CHART OF THE DAY: Here's What 515 Interest Rate Cuts And $12 Trillion Will Do To The Global Credit Markets

"Aggressive central bank actions in response to the bursting of one asset bubble often contribute to the creation of a new bubble," writes Michael Hartnett at Bank of America.

Hartnett's referring to the Asian financial crisis, which begot the dotcom boom, which begot the recent housing and credit bubble.

The recent financial crisis has prompted aggressive actions on the part of global central banks. And this has played out in surging bond prices and a collapsing yield.

"In the past 6 years, central banks around the world have cut interest rates 515 times, increased global liquidity by $12 trillion and crushed bond yields to the point that almost 50% of all global government bond market cap currently trades below 1%.

The stunning collapse in interest rates across debt markets in recent years is shown in Chart 3. For example, yields have dropped from 23% (Dec’08) to 5.6% today in High Yield Corporates, from 12% (Dec’08) to 4.5% today for EM $- denominated bonds and from 6% (Jun’07) to 2.6% today for Mortgage Backed Securities."

Business Insider/BAML

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Japan Is Jumping

The crazy volatile action in Japan continues.

After Thursday's big, 5% plunge, the Nikkei is up 1.7% in early going.

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Morgan Stanley Is Essentially Giving Up On A Business Wall Street Used To Love

Reuters

We've heard the stories from the old timers (B.C. — Before Crisis). Back in the day trading bonds, currencies and commodities used to make money for Wall Street hand over fist.

That was then, and this is now. Fixed income, as such trading is called, is in the pits for everyone on the Street, but no one is feeling the burn worse than Morgan Stanley.

According to the Wall Street Journal, that burn is leaving a scar. Morgan Stanley has decided to cull its fixed income unit and make it much smaller than its peers'.

From the WSJ:

During the dinner at Manhattan's fashionable SD26 restaurant, Colm Kelleher, Morgan Stanley's president of institutional securities, said the fixed-income unit would aim to pull in $1.5 billion to $2.5 billion in quarterly revenue, significantly less than the firm's peak of $3.39 billion in the first quarter of 2007, according to people familiar with the meeting. The unit generated $1.52 billion in revenue in the first quarter, excluding accounting adjustments.

Morgan Stanley executives believe the lower revenue will help the firm focus on more profitable business. They are targeting a 10% return on equity—a profitability yardstick—across the firm. Last quarter, Morgan Stanley had a return on equity of 7.5%, well below Goldman Sachs Group Inc.'s 12% and the 18% of J.P. Morgan Chase & Co.'s investment bank.

Bank analyst Mike Mayo said that he'd give Morgan Stanley's fixed income unit a D grade right now, and that he'd be pleased if they got it up to a C.

That's brutal.

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The US Housing Market Has Now Crossed Two Critical Milestones

The U.S. housing recovery reached "two significant milestones," according to Capital Economics' Ed Stansfield.

First, both CoreLogic and Case Shiller showed a double digit increase in home prices in March.

Second, the number of homes listed for sale climbed to 6.3 million in April.

"If we exclude November 2009, when homebuyer tax credits were distorting the market, the 6m mark was last breached back in 2007," writes Stansfield. The reason the 6.3 million figure is significant is because it compares with annualized home sales of 5.4 million.

What this basically means is that in the near-term, sheer momentum will help boost home prices.  But prices should moderate this year because supply exceeds sales. This latter point cools concerns about a new housing bubble:

"To put that into context, if the current listings/sales differential was to be sustained, end-month inventory levels would return to their long-run average level of just under 2.6m homes in the first quarter of next year. That would mean that the months’ of unsold homes measure, a useful indicator of the short-term supply and demand balance, and thus price pressures, would rise from 4.9 to 5.7.

In turn, that implies that the pace of house price gains would ease notably over the remainder of this year, dampening fears that the US housing market is again entering bubble territory."

Here's a longer term look at housing supply and demand.

Capital Economics

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Americans Are Not Even Close To Making Up What They Lost In The Recession

American households have regained less than half of the wealth lost during the Great Recession (2007 to 2009), according to a new analysis from the St. Louis Federal Reserve.

The researched found that U.S. households accumulated net worth totaling $66 trillion at the end of last year, down 55 percent from the peak in 2007 when adjusted for inflation and population growth.

The report found that "younger, less-educated and African-American and Hispanic families lost the most." These demographics suffered for various reasons, including high levels of debt, exposure to hard-hit occupations like construction, high concentrations of wealth in housing — which got destroyed in the crash.

Although household have been rebuilding their savings and paying down their debts in recent years, the recovery has been far from evenly distributed since it was largely tied to stocks.

From the report:

Of the total recovery of $14.7 trillion between the first quarter of 2009 and the fourth quarter of 2012, $9.1 trillion, or 62 percent, of the gain was due to higher stock-market wealth. Stock wealth is unevenly held, with the vast majority of stocks owned by a relatively small number of wealthy families. Thus, most families have recovered much less than the average amount.

Therefore, the report states, any conclusion that "the financial damage of the crisis and recession largely has been repaired is not justified.”

REUTERS/Eric Thayer

A home that was damaged by Hurricane Sandy, is seen in Union Beach, New Jersey November 12, 2012.

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Two Things You Should Know If You Want To Be Real About Hedge Funds

Hedge funds are known for being high powered, high performing financial firms that employ the smartest people and command the top of top dollar for their services.

So it's important to keep up with what they're doing.

This morning, two snippets of information about hedge funds caught our eye. If you think about them at all, you should know these facts about their performance and who's behind it.

1. 61% of all the money in hedge funds is managed by the 100 largest hedge funds, according to research firm Prequin. So if you're tracking them you're really tracking the industry.

2. Hedge fund performance has been abysmal since the financial crisis. This year they're up an average of 5% compared to the S&P's 15% gain. Investors have kept putting their money in funds, though. That is, until now, according to Bloomberg:

Hedge Fund Research said in April that funds saw inflows in 14 of the last 15 quarters (PDF)—but now there is evidence that substandard returns may finally be having an effect. According to eVestment, the $2.69 trillion industry has seen net inflows of just $5.8 billion through the first four months of the year, which it calls the slowest rate of growth to start a year on record. (The firm’s database goes back to the third quarter of 2003.) The figure is also the second-worst total on record, after the start of 2009, when investors pulled out $260 billion.

Just consider that a quick public service announcement.

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