High Yield where the beta play has been very strong as of late.

One thing for certain is that we are clearly noticing signs of a weaker tone in global credit impulse and the last 3 months trend in US Commercial & Industrials lending has been negative since the beginning of the year according to Bank of America Merrill Lynch:

31st of January: -0.1

28th of February: -0.1

31st of March: -0.6

30th of April: -0.7

- source Bank of America Merrill Lynch

Credit wise, we continue to see a gradual deterioration in the Credit Cycle hence our much more cautious tone for the second part of 2017, particularly in the light of record complacency and low VIX index for the time being.

• Final charts - Dude where is my vol?

We have long stated that financial repression driven by Central Banks could be clearly seen in the low volatility regime set up, which could be one of the chief reason why in recent years Global Macro Hedge Funds have underperformed, making the rally in equities probably one of the most hated by many lagging fund managers, seeing in the process record outflows from active strategies towards passive strategies and the ETFs giants. For our final charts we would like to point out two charts from Bank of America Merrill Lynch Global Equity Volatility Insights note from the 3rd of May entitled "US equity vol near 90yr lows; what's driving it and how long can it last". Some telling bullet points :

• US realized vol has only been lower 3% of the time since 1928
• Average single stock realized vol has now fallen to the lowest level on record (data since 1990)
• Realized stock correlation is also at lows rarely seen over the past 15yrs and is in the 25th %-ile since 1990.

"Today’s low S&P realized vol environment thus neither fully resembles the mid- 1990s or 2004-07 low vol periods. Single stock volatility is lower today than ever before. Stock correlation is not nearly as high today as in 2004-07 and postelection even fell to ultra-low mid-90s levels, which we find quite striking given the many purported drivers of structurally higher correlation today (stat arb / HF capital, passive investing, closet indexing, ETF usage) that were not present in the 90s." - source Bank of America Merrill Lynch

We do live in interesting times, and it might be after all that the king in Leo Tolstoy's short story parable could have had an interesting fourth question we think: Are we going for a Bayesian outcome? We wonder.

"The real must be postponed to a later date" - Philippe Muray, French writer.

Stay tuned!